Importance of Commercial Mortgage Modification to the Economy

Experts have been predicting that the commercial real estate sector will also experience a crisis that may even be worse than that of the residential housing market. The unabated rise in unemployment and the increasing number of vacancies in commercial properties are indicators of this impending trouble. This is understandable because this kind of situation makes it more difficult for property owners to come up with the mortgage payments, much less the balloon payment that is required at the end of the term. Like in the residential sector, this could result into an avalanche of defaults and foreclosure filings that could further damage the economy. Fortunately, commercial mortgage modification is one of the potential solutions to this problem.For example, the lender may allow a permanent or temporary decrease in interest rate as a way to help the borrower get back on track with the payments. Even a one percent interest reduction can bring down the debt burden by thousands of dollars every month. This kind of commercial mortgage modification could help a lot in giving the property owner some room to recover while waiting for the economy to recover and the vacancies to get filled again.Another strategy that can be used in commercial mortgage modification is to extend the duration or maturity of the loan. This is helpful in postponing the balloon payment or avoiding it altogether and it will also bring down the amount for the monthly payments. Balloon payments are usually required because commercial loans often have short terms but the monthly payments are based on a longer term. To illustrate, the computation for the monthly payments may be based on a term of 20 years but the actual term may only be five years. Thus, there is a substantial amount to be paid at the end of term. Ordinarily, the property owner will either sell the property or find a lender for the refinancing of the amount that is due as balloon payment. However, experts believe that looking for refinancing would be very difficult because of the tight money supply and the drastic decline in property values. For the same reason, finding buyers would also be very hard unless the asking prices are substantially reduced.A commercial mortgage modification may also involve the deferment or postponement of payments. For example, the lender may grant the borrower three to six months of payment moratorium. This will allow the borrower more time to accumulate cash and find tenants for the vacant units.In view of the impending crisis, financial regulators have expressed their support for commercial mortgage modification and urged banks to try to approve more loan workouts. Of course, they have also cautioned banks to continue to use the proper lending standards when evaluating such application work loan workouts and determining the creditworthiness of a borrower. But the regulators know that adjustments to the terms of the loans could help both the lenders and the borrowers and could contribute to the faster recovery of the economy.

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