Extend-and-Pretend Has Limits And the Market May Hit Them Soon

Written by:

Steve Marcinuk

Date:

10 Dec 2025

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The idea that banks can indefinitely extend troubled commercial real estate loans is likely overstated, according to Bill Bymel, founder and CEO of First Lien Capital LP. While regulatory forbearance and creative loan restructuring have allowed banks to avoid recognizing losses, Bymel contends that structural and political forces will eventually require banks to confront the true scope of their problem loans.

Bymel estimates there’s about a 25% chance the Federal Reserve continues loosening the rules that allow banks to “extend and pretend,” enabling lenders to delay recognizing losses and keep troubled loans moving with minimal disruption.

But he sees a far more likely scenario – roughly a 75% probability – in which banks are forced to acknowledge losses and reprice assets. The market, he says, is “more likely headed for a reset” than further regulatory leniency.

How Extend-and-Pretend Works

The extend-and-pretend strategy hinges on regulatory rules that give banks wide discretion in how they classify and manage distressed loans. Bymel points to the Troubled Debt Restructuring (TDR) standard, which effectively allows banks to keep a loan on accrual as long as the borrower is making some form of payment – even if the terms have been heavily modified.

In practice, this lets lenders repeatedly rewrite loan terms, push out maturities, or reduce interest rates to keep borrowers technically current and avoid recognizing losses. Bymel acknowledges there’s a small possibility – around 25% – that banks could continue leaning on aggressive restructurings to avoid capital hits, but he views that outcome as unlikely.

Bymel argues that many of these loan modifications are disconnected from economic reality, creating a system where losses are hidden as long as all participants are willing to maintain the fiction.

Why Consolidation Pressure Will Force Change

A major reason Bymel doubts the extend-and-pretend cycle can continue is the rising regulatory push for banking-sector consolidation. Regulators, he notes, increasingly want weaker institutions absorbed by stronger ones – an environment where asset quality can no longer be obscured.

During mergers or failures, regulators must establish clear valuations of assets and liabilities, which forces problem loans out into the open. Forbearance-masked losses become visible, and acquiring banks need an accurate picture of what they are taking on. Bymel expects regulators to apply more pressure for banks to mark assets to market, a shift that runs counter to extend-and-pretend practices that rely on keeping troubled loan values opaque.

The Scale of the Problem

Bymel also points to the operational limits of prolonged forbearance. The commercial real estate mortgage market is worth about $4 trillion, and most loans are relatively small – under $10 million – tied to local commercial properties. Many of these borrowers are under significant financial strain, a fact banks fully recognize. Bymel notes that lenders simply don’t have the capacity to keep restructuring this huge volume of small loans. The administrative load is becoming unmanageable, and in his view, that pressure alone will eventually force banks to abandon extend-and-pretend and adopt a more decisive strategy.

Where the Breaking Point Will Emerge

Bymel argues that the real tipping point will come from mounting stress in the non-bank lending sector, particularly where banks have extended significant credit to these institutions. As funding pressure builds and more CLOs falter, he expects a broad repricing across credit markets.

He also notes that while policymakers have historically avoided allowing major market corrections, the political landscape is shifting. There is growing recognition that perpetual extend-and-pretend policies impose real economic costs: they misallocate capital, prop up distressed borrowers, and distort price signals in real estate. Bymel warns that the system is edging toward a breaking point, even if the exact timing remains uncertain.

The Reality of Repricing

Bymel explains that extend-and-pretend is unsustainable because property values have dropped significantly, driven by higher interest rates and rising cap rates. He notes that mid-level C-grade multifamily properties, once profitable at low cap rates, are no longer attractive to investors due to increased financing costs.

As a result, many properties now have mortgage balances that exceed their current market value. “If you had an 80% LTV mortgage on a property that was a 1.25 debt service coverage ratio, if that variable rate mortgage went from three and a half to six percent, you are now underwater just from the increase in the cost of capital,” Bymel explains.

Bymel contends that extend-and-pretend works only while participants believe it will. Once confidence breaks – likely triggered by failures in non-bank lending and CLO markets – the process can accelerate rapidly, causing sudden market repricing.

Positioning for the Next Phase

First Lien Capital is preparing for what Bymel sees as the inevitable market transition from forbearance to acknowledgment of losses. His firm specializes in acquiring distressed commercial real estate loans in off-market transactions, focusing on properties with solid fundamentals but financial distress.

“If you can buy commercial real estate or buy residential investment real estate at a number that makes sense, where the numbers work under today’s normal market, long term there are so many tax advantages to owning cash-flowing real estate,” he says. Bymel’s approach involves working directly with banks and private equity firms seeking to exit troubled positions before broader market repricing takes hold.

For investors looking to position themselves ahead of the shift, Bymel advises focusing on major metropolitan areas and their supporting suburbs. He points to ongoing tenant demand in cities like New York, Chicago, Miami, Atlanta, Los Angeles, Dallas, Houston, San Francisco, and Seattle as a long-term anchor for property values, even as financing structures come under strain. “These places will always be places where people will want to live,” he says.

The way the extend-and-pretend era ends – whether through a gradual acknowledgment of losses or a sudden market repricing – will depend largely on how quickly stress in non-bank lending and CLO markets forces banks and regulators to confront commercial real estate distress. The current environment suggests that, despite efforts to delay the reckoning, recognition of losses and market repricing are increasingly likely in the near future.