After federal regulators told banks to work out struggling real estate loans whenever possible in the fall of 2009, they are beginning to mull whether that was a mistake. That's because too many banks have been following their recommendations in too many cases, leading to concern that the strategy might prove counterproductive to the banks' financial health and disruptive to the recovery in the commercial real estate market, according to a story in The Wall Street Journal. Regulators say that the 'extend and pretend' approach is contingent on a relatively quick recovery in the general economy. If the country lingers in the doldrums for too long, banks may end up not having enough cash to with all the real estate assets on their books.
At the same time, the 'extend and pretend' philosophy has prevented banks from selling assets at steep discounts, which has in turn led to less clarity for potential investors on whether the commercial real estate market has hit bottom. In fact, commercial property sales are now at a six-year low, according to a new report from Real Capital Analytics.
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