One loan
Example loan. Names and figures are illustrative.
A 96-unit apartment property. The loan matures in seven months. Income has fallen, and the loan cannot refinance for its full balance at today's rates.
1. What changed
Income has fallen 30% since the loan was made, from $1,461,600 to $1,023,120 a year. The loan is interest-only at 5.25%, and income now covers the payment just 1.06 times.
With the owner's $250,000 paydown (below), the balance is $18,310,000. A new loan today would cost 6.44%: the Secured Overnight Financing Rate of 3.94% on October 29, 2026, plus an example spread of 2.50 points. At that rate, income covers the interest only 0.87 times, so the full balance can't refinance.
The property is worth about $17,640,000, at the national apartment cap rate of 5.8% (Freddie Mac, June 2026). That's $670,000 less than the balance.
2. The owner and guarantor
The owner also personally guarantees the loan. They report $4.2 million of net worth, but only $450,000 in cash, behind $26.2 million of guarantees on three properties. They can pay $250,000 down now, bringing the balance to $18,310,000. They cannot carry a full refinance.
3. The bank's choices
| Choice | Value to the bank today | Main risk |
|---|---|---|
| $16.82 million | The sale doesn't close, or the price comes in low. | |
A property saleWhat the bank gets: $17,110,800 after an example 3% selling cost. Loss of $1,199,200. Time: an example six months to market and close. A local first right to buy, if any, can add time. If it fails (example chance, 30%): foreclosure starts after six months. Accounting: the $1,199,200 is charged off. The rest is likely graded substandard until closing. Interest received after the charge-off may be counted as income on a cash basis. |
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| $16.76 million | The owner doesn't agree. | |
Deed-in-lieuWhat the bank gets: the property, which the bank sells after an example six months. Income while it holds the property, less an example $40,000 of legal costs. Time: about six months after the handover. If it fails (example chance, 40%, the owner doesn't agree): foreclosure starts now. Accounting: the property is booked at $17,110,800, and $1,199,200 is charged off. Releasing the owner from the shortfall is a disclosed forgiveness. |
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| $16.71 million | The shortfall is still there at maturity. | |
ForbearanceWhat the bank gets: seven months of interest, $560,744. The $18,310,000 balance stays due. Time: the seven months left, then the same decision. If it fails (example chance, 10%, payments stop at month four): foreclosure starts then. Accounting: no change, unless the maturity date moves. If it moves, that's a disclosed change. |
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| $16.64 million | A small further drop in income leaves the payment uncovered. | |
ExtendWhat the bank gets: twelve months of interest, $961,275. The $18,310,000 balance stays due, against a $17,640,000 value. Time: twelve months, then the same decision. If it fails (example chance, 15%, payments stop at month six): foreclosure starts then. Accounting: the extension is disclosed. The loan likely stays substandard, and its interest isn't counted as income. |
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| $16.35 million | The slowest path, with legal and receiver costs. | |
ForeclosureWhat the bank gets: the property's income through an example 18 months, then a sale. Less example costs of $250,000 for legal work and $90,000 for a receiver. Time: notice goes out, and the property is sold under the rules where it sits. Slower than a sale the owner agrees to. If it fails (example chance, 20%): the resale comes in 10% below value. Accounting: $1,199,200 is charged off. The property is booked at $17,110,800 when the bank takes it. |
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| $16.20 million | The second note depends on a later sale. | |
ModifyWhat the bank gets: a $12,709,565 note at 6.44%, covered 1.25 times by income, plus a $4,401,235 second note repaid when the property sells (example, month 24). $1,199,200 is charged off. Time: short to document. The second note waits for a sale. If it fails (example chance, 25%): the later sale comes in 10% below value. Accounting: the performing note can count interest as income again, subject to the bank's own policy. The second note can't. A new maturity date is disclosed. |
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| $16.03 million | A buyer may not pay the example price. | |
Sell the loanWhat the bank gets: $15,563,500 at an example price of 85% of the balance. Loss of $2,746,500. Time: an example six months to find a buyer. If it fails (example chance, 40%, no buyer): a property sale starts then. Accounting: the loan comes off the books, and the loss is charged to reserves. |
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| $14.77 million | A new lender may not fund it. | |
Discounted payoffWhat the bank gets: $12,709,565, funded by the owner's new lender. Loss of $5,600,435. The owner keeps the property. Time: an example three months, for the new loan to close. If it fails (example chance, 50%, the lender doesn't fund): a property sale starts then. Accounting: the loss is charged to reserves. Forgiving the rest is disclosed. |
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| Not possible on these figures | The loan is $670,000 more than the property is worth. | |
New investor moneyWhat the bank gets: nothing on these figures. An investor would pay $5,600,435 to own $4,930,435 of equity. Accounting: no change. |
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"Value to the bank today" counts all the cash the bank receives under each choice, minus that choice's costs, discounted at 6.44%. Each figure is weighted by an example chance that the choice fails. Select any choice for details. See the workings.
4. Draft for the committee
Recommendation: a property sale. The bank receives about $17,110,800 at closing and charges off $1,199,200.
The top choices are close. A sale, a deed-in-lieu, forbearance and an extension are within about $180,000 of each other. The order rests mainly on example chances that each choice falls through. In practice, the decision turns on how likely the sale is to close.
What would change the answer:
- A sale that's less likely to close. If the chance of a failed sale is above about 38%, a deed-in-lieu moves ahead.
- Restoring interest income. Modify is the only choice where the bank can book interest as it comes due again, on a $12.7 million performing note. If that matters more than the last few hundred thousand dollars of value, the modification moves up.
- A lower cap rate. Below about 5.59%, the property is worth the full balance. Then new investor money becomes workable. Extension still depends on income, which covers the payment only 1.06 times.
- A better loan-sale price. A loan-sale price above about 92.4% of the balance would beat a property sale.
- Further income loss. Any further drop weakens an extension and forbearance first.
Note: Accounting effects are shown as general guidance under the 2023 interagency policy statement and current accounting rules. The bank's accountants and examiners make the actual determination.
5. The bank's package for the sale
What the bank requires from the owner's sale:
- Minimum net price: $17,110,800.
- Timeline: a marketing period and closing date set by the bank, plus any local first-right step.
- Payoff at closing: sale proceeds go to the loan. The $1,199,200 charge-off covers the rest.
- Reporting: regular updates from the owner on offers and progress.