Lenders Prepare for Impact: When the Wave Hits
Retelling Chapter 6 (Part 1) of The Commercial Real Estate Tsunami by Tony Wood (foreword by Matthew Anderson, ISBN 978-0-470-63637-4).
Part Three of the book shifts from diagnosis to survival tactics. Chapter 6 is aimed at lenders, and Tony Wood does not pull punches. He opens with two images: the three monkeys who see, hear, and speak no evil, and the banking phrase “extend and pretend.” Both describe how many institutions handled distressed commercial loans in 2009.
Wood had spent the prior year inside failed construction deals and troubled assets. Creditworthy clients with strong balance sheets were getting routine extension requests denied. Banks were creating defaults that better process could have avoided.
Gordon Stevenson’s nine-month fight for an extension
The chapter’s opening story is personal. Wood’s business partner Gordon Stevenson had a loan on a vacant corner parcel near a freeway and a college. He put 50 percent down. The land had not cratered in value the way occupied buildings had. Months before maturity he asked for a short extension while he lined up new financing. He had never missed a payment and had a long relationship with the bank.
The bank’s response was immediate foreclosure threats, including aggressive emails Wood describes as the electronic equivalent of screaming. No alternatives. No problem-solving. Only after nine months and a lawyer did the lender grant the extension Gordon had requested from the start. That bank later faced an FDIC cease and desist order.
Wood’s point is simple: if a bank can extend nine months late, it could have extended on day one. Regulators were urging extensions for performing loans. Many banks still refused, pushing solvent borrowers into foreclosure.
See no evil, hear no evil
Wood sees a pattern. Banks promote loan officers who underwrote boom-era deals into “workout specialists” overnight, then ask those same people to fix loans they originated. Conflicts abound. Delays in admitting trouble are common.
He recounts conversations he witnessed firsthand:
Lender: “Why don’t you just refinance?”
Borrower: “It’s only worth $10 million and I owe you $15 million.”
Lender: “We have an appraisal from last year that says it’s worth $10 million more than you owe.”
No follow-up questions. No fresh market check. Just “let’s talk again next month.” Wood cites lenders who rejected $8 million offers on $15 million loans, then sold notes for far less. Some of those banks were later seized by the FDIC.
Lenders face a historic REO wave comparable to the RTC era, but without the same playbook.
Acknowledge the problem first
Productive workouts start with honesty on both sides. Wood designs lender strategies around accurate property data, local market trends, and a borrower’s real ability to survive or fail. Outside consultants without internal politics help.
On valuations, Wood is blunt about appraisals in falling markets. Appraisals look backward. In a prolonged decline they often lag reality unless standards change. Broker price opinions with solid investment analysis can give lenders a more current picture. Brokers already supply much of the data appraisers use. Used carefully, they can help everyone limit losses faster.
Commercial loan modifications are coming, but carefully
Residential loan mods arrived first. Commercial mods were starting too, and Wood warns they will fail at high rates without strategy. Early residential mods failed at alarming rates within three to six months. Commercial deals have even more variables per property, so any standardized approach will only go so far.
Many assets will not qualify for modification. Those need cooperative takebacks and realistic resale pricing. Lenders that become owners must manage assets like owners. Special Assets teams need real sales and property management skills from day one.
Eric Von Berg: how we got a trillion-dollar maturity wall
Wood interviews Eric Von Berg, CMB, principal at Newmark Realty Capital and a former chairman of the California Mortgage Bankers Association. Von Berg’s core answer to “how did we get here?” is funding structure.
After the S&L crisis, heavy regulation pushed banks toward caution and off-balance-sheet lending. Securitization filled the gap. CMBS itself was not evil, Von Berg says, but everyone assumed rating agencies were “watching the store.” They were not. Residential subprime then killed securitization broadly, turning what might have been a 20 percent commercial correction into something closer to 40 or 50 percent in many sectors. Apartments held up better because Fannie and Freddie kept multifamily lending alive.
Von Berg calls it “extend and pretend,” visible first in land deals where appraisals lagged until values collapsed. Las Vegas and Phoenix were further along. Resort hotels were among the worst hit. The W Hotel in San Francisco sold at roughly half peak value.
Most of the trillion-dollar maturity wave sits in bank portfolios, not just CMBS. Von Berg also flags equity-rich borrowers who default because they cannot get small TI loans. Regulators treat new money as a workout requiring extra capital reserves, so banks say no even when the math works.
Historic REO volume is coming, though discounted note sales may keep reported REO lower than actual losses. Special servicer rules and lender workout law come next.
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