Bernake Anticipates Upcoming Refinancing Cycle

Federal Reserve Chairman Ben Bernacke noted recently that commercial real estate loans will soon need to be restructured.  It is expected that the peak activity will occur in Q2 2012.

To mitigate the possible crisis that could result when property values and debt no longer square — or possibly never did given the lax approval processes that preceded the financial collapse — Bernake urged that cash flow analysis be paramount in developing restructured deals. As Bernanke explained, “Commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value.”

Bank regulators have not yet publically agreed to using cash flow instead of marked to mark collateral values for determining the value of these loans to be restructured. It is anticipated that they will.

Ben finally gets it.  It’s the economic value that matters, not liquidation price.  Let’s hope all of the other regulators get the memo and apply.  Ben’s prudent proclamation to residential real estate, too.