“Extend and pretend,” the new rule for commercial real estate loans

By Michael Stoler | December 01, 2009 04:19PM

As the fall of 2009 comes to a close, many of the commercial real estate lenders continue to limit their exposure to financing for real estate. The buzzword for 2009 is “extend and pretend,” whereby a bank extends the term of a loan to a later date. The legendary Samuel Zell, chairman of Equity Group Investments, the keynote speaker at the NYU Capital Markets conference Nov. 19, stated that “our government has become the bailout city. If a loan is kept current, banks will ‘pretend and extend.'”

No one is surprised by the “pretend and extend concept,” especially if you had the opportunity to gain insight from the Federal Reserve’s October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices and hear the comments made by Ben Bernanke, chairman of the Federal Reserve, in a speech at the Economic Club of New York Nov. 16.

The Fed’s Opinion Survey addresses changes in the supply and demand of loans to businesses and households over the past three months. The results were based upon responses from 57 domestic banks and 23 U.S. branches and agencies of foreign banks.

About 35 percent of domestic respondents reported tightening standards on commercial real estate loans in the survey, compared to 45 percent in July. Roughly 20 percent of foreign respondents, on net, reported tighter credit standards, according to the recent survey, and a similar fraction indicated that demand for CRE loans had weakened. In both cases, these fractions were down somewhat from July.

According to the Mortgage Bankers Association, loans for commercial and multi-family property activity fell 54 percent in the third quarter of 2009 from the same quarter a year ago. Loan originations were down 12 percent from the second quarter.

On Nov. 24, the Federal Deposit Insurance Corporation reported that loan balances at commercial banks and savings institutions it insures fell in the third quarter at the fastest clip in at least 25 years.

A survey by Foresight Analytics found that 53 percent of CRE mortgages due by 2014, or approximately $770 billion, were “underwater,” meaning that the borrowers owe more than the value of the property.

“Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates, and falling rents,” Bernanke said at the Economic Club of New York last month. “These poor fundamentals have caused a sharp deterioration in the credit quality of commercial real estate loans on banks’ books and of the loans that back commercial mortgage-backed securities, or CMBS. “Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of commercial real estate loans.”

Recognizing the importance of this sector for the economic recovery, the Fed extended the Term Asset-Backed Securities Loan Facility, or TALF, program for existing CMBS through March 2010 and new structured CMBS through June. Moreover, the banking agencies recently encouraged banks to work with their creditworthy borrowers to restructure troubled CRE loans in a prudent manner, and reminded examiners that absent other adverse factors, a loan should not be classified.

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” and “Building New York” on CUNY TV and on WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is a director at Madison Realty Capital as well as an adjunct professor at NYU Real Estate Institute, and a former contributing editor and columnist for the New York Sun.