Banks have high percentages of real estate loans on their books

On Behalf of | Aug 18, 2016 | commercial real estate

As compared to the 1950s, banking in Florida and around the country has a substantially different focus today. In the 1950s, commercial banks had more commercial and industrial loans in their portfolios than real estate loans. Today, the balance has reversed with commercial banks having substantially more real estate loans rather than commercial and industrial loans in their portfolios.

In the 1950s, commercial and industrial loans comprised 40 percent of bank loans while real estate loans made up 25 percent of the portfolios. Banking started changing in the 1980s with the number of commercial and industrial loans falling while real estate loans increased. Today, commercial and industrial loans make up around 20 percent of bank loans, and real estate loans make up about half. During the housing bubble in 2007, real estate loans peaked at 60 percent of the loans held by banks.

Commercial real estate loans carry significant risks for banks because of the potential for defaults. This is especially true when prices that are high begin tumbling. Currently, real estate prices are high, but it is unclear when and if they will fall. Because of the risks associated with real estate loans, the National Banking Act of 1864 forbade banks from issuing real estate loans. That was relaxed in 1913 with the passage of the Federal Reserve Act and further loosened in 1927 with the passage of the McFadden Act just before the Great Depression.

When banks have high percentages of real estate loans on their balance sheets, regulators tend to scrutinize them more closely. This may make it more difficult for developers to obtain funding for commercial properties. Many commercial real estate owners may have loans that will mature in the next few years, and they may have trouble obtaining financing from traditional banks. A real estate attorney may help clients identify alternative funding sources if necessary.