Home  Mortgages Advantage of Commercial Mortgage Modification for the Economy
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Advantage of Commercial Mortgage Modification for the Economy |
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Written by MikeBartonolis
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Sunday, 28 February 2010 |
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Economic experts have been foreseeing the emergence of a crisis in the commercial property market that could even be worse than that situation in residential housing. 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. It is easy to see this because this type of situation makes it much harder for the borrowers to come up with the loan payments. 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. Luckily, commercial mortgage modification could offer a helping hand for the economy, the banks and the borrowers.
by MikeBartonolis
Economic experts have been foreseeing the emergence of a crisis in the commercial property market that could even be worse than that situation in residential housing. 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. It is easy to see this because this type of situation makes it much harder for the borrowers to come up with the loan payments. 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. Luckily, commercial mortgage modification could offer a helping hand for the economy, the banks and the borrowers.
One strategy is for the lender to approve a temporary or permanent reduction in the interest rate so that the property can avoid foreclosure. This is important because thousands of dollars could be eliminated from the debt burden of the borrower every month with just a one percent drop in the interest rate. 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 commercial mortgage modification strategy is to extend the maturity of length of the loan. 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. For example, the calculations for the monthly installments may be based for a term of 25 years but the actual term of the mortgage is only 10 years. Therefore, a large amount has to be paid just before the mortgage expires. 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. In the same manner, searching for potential buyers would also be a tough undertaking.
A commercial mortgage modification may also allow the property owner to stop paying for a while. The bank may allow the property owner to skip payments for three to six months without any penalty charges, for example. This would permit the property owner to look for more tenants and find ways to come up with the payments.
Meanwhile, commercial mortgage modification is also one of the workouts that are being touted by bank regulators to help the banks remain viable. With the number of foreclosures minimized, the economy could have a stronger chance for faster recovery.
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