The failure of the nine banks that were closed down by the Federal Deposit Insurance Corporation (FDIC) offers an important lesson for financial institutions. Those banks could have survived if they had increased their efforts to allow more commercial loan modification deals for their troubled borrowers. It had been observed that most of these companies were negatively affected by the unusually large number of commercial real estate loans in their credit portfolios.

It is believed that the demise of the nine banks began when owners of commercial properties started to become delayed in their loan payments Because of the financial crisis, many of the borrowers could not help it but default in their obligations because their capabilities to repay the loans have been badly compromised. This is easy to see because of the sharp increases in vacancies for shopping centers, hotels, business complexes, investment properties, warehouses, strip malls, office buildings, multi-tenant buildings and apartment buildings that have caused significant declines in cash flow. And as more and more borrowers joined the ranks of those in default in their mortgages, the banks with the most number of such type of loans were the first to feel the effects as their incomes began to plunge down correspondingly.

Whether the decision of the banks to have such a huge number of loans in their portfolios was a wise one or not is no longer the issue. Because the real estate market was then in the upswing, it is easy to understand why they chose to provide so many of this type of loans to maximize the banks’ income. However, they could have committed a more grievous mistake later when the market went into the downswing and borrowers started to default on their loans. And this was the failure to be more aggressive in looking for various solutions, such as a commercial loan modification.

Try as they might, the banks would have been incapable of forcing the property owners to come up with the mortgage payments when their businesses are failing to generate enough income in view of the state of the economy. A commercial mortgage refinace would have given the borrowers more time to deal with the situation and then recover, and the cash flow for the banks would not have been gravely interrupted in the same way as in a foreclosure. Foreclosure should be the last option because it would not have been beneficial for the banks at all if they were unable to sell the repossessed properties right away to convert the assets into liquid cash that they could use for their lending business.

Thus, it is advisable for the banks to look more closely for ways to allow a commercial loan modification. The decreased monthly payments would be much more preferable to zero payments from the commercial property owners. Also, the commercial borrowers might be able to get back on track and increase their monthly payments again in the future. It is therefore prudent for the banks to be more flexible when it comes to their standards, particularly when a financial crisis is happening. Cooperating with borrowers in searching for an answer, such as a commercial loan modification, could be a wise move for the banks.

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