Part 3 of 12 · The 5 Trillion Dollar Shell Game

Extend and Pretend

How U.S. banks are hiding $1.5 trillion in impaired commercial real estate loans — and what the Federal Reserve found when it looked under the hood.

In 2024, the Federal Reserve Bank of New York published a landmark research paper with a damning conclusion: American banks had systematically extended and modified impaired commercial real estate loans to avoid recognizing losses on their balance sheets. The practice — known colloquially as “extend and pretend” — has created a hidden maturity wall that represents 27% of total bank capital. This is not speculation. It is documented by the central bank itself.

What “Extend and Pretend” Actually Means

When a commercial real estate loan approaches maturity and the borrower cannot refinance at current rates — either because the property value has fallen, the new rate is too high, or both — the bank faces a choice. It can declare the loan in default, which triggers loss recognition, regulatory scrutiny, and potential capital charges. Or it can modify the loan: extend the maturity date, adjust the interest rate, or restructure the terms — effectively pretending the problem does not exist.

The NY Fed found that banks chose the second option at a massive scale. Using loan-level supervisory data, researchers Matteo Crosignani and Saketh Prazad documented that banks extended and pretended their impaired CRE mortgages in the post-pandemic period specifically to avoid writing off capital. The consequences were severe: credit misallocation, a 4.8–5.3% drop in new CRE mortgage origination since Q1 2022, and a growing maturity wall that now represents 27% of bank capital as of Q4 2023.

“Banks ‘extended-and-pretended’ their impaired CRE mortgages in the post-pandemic period to avoid writing off their capital, leading to credit misallocation and a buildup of financial fragility.”— Federal Reserve Bank of New York Staff Report 1130, Crosignani & Prazad (2024)

41%

2023 Maturing Loans Extended

27%

Of Bank Capital at Risk

4.8–5.3%

Drop in New CRE Origination

$957B

CRE Loans Maturing in 2025

The Mechanics: How Banks Hide the Problem

Step 1 of 4

Loan Modification

The bank and borrower agree to extend the loan maturity by 12–24 months. The bank avoids triggering a default event. The borrower avoids foreclosure. Both parties pretend the underlying problem — a property worth less than the loan — does not exist.

Step 2 of 4

Interest Rate Adjustment

The bank may temporarily reduce the interest rate or allow interest-only payments to keep the borrower from defaulting. This reduces the bank’s income but avoids the much larger capital charge that would come from recognizing a loss.

Step 3 of 4

Internal Risk Reclassification

Banks have discretion in how they classify loans internally. A loan that should be classified as “substandard” or “doubtful” may remain classified as “pass” — hiding the true risk profile from regulators, investors, and the public.

Step 4 of 4

The Maturity Wall Grows

Each extension pushes the problem forward. The maturity wall — the pile of loans coming due at the same time — grows larger. Eventually, the extensions run out, rates don’t fall enough, and the losses must be recognized. The question is not if, but when.

The Maturity Wall in Numbers

Year	CRE Loans Maturing	vs. Historical Average
2024	~$600 billion	~2x historical average
2025	$957 billion	~3x historical average
2026	$875 billion	~2.8x historical average
Total 2024–2026	~$2 trillion	Unprecedented

⚠️ What This Means for Investors: The maturity wall is not a future risk — it is a present reality. Banks that have been extending loans are running out of runway. As extensions expire and properties fail to refinance, forced sales will enter the market. This creates both risk (for those holding overvalued assets) and opportunity (for those with liquidity ready to acquire at distressed prices).

🎯 Key Takeaways — Part 3

The Federal Reserve’s own research confirms that banks systematically extended impaired CRE loans to avoid loss recognition.
41% of CRE loans maturing in 2023 were modified or extended rather than resolved.
The resulting maturity wall represents 27% of total U.S. bank capital — a systemic risk.
$2 trillion in CRE loans mature between 2024 and 2026, with 2025 being the peak year at $957 billion.
When extensions run out, forced sales will create acquisition opportunities for prepared investors.

Sources: Federal Reserve Bank of New York Staff Report 1130 (2024); Cohen & Steers CRE Debt Analysis; Kaplan Collection Agency CRE Outlook 2025; Baker Tilly CRE Debt Dilemma (2024).

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Extend and Pretend: The Bank Playbook for Hiding Bad Loans