Commercial Real Estate Lenders Warned to Avoid Risky Practices

new Jason stats graphic - June 2015Federal banking agencies are urging commercial real estate lenders to maintain prudent risk-management practices, warning that they will intensify oversight of commercial real estate lending practices in 2016.

In a statement seen as a “stark warning” to commercial real estate lenders, the federal agencies noted that many commercial real estate asset and lending markets have experienced substantial growth, increased competitive pressures, escalating commercial real estate concentrations in banks, and a lessening of commercial real estate underwriting standards, according to a new report from the CoStar Group.

The agencies specifically called attention to the higher concentration levels of commercial real estate loans at many banks as a result of the reassuring trends in asset-quality metrics, CoStar said.

This has caused competitive pressures to rise and commercial real estate underwriting standards to lessen, including less-restrictive loan covenants, extended maturities, longer interest-only payment periods, and limited guarantor requirements, CoStar noted in the news report.

The agencies also noted concern about specific commercial real estate risk management practices at some institutions, including an increase in the number of underwriting policy exceptions and inadequate monitoring of market conditions to properly assess risks linked to the concentrations.

The agencies reinforced existing guidelines for commercial real estate risk management, urging  institutions to preserve underwriting discipline and perform risk-management practices “to identify, measure, monitor, and manage the risks arising from CRE lending,” according to the news report.   The agencies also advised lenders to adhere to risk-management practices and maintain capital that is appropriate to the level and nature of their commercial real estate concentration risk, CoStar reported.

In 2016, the banking agencies said they would review commercial real estate lending activities, paying particular attention to banks that have undergone recent significant growth in commercial real estate lending, or institutions whose lending strategies include plans to substantially increase commercial real estate lending activities.  Institutions that operate in markets or loan segments with increasing growth or risk fundamentals also will come under closer scrutiny, according to the CoStar news report.

The statement noted that banks found to have deficient commercial real estate risk management practices and capital strategies may be required to “develop a plan to identify, measure, monitor, and manage CRE concentrations, to reduce risk tolerances in their commercial real estate underwriting standards or to raise additional capital to mitigate the risk associated with their CRE strategies or exposures,” CoStar  reported.

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