Federal Regulators are preparing workout guidance on commercial real estate loans that encourages banks to refinance these mortgages despite declines in property values.

Federal Deposit Insurance Corp. chairman Sheila Bair told a Senate panel the guidance would be issued soon. "Collateral is a secondary source of payment and should not be the primary determinant to close down lines of credit or deny a refinance because of weakened collateral value," Bair testified.

She stressed that "FDIC focuses on borrowers' repayment sources, particularly cash flow, as a means of paying off loans."

FDIC-insured banks hold $1.1 trillion in CRE loans, or 14% of all loans and leases. Banks have charged-off only $6.2 billion of CRE loans over the past two years, compared to $65 billion in single-family loans.

Comptroller of the Currency John Dugan noted it may be "difficult" to rollover CRE loans because of declines in property values and tighter lending standards. "While this is an area we are monitoring, the largest proportion and more problematic of these mortgages will not mature until 2011 and 2012," Mr. Dugan testified.

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