While the country’s lenders struggle to stay afloat, one of the main methods for keeping books in the black for banks with heavy commercial real estate lending portfolios is a common practice called “amend and extend” or “extend and pretend”[1]. Basically, this strategy involves changing the terms of an existing loan in order to give the borrower more time to pay that loan off. The hope is that by amending the terms to enable the borrower to avoid refinancing that may be impossible, the lender will ultimately be able to collect the balance due on the loan.
Let’s be clear: This common practice is entirely legal.
However, the SEC has become concerned that extend and pretend, along with another practice known as “troubled debt restructuring” that allows banks to break loans into pieces, may have been abused in order to diminish the volume of reserves banks are holding. At least one bank, Fifth Third Bancorp, has been subpoenaed by the SEC recently, though the lender refused to say whether or not the subpoena was related to these commercial lending practices. Data firms are blaming “toxic commercial debt” for twelve bank failures just last month, and currently commercial delinquencies account for 72 percent of all delinquent loans[2].
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[1] http://online.wsj.com/article/SB20001424052748704728004576176950557490900.html
[2] http://www.dsnews.com/articles/home-loans-now-less-of-toxic-threat-than-commercial-real-estate-2011-03-03
