A client of ours has recently purchased large portfolios of loans from failed banks.  Including some of the well-publicized FDIC auctions of leftover commercial real estate loans from now-closed banks.  In talking to this client last week, he believes we are seeing a divide in commercial real estate financing markets on existing debts.

The first pool of loans are the ones similar to the FDIC sales, which come from private banks, which are generally smaller in nature on local commercial real estate projects and properties.  Clearly, banks that failed have a new ownership and are forced to make some changes to their loan portfolios, but the few we’ve seen that the FDIC has actually sold off so far are the exception.  Most banks today have been able to hold their loans and have their former mortgage originators now monitoring those loans on a monthly basis to assess their cash flow potential.  With this knowledge of the up-to-date operations of each individual property, these private banks are often extending Tenant loans and softening terms.  Foreclosure is an expensive legal process and takes the loan into a different category with bank regulators.

The second type of loans are the commercial mortgage backed security loans, which as we had discussed before are pooled together and sold off as bonds in many pieces.  Our client has been active in buying a few of these pieces that on the surface seem to be riskier portions of the loan, but in all instances so far, the loan terms have been renegotiated and/or extended as opposed to foreclosed upon.

Many in the industry today call it “Extend and Pretend.”  If the underlying economics are on the upswing or do continue to improve, then operating results, including the payment of pricinpal and interest, will be able to increase on these loans.  The lenders today obviously feel it is more productive for them to continue to work with the existing in-place borrower than to draw a line in the sand, and force the company to go through the foreclosure process, let the property essentially disintegrate in condition, and command a significantly lower value at a distressed sale.