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Slowdown in real estate lending sharpest in commercial sector

On Behalf of | May 30, 2017 | Uncategorized

Real estate experts in Missouri and around the country have predicted for some time that rising interest rates and more conservative lending practices would make financing more difficult to come by for property developers and investors. Data released recently by the Mortgage Bankers Association suggests that these effects are now being felt. The trade group reports that mortgage closings in 2016 were down by 3 percent overall and 7 percent in the fourth quarter.

Reports suggest that the decline is particularly sharp in the commercial sector, where loans tend to be for higher amounts. Figures from Real Capital Analytics reveal that commercial property sales plunged 10 percent in 2016 and are continuing to fall in 2017. Investors poured more than $80 billion into the U.S. commercial real estate market between January and March in 2016, according to the firm, but they only spent $50.3 billion on commercial properties during the first quarter of 2017.

Some bankers blame new regulations introduced by laws like the Dodd-Frank Wall Street Reform and Consumer Protection Act for the slowdown in real estate lending. Lenders must now hold a stake of at least 5 percent in the commercial mortgage-backed securities transactions they originate, and this has prompted many banks to either scrutinize loan applications far more carefully or pull out of the market altogether.

When banks are less willing to extend credit, opportunities are created for nontraditional lenders that are not required to meet the same strict government regulations. While these lenders may provide a welcome source of money to developers working on strict schedules, they may also charge higher fees and rates than traditional banks. Attorneys with experience in complex commercial property transactions may scrutinize loan documents to identify potentially thorny provisions, and they could also verify that nontraditional lenders have the capacity to meet their obligations under these agreements.