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 might have been able to continue operating had they intensified their efforts to permit more commercial loan modification agreements with the borrowers who experiencing some difficulties. It had been observed that most of these companies were negatively affected by the unusually large number of commercial real estate loans 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. Because of the financial crisis, many of the borrowers could not help it but default in their obligations because their capabilities to repay the loans have been badly compromised. 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 loan modification 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. The decreased monthly payments would be much more preferable to zero payments from the commercial property owners. Moreover, if the commercial property owners are able to financially recover, they could return to higher monthly payments in the future. It is therefore prudent for the banks to be more flexible when it comes to their standards, particularly when a financial crisis is happening. Cooperating with borrowers in searching for an answer, such as a commercial loan modification, could be a wise move for the banks.
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