David GlancyLoan modifications can either amplify or mitigate credit losses depending on the strategy lenders employ. Using detailed supervisory data and a model incorporating various frictions that could encourage modifications (liquidity constraints, foreclosure costs, and loss recognition costs), I assess why banks extend CRE loans. I find that extensions predominantly address temporary payment frictions, both in normal times and following the Spring 2023 bank stress episode. Contrary to concerns about banks “extending-and-pretending” following that episode, banks increased income and principal paydown requirements for extensions, contributing to strong ex-post performance for extended loans.
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