Growing Number Of CRE Borrowers At Risk Of Double Defaulting On Loans

The number of borrowers defaulting for a second time on property loans nearly doubled over the past year, a potentially ominous warning sign for banks with a high concentration in commercial real estate.

The value of loan “re-defaults” on banks' books in September was up 90% from a year prior, according to industry tracker BankRegData data reported by the Financial Times.

Around $1B of loans have been added to the list of those at risk of re-default in the last quarter alone, with the total value of loans at risk sitting at $5.5B. 

The level of borrowers receiving relief for modified, nonperforming commercial real estate loans only to once again become delinquent is the highest it has been since 2014, the FT reported. 

The double defaults show that “extend and pretend” strategies lenders have used to avoid taking write-offs on property loans could backfire as interest rates remain elevated.

Banks have roughly $2T in commercial real estate loans, but the value of delinquent loans has increased by 25% to hit $26B in the first three quarters of 2024 — spelling potentially heightened difficulty in the near future.

“They are kicking the can down the road,” Ivan Cilik, a principal with accounting firm Baker Tilly’s financial services group, told the FT. “I think lenders are trying to work out the problems with these loans, but if rates don’t come down borrowers are not going to be able to make payments.”

Loan modifications shot up by 150% during 2023 from a year prior, with extensions being the most popular option, according to data from CREDiQ published this spring.

Experts predicted at the beginning of this year that “extend and pretend” strategies could not sustain for much longer. Now, regulators fear that the practice is covering up a growing systemic risk and distorting loan markets as lenders seek to avoid loan write-offs.

“Banks ‘extended-and-pretended’ their impaired commercial real estate mortgages in the post-pandemic period,” researchers at the Federal Reserve Bank of New York warned in a paper last month, adding that the modifications could cause “credit misallocation and a build-up of financial fragility.”

Overall, “extend and pretend” loan modifications have resulted in banks being able to report new delinquencies slowing by 40% this year. Only around one third of modifications offered by banks over the past year have actually resulted in a double default, the FT reported.