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• W36789523 abstract "James R. Peterson, a free-lance financial writer in New York City REITs and conduits put pressure on commercial real estate loans Aroaring economy is good for everyone, including banks. But it has its downside. An abundance of liquidity, much of it currently coming from investors seeking sanctuary from unstable Asian markets, is prompting banks to loosen underwriting standards in order to continue to grow their loan portfolios and boost Most banks, especially those burned in the past, remain conservative in their lending practices. But surveys conducted by federal bank examiners have revealed a disturbing trend, a crack in the foundation of sound bank lending that seems to be growing incrementally but which remains unchecked by regulators. What we're seeing is a shifting and loosening of standards in a variety of areas, says Acting Comptroller of the Currency Julie Williams. More banks are looking at their loan transactions as if they were investors rather than lenders, and they are taking risks that are more characteristic of investors. She says the shift to riskier lending is fairly conspicuous in home equity lending and especially pronounced in commercial real estate lending. Thinner margins, waived standards Excess capital that might go into reserves if the IRS didn't require banks to pay taxes on it now flows into the booming real estate market. But major competition from other lenders, especially Wall Street conduits and real estate investment trusts (REITs), is making real estate lending especially tricky for banks, forcing them to underwrite more and more loans with razor-thin margins. New surveys by the Federal Deposit Insurance Corp. show that underwriting practices continue to weaken at many of the state-chartered banks it regulates. Survey figures show the problem is most obvious among banks actively underwriting commercial real estate loans and construction loans. FDIC surveyed 612 banks making commercial real estate loans and found that 13% frequently fail to consider adequate repayment sources other than the projects funded, compared with 8% a year ago. survey of 387 banks making construction loans shows that 31% often fund highly speculative construction projects, compared with only 18% a year ago. A lot of it is driven by the profit motive, says Robert Walsh, manager of planning and program development at the FDIC. Times are good and the bottom line is that banks always want to increase their profits. He says competition among lenders has produced loan prices that no longer relate to risk. When margins become paper thin, underwriting standards are waived, he says. FDIC's figures are amplified in surveys by the Office of the Comptroller of the Currency (0CC) and the Fed that show a loosening of underwriting standards among big banks and Federal Reserve-member banks. Fed is cautioning banks against any further weakening of standards. The message is that banks can't really count on today's favorable economic conditions and must be prepared for the worst, says William Treacy, a Fed financial analyst. Today is a critical time for banks to maintain good lending discipline, he says. We certainly don't want them to stop lending, but they should analyze the credit quality of their loans thoroughly, set down clear lending standards, and stick to them. New Fed guidelines to be published soon stress strong forward-looking analysis of loan applicants as part of the process of approving loans. Of the banks we looked at, more than 50% did not include financial projections in the loan approval process, says Treacy. Fed also wants banks to be certain that their loans are priced appropriately for the risks that are being assumed. Emphasis on portfolio management Believing it is just as important for banks to properly manage their loan portfolios as judge the quality of individual loans, the 0CC has published its first guidelines specifically for that purpose. …" @default.
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• W36789523 date "1998-08-01" @default.
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• W36789523 title "The Feds Look at Underwriting Practices and Don't like What They See" @default.
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