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Exactly what is a High Volatility Real Estate Loan and how does it impact your lending capability?
An increasing number of bankiers are becoming acquainted with the concept of "High-Volatility Commercial Real Estate", or HVCRE for short. HVCRE is the name given to the concept. Those bankiers may feel that the HVCRE has a damping effect on their capacity to extend credit to industrial real estate lenders. However, many banks don't know (i) why we have the HVCRE concept, (ii) what an HVCRE loan is, and (ii) what impact HVCRE has on their creditworthiness.
What is the meaning of the term HVCRE? Soon after the 2007-2008 economic downturn, the highly volatile business property segment gained momentum. At about the same period, the Basel Committee was in the midst of an update of its own funds framework. Basle Bankenaufsicht (Basel Banking Supervision Committee) is an intergovernmental body of the supervisory authorities of the world's major economic systems, focusing on the importance of appropriate capitalisation in a robust global system of banks.
During 2011, the Board concluded its third review of banking regulatory framework, generally known as Basel III. According to Dodd Frank, in July 2013 OCC, Federal Reserve and FDIC released all regulatory requirements that are applicable to all banking entities regardless of their number. During the development of these provisions, the supervisory authorities considered certain categories of property loans to be more risky than other categories of property loans.
Such special real estate loans have been described by the regulatory authorities as "High volatility commercial real estate loans" or "HVCRE". "What is a hurricane credit? Either way, an underlying loans facility is any facility used for the purpose of acquiring, developing or constructing real estate, unless the facility is financed: 1-4 Familienwohnobilien; (ii) Immobilien, which would be regarded as a "qualified investment" in municipal redevelopment (in general, any loans that could be classified as eligible investments under the Reinvestment Act of the European Union should pass this examination); (iii) the sale or redevelopment of farmland;
iv ) industrial real estate where ( A ) the loan-to-value ratios are less than or equal to the highest amount allowed by the relevant regulatory authority (typically 80%, according to the nature of the debt and the relevant regulatory authority of the bank), and ( B) the Mortgagor provides equity in the amount of at least 15% of the estimated "completed" value of the real estate property transaction in the amount of either hard currency or available-for-sale unsecured securities (which may contain certain out-of-pocket undevelopment costs).
Long-term loans do not qualify as loans from AVCRE. They are loans for which the basic research has been completed and no advance payments are made in the near-term. A few instances of other loans that are not regarded as loans from AVCRE are: - loans from other banks: i) Accommodation (including multi-family rented housing) for low or middle-income persons at an affordable price; ii) communal utilities aimed at low or middle-income persons; and iii) operations that revitalise or stabilise low or middle-income geographical areas, defined areas of disasters, or poor or undeveloped non-metropolitical middle-income geographical areas identified by the German authorities responsible for bank supervision.
How do HVCRE loans affect a bank's ability to grant credit? Basle III and the Dodd Frank implementation rules demand that governments withhold more funds when a credit is categorised as HVCRE. In general, most business loans bear a 100% credit exposure spread. However, as regulatory authorities consider them to be more conducive to the risks to a bank's long-term liquidity, HVCRE loans have a 150% credit exposure ratio.
Or in other words, a banking institution must now allocate $6 million in funds to obtain a $50 million HVCRE credit instead of the $4 million it would need to allocate to a traditional industrial real estate credit. It would be expected that the inevitable result of these higher demands on equity would be an increase in prices for building loans and banking institutions less willing to lend to develop project finance.
No clear information is currently available on the extent to which prices and loans are affected by the provisions of the SVCRE. However, we hear anecdotes from our customers that they do not at least intentionally limit their commitment to loans from Hypo Vereinsbank (HVCRE), but only value these loans in accordance with the higher demands on them.