For more than a year now, multifamily equity funds and brokers have complained about the “extend and pretend” policy in the banking industry. At the 2010 ULI Fall Meeting, Shelia Bair, chairman of the Federal Deposit Insurance Corporation (FDIC), defended that policy.

“Some have criticized these loan workouts as a policy of extend and pretend,” Bair said. “But the restructuring of these commercial real estate loans around today's cash flows and interest rates may be preferable to foreclosure and forced sale of distressed property.” Last fall, the FDIC issued guidance designed to provide more clarity to banks on how to report those cases where they have restructured commercial loans, which Bair said was an important step to reduce uncertainty as to how restructuring efforts would be reported.

One attendee asked why a Resolution Trust Corporation (RTC)-type instrument hadn't been established. Bair said that even without the RTC, some assets were being cleansed from the system.

“There's plenty of property going into foreclosure,” she said. “I don't think there's any shortage there.” On the mind of many people was when banks would start producing more new loans. Bair answered by saying that regulators were trying to strike a balance.

“There was too much credit out there in the past,” Bair said. “You don't do borrowers any favors by making them loans that they cannot repay and supporting projects that aren't viable.”