The Federal Reserve and other banking regulators might issue new guidance on commercial real-estate loans to improve lending standards that...
The Federal Reserve and other banking regulators might issue new guidance on commercial real-estate loans to improve lending standards that are weakening, Federal Reserve Governor Susan Bies said.
“Given this easing of standards, there is concern that portions of banks’ home-equity loan portfolios may be vulnerable to a rise in interest rates and a decline in home values,” Bies told the North Carolina Bankers Association. Bank supervisors today have similar concerns about commercial real-estate lending.
The so-called guidance letter that Bies referred to is the third that the Fed and other bank regulators are considering to rein in risky real-estate lending and an erosion of credit standards that officials fear could lead to loan losses if the real-estate market turns down or interest rates rise. Guidance letters are aimed at improving lending standards without interfering with markets.
On May 16, the central bank urged lenders to boost standards for home-equity loans. A letter dealing with first mortgages is under discussion, said Kevin Mukri, a spokesman for the Comptroller of the Currency.
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Regulators are looking at commercial real-estate loans because they have “historically been a highly volatile asset class” and “played a central role in the banking problems of the late 1980s and the early 1990s.”
Home-equity lending, in which consumers borrow against the equity they’ve acquired in their homes, increased 40 percent last year to $398 billion, Bies said. Banking regulators, including the Fed, have seen banks reduce credit standards as they compete for that business.
Such nontraditional financing methods as interest-only loans, adjustable-rate mortgages and second mortgages with high loan-to-value ratios are becoming more popular, Bies said.
“Industry experts are increasingly concerned about the quality of collateral valuations relied upon in home-equity lending and residential refinancing activities,” she said.
Fed officials, including Chairman Alan Greenspan, said earlier this year that the real-estate market may be overvalued and that aggressive lending practices, such as no-interest and variable-rate loans, could leave banks vulnerable if the economy slows.
Still, some Fed officials hesitate to endorse greater regulation of bank lending.
“Policy measures that impede the functioning of credit markets need to be approached cautiously to avoid an overreaction that stymies much of the benefit of the innovations in retail credit practices,” Richmond Fed President Jeffrey Lacker said in a speech at the same event.