Last week government bank regulators officially put their blessing on the practice of "pretending and extending" by issuing guidance to banks that allow them to modify commercial loans without being viewed unfavorably by their regulators. It has become clear to Washington that the next banking crisis and government bailout is right around the corner. They have taken this step to ease the pain that is sure to come.

Analyst estimate that there is about $270 billion in negative equity that has to be resolved in the next few years. This comes from about 1.5 trillion in debt that is maturing on CRE loans. This property cannot be refinanced because of the negative equity. If the banks were to foreclose and not modify the loans, they would be forced to show the real value of the property on their books, wiping out the profits they reported earlier this year and causing a liquidity crisis in an already overstressed banking system.

By allowing the banks to modify these loans, the bankers and property owners are allowed to "kick-the-can" down the road some more years.

Prior to this change in guidance, if a bank were to modify a loan, and the loan amount was greater than the market value, the loan would have been considered "adversely credit classified". Such a loan modification would not have been considered prudent based on sound banking principles. This new guidance allows them to modify the loans even if the loan amount exceeds the market value.

Source:
Commercial Mortgage Blog