Last week our underwriting team turned down a bunch of loans. Too many delinquencies, not enough time in business, debt service was too low, loan-to-value (LTV) was too high, and cash flow was not of sufficient quality - all good reasons, all normal conclusions. As we have been chronicling in our blog (HERE for example), we have been experimenting with artificial intelligence.
Tag: Credit Performance
If you think the economy is going to muddle along, then you should skip this post as our analysis isn’t going to make a difference in your future - 2021 will be much the same as 2016. However, if you think the economy is going to pick up steam, or if you think the economy will get weaker, then today’s data could make a difference over the next couple of years. As can be seen by the graph below, commercial real estate risk continues to increase and the risk on new community bank loan production is up 6.5% during the first half of this year compared to last year.
Earlier in the week (HERE) we equated community bank credit ratings to toenails and substantively showed community banks the current probabilities of default for commercial real estate (CRE) by credit risk grade. We discussed how banking is becoming more quantitative and how when rates go up, it will be the bank that correctly classifies credit, allocates capital and correctly prices risk that will have a distinct advantage.
On this Earth Day, we are happy to report that doing right by the Earth can also help your borrowers and shareholders. When you underwrite your next loan on a commercial property, it might make sense to understand the property’s “walkability” or ability to walk from the property to nearby amenities such as public transportation, markets, parks and shops. The easier it is to get from your collateral the more likely that property will appreciate in a good market and hold its value in a down market. This goes for office, retail and multifamily.
For many community banks, a concentration in real estate lending may be an issue. This is especially concerning given the recent decrease in capitalization (cap) rates across many geographies and property classes. While community bankers have a difficult job trying to diversify their balance sheet away from real estate, we wanted to present a couple quantitative points that will make the job of risk management easier for banks.