Shadow Lenders Are Pushing Into Risky Real Estate Deals
By Christine Idzelis and Craig Torres
Seven years after the financial crisis, private funds in the U.S. are extending their push into traditional banking. So-called shadow lenders — asset managers that operate outside the banking industry’s regulatory oversight — have been making an increasing number of leveraged loans to midsize businesses. Now their involvement is growing in commercial real estate, a market that scorched traditional lenders when it blew up after the 2008 financial crisis. If banks face higher hurdles, part of the reason is repercussions from the financial crisis. Soured commercial property loans cost them $135 billion in charge-offs from the end of 2007 through 2013, according to the FDIC. “The banking industry, especially community banks, lost a heck of a lot of money in commercial real estate, and the regulators are very wary of it,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington regulatory consulting firm. Tougher regulations followed the lending bust. Under international standards known as Basel III, banks must set aside more capital for certain loans that finance commercial real estate acquisition, development and construction, making the lending less profitable.