Commercial Loan Modification and Loss Mitigation in Today’s Economy

With the economy perched on the brink of recovery why are we still hearing buzz words like “commercial loss mitigation” and “CRE mods” bouncing around? Why has the FFIEC (Federal Financial Institution Examinations Council) been encouraging it? The answer to both is very simple.The FFIEC is looking at the economy as a symbiotic relationship between creditors (banks), companies, and consumers. All three work together to support the others. Currently many banks have quite a few CRE (commercial real estate) loans that are not looking to healthy after the long recession. The FFIEC simply does not want the banks to panic and start calling in loans at the first sign of recovery. That could spell disaster. The banks end up with once overvalued property and equipment for defaulted loans. With that the plants and mills close pushing down the value further.Instead, what the government wants to see happen is this. Audit the commercial loans and keep as many of the alive through restructuring as possible. This gives companies a chance to rebound and pay off the loans. Market forces will take care of bloated companies and what will be left are more efficient companies. It is the same thing the government has been doing in the residential housing market. The bank does not want your house, they want there money and are willing to work with you in order to get it. A bird in the hand is worth two in the bush. Try to think of it in terms of “Economies of Scale”, For once, businesses are following personal finances rather than the other way around. It is hopeful that this new direction will lead to a more robust economy.With every economic cycle we learn a bit more. There was Reconstruction, the Great Depression, OPEC, the 80′s “spend now, pay later”, the Internet boom. Each of these has taught us more about how our nation’s economy works and the importance of being prudent.

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