According to a new report, some of the largest American banks are quietly reducing their exposure to the troubled sector of the US economy.
The New York Times reports that banks are selling loans for commercial real estate to “reduce their losses.” For example, Goldman Sachs and Citigroup recently sold parts of a $1.7 billion loan backed by office buildings in New York, San Francisco, and Boston.
In addition, Capital One sold a $1 billion portfolio, which includes many loans for office buildings in New York.
While the sold loans are insignificant compared to the $2.5 trillion worth of commercial real estate loans held by all banks in the US, this change in strategy is significant.
The newspaper suggests that these actions reflect some lenders’ reluctant acknowledgment that the “extend and pretend” strategy is failing, and many property owners, especially those of office buildings, are likely to default on their mortgages. As a result, significant losses are expected for lenders and a drop in bank revenues.
“Extend and pretend” is an approach that gained popularity during the global financial crisis of 2007-2008, where the lender extends the repayment term of the loan to the borrower, allowing property owners to pretend that the value of the property has not decreased.
The commercial real estate market is facing challenges due to the increase in remote work. According to ATTOM data, in March, there were 625 cases of commercial real estate foreclosures nationwide, representing a 117% increase on an annual basis.