Commercial Loan Modification

Economic experts have been foreseeing the emergence of a crisis in the commercial property market that could even be worse than that situation in residential housing.  The continued rise in the number of people losing their jobs and the rising number of vacancies in commercial real estate are like dark clouds indicating that a storm is brewing.  It is easy to see this because this type of situation makes it much harder for the borrowers to come up with the loan payments.  And if this is true, it is logical to conclude that they would not also be capable of making the balloon payment that is required as the final payment for the mortgage.  Just like in the residential real estate market, this could ignite a series of defaults and foreclosures that could further bring down the economy.  Luckily, commercial mortgage modification could offer a helping hand for the economy, the banks and the borrowers.

A possible way for this to work is that the bank may permit a permanent or temporary decrease in the rate as a way to help the borrower avoid foreclosure.  Even bringing down the rate by one percent could reduce the debt burden by thousands of dollars each month.  This kind of commercial mortgage modification could achieve much in providing the property owner some room to breathe while waiting for the economy to recover and for the properties to get more tenants again.

Another technique that can be used in commercial mortgage modification is to adjust the duration or maturity of the mortgage.  This could push back the due date of the balloon payment or even let the borrower completely avoid it if a source for refinancing is located.  Commercial loans usually have balloon payments because the monthly installments are often based on a longer term than the actual duration of the mortgage.  To illustrate, the monthly payments may be computed with 25 years as the loan duration but the real term may only be for 10 years.  Therefore, a large amount has to be paid just before the mortgage expires.  During better times, the commercial property borrower will either find a buyer for the property or search a bank to provide another loan to in order to come up with the balloon payment.  But with the economic crisis where there are less available funds and property values have dropped substantially, looking for a source of funding could be tough.  In the same manner, searching for potential buyers would also be a tough undertaking.

A commercial mortgage modification may also permit the borrower to hold back on the payments for a certain period of time.  The bank may allow the property owner to skip payments for three to six months without any penalty charges, for example.  This will provide the mortgage borrower with more time to gather some funds and find ways to decrease the vacancies.

Meanwhile, commercial mortgage modification is also one of the workouts that are being touted by bank regulators to help the banks remain viable.  With the number of foreclosures minimized, the economy could have a stronger chance for faster recovery.

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