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Banks increasingly reliant on real estate lending

8/18/2016 | Real Estate Blog

Bank branches in Pennsylvania and across the nation look much the same today as they did in decades past, but the financial sector has been undergoing huge changes behind the scenes. Banking assets have increased from about $209 billion in the mid-1950s to an eye watering $15 trillion today, and the financial sector has gone from accounting for less than half of the nation’s GDP in 1955 to making up 83 percent of today’s economic output. However, perhaps the biggest change in American banking has been the shift from commercial and industrial loans to real estate-based lending.

The National Banking Act of 1864 prohibited banks from making any real estate loans, but mortgages and other property-based loans now account for about half of all bank lending. The recent surge in property lending has coincided with a reduction in commercial and industrial loans, which have declined from about 40 percent of bank financing in 1955 to about 20 percent today. Smaller banks with assets of $1 billion or less are even more dependent on real estate loans with mortgages representing about three quarters of their lending.

While commercial lending is usually based on quantifiable data like revenue projections and asset valuations, residential and commercial real estate loans are often far more speculative. This has many financial experts worried about volatility and bubbles, and these concerns have been fueled recently by looser underwriting standards and a wave of new lending spurred by fears of rising interest rates.

Securing capital is sometimes a challenge for real estate buyers and developers, and attorneys with experience in this area may help them to make informed financial decisions by assessing the provisions of the various loan packages on offer. Attorneys could also help developers to avoid unnecessary delays by anticipating zoning, land use and regulatory issues and suggesting strategies designed to avoid or address them.