Banks Report Continued Tightening on Multifamily, AD&C Loans

Credit standards on loan applications for commercial real estate loans (CRE), which includes land development and construction, multifamily, as well as nonfarm nonresidential loans, tightened over the first quarter of 2016. Moreover, the pace of tightening in each of these types of CRE loans has progressively grown over the past year. More specifically, banks indicate that tightened lending standards over the past year has focused on policies related to loan-to-value ratios and debt-service coverage ratios.

According to the most recent iteration of the Federal Reserve Board’s Senior Loan Officer Opinion Survey (SLOOS), covering the first three months of the year, a net share of 25% of senior bank officers reported that standards at their bank had tightened on construction and land development loans over the quarter while a net share of 36% reported that lending standards on loans for multifamily residential properties tightened. A net share of 12% reported that lending standards on nonfarm nonresidential loans tightened.

The net share is the difference between the percentage of senior loan officers reporting that standards eased at their bank and the proportion answering that standards had tightened. According to Figure 1 below, no bank reported having eased standards on any of the three commercial real estate loan categories over the quarter. Instead, the extent of net tightening was the result of overall tightening in each category.

Presentation1

Over the past year, lending conditions have progressively tightened on each of these types of CRE loans. As illustrated in Figure 2 below, lending standards on multifamily residential and nonfarm nonresidential loans eased on net in the second quarter of 2015 while net lending standards were slightly tight on construction and land development loans. However, by the third quarter of 2015, lending standards on all three categories of CRE loans experienced net tightening and, in successive quarters, the extent of tightening has progressively grown.

Updated – Tighter lending standards may partly reflect banks’ response to Basel III rules creating a category of high volatility commercial real estate. The Basel III rules assign a higher risk weighting to CRE loans considered highly volatile. As a result, lenders are required to hold more capital aside for this type of loan.

Presentation2

This iteration of the SLOOS also included a special question specifying how banks tightened standards on CRE loans. The additional question asked senior bank officers to identify which policies, from a menu of options, did the bank change over the past year. As shown by Figure 3 below, the policies that banks tightened, on net, were loan-to-value ratios and debt-service coverage ratios. In contrast, banks reported that loan characteristics such as maximum loan size, maximum loan maturity, and market areas serviced eased on net over the year*.

Presentation3

* According to the SLOOS, wider spreads of loan rates over your bank’s cost of funds equal tightened standards while narrower spreads means standards have eased. Reduced market areas reflects tightening while expanded market areas indicates that standards have eased. Shorter interest-only periods signify tightening and longer interest-only periods denote easing.



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