The whole extend-and-pretend concept has been a fiction of process to help banks and borrowers. Don't push problems to the point banks must recognize them, write down the associated loans on their balance sheets, and then foreclose or sell the loan at a loss. Cooperate and retain the property (at least for now) without insolvency or bankruptcy. Then, when the Federal Reserve cuts interest rates more, refinancing will be easier and all that wasn't maybe so well will ultimately end well.

A new analysis from the New York Fed suggests that the attempt to plaster over problems and wait for a favorable rate change isn't broadly helpful. Instead, the staff argues that the extend-and-pretend process led to increased, not decreased, financial pressure on banks.

Matteo Crosignani and Saketh Prazad of the New York Fed's staff used supervisory data, giving them greater detailed insight than exterior views of banks. Starting in the first quarter of 2022, as the authors put it, banks extended the maturities of impaired CRE loans and then pretended that the results weren't distressed loans. Pushing the loans out also understated the conditions because these were typically balloon mortgages with interest-only payments and a "sizable loan principal balance" that needed repayment at maturity. Essentially, the shift downplayed the risk as the borrowers weren't able to continue making those interest payments, let alone be ready for the balloon portion.