Correspondent Blog
Tag: Underwriting
CRE Credit Risk – What You Need To Know Now
The current banking crisis has put a magnifying lens on all non-Too-Big-Too-Fail banks. While the market focuses on deposits and liquidity, media pundits and analysts are waiting for credit problems to appear. Of all the credit risks within banks, one of the largest is in commercial real estate exposure. When CRE credit risk arises, it…
Bank Credit Risk: A Risk-Return Analysis
Most bankers are familiar with the concept of risk-return tradeoff, which states that potential return rises with an increase in risk. Low-risk assets pay lower potential returns, whereas high-risk assets pay higher potential returns. Further, some bankers are taught early in their careers that they are in the business of taking risks, and banks would…
The Problem With DSCR and LTV in Lending
Many community banks today are willing to underwrite real estate secured loans on just two metrics: debt-service-coverage ratio (DSCR) and loan-to-appraised value (LTV). Banks typically approve credits above 1.20x DSCR and below 75% LTV – with many loan-specific factors that may skew these acceptable levels. For competitive reasons, we see banks dipping to 1.10X DSCR,…
Fixing Loan Selection Bias In Banking
At this point in the business cycle, we believe that community banks should migrate to higher credit quality loans. However, in response to our last few blogs, some community bankers told us they have few opportunities to originate loans at 1.75X debt service coverage ratio (DSCR) and sub 60% loan-to-value (LTV). We believe that the…
Managing Stagflation Credit Risk in Banking – Part III
We established that stagflation (defined as high inflation and likely accompanied by higher interest rates and stagnant or no growth) could be toxic for real estate projects. Few bankers working today have any experience with how destructive stagflation can be since this environment last occurred in the 1970s.
Here is a Better Way To Stress Test Borrower Financials
Every community bank has a set of financial statement reports and ratio analyses to assess underwriting and credit risk. The advent of credit spreading software such as CreditQuest has made this job very easy. However, few banks take the extra step of modifying their reports and analysis based on the current economic cycle and market…