Banks Relax Lending Policies Due to Lower Loss Rates

The finance sector is seeing an increase in lending activity among U.S. banks as the latter observes lower loss rates in construction and commercial real estate loans since 2009, a new report from Forbes.com said.

Citing data from financial firm Safeworks, the report said that net charge-offs account for 0.16 percent of average loan balances last quarter, down from 0.9 percent in 2009. Loss rates for construction and land development loans, have declined to 0.24 percent last quarter from 3.58 percent of average loan balances by the end of 2009.

According to Safeworks analyst Regan Camp, aside from the lower loss rates, the uptick in the U.S. economy and a rise in the number of viable borrowers from the commercial and industrial development sector are bringing back “confidence” to the segment.

The Federal Deposit Insurance Commission’s (FDIC) latest quarterly report revealed that bank lending activities have increased in “unseen levels” in commercial real estate since 2007. Results from a survey conducted by the Federal Reserve also showed that banks have eased loan terms and issued more loans during the first quarter despite stronger demand for credit, Bloomberg reported.

The addition of new banks in the segment have resorted into increased competition as well, leading to more lending and construction activities in the residential and commercial sector, the report said.

The report also cited data from the Mortgage Bankers Association which revealed that bank portfolio loans for commercial and multifamily mortgage loans have soared by 19 percent during the second quarter as compared with last year’s figures.  Commercial or multifamily mortgage loans taken by government-owned Fannie Mae, Freddie Mac as well as commercial life insurance firms dipped during the same period.

Banks shied away from lending the commercial real estate segment of the market due to significant losses linked to loans taken during the recession. Loan demand was also down as developers either closed shop or held off due to the market’s instability.  

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