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Jim Yoder: The End of “Extend and Pretend”

During the financial crisis of 2009, the Financial Accounting Standards Board relaxed the rules to avoid a severe financial crisis among lending institutions. But the days of kicking the can down the road are over. Now that financial institutions have had time to get healthy, the road has run out.
By |
Jim Yoder

During the financial crisis of 2009, the Financial Accounting Standards Board relaxed the rules to avoid a severe financial crisis among lending institutions. Commercial real estate loans financed in the middle of the decade would be maturing from 2009 through 2014 to the tune of around $2 trillion dollars. A vast majority of them were “under water,” worth on average of 35 percent below the original purchase price.

To refinance the loan, banks have been only willing to loan around 65 percent of the revised value—versus 80 percent prior to the meltdown—forcing the borrower to have to pay down the loan just to get it extended. But even if the borrower had the ability to do so, the motivation would not be there, as a portion of the pay-down could have resulted in an immediate loss of equity.

This would have caused another round of financial calamity, possibly dwarfing the housing crisis. Obviously, the Fed did not want this to happen, so to avert the crisis it created the new accounting standards, allowing the institutions to “extend and pretend” and kick the can down the road.

However, now that the financial institutions have had time to get healthy, the road has run out! Experts have been predicting this; we have only seen glimpses and isolated opportunities to date. We predicted that in late 2010 to 2011 we would see an acceleration of investment opportunities depending on action by the government, and that action is here.

Jim Yoder is a principal and managing director of Valeo Real Estate Fund. Contact him at [email protected]