Federal Reserve highlights loosening underwriting standards

The Federal Reserve’s latest Monetary Policy Report points to rapidly rising commercial property valuations amid stronger demand for loans and eased lending standards.

The Federal Reserve System’s latest Monetary Policy Report points to rapidly rising commercial property valuations amid stronger demand for loans and eased lending standards.

The Fed said:

“Valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly, and underwriting standards at banks and in commercial mortgage-backed securities have been loosening.

“CRE loans on banks’ books increased appreciably this year through May, consistent with stronger loan demand and a further easing of lending standards.

“Banks also reported that, over the past 12 months, they had eased spreads, increased maximum loan sizes, and extended the maximum maturity on such loans. Issuance of commercial mortgage-backed securities (CMBS) continued to be robust, and the spreads of CMBS rates over Treasury rates remained narrow.”

In addition to rising commercial real estate prices, the report cited underwriting standards for leveraged loans and borrowing by lower-rated businesses as areas of concern. But financial vulnerabilities in the financial system have moderated through this year and the financial system will be more resilient because of stronger capital positions when another downturn comes, the report argued.

The Fed has maintained that the outlook for commercial real estate remains “favorable,” with apartment construction strong in major and secondary markets alike, from New York to Richmond, Atlanta to Dallas and San Francisco.

Fed Chair Janet Yellen, in an accompanying testimony before Congress, noted that the Fed still plans to gradually raise interest rates this year.

Commercial and industrial loans (to businesses) on banks’ books have also expanded at a solid pace this year, in part reflecting narrower loan spreads, though the growth of small business loans remained subdued, “evidently reflecting still-tepid demand for credit from small business owners.”

Aggregate credit provided by commercial banks increased at a solid pace in the first quarter of 2015, while delinquencies continued to improve across most major loan types.

 

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