Federal Reserve Official Urges Lenders to Use Caution When Making Real Estate Loans

As regulators look to tighten restrictions on lenders, Federal Reserve Governor Susan Bies expressed concern Monday that some lenders might be relaxing some terms more than they should in order to make real estate loans. Bies told a forum in Naples, Florida, sponsored by America’s Community Bankers, that while underwriting standards have improved since the late 1980s and early 1990s, there is much work to be done.

“However, we have noticed some recent slippage. We also continue to monitor whether lenders routinely adjust covenants, lengthen maturities, or reduce collateral requirements,” she said. “To be clear, we have not yet seen underwriting standards fall to unsatisfactory levels on a broad scale, but we are concerned about some of the downward trend in these standards.”

Bies noted that banks’ ability to weather difficult market conditions will depend on risk management and their levels of capitalization. She said that supervisors have noticed more banks lending into areas outside their normal market, and sometimes reaching out to borrowers who also are venturing into competitive real estate markets where they have less experience.

While fewer Florida home loans are expected to be issued for investment purposes in the coming year, analysts are still concerned. The Florida home loan market is among the regions where investments have been relatively high in recent years, most notably in areas like urban condominiums that builders are putting up in anticipation of a wave of retiring baby boomers in coming decades.

Some regulators also worry that the widespread and sometimes exotic lending will lead to large-scale problems down the line. Be advised, when you apply for a Florida home loan, to proceed cautiously.