Banks that restructured commercial real estate loans to make them appear more attractive are now facing an SEC investigation[1]. Lenders around the country have been using “creative” methods to try and keep their commercial loan portfolios from turning toxic, but now the SEC is questioning “extend and pretend” and other debt restructuring strategies which may involve modifying the terms of existing commercial loans or breaking a commercial loan into pieces. These practices are legal, but the SEC fears that they may be being abused in order to reduce requirements on the volumes of reserves a bank has to set aside.
According to a report by Trepp, LLC, a data firm specializing in commercial data, non-performing commercial real estate loans make up 72 percent of the $320 million in non-performing loans reported by banks in February[2]. They are also being credited with the failure of 12 banks last month. In comparison, residential real estate loans comprised 20 percent of the non-performing loans in February. It should be noted that the Mortgage Bankers Association (MBA) reports that commercial and multifamily loans did have the lowest delinquencies “across the board” in 2010.
Do you think this is a bad sign for commercial real estate in 2011? What do you make of this in light of the positive press coverage and appearance of a slow but steady rebound in the commercial industry?
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[1] http://www.zacks.com/research/get_news.php?id=062l7984
[2] http://www.dsnews.com/articles/home-loans-now-less-of-toxic-threat-than-commercial-real-estate-2011-03-03
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