Bank Guidance Not Likely to Impede Credit Flow to Housing
In response to NAHB concerns, final guidance on commercial real estate lending (CRE) issued on Dec. 6 by the four federal banking regulators — the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) — is not likely to significantly impact the flow of capital to the housing industry.
(To read a press release from the FDIC, click here; from OTS, click here.)
The guidance was issued out of concern that many financial institutions do not have adequate underwriting practices, risk management systems and capital reserves to address their exposure from rapid growth in their commercial real estate portfolios.
NAHB criticized the proposed guidance for failing to distinguish among the significant variations in risk from the different types of real estate loans. NAHB specifically urged the regulators to modify the guidance to reflect the positive historical credit performance of housing production (AD&C) loans and multifamily mortgages.
Comment letters from NAHB included data demonstrating the lower credit risk posed by residential real estate loans as opposed to other types of real estate lending, and NAHB President-elect Brian Catalde elaborated on the housing industry’s views on the guidance in meetings with the heads of OCC and OTS as well as the Treasury’s assistant secretary for financial institutions.
The final guidance issued last week imposes no new restrictions on CRE lending, but it states that the regulators will supervise more closely financial institutions with high CRE levels or rapid growth in these loans and expects them to hold higher levels of capital. The proposed guidance was widely criticized as regulatory overkill by the banking industry and others, such as NAHB, who were concerned about its impact on the availability of credit.
All of the regulators noted NAHB comments that urged distinguishing among the different CRE risk classes. The final guidance states that consideration should be given to the lower-risk profiles and historically superior performance of certain types of CRE and specifically mentions pre-sold construction loans and multifamily mortgages.
In addition, the guidance states that providing financing for pre-sold buildings should be viewed as a form of risk mitigation. The guidance makes clear that for purposes of bank examinations, assets will be grouped into risk categories in order to apply risk management standards and capital requirements that are appropriate to each category. The positive result is that the regulators will not paint all real estate assets with the same brush.
"The availability of AD&C lending is of critical importance in our ability to respond to the growing housing needs of our community," said Kent Conine, chairman of NAHB's Housing Finance Committee AD&C Subcommittee and 2003 NAHB president. "The last thing we need is to see constraints placed on our access to that credit, and it is encouraging that NAHB has been able to share that concern with the banking regulators and remind them of the different risks involved in various real estate loans."
The Fed, FDIC and OCC added the criterion of the rate of growth of an institution’s CRE portfolio as a means by which to reduce the number of institutions that will be affected by the new guidance. OTS went even further by not establishing explicit numerical thresholds to trigger more intense examinations.
"While there is still some danger that the final guidance could inhibit residential real estate lending, the modifications in the final rule go a long way toward reducing that possibility," said Catalde.
For more information, e-mail Chellie Hamecs at NAHB, or call her at 800-368-5242 x8425; or contact Donna Ely, x8529.
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NAHB Kit Gives Builders Back-to-Basics Tips in Changing Market
With the current cooling of the nation’s housing market expected to persist into the middle of next year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.