Commercial Loans Receiving Deeper Scruitiny
Banks are worried. Not only about consumers’ ability to repay home mortgages as interest rates rise, but also about the commercial real estate market.
Investors and lenders are looking more closely at the loans they make for properties such as malls and office buildings and wondering whether some borrowers might default because of rising rates that in some cases can erode property values.
While it hasn’t reached a crisis point yet, the industry is uneasy because of the huge amount of lending during the years-long real estate boom, and because it’s hard to anticipate which loans will sour.
Commercial borrowers are vulnerable to higher rates because they tend to refinance rather than pay off their real estate loans, and in an environment where rates are rising, new loans become more expensive or harder to get. Moreover, if a commercial property has lost value, a lender may require the borrower to put up more money for a new loan.
The size of commercial loans - they can range from $1 million to $900 million - make them harder to pay off. So many borrowers as a matter of course take out five-year or seven-year loans and pay them back by refinancing with new mortgages.
The industry is also concerned that borrowers might not be able to qualify for another loan to pay off their mortgages because their properties have lost value. Also, some borrowers may not be able to handle the higher monthly loan payments that come with higher interest rates because they cannot immediately raise their rents.
The greatest worry is that borrowers might abandon their properties, in much the same way in the late 1980s and early ’90s, when owners walked away from malls and office buildings because they could not find lenders to provide money for another loan. Many of these lenders themselves were overburdened with bad real estate debt leading to the real estate bust of the late ’80s that prompted the U.S. government to intervene with the creation of the Resolution Trust Corp.
Right now, anyone looking for money to buy a mall or an office building doesn’t have to search far to find a lender, which makes credit inexpensive. But, this may change if investors shift their money from real estate to stocks.
(Source: Seattle Post-Intelligencer)