In June 2023, the Federal Reserve, FDIC, and Treasury told banks to extend loans for struggling borrowers without penalty, a policy called "extend and pretend." Now that inflation is cooling and rates are falling, regulators have withdrawn that guidance, leaving commercial real-estate lenders facing a maturity wall as loans come due and borrowers can't refinance.
Many people, even seasoned real estate investors, don't know that in June of 2023, the Fed sent out a joint memo. Not just the Fed, the FDIC, the Treasury, all of the regulators, everyone from a red pen got together and pushed out joint guidance to all of these lenders and said, hey, if you have an otherwise creditworthy borrower, modify the loan, extend it out in '23. Okay, so that entered in this phase of what we call extend and pretend. And what to certain extent, the regulators were saying is we're not going to penalize you for what we call NPL, non-performing loans, on your balance sheet, or if it's in your roster, your stable of loans, and they're not performing. We're not going to force you to go foreclose on your borrower because the Fed was saying we do not want 2008. We do not want to go back to 2008 where lenders were foreclosing and had thousands of loans on their REO schedule, and then that clogged the market. So like in 2008, by 2015, we still working our way through it. We were still working our way through it almost like a decade after 2008. So the Fed's like, let's not do that again. No, that was a bad telenovela. Let's actually do something different. And so this extend and pretend came into place. But then as the economy started to get better and we started to see the Fed's fight against inflation start to even out certain things and rates could start to come down slightly, we start to see some movement in the Treasury, right? We started to see SOFR. I think I looked at SOFR today, it's 3.61 or something like that. So you started to see some of these KPIs from the standpoint of how banks loan to borrowers in the CRE industry. And the Fed's like, okay, no longer, no extend and pretend. And that is what is creating pressure on the maturity wall.
