There are several risks associated with CRE lending, the most significant being the volatility of the value of the collateral on the loan, which is often the real estate being purchased or developed with the funds from the loan. Real estate is a notoriously cyclical market with fluctuations that can leave loans backed by real estate under-collateralized in the event of an economic downturn. The OCC Comptroller’s Handbook on CRE lending is careful to point out that CRE lending brings a unique take on other common lending risks, such as credit, interest rate, liquidity, operational, compliance, strategic and reputational risks.
In addition to thinking through the risks associated with CRE lending, banks and credit unions considering expanding commercial real estate lending should think about whether CRE is a good fit for their institution. Because CRE lending comes with a unique set of risks, it is important that any bank or credit union considering expanded CRE lending have a robust credit analysis process in place. Specifically, institutions that have continually updated their credit analysis processes following regulator’s guidelines or have implemented software solutions are going to be in the best position to perform comprehensive global cash flow and credit analysis on CRE loans. In fact, software solutions are often key to both profitability and regulatory approval.
In an increasingly challenging banking environment, community banks and credit unions are on the lookout for new opportunities to grow their loan portfolios and remain competitive. For many, commercial real estate lending may be the ticket. By understanding the risks, working with regulators and implementing robust credit analysis process, community banks and credit unions can take advantage of opportunities in CRE.
Learn more about the Sageworks Credit Risk Solution.