by Calculated Risk on 3/11/2009 12:45:00 PM

From James Saft at Reuters: Builder loans are the forgotten land mine in U.S. credit crisis (ht Michael)

Banks in the United States face a new source of write-downs and failures in the coming year, as loans made to developers to finance residential and commercial property development rapidly go bad.
...
Called acquisition, construction and development, or ADC, loans, they total 8.4 percent of all bank loans, just below a 30-year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial space.

[CR Note: or just C&D loans for Construction & Development]

"Everyone in the media is focused on consumer foreclosures," said Ivy Zelman, a housing analyst at Zelman & Associates. "What they're not focused on is the builder-developer foreclosures, which are only in the early innings and which will continue to wreak havoc as these assets are liquidated at depressed prices. Until they are cleared, there can't be a stabilization in home prices."

Zelman thinks the pressure will cause "hundreds of banks" to close.
...
Of particular concern is that ADC loans are concentrated in smaller banks, which tend to have deep ties to local developers. ADC loans account for 47 percent of nonperforming loans at small banks, compared with 14 percent at larger banks.

This really isn't a new topic - the FDIC issued a report on emerging risks in 2006 that clearly showed that medium sized institutions ($1-$10 billion in assets) had excessive exposure to C&D loans. And it is really the mid-sized institutions, not the smaller institutions (although plenty of those will fail too because of bad C&D loans).

Here are three key graphs concerning C&D loans based on the FDIC Q4 Quarterly Banking Profile:

Click on graph for larger image in new window.

The first graph shows the number of FDIC insured institutions with construction loans exceeding total capital.

Not all of these institutions will fail, and not all failures will be because of C&D loans, but this gives an idea of the number of institutions with excessive exposure to C&D loans.

The second graph shows the concentration of C&D loans by institution asset size.

This suggests that a higher percentage of mid-sized banks ($1 to $10 billion range) will fail from C&D losses. There were two examples this year: County Bank, Merced, California had $1.7 billion in assets. Alliance Bank, Culver City, CA had $1.14 billion in assets. Both were seized by the FDIC on February 6th.

Of course there are many more small banks. The FDIC Q4 report shows 7,629 institutions under $1 billion in assets, 562 mid-sized institutions, and only 114 with greater than $10 billion in assets. So most of the failures will be smaller banks.

The third graph shows the noncurrent rate for C&D loans. The rate is rising quickly - hitting 8.5% in Q4 - although the rate is still below the level of the early '90s (related to overbuilding of CRE and the S&L crisis).

Put together, these graphs suggest many more bank failures as the C&D noncurrent rate continues to rise. Other banks will fail because of bad residential loans (like IndyMac), and some institutions from bad CRE loans, but most bank failures will probably be C&D related.

by Calculated Risk on 3/11/2009 10:51:00 AM

From Brad Setser: The fall in China’s exports caught up with the fall in China’s imports, at least for now

After soaring for most of this decade — the pace of China’s export growth clearly turned up in 2002 or 2003 and then stayed at a very high pace — China’s exports are falling back to earth. The surge in China’s exports could prove to be as unsustainable as the rise in US (and some European) home prices. They might end up being mirror images … as Americans and Europeans could only import so much from China so long as they could borrow against rising home prices.
emphasis added

credit: graph from Brad Setser

Historically there has been a strong correlation between household mortgage equity withdrawal (MEW) in the U.S. and the U.S. trade deficit. Now that MEW is essentially over, the U.S. trade deficit has declined sharply too.

As Setser suggests, the surge in China's exports were very dependent on the U.S. and European housing bubbles - and MEW.

Note: Q4 MEW will probably be available next week (the Fed's Flow of Funds report will be released tomorrow).

by Calculated Risk on 3/11/2009 09:13:00 AM

From The Times: Bank to begin 'printing money' to boost economy

The Bank of England will start pumping newly created money into the economy today by buying £2 billion in gilts as it embarks on "quantitative easing" in an effort to boost the economy.
...
Mervyn King, the Governor of the Bank, indicated last week that the Bank would continue this course of action until the lending markets became unglued.

... the Bank's announcement has already had some effects.

Benchmark ten-year bond yields fell to a record low of 2.95 per cent at the beginning of the week and sterling swap rates, used by banks and building societies to calculate fixed-term mortgage rates, have also dropped, indicating that lenders should be able to offer more competitive home loan rates.

Corporate borrowing costs have also fallen by between 0.44 and 0.72 percentage points, according to the sterling iBoxx index.

The Fed will probably watch this closely as they discuss buying long-term treasuries at the Fed meeting next week.

by Calculated Risk on 3/11/2009 01:49:00 AM

Link: A conversation with Timothy Geithner

Stress test / public-private discussion starts at just after 6 minutes ...

by Calculated Risk on 3/10/2009 11:16:00 PM

From Bloomberg: Libor Creep Says Credit Markets Risk Freeze on Policy Distrust

The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans climbed to 1.33 percent yesterday, the highest level since Jan. 8 ...

Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets ... “The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution,” said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors ...

And from Bloomberg: Bank Debt Stressed at Bear Stearns, Lehman Peaks

Bank debt is as stressed as when Bear Stearns Cos. had to be bailed out and Lehman Brothers Holdings Inc. collapsed, according to analysts at BNP Paribas SA.
...
“We’re seeing the start of the next leg of the crisis and that’s going to be financial bondholders taking a haircut as lenders default,” said Mehernosh Engineer, a London-based strategist at BNP Paribas.