The failure of the nine banks that were closed down by the Federal Deposit Insurance Corporation (FDIC) offers an important lesson for financial institutions.  Those banks could have survived if they had increased their efforts to allow more commercial loan modification deals for their troubled borrowers.  A substantial percentage of these banks had been stricken by the unusually high number of commercial property loans that are found in their credit portfolios.

Presumably, the failure of the nine banks started when more and more property owners became late in in their monthly payments.  As a result of the economic situation, a large number of the property owners are being forced into mortgage defaults because of their severely reduced financial capabilities.  This is easy to see because of the sharp increases in vacancies for shopping centers, hotels, business complexes, investment properties, warehouses, strip malls, office buildings, multi-tenant buildings and apartment buildings that have caused significant declines in cash flow.  And as more and more property owners found themselves unable to come up with their monthly payments, banks that have a relatively higher number of this kind of loan also discovered that their profits have substantially declined.

Whether the decision of the banks to have such a huge number of loans in their portfolios was a wise one or not is no longer the issue.  Because the real estate market was then in the upswing, it is easy to understand why they chose to provide so many of this type of loans to maximize the banks’ income.  The problem could have started when the market reversed and the property owners began to be late in their payments to stop paying altogether.  And this was the failure to be more aggressive in looking for various solutions, such as a commercial loan modification.  

Try as they might, the banks would have been incapable of forcing the property owners to come up with the mortgage payments when their businesses are failing to generate enough income in view of the state of the economy.  A commercial mortgage refinace would have been helpful in providing the owners with more time to find a solution for their situation and then regain lost ground, and the income of the banks would not have been greatly affected in a similar way as in a foreclosure.  Foreclosure should be the last option because it would not have been beneficial for the banks at all if they were unable to sell the repossessed properties right away to convert the assets into liquid cash that they could use for their lending business.  

Therefore, it may be a wise decision for the banks to examine more closely the possibilities for a commercial loan modification.  Even if the monthly payments made by the borrowers would be reduced, this is much better than zero payments.  Moreover, if the commercial property owners are able to financially recover, they could return to higher monthly payments in the future.  It therefore makes sense if banks tried to be more adjustable with their rules, especially if the economy is not doing well.  Collaborating with the borrowers to find a solution, such as a commercial loan modification, may be the prudent decision to make.

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