U.S. banks and other lending institutions were put in the limelight on Friday, when federal regulators released a report stating their concerns about a growing decline underwriting standards.
In the report, the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. stated that there has been “an easing of CRE underwriting standards, including less-restrictive loan covenants, extended maturities, longer interest-only payment periods and limited guarantor requirements.”
With continual growth across the commercial real estate sector, the industry has continued to see rising property values, low capitalization rates, and strong demand, which has led many institutions to grow their real estate lending portfolios. With that said, the three banking agencies stated that some institutions are allowing for more underwriting policy exceptions and are not monitoring market conditions properly.
The regulators urged industry players to review their lending policies and practices, and be prudent in managing risk. The agencies and governing bodies intend to keep a close eye on potential issues in the lending world with a special focus on “those financial institutions that have recently experienced, or whose lending strategy plans for, substantial growth in CRE lending activity, or that operate in markets or loan segments with increasing growth or risk fundamentals.”
In the past year, the rating agencies have repeatedly warned of declining underwriting standards. Fitch Ratings recently released two reports raising a red flag in the commercial mortgage-backed securities market, pointing to an increasing amount of changes in new CMBS deals both before securitization and after closing.