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Saturday, December 08, 2007

Rising Delinquencies for Construction Loans

by Calculated Risk on 12/08/2007 08:13:00 PM

From Floyd Norris at the NY Times: Like Subprime Mortgages, Some Construction Loans Are Delinquent (hat tip FFIDC)

Figures compiled by the Federal Deposit Insurance Corporation ... show that both midsize and small banks had construction loans outstanding that were greater than their total capital. A decade ago, such loans were equal to only a third of capital for those banks.
Now ... 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.
“I think there will be a wave of bank failures in the not-too-distant future,” [Matthew Anderson, a partner in Foresight Analytics] 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.”

When construction loans go bad, they can go very bad, in part because it can take a long time to slow them down after markets begin to weaken. Construction projects, once begun, are useless if not finished.
During the Paulson Q&A on Friday, he was asked: "Do you anticipate bank failures like England saw with Northern Rock?" Paulson gave a non-answer, and the reason is probably because there are several bank failures in the offing.