Commercial real estate lending now feeling the pinch

The Comptroller of the Currency is now warning about a worrisome concentration of development and construction loans among community banks. According to their website, "The Office of the Comptroller of the Currency was created by Congress to charter national banks, to oversee a nationwide system of banking institutions, and to assure that national banks are safe and sound, competitive and profitable, and capable of serving the banking needs of their customers in the best possible manner."

From the recent press release:

Comptroller of the Currency John C. Dugan told a bank conference today that the OCC (Office of the Comptroller of the Currency) is focusing increased attention on problems arising from high community bank concentrations in commercial real estate (CRE) at a time of significant market disruptions and declining house and condominium sales and values. “The combination of these conditions is putting considerable stress on one particular category of commercial real estate lending: residential construction and development – and other categories of CRE loans will feel similar stress if general economic activity slows materially,” Mr. Dugan said in a speech before a meeting of the Florida Bankers Association. In the area of construction and development (C&D) loans, nonperforming loans in community national banks amounted to 1.96 percent of the total at the end of the third quarter, double the rate of the year before.

Of course that will likely mean future restrictions on lending by these types of banks for development projects as this market downturn plays out:

The OCC expects banks with CRE concentrations to make realistic assessments of their portfolio based on current market conditions, and to make necessary adjustments as market conditions change.
“For those of you in stressed markets, it will almost certainly require you to downgrade more of your assets, increase loan loss provisions, and reassess the adequacy of bank capital,” he said. “These are normal, expected steps to take in these circumstances, and I can’t stress enough how important it is for you to make these realistic judgments yourselves, based on sound credit administration practices, instead of forcing our examiners to try and make these same judgments in the first instance.” In recent years, the Comptroller said, banks had become too complacent regarding the potential for significant stresses in these markets, and CRE concentrations rose significantly in many banks. The ratio of commercial real estate loans to capital has nearly doubled in the past six years, he said. “Even more significant than this overall industry statistic is the number of individual banks that have especially large concentrations,” Mr. Dugan added. “Over a third of the nation’s community banks have commercial real estate concentrations exceeding 300 percent of their capital, and almost 30 percent have construction and development loans exceeding 100 percent of capital.”