Benefits Of Commercial Mortgage Modification For The Economy - Financial analysts have been predicting that the commercial property sector will also undergo a crisis that might even be worse than the collapse experienced in the residential housing market. The increasing number of vacancies in commercial properties and the unchecked increase in the unemployment rate are harbingers of potential serious problems in this particular market. |
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You are here: DIME Home > Finance > Benefits Of Commercial Mortgage Modification For The Economy
Financial analysts have been predicting that the commercial property sector will also undergo a crisis that might even be worse than the collapse experienced in the residential housing market. The increasing number of vacancies in commercial properties and the unchecked increase in the unemployment rate are harbingers of potential serious problems in this particular market.
Author: Michael Bartonolis
Date: Dec 16, 2009 - 1:52:48 PM
Financial analysts have been predicting that the commercial property sector will also undergo a crisis that might even be worse than the collapse experienced in the residential housing market. The continued rise in the number of people losing their jobs and the rising number of vacancies in commercial real estate are like dark clouds indicating that a storm is brewing. This is a logical prediction because the end result of this kind of situation are problems for the property owners in making the monthly installments. And if this is true, it is logical to conclude that they would not also be capable of making the balloon payment that is required as the final payment for the mortgage. Just like in the residential real estate market, this could ignite a series of defaults and foreclosures that could further bring down the economy. It is here where commercial mortgage modification could provide assistance to the ailing property owners, the banks and the economy as a whole.
One strategy is for the lender to approve a temporary or permanent reduction in the interest rate so that the property can avoid foreclosure. Even bringing down the rate by one percent could reduce the debt burden by thousands of dollars each month. This kind of commercial mortgage modification could achieve much in providing the property owner some room to breathe while waiting for the economy to recover and for the properties to get more tenants again.
Another technique that can be used in commercial mortgage modification is to adjust the duration or maturity of the mortgage. This is helpful in putting off the balloon payment or even avoiding it completely if refinancing could be obtained later on and it will also decrease the monthly payments. The balloon payments are often present because the monthly payments for commercial loans are often based for a longer term than the actual loan term. To illustrate, the monthly payments may be computed with 25 years as the loan duration but the real term may only be for 10 years. Thus, a large amount is still unpaid when the end of the term is reached. During better times, the commercial property borrower will either find a buyer for the property or search a bank to provide another loan to in order to come up with the balloon payment. However, with the financial crisis, hunting for a bank to provide refinancing could be very hard because of the decline in property market values and the much reduced availability of loans. The same could be true when looking for possible buyers of the property.
A commercial mortgage modification may also allow the property owner to stop paying for a while. To illustrate, the borrower may be allowed by the bank to skip three to six months in the payments without incurring penalty charges. This will provide the mortgage borrower with more time to gather some funds and find ways to decrease the vacancies.
Meanwhile, bank regulators have joined the other experts in urging the banks to consider the possibility of a commercial mortgage modification or loan workout when property owners request for assistance. With the number of foreclosures minimized, the economy could have a stronger chance for faster recovery.
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