I have to admit, I was completely new to the term "extend and pretend" when I first heard it a couple of weeks back. The investment real estate market, especially here in Memphis, TN. has been helped along by this strategy but also hampered by it. I was reading an article in my local newspaper and was shocked at what I read. I was so dumbfounded after reading the article that I had to do some research on it before commenting here.
Then low and behold, I'm here in Orlando, FL. at the 1-800-SELL-NOW real estate investor event talking about the great opportunities to invest in Memphis real estate, and the topic turns to the failed bank strategies that are actually extending the housing crisis. Extend and Pretend was one of the leading strategies that everyone agreed was hurting the market the worst.
If you are not familiar, I'll break it down for you.
Banks are actually extending loans that are in default for borrowers on properties that they know have lost value. They do this on the hope that the properties will actually go up in value and at THAT time, they can either call the note due or re-work the loan to terms more favorable to the bank. That re-work will usually include a principle buy-down which the borrower cannot fulfill and the property goes into default and foreclosure. Do you see the problem here? Today's problems are being put off until tomorrow or worse - next year and the year after.
Now this approach is definitely more prevalent with commercial properties than it is with residential. But the simple fact that banks are ignoring what is a growing problem (delinquent commercial loans), obviously should concern us all. It will lead to less liquidity in the market and less flexibility on the part of banks to work with residential investors like us. It's that hidden, ticking, time-bomb that will end up delaying the recovery of our banking system.
Extend and pretend is a banking business model that we should all be aware of and hope that it is a "rare" tactic. If it's not, this bank meltdown will be around a little longer and the credit squeeze will continue. The best we can do as real estate investors, whether buying in Memphis or anywhere else, is pusue the deals that are available and keep our eyes on those coming down the road.