CRE Loans: Are Underwriting Standards Slipping?

By Kuehner-Hebert, Katie | American Banker, July 7, 2005 | Go to article overview

CRE Loans: Are Underwriting Standards Slipping?

Kuehner-Hebert, Katie, American Banker

In the 1980s developers were building scores of skyscrapers, strip malls, condominiums - just about anything - on pure speculation that tenants would follow. Lenders were all too happy to help.

Then the bubble burst. Buildings sat half empty, and many banks with defaulted loans to developers on their books found themselves in deep trouble.

Now commercial real estate concentrations have again reached record levels - roughly 28% of community banks' assets as of March 31. To make sure history doesn't repeat itself, regulators are sounding the alarm, cautioning bankers not to succumb to pricing pressures and weaken underwriting standards.

Federal Reserve governors have issued warnings and revealed that the Fed is drafting "best-practices" guidelines on commercial real estate lending.

The Federal Deposit Insurance Corp. has put out its own best- practices guidelines on CRE lending and hosted teleconferences and roundtable discussions, reminding banks to ensure that the credits do not sour. The FDIC is also requiring banks that focus on such lending in the fastest-growing markets to document how they analyze the risks they face and prepare for bumps.

Some bankers say regulators should not worry, because they have maintained stringent underwriting standards. Others, taking the warnings to heart, have scaled back in this business or ramped up in others to balance out the risks.

According to the Fed, growth in CRE lending at banks with assets of less than $1 billion accounted for virtually all of their asset growth in 2003 and 2004. The CRE growth alone totaled nearly $32 billion last year.

The profitable business is especially popular among community bankers, who think their relationships with customers give them an edge over larger banks that focus on retail banking and corporate lending.

The Fed is quick to emphasize that current underwriting standards are much better than in the 1980s, and that banks are making fewer loans for pure spec development. Still, in recent surveys of senior loan officers, the Fed has learned that standards may be weakening.

In a June 3 speech to the Conference of State Banking Supervisors in San Antonio, Fed Governor Mark W. Olson said that the regulator has seen signs that standards are deteriorating as a result of strong competition and tight spreads. Several days later Fed Governor Susan Schmidt Bies echoed his comments at an American Bankers Association conference in Chicago for chief financial officers.

"At a recent Risk Management Association roundtable, several bank appraisers conceded that they are pressured to make deals on the assumption that exceptionally strong performance will continue indefinitely," Ms. Bies said.

Campbell Chaney, an analyst at Sander Morris Harris in San Francisco who used to be a Fed examiner, listed other ways some banks have loosened standards: making loans with higher loan-to-value ratios, accepting lower debt-coverage ratios, and extending loan payment terms, including stretching payment due dates from one month to two months or longer.

Though each of these measures may be acceptable individually, combined they could contribute to problems down the road if borrowers run into trouble, he said.

If underwriting standards are weakening, it is mainly because of competition. Community banks are under pressure to lend more, but commercial and industrial loan demand has not recovered fully and larger banks are winning more retail business. So small banks want as much of the CRE lending pie as they can get while demand for such loans is still high.

Frontier Bank in Everett, Wash., a subsidiary of the $2.4 billion- asset Frontier Financial Corp., has a 697.5% ratio of commercial realty loans to Tier 1 capital; the median for banks nationwide is 156%. But Frontier's board believes it is doing all the right things to mitigate risks, chief executive John J. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

CRE Loans: Are Underwriting Standards Slipping?


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    New feature

    It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit

    To use OpenDyslexic, choose it from the Typeface list in Font settings.

    OK, got it!

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search


    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.