Banks Are Starting to Slip into Old, Bad Habits

Banks could be slipping into old bad habits. Last year, as interest rates fell, banks started to loosen underwriting standards reminiscent of the last cycle—the kinds of missteps that ultimately led to the great recession. This includes high loan-to-value ratios as well as skipping essential steps, like income verification.

“The banks are starting to get a little bit scary. You are starting to see the behavior that you saw in 2006 and 2007 again,” Steve Jacobs, CEO of Ten-X Commercial, tells GlobeSt.com. “I don’t think this is a mainstream trend, but it is something that I have noticed and something that surprised me. This pushes buyer activity and it compresses cap rates and pushes pricing up. It means a buyer will pay a 3-cap for a property when it really should be a 4-cap. That is when it gets dangerous.”

Like the last cycle, this is most prevalent in the residential market. “It is more in the residential market than the commercial market,” says Jacobs. “In the last six to 10 months, I have seen lenders doing a no income verification loan, which was a huge problem in the last cycle. I have also seen lenders doing 95% loans, which had all stopped in 2009.”