According to The Wall Street Journal (subscription required), bank auditors are looking closely at whether or not banks are using interest reserves to hide troubled real estate construction loans.Interest reserves represent money set aside by the bank from loan proceeds to cover the interest expense to be incurred over the life of the loan. In effect, the bank could be paying themselves interest even when a loan is not performing and should be considered delinquent.
"As an indication of regulators' concerns about construction lending, the FDIC in recent months has hit some banks with cease-and-desist orders requiring, among other things, that they overhaul how they use interest reserves. Analysts have warned that some 150 small banks could fail in the next few years because of their big bets on construction loans."Use of interest reserves has been a long standing practice. However, with bank losses growing daily from bad real estate construction loans, The Wall Street Journal notes some banks may alter or discontinue this practice.
If interest reserves are a critical element of your real estate construction loan, you'll find some private money lenders are willing to provide interest reserves. Of course, the cost of this money will be significantly higher than bank financing.
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Tags : commercial real estate , hard money loans , construction loans
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