New bipartisan House bill could boost construction lending

Proposal seeks changes to HVCRE rules

New York /
Apr.April 28, 2017 08:30 AM

When mortgage bankers complain about Obama-era financial regulations hurting the industry, they usually point to one obscure rule: High Volatility Commercial Real Estate, or HVCRE. Now, a new bipartisan House bill wants to overhaul the rule and make it easier for banks to fund development projects.

HVCRE, which is part of the Basel III international regulatory framework and went into effect in January 2015, is aimed at preventing banks from binging on risky real estate loans, such as construction financing. Developers who want to get a construction loan from a bank need to contribute at least 15 percent of a project’s value in cash. If they don’t, the bank is legally required to set aside a bigger capital buffer to insulate itself against losses, restricting its ability to do business and potentially making a loan more expensive for a borrower.

The problem is that some developers may have bought a construction site on the cheap a long time ago, meaning their actual cash investment is small and far less than 15 percent of a project’s value. These developers don’t qualify for a cheap bank loan under HVCRE rules and often choose to borrow from non-bank lenders (which aren’t subject to HVCRE) instead, costing banks business.

The new bill, co-sponsored by Reps. Robert Pittenger (R-NC) and David Scott (D-GA), seeks to change that by allowing developers to count a property’s appraised value (not the actual cash invested) against the 15-percent threshold. It would also allow developers to withdraw funds from the project if the property’s value appreciates, as long as the 15-percent threshold is met, among other provisions.

Industry groups predictably cheered the move. “As the rule currently stands, banks are hindered in their ability to provide (real estate) financing,” Mortgage Bankers Association chair Rodrigo López said in a statement. “Through clarification from legislation, they will be able to better meet the needs of their borrowers, contributing to the greater overall commercial real estate finance ecosystem.”

Lisa Pendergast, executive director of CRE Finance Council, called the bill “an important step in clarifying many of the ambiguities in the final HVCRE rule that the industry has grappled with for over two years.”

In its January issue, The Real Deal broke down how a loosening of financial regulations could benefit banks. Critics worry that more lax rules could lead to a return of the kind of reckless lending seen prior to 2008 and destabilize financial markets. Mark Zandi, chief economist at Moody’s Analytics, said in December that financial deregulation combined with tax cuts and other forms of fiscal stimulus “means we’re going to get more of an overheating economy more quickly.”


Related Articles

arrow_forward_ios
With a cooling trade war, stocks perform well, including real estate. (Credit: iStock)
Real estate stocks push up this week as U.S.-China trade tensions ease
Real estate stocks push up this week as U.S.-China trade tensions ease
416 West 25th Street and Maverick Real Estate Partners principal David Aviram (Credit: Google Maps and LinkedIn)
Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case
Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case
Carpenter & Company's Richard Friedman and 2 Canal Street in New Orleans (Carpenter & Company, Google Maps)
New Orleans Four Seasons lands $315M loan from Madison Realty Capital
New Orleans Four Seasons lands $315M loan from Madison Realty Capital
Cohen Brothers Realty’s Charles Cohen and 750 Lexington Avenue (Getty Images, Cohen Brothers Realty, Council on Tall Buildings and Urban Habitat)
Cohen Brothers’ Midtown tower back in special servicing
Cohen Brothers’ Midtown tower back in special servicing
ASG's Steve Reardon, DoorLoop's Ori Tamuz and David Bitton (ASG, DoorLoop)
Property management startup DoorLoop raises $20M
Property management startup DoorLoop raises $20M
Carmel Partners' Ron Zeff and a rendering of the LIC project (Getty Images, Carmel Partners, Privcap)
Carmel Partners nabs $364M loan for Queens development
Carmel Partners nabs $364M loan for Queens development
Dealpath's Mike Sroka (Dealpath, Getty)
Deal management platform Dealpath raises $43M Series C
Deal management platform Dealpath raises $43M Series C
RXR's Scott Rechler and SL Green's Marc Holliday with 5 Times Square (Getty Images, SL Green, 5 Times Square)
RXR lands $1.3B financing for 5 Times Square; SL Green in as partner
RXR lands $1.3B financing for 5 Times Square; SL Green in as partner
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...