Federal Regulators Encouraging Banks to Provide Commercial Loan Workouts
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During a speech at the Commercial Mortgage Securities Association Annual Conference held January 20th, 2010 in Washington D.C., FDIC Chairperson, Sheila C. Bair said that the FDIC and other federal regulators are encouraging banks to "work with financially distressed borrowers through loan modifications and other cooperative efforts", which would include commercial loan workouts.
Commercial loan workouts are plans that banks can provide to delinquent borrowers. Banks can "workout" payment arrangements so that borrowers can get back on track, extend the reset period, thereby delaying the balloon payment of a commercial mortgage loan, decrease the interest rate and/or reduce the principal amount. Commercial loan modifications or restructuring changes the loan terms in the borrowers favor. Loan modifications may or may not be a part of the commerical loan workout plan banks can offer to help property owners avoid foreclosure. It really depends on what the owners of these commercial mortgages, the investors are willing to allow banks to offer.
But there is good news. Late last year, federal regulators issued a new guideline called "Prudent Commercial Real Estate Loan Workouts". According to the FDIC's website, FDIC Chairperson Sheila C. Bair also stated before the Commercial Mortgage Securities Association Annual Conference that "the guidance gives specific examples that reflect various ways that bankers may decide to work with borrowers, including loan modifications and restructurings that can pass muster under accepted accounting principles".
This new policy will help banks who were hesitant in the pass to provide commercial loan workouts to proactively offer solutions to distressed commercial property owners. Chairperson Bair went on to say the Prudent Commercial Real Estate Workouts policy "emphasizes that restructured loans will not be subject to adverse classification by examiners solely because the value of the underlying collateral has fallen. In fact, institutions are encouraged to implement prudent, loan workouts based on an updated picture of the borrower's financial condition".
These new guidelines are designed to help banks and borrowers alike, due to the present state of the economy. "Solid loan workouts that are based on the documented financial capacity of the borrower and the long-term prospects of the underlying project" Bair said.
Key to a successful commercial loan workout is the borrowers ability to repay the restructured loan or workout plan. If banks can't document this, then the commercial loan workout is a "no-go". If a commercial loan workout is denied, other alternatives may exist for borrowers to avoid foreclosure.
A "short sale" allows the borrower to sale their commercial property for less than the actual mortgage balance. But a financial hardship must be documented. Another alternative: "Deed in lieu of foreclosure". A deed in lieu of foreclosure grants the property owner the right to convey their commercial real estate to the bank to avoid foreclosure. But it would be wise to consult with a legal and/or tax advisor before considering these options, due to possible tax consequences.
During a speech at the Commercial Mortgage Securities Association Annual Conference held January 20th, 2010 in Washington D.C., FDIC Chairperson, Sheila C. Bair said that the FDIC and other federal regulators are encouraging banks to "work with financially distressed borrowers through loan modifications and other cooperative efforts", which would include commercial loan workouts.
Commercial loan workouts are plans that banks can provide to delinquent borrowers. Banks can "workout" payment arrangements so that borrowers can get back on track, extend the reset period, thereby delaying the balloon payment of a commercial mortgage loan, decrease the interest rate and/or reduce the principal amount. Commercial loan modifications or restructuring changes the loan terms in the borrowers favor. Loan modifications may or may not be a part of the commerical loan workout plan banks can offer to help property owners avoid foreclosure. It really depends on what the owners of these commercial mortgages, the investors are willing to allow banks to offer.
But there is good news. Late last year, federal regulators issued a new guideline called "Prudent Commercial Real Estate Loan Workouts". According to the FDIC's website, FDIC Chairperson Sheila C. Bair also stated before the Commercial Mortgage Securities Association Annual Conference that "the guidance gives specific examples that reflect various ways that bankers may decide to work with borrowers, including loan modifications and restructurings that can pass muster under accepted accounting principles".
This new policy will help banks who were hesitant in the pass to provide commercial loan workouts to proactively offer solutions to distressed commercial property owners. Chairperson Bair went on to say the Prudent Commercial Real Estate Workouts policy "emphasizes that restructured loans will not be subject to adverse classification by examiners solely because the value of the underlying collateral has fallen. In fact, institutions are encouraged to implement prudent, loan workouts based on an updated picture of the borrower's financial condition".
These new guidelines are designed to help banks and borrowers alike, due to the present state of the economy. "Solid loan workouts that are based on the documented financial capacity of the borrower and the long-term prospects of the underlying project" Bair said.
Key to a successful commercial loan workout is the borrowers ability to repay the restructured loan or workout plan. If banks can't document this, then the commercial loan workout is a "no-go". If a commercial loan workout is denied, other alternatives may exist for borrowers to avoid foreclosure.
A "short sale" allows the borrower to sale their commercial property for less than the actual mortgage balance. But a financial hardship must be documented. Another alternative: "Deed in lieu of foreclosure". A deed in lieu of foreclosure grants the property owner the right to convey their commercial real estate to the bank to avoid foreclosure. But it would be wise to consult with a legal and/or tax advisor before considering these options, due to possible tax consequences.
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