Simplified

With commercial lending volume up 16% in 2005 to $1.3 trillion, it was only a matter of time until federal regulators stepped in to put a possible “halt” to this staggering growth of commercial real estate loans.

In January, several regulatory agencies, including the Federal Reserve, proposed new guidance for banks concerning commercial lending on commercial loans and apartment loans, including: lending caps, increased risk management, adding additional capital and more. You can read the entire report here.

According to an article published online by The Wall Street Journal, local and regional banks are in an uproar over the feds call for a “tightening of the belt.”

So, should banks really be concerned with the proposed new regulations? Apparently they are. The American Bankers Association, and over 1000 banks, sent letters of protest, claiming their commercial real estate loan portfolios are healthy and performing well.

However, it wasn’t long ago that 1000s of banks and S&Ls closed their doors due to the bottom falling out of the commercial real estate market.

In the late 1980s and early 1990s, aggressive commercial lending led to “overbuilding, vacant properties, price collapses and huge losses for taxpayers,” states the WSJ article.

The ABA and banks argue that their commercial mortgage lending practices have become far more sophisticated since the ’80s and that they shouldn’t be restricted on new originations, nor should their existing portfolios be exposed to additional risk management practices.

In the next few weeks, Congress will decide. We at CommercialBanc feel that there will be some new guidelines issued, after all, many of the banks in question have commercial mortgage portfolios averaging over 800% of capital, or 8.0 times their capital, that’s pretty aggressive!