How to Cope as Banks Adjust Their Underwriting
We can expect banks to be much more selective with their new originations
Without a doubt banks have become more conservative in their underwriting. Yet, there are still ways that borrowers can tap this capital source—even as numerous properties are returned to creditors. But don’t underestimate the uphill climb facing borrowers, says Omar Eltorai, market analyst at Reonomy.
“Banks and other portfolio lenders will likely stay focused on risk mitigation and workouts, while new origination will use strict underwriting criteria and will be targeted at the lender’s ‘sweet spot’ or core area of focus,” he says.
Right now, banks across the country have tightened their underwriting standards by requiring higher debt service coverage ratios and lower loan-to-values, while granting fewer exceptions for borrowers. “While banks have not stopped lending, many have pulled back hard on originating new construction and development loans. But many have also become much more conservative with multifamily and other CRE loans, too,” Eltorai says.
As the economy opens at different speeds around the country, Eltorai expects banks to be much more selective with their new originations.
“Lenders with large exposures to hard-hit sectors of the economy—such as energy, retail, and hospitality—are likely going to keep most of their attention on their current loan assets, and be more hesitant to originate new loans to these sectors,” he says.
When banks do lend, there’s little doubt that they’ll prioritize previous customers that have good track records.
“Given the tighter underwriting standards, more attention paid to existing assets than to new assets, and preference for repeat borrowers—the availability of lending is likely going to continue to be lower than at the start of the year, at least until the lenders feel a strong economic recovery is afoot,” Eltorai says.
“An example of this might be that we see greater new loan originations to repeat borrowers who are not in hard-hit industries, whereas new borrowers or those in hard-hit areas would likely have much more expensive financing or no financing at all.”