New Relationship Between Risk and Funding
September 17th, 2013 by Tatyana Levin
Because both commercial real estate and the banking industry make so much money and involve so many people, both industries have to be regulated by the government in order to prevent the scads of people involved from getting hurt financially.
When the commercial real estate industry and the banking industry work together, millions if not billions of dollars are exchanged annually and thousands of people are involved in these exchanges. Everyone involved is exposed to at least a certain amount of risk.
Every so often new regulations are introduced to try and safeguard both the customers and the industries themselves. In July, new regulations were presented that limit how much money lenders can loan; now they are required to keep more assets liquid rather than tied up in investments.
Because of this, there will be less money to lend for commercial real estate ventures and the lending that will be done will be restricted.
This means that it will be harder to get a mortgage to buy a commercial property and approval will be based on risk assessment rather than potential profit.
Unfortunately, many commercial real estate loans are considered too volatile and surpass the maximum risk that lenders have deemed acceptable.
Risk is set and discussed on a scale from 1%-100%, and according to Basel III rules, high volatility commercial real estate (HVCRE) is set at a 150% risk.
This doesn’t mean that it will be impossible to get a commercial real estate mortgage, but mortgages will be limited to less risky properties to protect all parties involved.