A top US bank regulator is worried about a real-estate bubble — even if he won't say it

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There are a few ingredients that create a credit bubble.

Lenders need to be cranking out more and more loans, taking on debt to their books. Underwriting standards, or the ease at which borrowers are able to get a loan, have to be decreasing. (This means less qualified borrowers are getting loans.) Finally, for the bubble to pop, you need an economic slowdown that causes borrowers to not be able to pay back their loans.

Bubbles are damaging, which is why the US government has a myriad of agencies and regulators assigned to look out for them.

One of those is Thomas Curry, who heads the Office of the Comptroller of the Currency. The OCC, which is the section of the US Treasury responsible for overseeing banks in the US, released the Semi-Annual Risk Perspective for the banks on Monday.

In it, Curry and the OCC highlighted risks to both banks' operations and their lending businesses. One part of the economy in particular, according to Curry, is worrying, and even if he didn't say it, a bubble may be forming.

A new, but different, real-estate bubble

While Curry emphasized that the banking system was "strong and healthy," part of his job is to worry about what could go wrong. Based on where we are in the credit cycle, Curry said in remarks accompanying the report, worrying trends are beginning to appear.

"It's at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk," said Curry, whose office works with the Federal Reserve and FDIC to regulate banks.

Based on that cycle, Curry said he was starting to see changes in the lending standards of banks, particularly in commercial real estate, or CRE. Here's Curry on the recent shifts for lenders (emphasis added):

"While leveraged lending and auto lending remain concerns, CRE lending and concentration risk management has become an area of emphasis for regulators. CRE portfolios have seen rapid growth, particularly among small banks. At the end of 2015, 406 banks had CRE portfolios that had grown more than 50 percent in the prior three years. Of note, more than 180 of these banks more than doubled their CRE portfolios during the past three years. At the same time we are seeing this high growth, our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices."

Philipp Guelland/Getty Images

So on the bubble checklist you've got significant growth in loans, easing of underwriting standards, and funky tricks to allow less-qualified candidates access to loans. The OCC report also noted that vacancy rates for apartments were creeping up, and it expects the same to happen for industrial and retail spaces as well.

To be clear, Curry and the OCC report don't use the word "bubble," but generally one of the government regulators in charge of watching the banking system isn't going to throw around that term too often. Also, calling it a bubble would most likely bring to mind the 2008 real-estate crash, which probably isn't a great thing to draw connections to.

Regardless of whether the word was used, the assessment by Curry and the OCC suggests that a commercial real-estate bubble just may be forming.

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