Part 2: Regulators Make Accommodations for CRE Collateral Stress

Jul 24, 2023 | Macro Insights, No Bull Economics

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The regulators are permitting the banks to “extend and pretend” by allowing them to work with troubled borrowers of sound commercial real estate properties to restructure & buy time to restore value. It’s a good idea, but will it work?


  • In our last post, we discussed the seemingly overwhelming challenge for the banks as it relates to the prospect of a material decline in commercial real estate (CRE) values.  
  • Notably, this is an issue that affects the regional banks more than the SIFIs (systemically important financial institutions) given a relatively heavy real estate portfolio weighting for the smaller banks.
  • Analysts estimate a significant amount of debt maturity for CRE loans starting in 2024, and fortunately, the bank regulators have made some accommodations that could help the banks as outlined in its Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.

Key Policy Points

Bullets below highlight loan accommodations & extensive loan workout arrangements which are encouraged for commercial real estate borrowers who are experiencing diminished operating cash flows, depreciated collateral values, prolonged sales & rental absorption periods:

  • Short-term or temporary loan accommodations before a loan reaches a workout scenario.
  • Reliance on a borrower’s global debt service coverage, including cash flows generated by both the borrower(s) & guarantor(s) beyond the specific credit.
  • Reliance on market valuations (as opposed to fair value) that corresponds to the workout plan objective and the loan commitment. For example, if the financial institution intends to work with the borrower so that a project will achieve stabilized occupancy, then the financial institution can consider the “as stabilized” market value in its collateral assessment for credit risk grading.
  • Classifying loans according to a borrower’s expected performance and its ability to meet its obligations in accordance with the modified terms over the remaining life of the loan (as opposed to measuring risk based upon a loan’s payment history). The prospects for the CRE property may consider improving events & market conditions that reasonably may occur during the term of the loan.
  • A restructuring may involve a multiple-note structure in which, for example, a loan is restructured into 2 notes with one note representing a portion of the current outstanding debt that is reasonably assured of repayment and performance according to prudently modified terms.

Source: Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts

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