I have had many conversations with bankers recently concerning loan requests for clients. At some point during our talks I usually ask general industry questions like, “What kind of demand are you seeing?” or “What is the bank’s appetite these days?” or “I forgot my wallet — can you buy lunch?” Some bankers wonder if I ever owned a wallet.
But these days, sensing a general attitude of uneasiness from bankers, I have started to ask, “What is your biggest concern?” The answer is fairly universal: credit quality. The bankers have either specific concerns about specific credits or a general concern about all credits. And this concern is impacting their willingness to extend new loans.
Credit quality is really a function of two things: (1) the actual ability of the borrower to repay the debt from primary, secondary and tertiary sources of repayment and (2) the rating that the lending institution or its regulators put on the credit. You would think that the second item is a function of the first, and typically it is, but bank regulators have made it clear that they have industry wide concerns about the commercial real estate industry and they are painting all real estate loans with a broad brush.
So the lenders now have a multitiered approach to granting credit: first, what do I think about this borrower’s ability to repay the loan and, second, what will the regulators do if I make the loan? With an almost palpable fear of the unknown from the regulatory side, bankers are making fewer commercial real estate loans.
I don’t want it to sound like the regulatory agencies are doing anything badly or being unreasonable. They are responding to a global banking crisis from the residential market and are trying to ensure that the commercial real estate market does not have a similar meltdown. I do think it is safe to say that the regulatory pendulum has swung from the side of being accommodating to the side of conservatism, perhaps overly so.
But this is a natural part of the process when a system tries to correct itself. This regulatory concern about credit quality will translate into lender concern and result in fewer commercial real estate loans — for a while. The good news is that our communities in southern Louisiana are doing better than other parts of the country and our banks are well capitalized, so we just need to be patient while the market correction continues. We also need patience while our bankers figure out the credit quality issue.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
