This is What the End of Extend and Pretend Looks Like

Whether you call it extend-and-pretend or delay-and-pray, the strategy has become a favorite of banks holding too many CRE loans that could suddenly lose value. Nothing shocking here, but there’s been a surfeit of sweeping themes and fewer details of banks trying to avoid putting pressure on their balance sheets.

The New York Times has pulled together some specifics as some big banks look to offload portions of commercial real estate portfolios to avoid losses when office property owners can’t pay off mortgages.

“The banks know they have too many loans on their books,” Jay Neveloff, head of Kramer Levin’s real estate practice, told the Times. He said that some institutions are making discrete inquiries to see how great a discount they’d need to offer for buyers to pick up the worst of their lots. “The banks are going to a select number of brokers, saying, ‘I don’t want this public,’” he said.

Neveloff said that he’s working on behalf of some family offices that have heard directly from banks looking to sell discounted loans. GlobeSt.com heard earlier this year from at least one large investor who received similar inquiries from banks.

Michael Hamilton at the real estate practice of O’Melveny & Myers told the Times that he had been involved in deals in which banks gave borrowers a year to find a buyer, even if that required “a substantial discount.”

“What I have been seeing is the cockroaches are starting to come out,” Hamilton said. “The general public does not have a sense of the severity of the problem.” The banks wanted to avoid a foreclosure, which would make public the situation.

The reason for the quiet nature of these inquiries and deals is to prevent attention to the value of their portfolios. That would provide data for a mark-to-market reevaluation of the value of the properties. If the banks effectively questioned the values of the properties, they might face pressure to write down the value of much of their portfolios. Suddenly, significant portions of their assets would be worth less. Last year, questions of the values of government and mortgage-backed bonds — purchased when yields were very low — drove Silicon Valley Bank, First Republic Bank, and Signature Bank into FDIC receivership.

And as the large investor that spoke to GlobeSt.com earlier this year also noted, banks face legal restrictions on how long they can hold onto property themselves before having to write it down and sell.