Report

Extend-and-Pretend in the U.S. CRE Market

Abstract: We show that banks “extended-and-pretended” their impaired CRE mortgages in the post-pandemic period to avoid writing off their capital, leading to credit misallocation and a buildup of financial fragility. We detect this behavior using loan-level supervisory data on maturity extensions, bank assessment of credit risk, and realized defaults for loans to property owners and REITs. Extend-and-pretend crowds out new credit provision, leading to a 4.8–5.3 percent drop in CRE mortgage origination since 2022:Q1 and fuels the amount of CRE mortgages maturing in the near term. As of 2023:Q4, this “maturity wall” represents 27 percent of bank capital.

Keywords: commercial real estate; zombie lending; financial fragility; credit misallocation;

JEL Classification: G21; E51; R33;

https://doi.org/10.59576/sr.1130

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2024-10-01

Number: 1130