Bank's Flight from Realty Lending Is Self-Destructive
Though the banking industry has been hit hard by underperforming real estate loans, by sharply limiting its involvement in realty the industry now risks hurting its chances for recovery.
The United States may be pulling out of the recession, but unless lending institutions get back into the business of making intelligent real estate loans, this will be the shortest rebound in memory.
Essential to Recovery
The real estate market plays a central role in the nation's economy. As much as 25% of the labor force is linked to the real estate industry. The likelihood of experiencing a full economic recovery without an improvement in this sector is slim.
The resilience of the real estate market depends largely on funding, and lending institutions are understandably afraid of making real estate loans. But in the heat of concerns over sour deals, we often fail to recognize that losses resulted more from unbridled growth than from volatility in market.
This was obscured during the boom years, when he forward movement of the economy dramatically reduced lending risks.
Caution in real estate lending is justified, but the job at hand is to learn from our mistakes, not halt in our footsteps.
The traditional advantages of real estate lending still exist.
Lenders have the security of the property itself. Unlike receivables, machinery, cars, and other assets whose value decreases over time, real estate's value can grow over the long term, despite peaks and valleys of the market cycle.
And historically, real estate loans have proved to be the most secure type of credit.
A Question of Survival
Moreover, today's appraisals are no longer based on hopeful rates of return.
There do exist opportunities for banks to develop solid real estate portfolios with credit-worthy borrowers, real equity, and a safe cash flow.
Reentering the real estate market is a question of survival, and it's time of begin making smart loans again.
Mr. Berger is executive vice president of Gelt Funding Corp., Brooklyn, N.Y., a real estate finance company. He was formerly senior vice president of Helmsley-Spear Inc., the New York realty company.