With the commercial property sector sliding down to a crisis that could even be worse than the one felt by the residential real estate segment, it is easy to understand why the financial regulators have encouraged banks to step up their efforts to discover ways to allow commercial mortgage modification for borrowers who are in danger of foreclosure.  The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other financial regulators are worried that the stability of the financial institutions could easily crumble with the onset of the upcoming wave of defaults by commercial property borrowers.  The property owners are experiencing difficult times as a result of the reduction in their cash flows, the decline in the values of their properties, and absorption periods for rental and sales that are too long.

The regulators also realize that a substantial number of these troubled property owners can still be depended upon when it comes to repaying loans and that they are only temporarily prevented from doing so.  Hence, if both parties could just reach a decision for a mutually beneficial commercial mortgage modification, there is a strong chance that both will feel the positive effects in the future.

The bank regulators have identified various kinds of commercial mortgage modification strategies and these include the lengthening of the duration of the mortgage, the provision of more credit, the renewal of specific provisions in the original loan contract, and changes to the conditions with regards to payment.  As a way to encourage the lenders, the regulators have also stressed that if the workout deal will lower the classification of the loan, the bank examiners will disregard this and will take it as a negative score against the bank if the lender had applied the appropriate standards in evaluating the risks that come with the loan modification.

The financial regulators want to prevent foreclosures that could have untoward effects on the economy, the borrower and lender if both parties are unable to come up with a commercial mortgage modification agreement that is acceptable to them.  Obviously, the borrower will no longer have the income-producing property and this in turn would reduce its positive contributions to the economy.  After spending so much on the foreclosure proceedings, the lender will also experience the negative impact of possessing a property that it could not sell because the market is filled with a large number of such properties.

As for the borrower, it is usually prudent to get the services of a loss mitigation professional who can help in preparing the arguments that could be more effective in convincing the bank to approve a commercial mortgage modification.  This professional will also conduct a forensic loan audit to find out if there are any indications that the lender had violated certain laws and regulations governing the rights of borrowers when it provided the loan in the first place.  Because of the grave penalties for such violations, their discovery can provide the borrower with a substantial amount of leverage when negotiating with the lender for a restructuring of the loan.

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