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With the commercial real estate market about to go into a crisis that may actually even be worse than the one experienced by the housing sector, it is easy to figure out the reasons why the bank regulators have urged the lenders to enhance their efforts in finding ways to approve a commercial mortgage modification for their property owners on the brink of foreclosure.  The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and other regulators are concerned that the viability of the banks and lenders could be severely compromised as a result of the expected large number of defaults by commercial  property owners.  The property owners are experiencing difficult times as a result of the reduction in their cash flows, the decline in the values of their properties, and absorption periods for rental and sales that are too long.

The regulators also realize that a substantial number of these troubled property owners can still be depended upon when it comes to repaying loans and that they are only temporarily prevented from doing so.  Hence, if both parties could just reach a decision for a mutually beneficial commercial mortgage modification, there is a strong chance that both will feel the positive effects in the future.

The bank regulators have identified various kinds of commercial mortgage modification strategies and these include the lengthening of the duration of the mortgage, the provision of more credit, the renewal of specific provisions in the original loan contract, and changes to the conditions with regards to payment.  As a way to encourage the lenders, the regulators have also stressed that if the workout deal will lower the classification of the loan, the bank examiners will disregard this and will take it as a negative score against the bank if the lender had applied the appropriate standards in evaluating the risks that come with the loan modification.

The bank regulators are concerned that if an agreement for a commercial mortgage modification could not be reached, then a foreclosure of the commercial property would be imminent and this could have detrimental effects on the bank, the borrower and the economy.  Obviously, the borrower will no longer have the income-producing property and this in turn would reduce its positive contributions to the economy.  After spending so much on the foreclosure proceedings, the lender will also experience the negative impact of possessing a property that it could not sell because the market is filled with a large number of such properties.

As for the property owner, it would be advisable to hire a loss mitigation expert to make sure that the arguments for a commercial mortgage modification are effectively provided.  This professional will also conduct a forensic loan audit to find out if there are any indications that the lender had violated certain laws and regulations governing the rights of borrowers when it provided the loan in the first place.  Because of the grave penalties for such violations, their discovery can provide the borrower with a substantial amount of leverage when negotiating with the lender for a restructuring of the loan.

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Commercial Loan Modification

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.