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

TRD New York /
Dec.December 01, 2009 04:19 PM

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.


Related Articles

arrow_forward_ios
Starwood's Barry Sternlicht and Pacific Retail's Steve Plenge with Parkway Plaza mall in San Diego and the Plaza West Covina mall in Los Angeles (Getty, Starwood, Pacific Retail)

Last bidder standing has big plans for Starwood’s troubled mall portfolio. But first, creditors must sign off

Last bidder standing has big plans for Starwood’s troubled mall portfolio. But first, creditors must sign off
Jared Chupaila, CEO of Brookfield Properties’ retail group, with Florence Mall and Fashion Square (Brookfield, TripAdvisor, iStock)

Brookfield and Namdar plan to hand over keys to struggling malls

Brookfield and Namdar plan to hand over keys to struggling malls
With about $23 billion of hotel-related CMBS loans in forbearance, more lenders are looking to offload those mortgages. (iStock)

Hotel industry is in trouble and more lenders want out

Hotel industry is in trouble and more lenders want out
Fed Board Governor Lael Brainard (Getty, iStock)

Fed wants banks to step up lending in low-income areas

Fed wants banks to step up lending in low-income areas
Matt Salem, KKR head of real-estate credit (Getty; KKR)

Hotel and retail mortgages dragging down recovery

Hotel and retail mortgages dragging down recovery
Fed Reserve Chairman Jerome Powell (Getty)

What low interest rates through 2023 means for real estate

What low interest rates through 2023 means for real estate
The rates for a 30-year fixed-rate mortgage dropped 7 percentage points for the week ending September 10, reaching 2.86 percent. (iStock)

Mortgage rates notch new low

Mortgage rates notch new low
The special servicing rate has increased each month since the coronavirus pandemic hit the United States, and clocked a 55 basis point increase to 10.04 percent in August (iStock)

CMBS delinquencies fell, but hold the applause

CMBS delinquencies fell, but hold the applause
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...