According to a recent report from the Federal Reserve Bank of New York, extending the maturity dates of struggling commercial real estate mortgages is posing a growing threat to the overall financial system. As reported by Reuters, this practice known as “extend and pretend” has been utilized by banks in order to avoid writing off their capital during the post-pandemic period.
The authors of the white paper state that this strategy has resulted in credit being misallocated and an increase in financial instability. The primary institutions engaging in these extensions are those with weaker marked-to-market capital levels, which have suffered losses on their securities holdings since early 2022. In order to prevent further depletion of their capital, these banks have chosen to ignore signs of distress within their CRE portfolios.
As noted by Reuters citing the white paper, extending maturities for troubled CRE loans has had negative consequences such as hindering new lending opportunities and raising concerns about potential defaults on existing mortgages. The authors warn that these extensions have also contributed significantly towards creating a “maturity wall,” where numerous CRE loans will mature at once with heightened risk for significant losses within a short timeframe.
In summary, according to NY Fed’s findings: “Extend and Pretend” poses serious risks for our financial system.
