Is the era of “extend and pretend” finally coming to an end? Did it ever exist in the first place?
The idea that banks were extending problematic commercial real estate loans down the road to push off losses was viewed as an accepted fact by the industry. But a Federal Reserve Board economist published a paper disputing the widely accepted narrative.
The paper titled “Pretend or Amend? On Evergreening in CRE” argued that banks have not blindly extended maturities on bad loans. In fact, the opposite occurred, the findings show. Since 2022, banks have been more selective about loan extensions and required loans to be backed by collateral, also known as recourse. On loans with low debt yields, only about 20 percent of non-recourse loans received extensions compared to 40 percent of recourse loans, according to the report.
The paper, written by economist David Glancy, may rattle doomsday prognosticators who have predicted that a day of reckoning is around the corner when banks can no longer push off maturity dates. Banks will be forced to write-down loans, leading to bank failures, the theory goes.
Howard Lutnick also perpetuated predictions of bank collapses. In 2024 the then-chairman of Cantor Fitzgerald estimated somewhere between 500 and 1,000 banks would fail in the near future.
“You’re going to start seeing that in ’25 and ’26. Every single weekend a regional bank is going to go bye-bye,” said Lutnick, at The Real Deal’s annual NYC forum in May 2024.
Since then, only the First National Bank of Lindsay has failed. A Treasury OIG report suggested the tiny Oklahoma bank collapsed mostly because of fraud committed by the CEO.
Glancy’s paper looked at whether banks increased loan extensions on their more challenged loans. If so, did banks provide more accommodations to the lowest quality borrowers?
According to Glancy’s research banks did not ease requirements. Low yielding loans were about 7 percentage points less likely to receive extensions after 2022. Non-recourse loans were 5 percentage points less likely to obtain an extension.
Another key finding: since 2023 banks extended loans around historical norms. The volume of maturing loans receiving extensions was around 50 percent. This slightly exceeded pre-pandemic extension rates which hovered around the mid-40s, but fell below the 60 percent extension rate for loans maturing early in the pandemic.
“There is no clear sign of banks increasing extensions to hide the stress.” the report said.
It concluded: “large banks do not extend-and-pretend.”
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