April 2, 2017 Carol Bernardes

Tighter Lending Standards from Banks Make Traditional Real Estate Loans Harder to Acquire

banks think ahead real estate house investments

Following the financial crisis and economic recession in 2008, the noose tightened on previous lending practices by banks and financial institutions, particularly those that relate to commercial and income-producing real estate development.

According to a Federal Reserve Study released in January 2017, “Most domestic banks that reportedly tightened either standards or terms on C&I loans over the past three months cited as an important reason a less favorable or more uncertain economic outlook.”

The specific reasons leading to that uncertain economic outlook included:

  • deterioration in the bank’s current or expected capital positions
  • worsening of industry-specific problems
  • reduced tolerance for risk
  • decreased liquidity in the secondary market for these types of loans
  • decline in the bank’s current or expected liquidity positions
  • increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards

The initiation of tighter lending standards during the recession was intended to curb many of the questionable lending practices that led to the bursting of the housing bubble. But now that the economy has demonstrated a continued trend toward recovery, as has the real estate market (however slow that recovery may be), are the restrictive lending rules causing the continued delay of a full housing market recovery?

Conventional loans have always posed a problem for real estate investors to secure, so with even closer scrutiny and more red tape, borrowers are now turning to less traditional forms of borrowing to fund their commercial and income property endeavors.

With alternative options available to them, real estate investors no longer need to stand in the line to see a loan officer who is going to make it as difficult as possible for them to obtain a loan. Instead, they will seek rapid processing hard or soft money loans through privatized lending institutions, solicit privately funded loans through sole individuals, or explore the countless crowdfunding options available today.

With privatized lending, there exists less regulatory oversight and the potential for another housing bubble. One of the greatest benefits, however, that privatized lending offers is that the government’s exposure to risk is significantly reduced. Meaning, that because most private lending is not government-backed, taxpayers won’t have to bail private lenders out during a future financial downturn.

But the downside to private lending might be that because real estate investors are seeking to profit, they are less likely to invest in properties that don’t yield high ROIs.

This could mean that while there will be more housing available, the ever-growing low-income population will have less access to it. Regardless of the tighter restrictions placed on lending by banks, many of their mortgages are government-backed. And that means that because fair housing laws can be applied, low-income families will have more access to homes they can afford. 

Ultimately, the tighter restrictions banks are placing on their loans are supposed to be protecting the banks themselves, and on a larger scale, the taxpayers and overall economy. Although housing finance reform is expected to provide better financial stability, it should not do so by choking out the very investors who are making the largest contributions to the housing market overall.

The new administration in D.C. has already indicated that it is keen to enact reforms, but those reforms may not span bipartisan lines and will most likely be stalled by infighting between parties. The only thing that is certain is that 2017 is going to be nothing less than an interesting year for real estate investors.

It’s time for you to be part of our team and start thinking ahead. Contact us today at [email protected]

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