Tags: commercial | home | loans

Bankers Punt on Bad Loans, Hope for Recovery

Wednesday, 02 Sep 2009 10:27 AM

By Michael Kling and Dan Weil

Banks are effectively sweeping the commercial real estate bust under the rug with their “extend and pretend” strategy, say commercial real estate experts.

And in the home loan sector, a major bank admits, exactly the same thing is happening.

While commercial real estate has crashed, unlike most home loans, commercial real estate loans are usually due in full at the end of the term, often 10 years. In normal times, property owners would simply get another mortgage.

But many are now underwater, with mortgages more than property values. No sane person will grant them a loan, and lenders don’t want to foreclose.

Bankers’ solution is to “extend and pretend,” also known as “delay and pray.” Extend the loan term, ignore the property value, and hope values rebound soon.

As bankers say, “A rolling loan gathers no loss.”

They’ll have to wait a while for values to recover, according to Ray Torto, chief guru at commercial property giant CBRE.

Commercial real estate values will fall 40 to 50 percent peak to trough, and will need years to recover, he told ABC news. They’ve already dropped about 30 percent.

Real estate values won’t improve significantly within a year or two, agrees Christopher Grey, at Third Wave Partners, an advisory firm.

“The reason is not only do you have extremely negative fundamentals, there’s a tremendous overhang of properties that are distressed and very little investor interest,” Grey told Retail Traffic, a trade publication.

Meanwhile, as the media write and talk about home foreclosures as if they’re flowing like wine, that’s not the case, according to an anonymous Bank of America official.

The official told CNBC that “foreclosure sales have been abnormally low since we learned of the pending implementation of the administration’s Making Home Affordable program.”

Once that happened, “we delayed the initiation of foreclosure proceedings and sales for customers that may eligible for a loan modification under MHA,” the official said.

“As a result of this policy, our foreclosure sales in recent months have been as little as half the normal pace we experienced before.”

And Bank of America makes every effort to find a modification or other solution to avoid the burdens of foreclosure.

“Now that Making Home Affordable programs are operational, we do project an increase in foreclosures, as we exhaust every available option to qualify customers for modifications and other solutions,” the official said.

That prediction stems from “the increasing number of customers who will not qualify for loan modification because they have suffered major life events servicers can’t solve, ... primarily unemployment and underemployment,” he said.

The official added that BofA doesn’t keep foreclosed properties off the market.

BofA may not have to worry about foreclosures too much longer.

Home prices in 20 major cities rose 1.4 percent on average in June from May, according to the latest S&P/Case-Shiller index.

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