According to a new report, some of the largest American banks are quietly reducing their exposure to the troubled sector of the U.S. economy.
The New York Times reports that banks are selling commercial real estate loans to “reduce their losses.” For instance, Goldman Sachs and Citigroup recently sold parts of a $1.7 billion loan secured by office buildings in New York, San Francisco, and Boston.
Additionally, Capital One sold a portfolio worth $1 billion, which includes numerous loans for office buildings in New York.
Although the sold credits are insignificant compared to the $2.5 trillion worth of commercial real estate loans held by all U.S. banks, this shift in strategy is noteworthy.
The newspaper suggests that these actions reflect some lenders’ reluctant acknowledgment that the “extend and pretend” strategy is failing and that many property owners, particularly of office buildings, are likely to default on their mortgages. Consequently, significant losses for lenders and a decline in bank revenues are anticipated.
“Extend and pretend” was a strategy popularized during the global financial crisis of 2007-2008, wherein lenders extended the repayment term of loans to borrowers, allowing property owners to pretend that the value of the property had not decreased.
The commercial real estate market is facing difficulties due to the increase in remote work. According to ATTOM data, 625 cases of commercial property seizures were registered nationwide in March, representing a 117% year-over-year increase.
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