Bankers Criticize Plan to Curb Realty Loans

Stung by the implication that they are incapable of safe lending, bankers took issue with a proposal in Congress to reimpose old-time loan-to-value standards for real estate lending.

The proposal to overturn the 1982 deregulation of real estate lending was attached to the Senate banking bill by Sen. Timothy E. Wirth, D-Colo.

It could result in a ban on loans for projects in excess of 80% of value and could impose standards as low as 60% for some loans.

Market Volatility

Bankers argue that such restrictions are out of step with a volatile real estate market and point the finger of blame in the wrong direction.

"Value is a moving target," said William S. Fruit, executive vice president of Signet Bank-Virginia, one of several bankers to argue that imposing an 80% loan-to-value standard on real estate deals would be irrelevant to today's problem.

Mr. Fruit laid much of the slide in real estate on unexpected weakness in the economy. He said that what is needed, if anything, is a "better crystal ball."

Proponents of the Wirth provision, including some key senators and the chairman of the Federal Deposit Insurance Corp., L. William Seidman, say the loans giving banks trouble now would never have been made under the old standards. But bankers disputed that.

"We can look at these loans in hindsight and say they were 100% loan to value," said Robert J. Eisenberg, president of Broadwater Financial Inc., a bank consulting firm in Boston. But "the same loans in 1986 to 1988 were [judged by regulators to be] successfully collateralized. It was only when the markets started to soften" that the loans appeared to violate the old standards.

"The banks were making a lot of their loans based upon what appraisals said," agreed Kevin J. McCullagh, senior vice president of Mellon Bank Corp. He said banks were the victim of "a bull market for real estate" in which wildly optimistic assumptions prevailed.

The trick, the bankers said, is to look at economic trends, market data, and other criteria in addition to appraised value. "Bankers such as myself are wrestling with it on a daily basis," siad Mr. Fruit.

Mr. Eisenberg asserted that regulators "cut the legs out from under" the industry by tightening credit in response to a softening market. The correct response, he said, would be to pump liquidity into real estate, just as the regulators pumped liquidity into the stock market in response to the crash of 1987.

Some bankers concede a need for Mr. Wirth's restrictions down the road, if not today. Ralph M. Carestio, executive vice president of KeyCorp said he agreed that loan-to-value relationships "got out of whack" in the 1980s. Although reimposing the standards is a "non-event" in today's comatose lending market, it may eventually pay off, he said.

"In five to seven to eight years, there'll be a real estate market again," he said, and restraints on overoptimistic lending will be needed.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.