Economic experts have been foreseeing the emergence of a crisis in the commercial property market that could even be worse than that situation in residential housing. The increasing number of vacancies in commercial properties and the unchecked increase in the unemployment rate are harbingers of potential serious problems in this particular market. It is easy to see this because this type of situation makes it much harder for the borrowers to come up with the loan payments. And if they could not make the monthly payments, it naturally follows that they would not also be able to make good with the balloon payment at the end of the loan term. Just like in the housing sector, the large number of defaults and foreclosures could worsen an already ailing economy. Luckily, commercial mortgage modification could offer a helping hand for the economy, the banks and the borrowers.
A possible way for this to work is that the bank may permit a permanent or temporary decrease in the rate as a way to help the borrower avoid foreclosure. Even bringing down the rate by one percent could reduce the debt burden by thousands of dollars each month. This kind of commercial mortgage modification could achieve much in providing the property owner some room to breathe while waiting for the economy to recover and for the properties to get more tenants again.
Another technique that can be used in commercial mortgage modification is to adjust the duration or maturity of the mortgage. This could push back the due date of the balloon payment or even let the borrower completely avoid it if a source for refinancing is located. Commercial loans usually have balloon payments because the monthly installments are often based on a longer term than the actual duration of the mortgage. For example, the calculations for the monthly installments may be based for a term of 25 years but the actual term of the mortgage is only 10 years. Thus, a large amount is still unpaid when the end of the term is reached. If the economy is booming, the property owner simply finds a source of refinancing or located a buyer for the property. However, with the financial crisis, hunting for a bank to provide refinancing could be very hard because of the decline in property market values and the much reduced availability of loans. The same could be true when looking for possible buyers of the property.
A commercial mortgage modification may also permit the borrower to hold back on the payments for a certain period of time. To illustrate, the borrower may be allowed by the bank to skip three to six months in the payments without incurring penalty charges. This would permit the property owner to look for more tenants and find ways to come up with the payments.
Meanwhile, bank regulators have joined the other experts in urging the banks to consider the possibility of a commercial mortgage modification or loan workout when property owners request for assistance. With the number of foreclosures minimized, the economy could have a stronger chance for faster recovery.
Tags: commercial loan audit, commercial loan mod, commercial loan modification, commercial loan review, commercial loan short sale, commercial loan short sales, commercial loan workout