Wary Of Realizing Losses, Lenders Pretend and Extend
Retail Traffic reports: Two new phrases have entered the commercial real estate industry lexicon in recent months: "Pretend and extend" and "A rolling loan gathers no loss." Both witticisms describe an ongoing phenomenon in commercial real estate finance: as the level of distress mounts, lenders have been loath to seize properties from troubled borrowers.
Instead, in many cases banks are generously granting extensions or other modifications even in situations where it appears unlikely that borrowers will be able to pay back the loans.
Year-to-date, $60.5 billion in commercial real estate assets have entered default or delinquency, according to a recent report from Real Capital Analytics (RCA), a New York City-based research firm. (Overall, the firm counts $108 billion of assets in default, foreclosure and bankruptcy, including some 1,420 retail assets worth $31.1 billion.) In contrast, only $4.1 billion in troubled asset situations have been resolved this year. As one indication of this trend, from January through April, the 20 largest banks in the country reported that modifications of existing loans outnumbered new commitments by approximately two to one, notes Sam Chandan, president and chief economist with Real Estate Econometrics, another New York City-based real estate research firm.
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Posted by: Mark Alferman