Banks Are Starting to Slip into Old, Bad Habits


Banks could be slipping into old bad habits. Last year, as interest rates fell, banks started to loosen underwriting standards reminiscent of the last cycle—the kinds of missteps that ultimately led to the great recession. This includes high loan-to-value ratios as well as skipping essential steps, like income verification.

“The banks are starting to get a little bit scary. You are starting to see the behavior that you saw in 2006 and 2007 again,” Steve Jacobs, CEO of Ten-X Commercial, tells “I don’t think this is a mainstream trend, but it is something that I have noticed and something that surprised me. This pushes buyer activity and it compresses cap rates and pushes pricing up. It means a buyer will pay a 3-cap for a property when it really should be a 4-cap. That is when it gets dangerous.”

Like the last cycle, this is most prevalent in the residential market. “It is more in the residential market than the commercial market,” says Jacobs. “In the last six to 10 months, I have seen lenders doing a no income verification loan, which was a huge problem in the last cycle. I have also seen lenders doing 95% loans, which had all stopped in 2009.”

Of course, like last cycle, that also doesn’t exempt the commercial markets, which have also started to see loosening standards. “On the commercial side, I am seeing lenders that were really holding tight at the 60% or 70% loan to cost or loan to value starting to play in the 80% or 90% range,” says Jacobs. “We have seen several deals get financed at 90% and even a couple at 95% loan to value. That makes me think that we are treading backwards.”

It is hard to say what is driving this trend—especially since the downfall of the last cycle wasn’t so long ago. It could be the reduction in interest rates, which made money cheap while demand remains high. :It may tie into that. The reductions have been this year, and the higher loan-to-value ratios have also popped up in the last eight months,” says Jacobs. “I do think that ties to the rate reductions. You would want to think of it the other way. You wouldn’t think that as rates were reduced, banks would get tighter because they are lending the money for less.”

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