Borrowers and lenders are dismayed by the Federal Deposit Insurance Corporation's action last week to set specific loan-to-value ratios for real estate lending.

"It's unfortunate that the agencies decided to go with specific numerical limits," said Gary G. Gilbert, bank agencies liaison director at the Savings and Community Bankers of America. "We also believe they should treat residential lending more leniently than commercial lending. These LTV ratios appear to apply to both." He was not alone on the issue.

David Seiders, chief economist for the National Association of Homebuilders, said the proposed regulation is "very troublesome" to his members, who already face some extremely conservative underwriting standards set by their lenders. "We had hoped that the range option discussed previously by the regulators would be very flexible, but this is not the case," he added.

The other three bank and thrift regulators--the Office of the Comptroller of the Currency, the Federal Reserve Board and the Office of Thrift Resolution--are expected to publish similar proposed regulations soon.

The FDIC ignored the advice of the SCBA, the American Bankers Association and the Association of Bank Holding Companies, which wrote in a June 12 letter to the regulatory agencies that "inclusion ... of detailed loan-to-value ration limits would have a negative effect on the nation's economy and all aspects of the development, financing, construction and the sale of residential and commercial real estate." (For text of letter, see page 4.)

"I think a typical commercial bank already has prudent underwriting standards in place," said Kevin J. McCullaugh, chairman of the ABA's Real Estate Executive Committee and senior vice president of Mellon Bank NA in Pittsburgh. He expressed concern that one escape clause may be insufficient.

Recognizing that there may be some lending demands--e.g., loans made to meet the requirements of the Community Reinvestment Act--that would push lenders over the LTV limits, the FDIC will allow lenders to make loans that are above the ratios up to 15% of capital.

McCullaugh also said the limits could put the affected institutions at a competitive disadvantage with other sources of real estate loans, such as insurance companies and real estate investment trusts.

Several types of loans would be exempt from the limits: loans guaranteed by the federal government or a state; loans facilitating the sale of real estate acquired by the lender to collect a debt; loans where real estate is taken as additional collateral through an "abundance of caution" by the lender; loans renewed, financed or restructured without advancement of new funds; and loans originated prior to the effective date of the proposed regulation.

The regulation proposes two alternative methods: One permits an institution to set limits within a range; the other sets flat limits for the industry.

Under the first alternative, loans for raw land would have LTV ratios of from 50% to 65% preconstruction loans would have a LTV ratio of from 55% to 70%. Construction and improved property loans would have an LTV limit of from 65% to 80%. One- to four-family residential and home equity loans would face an LTV limit of 80% to 90%.

Using the industry standard approach, the LTV limit for raw land would be 60%; for preconstruction loans 65%; for construction and improved property loans 75%; and for one- to four-family loans and home equity loans 95%.

Under the Federal Deposit Insurance Corporation Improvement Act, the real estate lending limits must be in effect by next March. The comment period on the proposed regulations ends 45 days after they are published in the Federal Register.

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