The Coming Commercial Loan Default Wave. . . Will it Materialize?

The New York Times is reporting that of the commercial loans that were made in 2007 with a balloon payment due in 2012, only 28% have managed to make that balloon payment. This is another indicator of the coming commercial mortgage default wave that has been predicted for some time now. The real question is, will it materialize? Banks and other lenders have a vested interest in making sure that these loans do not default, and consequently, there would seem to be enough inertia for reasonable workout terms.

One problem with this idea for commercial banks, however, is that they are terrified of their regulators who now micromanage how they handle these loans. That micromanaging in many cases will make any terms to onerous for the borrower and will result in a default. Some workouts have been reached using the “extend and pretend” formula (i.e., extend the term of the loan and pretend that the market will get better), and there will likely be some loans that follow this course. But the real question is how many? That remains to be seen.

The article goes on to point out that while some of these loans were made with 5 year maturities, some were made with 7 and 10 year maturities. So, there will be growing numbers of matured loans over the next 3-5 years and growing pressure on the commercial real estate mortgage industry to develop programs to deal with these loans, or face further significant loss of commercial real estate value.