Monday, March 26, 2007

WSJ article on Bank loans to home builders

If you have an online WSJ subscription, this is really worth reading:

just in case that above link doesn't work:

According to the Federal Deposit Insurance Corp., U.S. banks held $565 billion in real-estate construction and development loans at the end of last year, more than double the $272 billion held at the end of 2003. The FDIC doesn't break out loans for residential construction (read: risky) versus commercial projects (not so risky). But it's a good guess that the bulk of the increase in banks' construction loans came from housing. According to the Commerce Department, residential construction is a bigger business and has grown quicker.

Proportionally speaking, then, it's also a good guess that an increase in late payments on construction loans is coming from the residential side -- especially when considering that it's residential builders, not commercial developers, that are really in the dumps these days. In the fourth quarter, $5.3 billion in construction loans were 30 to 89 days past due, according to the FDIC, up from $2.8 billion a year ago.

ouch.... and further on...

Overall, construction loans accounted for 7.8% of loans outstanding in the fourth quarter, up from 2.9% a decade earlier.

But wait, we learned our lesson from the S&L crisis... not!

Oh, that $5.3 billion in loans overdue... its on a graph going up parabolically.

To add a tidbit, I know of a banker worried about a few billion in construction loans from that banker's employer. (Extra audits, etc.)

Now, what fraction of $565 billion going belly up would create a banking crisis? I'm certain the system could handle $60 billion in losses (~10%); what I doubt is that a 20% loss (about $115 Billion) could be shaken off.

So let's say the system survives but gets a "good scare." How much more will that tighten credit standards? Hmmm??? I think quite a bit.

Got popcorn?

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