According to a recent report from Reuters, the Federal Reserve Bank of New York has expressed concerns about extending the maturity of troubled commercial real estate mortgages. This practice is seen as potentially increasing risks for the broader financial system.
The study’s authors noted that many banks have been using a strategy known as “extend-and-pretend” in order to avoid writing off their capital during the post-pandemic period. However, this approach can lead to credit misallocation and create financial fragility.
The white paper also highlighted that banks with weaker marked-to-market capital levels are primarily responsible for these CRE mortgage extensions. These institutions have been pretending that these loans are not distressed in order to prevent further depletion of their capital since early 2022.
Reuters reported on how extending maturities for troubled CRE mortgages has made it more difficult for new loans to be issued and increased the likelihood of imminent defaults. The New York Fed authors stated, “These extensions have also contributed to a ‘maturity wall’ where there is now an elevated risk of large losses materializing within a short period.”
In summary, according to Connect CRE’s coverage on this topic titled “NY Fed: “Extend and Pretend” Increases Risk To Financial System,” it appears clear that prolonging repayment terms on struggling commercial real estate loans may ultimately pose significant dangers not only at individual bank level but across entire economic sectors as well.
