Lenders Trying to Contain Bank REO Properties
A growing number of banks are trying to stem the tide of bank REO properties in the commercial real estate market by offering loan modifications and extensions. Current data showed that about $60.5 billion commercial assets are in default.
The commercial real estate market is experiencing a change in banks’ strategy. To try to avoid realizing losses on their loans in the commercial real estate market, banks are offering loan extensions and modifications to stem the tide of bank REO properties.
According to data released by research firm, Real Capital Analytics, year-to-year figures showed almost $60.5 billion assets in the commercial real estate market that went into default. Overall, the total delinquent assets, bank REO properties and bankruptcy reached $108 billion. This includes about 1,420 commercial asset estimated to be worth $31.1 billion.
In contrast, data showed that a total of $4.1 billion in distressed assets were resolved so far this year. According to Real Estate Econometrics chief executive officer and president Sam Chandan, in the first four months of this year, 20 biggest banks across the country reported that their loan modification activity outnumbered their commitments by two to one.
Industry experts said that lenders and banks are trying to avoid realizing their commercial real estate loan losses. They pointed out that loans taken out during the market boom have loan-to-value ratio of 100 percent. Those loans were also underwritten with the assumption that properties will experience rising rents and occupancies.
However, since 2007, values of commercial properties dropped considerably, followed by rents and occupancies. Adding to the problem is the locked down of commercial mortgage-backed securities.
Third Wave Partners LLC managing partner Christopher Grey said that banks are hoping that stemming the tide of bank REO properties for one or two years would give the market a breather and allow them to recover a bigger portion of their investments than what they will stand to gain if they decide to sell in the current market.
Grey added that he is not hopeful that retail properties will increase its value under the current market. He explained that this is because there are a great number of distressed properties on the market and little investor interest. Additionally, retail is tied with consumers who are expecting an income decline.
Industry experts agree that if banks would foreclose on assets and add to the growing number of bank REO properties, they will be forced to manage properties in a very unstable economic climate.
By Cassiano Travareli