Last week I looked at the recent press release from the FDIC concerning guidance to banks for commercial real estate loan workouts. As I followed up with bankers on the guidance, I learned more about the perceived problem than the potential solution. That’s when I learned the buzz phrase “extend and pretend” which translates into “let’s extend the loan on the same terms for another year and hope things get better.”
The FDIC policy statement details risk-management practices for loan workouts that “support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency and timely loss recognition.” As I read through the guidance again and spoke with bankers it became clear that the biggest issue is timely loss recognition.
Regulators fear that bankers are “kicking the can” down the road without adjusting terms and without properly recognizing the loan risks, actions which might include an internal downgrade with additional reserves or a partial write-down of the debt. Failing to take the appropriate internal actions would result in a bank having overstated assets and overstated equity, both which would lead to a greater loss if the FDIC had to take over the bank (and we’ve already had more than 100 banks fail this year).
Bottom line from my discussions with bankers is that the regulators are on to “extend and pretend” and are criticizing banks for the practice when they find it.
So what does this mean for borrowers? That will be the final installment next week.
(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.)
