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The demise of the nine banks whose doors were slammed shut by the Federal Deposit Insurance Corporation (FDIC) provides a vital lesson for the financial services industry.  Those banks could have survived if they had increased their efforts to allow more commercial loan modification deals for their troubled borrowers.  A substantial percentage of these banks had been stricken by the unusually high number of commercial property loans that are found in their credit portfolios.

Presumably, the failure of the nine banks started when more and more property owners became late in in their monthly 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.  We can easily understand this if we take into account the large increases in vacancies in hotels, shopping centers, investment properties, business complexes, strip malls, warehouses, multi-tenant buildings, apartment buildings and office buildings that have severely brought down their incomes.  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 industry was booming at that time, it is easy to see that they merely wanted to maximize the incomes of the financial institutions.  The problem could have started when the market reversed and the property owners began to be late in their payments to stop paying altogether.  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.  

Therefore, it may be a wise decision for the banks to examine more closely the possibilities for a commercial loan modification.  The decreased monthly payments would be much more preferable to zero payments from the commercial property owners.  Moreover, if the commercial property owners are able to financially recover, they could return to higher monthly payments 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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