U.S. banks are facing growing exposure to risk due to a surge in “double defaults” on commercial real estate (CRE) loans, according to the Financial Times. This trend has raised questions about whether banks’ use of “extend and pretend” strategies may be masking deeper issues within the sector.

Under Scrutiny: Banks have been using “extend and pretend” practices to modify troubled loans, delaying potential losses by giving temporary relief to borrowers and staving off immediate defaults. While this has helped banks avoid immediate write-offs, experts such as Ivan Cilik from Baker Tilly caution that continued high interest rates could render these measures ineffective, potentially leading to unsustainable debt loads.

Regulatory Concerns: Researchers at the Federal Reserve are warning that recent years’ lenient loan modifications could misdirect credit and contribute to financial instability. They criticize banks for easing terms on distressed loans since the pandemic, which may only defer defaults that are likely inevitable.

Key Data: “Re-defaults” on modified CRE loans have jumped 90% from the previous year, reaching $5.5 billion by September, the highest level seen since 2014. These defaults are most prominent in office buildings, retail spaces, and apartment complexes, all sectors significantly impacted by high interest rates and post-pandemic occupancy declines.

The Big Picture: With delinquent commercial property loans totaling $26 billion—a 25% increase this year—banks’ heavy reliance on “extend and pretend” may soon be unsustainable. As borrower relief remains limited, a continued rise in re-defaults could signal broader losses throughout the CRE market.