We have been looking at the recent FDIC guidance to banks regarding commercial real estate workouts and the concern by regulators that banks have been extending loans without taking appropriate measures. We said that the regulators were on to “extend and pretend” and are criticizing banks for the practice when they find it.
So what does this mean for borrowers?
My suspicion is that borrowers are going to have to come to the table with something before banks are going to extend maturing loans. That “something” may be a principal paydown, additional collateral, additional guarantors, initiation or speeding up of principal amortization or a combination of these elements. The banks need to show regulators that something was gained in exchange for the extension of time and that the deal was not just “kicked down the road.”
And you can bet that borrowers will need to provide full documentation of all cash flows, status of all projects (not just the one being extended), and a plan for keeping the loan on a performing basis.
This is not intended to be bad news for borrowers. We just need to realize that the banks are under pressure and need to operate in a manner to will allow them to continue providing financial services to the community. Ultimately the banks want the same thing as the borrowers: financing that fits the project.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
