Wednesday, June 24, 2009
CRE: "pretend and extend"
Aside from the discussions of government policy, there was a consensus that banks largely are trying to delay the days of reckoning when they will have to recognize losses and writedowns by extending loans as much as they can. The phrase “pretend and extend” came up more than once, as in, banks are pretending that borrowers can pay off their loans and therefore granting extensions to them. However, no one thinks that can go on forever. As Barone described the process with dealing with troubled borrowers, “Banks are granting extensions at low rates and hoping the economy recovers quickly enough to get the loans performing. But things have gotten worse instead of better.” Lynn agreed that banks “are playing for time” and waiting for a value floor. But right now no one really knows what commercial real estate values are because the volume of investment sales transactions is too low to truly draw conclusions. All anyone knows is that cap rates are much higher than they were at the peak of the market in 2007–perhaps as much as 300 to 350 basis points. But by not foreclosing on troubled loans, all this process is doing is keeping values of commercial mortgages at “unsustainable levels.” At some point, the losses need to be realized. So panelists expected the long awaited boom in distress to materialize in 2010.
there is a hell of a lot of pain coming.