Interest Rate Roundup

Friday, June 06, 2008

Construction loans the next source of pain for banks

The Wall Street Journal touched upon a theme I've mentioned before: Many banks are overexposed to construction and development loans. This risk was highlighted by the regulators as far back as two years ago. But nobody on Wall Street was worried then. That sure has changed. Look for more bank failures to result from overdependence on real estate lending:

"Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.

"Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.

"As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee Thursday.

"At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila Bair said banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern. "That's where we are really seeing the delinquencies spike," she said."


  • the banking regulators were asleep at the wheel. the guidance they issued in 2006 was too little, too late. hell, the OTS did not even issue it. something stronger should have been issued in 2004 followed by stringent examinations. there are over 2,500 insured institutions with construction loans more than 100% of their core capital. 184 or 58% of the 317 banks headquartered in FL have an exposure over 100%. much of this has been supported by non-core deposits; now the FDIC chair is concerned about brokered deposits. give me a break, where were the banking regulators when these exposures were being put on the balance sheet. that is the question the senate banking committee should have asked last week. bailout bair needs to stop telling congress and servicers on how to mitigate mortgage loans and spend her time fixing the morale problems at the FDIC and figuring out how to handle the coming tsunami of failures from construction lending.

    By Anonymous Anonymous, at June 7, 2008 at 7:25 PM  

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