Saturday, December 08, 2007


(Via Atrios)

I don't know how many construction loans the local banks have made but with Arizona and Tucson in a recession that's likely to get worse next year, will one of our banks fail?

Like Subprime Mortgages, Some Construction Loans Are Delinquent
Published: December 8, 2007
NY Times

BANKS across the United States, particularly the smaller ones, have become dependent on construction lending just as that area of the economy is weakening and the number of bad loans is growing.

...both midsize and small banks had construction loans outstanding that were greater than their total capital. ... Now, however, more than 3 percent of all construction loans are classified as being nonperforming, or have borrowers that are behind on their payments. That is the highest proportion in a decade.

“When you look at the regional impact, the areas that were the booming condominium markets, like South Florida, have shown a surge in delinquency rates,” said Matthew Anderson, a partner in Foresight Analytics, a real estate market analysis firm based in Oakland, Calif.

“I think there will be a wave of bank failures in the not-too-distant future,” he added, “although probably not on the order of the 1980s and 1990s. You had a lot of high loan-to-value lending going on in markets that have soured significantly.”

In early 1991, in the last big real estate downturn, the percentage of construction loans that were either on nonperforming status or behind in payments hit 18.5 percent, nearly six times the current level.

That is unlikely to happen unless a severe recession arrives, but the possibility has worried federal bank regulators. In 2006, they proposed rules to restrain such lending but backed off after banks objected. The policy that finally came out did little more than warn that “rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the advent of adverse changes in commercial real estate markets.”

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