Federal regulators have issued guidance that encourages banks to refinance or restructure commercial real estate loans despite declines in property values and rents.
"The financial regulators recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions," according to a policy statement issued by the Federal Financial Institutions Examination Council.
The policy statement provides examples of prudent CRE workouts. It also stresses the importance of the borrower's willingness and capacity to repay the mortgage.
The guidance tells examiners not to adversely classify prudent workouts, even in cases where the borrower is associated with an industry that is facing financial difficulties.
CRE loans that are "renewed or restructured in accordance with prudent underwriting standards should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment," the guidance says.