Distressed Commercial Markets & The 2010 Political Landscape
Business → Marketing & Advertising
- Author Trail Potter
- Published January 18, 2011
- Word count 526
In the aftermath of the financial crisis, many distressed commercial real-estate investors expected a plethora of opportunities to arise from foreclosures on distressed properties. Unfortunately for many investors, a combination of factors, which includes the political landscape have created new pressures on banks, to hold onto properties and extend loans without foreclosing on properties.
After the financial crisis the landscape was set for billions of dollars of distressed transaction. The majority of the properties that experienced transactions in the few years prior to the meltdown at the end of 2008, are not able to attract refinancing, as the loan to value on these properties cannot reach a hurdle rate of 75%. With properties dropping more than 50% in value and lending standards tightening on all properties, there is very little chance that banks will step up to the plate to refinance commercial real-estate.
With this in mind, many believe that banks would eventually foreclose on loans that are underwater, but this has not occurred. Banks theoretically should take properties from the borrowers and then investors would purchase the distressed properties from the banks at distressed prices. Over the course of the past 2 years, this phenomenon has not occurred.
Banks have not foreclosed at levels that were predicted by many market participants. There are some who have forecasted foreclosures that are 90% higher than what has taken place to date in the commercial market space. Only a small portion of loans have resulted in lenders taking possession through foreclosure.
What has occurred instead, is that banks have extended loans and delayed taking active. Through numerous changes in regulations via Fannie and Freddie, lenders have restructured loans allowing current tenants the opportunity to stay within their current mortgages. The technique is extending the process in the hopes that the market will eventually turn around, and the loans will then become profitable.
Unfortunately, the market has been slow to turn around. Although prices have climbed slightly from June through September of 2010, October was a disaster for the commercial real-estate markets. According to Costar, the national commercial real-estate index dropped 3.88% in October, giving back all the gains over the past few months. Part of this has been to lack of interest at current prices, and a portion has been associated with the large increase in rates during the past couple of months.
The over lending that occurred from 2004-2008, has been blamed on overzealous bankers and brokers and there is very little sympathy for banking institutions. There is however sympathy for the homeowner, with is why there have been so many programs set up to allow real-estate owners on both the commercial and residential sectors to hold on to properties.
The bottom-line for banks foreclosing would mean writing off the loan and, for many banks writing off the loan means bankruptcy. Federal regulators know this and that’s why they have not pushed banks to resolve delinquent commercial mortgages. The Fed has turned a blind eye to questionable loan restructuring. The Fed has recommended a balanced approach. It is clear, that forcing banks to mark their portfolios to distressed values would trigger a wave of bank failures which the US economy could not handle.
Trail Potter is a contributor to the Abacus Financial writing team based in Houston, Texas. He has a background in financial planning with a focus on real estate and commercial growth patterns.
Abacus Financial - http://www.abacus-financial.net (Los Angeles, CA)- is the national expert in workouts of distressed commercial real estate borrowers and operating companies.
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