How to cope when banks adjust their underwriting


Without a doubt, banks have become more conservative in their underwriting. However, there are still ways that borrowers can tap this source of capital – even as many properties are returned to creditors. But don’t underestimate the rise of borrowers, says Omar Eltorai, a market analyst at Reonomy.

“Banks and other portfolio lenders will likely continue to focus on risk mitigation and workouts, while the new emergence will use strict underwriting criteria and focus on the lender’s sweet spot or core focus,” he says.

Currently, banks across the country have tightened their underwriting standards by demanding higher debt service coverage ratios and lower loan-to-value ratios while allowing fewer exemptions for borrowers. “While banks have not stopped lending, many have withdrawn heavily to take out new construction and development loans. But many have also become much more conservative with multi-family and other CRE loans, “says Eltorai.

With economies opening at different speeds across the country, Eltorai expects banks to be much more selective about their new origins.

“Lenders with high exposure to hard-hit economic sectors such as energy, retail and hospitality will likely pay most of their attention to their current lending assets and will be reluctant to lend to those sectors,” he says.

When banks lend, there is little doubt that they prioritize previous clients with good track records.

“With more stringent underwriting standards, more attention paid to existing assets than new assets, and preference for repeat borrowers – credit availability, at least up to lenders, is likely to continue to be lower than it was at the beginning of the year, I believe a strong economic recovery is in progress, ”says Eltorai.

“An example of this could be that we are seeing larger new loan origins to replicate borrowers who are not in badly affected industries, while new borrowers or borrowers in badly affected areas would likely have much more expensive or no funding.”

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