A recent report from a regular Federal Reserve survey of senior loan officers may have struck a note of encouragement for local and regional private homebuilders.

The report indicates a positive trajectory in the availability of bank financing. That's a trend likely to be welcomed by homebuilders and, as a consequence, by homebuyers desperate for affordable homeownership options in a market sorely lacking on this front.

In first quarter 2024 data, the trend shows signs of a credit and lending thaw in the making. Eric Lynch, an economist in the National Association of Home Builders survey research group, writes:

Both multifamily as well as all CRE construction and development loans, on net, experienced a loosening of lending standards from Q4 2023 to Q1 2024.  Construction & development experienced the share of banks reporting tightening conditions drop 15.1 pp to 24.6% while multifamily decreased by 6.8 pp to 33.9%.  On a year-over-year basis, lending conditions for both construction & development (-49.2 pp) and multifamily (-30.6 pp) loosened substantially." – Eye On Housing

Still, whatever glimmer of hope homebuilders – specifically, privately-held firms whose capital finance lines for acquisition, development, construction, and operations stem mostly from regional and community banks – got from the Fed's Senior Loan Officer Opinion Survey (SLOOS) may be short-lived.

The takeaway – that they could expect a thaw in lending and credit conditions to improve thanks to the strength of structural demand among qualified buyers of new homes – runs in stark contrast from what they're now hearing on the ground among their local, community, and regional bank points of contact.

Our bank representatives are telling us that regulators' scrutiny over every commercial real estate loan in their portfolios is getting increasingly intense," the principal owner of a multi-regional private homebuilding operator tells us. "With those regulators on the banks' backs, banks are only doing business with builders they already have relationships with."

What's more, homebuilding company owners we've talked to this week, the trouble compounds if and when a bank may "get nicked" with a potential loss on loans they may have out on commercial office or retail properties that may be at risk of loan defaults in the wake of post-pandemic economic and workplace shifts. So, even if – comparatively – homebuilder loans now might be expected to generate reliably high returns, there's a growing pushback thanks to intensifying federal oversight, particularly when it comes to local community and regional banks.

The culprit? Growing jitters about follow-on impacts of growing financial distress among commercial office and retail developers and property owners, and federal regulatory agency reactions – and over-reactions – to that growing risk. Just this week, Starwood Capital Group chairman and ceo Barry Sternlicht shared his worries about the the more than 4,000 regional and community banks in the U.S. – "lenders of choice" for both local businesses and homebuilding firms.

Fortune's Will Daniel reports:

The combination of higher interest rates (which raised borrowing costs and reduced asset values) and the rise of hybrid work (which increased vacancy rates) hit the office owners particularly hard over the past few years. In January, Sternlicht even told Bloomberg the office real estate market is experiencing an “existential crisis” at this point, and could face $1 trillion in losses. If his prediction proves prescient, that would lead to serious issues for regional and community banks that hold real estate debt but don’t have the large balance sheets to navigate excessive loan losses.

Multiple Wall Street analysts, strategists, and real estate industry leaders have warned about potential issues at regional banks due to underwater real estate loans over the past year. Scott Rechler, CEO of the New York–based real estate investor, operator, and developer RXR, told Fortune in March that regional banks are essentially facing a “slow-moving train wreck.” With wave after wave of commercial real estate loans maturing over the next few years, and values in the sector plummeting, banks will struggle to deal with rising loan losses, Rechler argued."

Although borrowing conditions for builders became more expensive and tighter after the Federal Reserve began raising its funds rate and tightened even further in the wake of several large regional bank failures in early 2023, many builders have managed to navigate these conditions to this day.

Now, however, a consequence of federal agencies' increased pressure on local, regional, and community banks to expand loss risk reserves and batten down their hatches on current and future lending, it looks more and more like it's not just homebuilders but their homebuying customers – many of them first-time, lower-price-tier, entry-level buyers that will get hurt first and hardest.

Affordability, which all the builders are working to offer right now by increasing their spec builds and acquiring lots priced lower and further out from job centers, will get even worse if we can't access the kind of financing we need to keep feeding the machine," our regional homebuilding principal tells us. "Our bankers are telling us that if they get hit with distress on the commercial side of their business, it could effectively mean cutting our capital lines in half. That's the last thing homebuyers looking for affordable homes need right now is for us to be able to produce even less than we are right now."