Double commercial property loan defaults are at their highest point in 10 years.
And as the Financial Times (FT) reported Thursday (Nov. 7), this situation has raised worries that a lending practice known as “extend and pretending” is masking an increasing system risk.
“They are kicking the can down the road,” Ivan Cilik, a principal at accounting firm Baker Tilly’s financial services division, told the FT.
“I think lenders are trying to work out the problems with these loans, but if rates don’t come down, borrowers are not going to be able to make payments,” he added.
The report noted a growing concern among regulators about the increase in loan modification and if they are distorting loan markets.
A paper last month from the New York Federal Reserve warned that lenders seemed in many cases to be offering breaks to property borrowers for the sole purpose of delaying a write-off.
“Banks ‘extended-and-pretended’ their impaired commercial real estate mortgages in the post-pandemic period,” the central banks researchers wrote, cautioning that generous modifications could lead “to credit misallocation and a build-up of financial fragility.”
That is leading to an uptick in double defaults, the FT added. At the close of September, the value of commercial real estate “re-defaults” was up 90% year-over-year to $5.5 billion.
That marks the highest level in 10 years for modified, non-performing commercial real estate loans, in which a stressed borrower was issued some sort of relief — a lower mortgage rate, for example — only to become delinquent once more.
While just a third of these modified loans have defaulted twice, the FT adds, it is likely that this trend will continue to increase.
“We are in the early part of the curve,” said Cilik. “If we continue to see rising delinquencies we will know that these modifications are just not working out.”
Meanwhile, PYMNTS reported recently on a jump in credit card debt among consumers, which has reached levels not seen in years. Filings by several big banks illustrate that the trend of delinquencies and charge-offs has been climbing as well.
PYMNTS Intelligence’s own data suggests that more than 40% of consumers revolve their debt every month, and that figure jumps to 51% for those consumers who live paycheck to paycheck and have issues staying on top of their monthly bills.
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