National Real Estate Investor's Beth Mattson-Teig looks at how some banks are being more cautious with construction capital in the wake of regulatory requirements.
Banks are particularly sensitive to the issue of concentration—both geographically, and by asset type—and in some markets, the apartment sector has been the victim of these heightened concerns. The Federal Reserve, the OCC, and the FDIC have all said they will be paying particular attention to institutions where commercial real estate/multifamily loans make up 300% of the bank's risk-based capital.
Basel III requirements related to high volatility commercial real estate loans (HVCRE) have also played a role in some tightening on construction loans due to increased capital reserve requirements. However, in most cases, the regulatory requirements are having a bigger impact on loan-to-cost amounts that banks are willing to extend and loan pricing ...
It is no surprise that banks are hyper-sensitive to concentration risk in the wake of the Great Recession. Regulators are also paying close attention to bank concentration risk. “What we have heard is that the regulators have been keeping an eye out for banks that have been growing their commercial real estate books particularly quickly and/or have large concentrations,” says Jamie Woodwell, vice president, commercial real estate research, for the Mortgage Bankers Association (MBA).