The net effect of the bank and thrift regulators' decision to adopt lending guidelines rather than strict loan-to-value ratios is to ratify current practices rather than change lending behavior, say experts on real estate finance.
"We crafted our proposal so that the bulk of lending activity wouldn't be caught," said David Seiders, chief economist of the National Association of Home Builders.
"What we see in the proposed guidelines is very much like our proposal."
The National Realty Committee, which represents commercial lenders and builders, also was pleased. "This will help us make a transition to what we hope will soon become a normal market," said NRC President Steven A. Wechsler. The NRC was pleased that the guidelines, unlike the proposed regulations, would cover restructurings, even if they involve some new money.
Wechsler said commercial banks have about $400 billion in commercial real estate loans, many of which will come due within the coming year and require restructuring.
Robert F. Miailovich, assistant director of policy at the Federal Deposit Insurance Corporation. agreed that the guidelines would have little effect on increasing real estate lending. But he noted that the departure in 1982 from statutory guidelines had a negative impact.
He said the FDIC looked at the 75 biggest real estate loans that went bad at First Republic Bank of Houston and Bank of New England. "Seventy-two of the loans would have been illegal under the 1982 rules," he said.
The limits that will be set by the guidelines are the same as those contained in banking and thrift laws until they were repealed by the Garn-St Germain Depository Institutions Act of 1982.
The FDIC staff had wanted the new restrictions to be issued in the form of a regulation. but the protests of lenders to the proposed regulations caused the principals of the four regulators to bow to Treasury Department pressure and go the guideline route.
The guidelines. however, will go much farther than loan-to-value ratios, according to Miailovich, and will address other safety and soundness criteria for real estate lending.
The FDIC postponed final action on the guidelines until its Oct. 27 meeting. The Federal Reserve Board Is expected to act on them Oct. 21. The Office of Thrift Supervision and the Office of the Comptroller of the Currency also announced the new guidelines.
The guidelines will include loan-to-value ratios. but will note that they are only one of many factors that must be considered. Other factors include the capacity of the borrower, the ability of the borrower to meet debt service. the overall creditworthiness of the borrower, the level of cash equity invested in the property, secondary sources of repayment and additional collateral or credit enhancements.
The LTV ratios will be 65% for raw land. 75% for development, 80% for nonresidential construction and 85% for one- to four-family residential construction and improved property. One- to four-family permanent mortgages and home equity loans will not have a maximum, but those with a LTV ratio of more than 90% must be backed by mortgage insurance or readily marketable collateral.
The ratios may be exceeded on a case-by-case basis up to 100% of an institution's total capital. Multifamily loans that exceed the LTV ratios could be made up to 30% of total capital.
Exempted from LTV limits would be loans guaranteed or insured by the federal government or its agencies; loans backed by the full faith and credit of a state or local government; problem loans that must be renewed, refinanced or restructured in connection with a workout; loans that facilitate the sale of foreclosed real estate; loans where real property is taken in an abundance of caution by the lender; loans, such as working capital loans, for which the lender does not rely principally on real estate as security; and loans that are to be sold promptly after origination, without recourse, to a financially responsible third party.