Banks practicing self-corrective measures.

Banks practicing self-corrective measures

While Congress is threatening to restore restrictions on bank lending that were lifted in 1982, area mortgage executives were not alarmed because, as they say, current bank practices are even more arduous.

The nation's bank regulators were told recently by the Senate Banking Committee, before the Senate recessed for summer session, that they have nine more months to create revised lending rules, which Congress will make law. If they do not, pursuant to an amendment by Senator Timothy Wirth, a Colorado Democrat, the strict loan-to-value criteria that existed prior to the Garn-St. Germain Act of 1982 will be restored.

The Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Treasury Department are responsible for concocting the new regs.

Prior to 1982, banks were not permitted to make a loan backed by commercial real estate that was more than 80 percent of the value of the real estate; 70 percent if the commercial property is partially developed; and 65 percent of the appraised value of undeveloped land.

During the "go-go" 80's, banks were known to lend 90 or 100 percent of the acquisition and construction costs. Restrictions on land lending were relaxed and the type of property banks could lend on was broadened. Some banks profited well from the loans and others were burned.

Banks have become more "draconian" than what Congress is proposing, said Robert Greer, managing director in charge of the finance department at Jones Lang Wootton.

"Basically, this will have zero affect on what is practically going on in the market," said Greer whose firm arranges financing with banks, insurance companies, and pension funds.

Today, he said, loan-to-value ratios in the 60 to 70 range are common because loans are being written on actual cash flow in place and banks have raised their coverage ratios from around 1.15 percent to 1.25 percent and sometimes 1.30 percent.

"The banks are flat out asking for cash or its equivalent," said Conrad D. Stephenson of the Comras Company.

Stephenson, who was with Chase Manhattan Bank during much of last decade's boom period, said the previous regulations were not particularly onerous. Prior to 1982, he said, Chase made loans to a number of developers of major projects, including: Tishman Speyer on Madison Avenue and Park Tower on 59th Street.

"Banks lived with them (the regulations), builders lived with them and we still managed to improve New York City," he said.

It is not clear yet, Stephenson said, whether or not, if rules are rolled back to 1982, if the difference between the amount loaned and the full amount needed can be replaced by a personal guarantee or secondary collateral.

If they will have any effect at all, said Melvin Bisgyer, director, Walter Oertly, Associates, Inc. mortgage finance specialists, the regs proposed by Congress may slow up the turnaround in the market that everyone is waiting for.

The new developers of last decade may be "in for a shock," however, he said. Builders active before the 80's were used to adhering to such ratios. And, that, he said, is "good real estate."

"People don't put up speculative office buildings if they have 20 percent equity," he said.

Merrie Frankel, of Cushman and Wakefield's Finance Group, which does land loans and construction loans, said she was not shocked at all by the news. "It's almost legitimizing what banks are doing already because they've been hit so bad."

Mortgage pro Michael Coratolo, president of Michael Coratolo, and Associates, Inc. said, even in the "hey day," banks were rarely lending more than 85 percent of the total acquisition and construction costs. If they did, he said, it was based on the developer's personal guarantee -- the financial strength and feasibility of the job and the track record of the builder.

Many blame the woes of today's real estate and banking fields and the "Savings and Loan crisis" on Congress's "deregulating committee" set up in the early 80's. The result of this committee's work was an expansion of services and a relaxing of the rules on who banks could lend to, what properties they could lend on and how much of his own money a developer had to put up. Banks were permitted to offer competitive rates on interest rates and negotiable rates. And they ventured into activities in which they had not previously been involved such as speculative real estate, condominium investment, and insurance. Says one banker: "They went into areas where they didn't have expertise, but they did because of deregulation."