Small Banks at risk, too ….
By: Myles, June 26th, 2008
Here we go again. Recently, the headlines have been dominated by the global banks, like Bear Sterns, and their massive missteps and huge losses.
For instance, this just in from CitiGroup: $8.9 billion of write-downs in the second quarter, nearly $15 billion of losses in the last two quarters of 2008, and more than $46 billion of credit losses and write-downs since the middle of 2007.
The troubles, apparently, go far beyond the mega players. Small banks and construction loans: Yet another area within the banking industry that appears to be headed for bad times. So, how will all of this translate to the Maryland Real Estate community?
As reported in the Wall Street Journal today, regulators are increasingly worried about a lending practice that allows real-estate developers to delay paying construction-loan interest but can mask problems at the banks that made the loans.
Small banks, which are more exposed relative to bigger banks, have $280 billion of outstanding construction loans overall, mostly to condominium developers and home builders.
When the loans were made, the banks calculated the interest that would be paid and put that money aside in “interest reserves.” In essence, the banks pay themselves until the loan becomes due or the property generates cash flow.
Regulators fear this practice can be abused to keep recording loans as performing even though the underlying real-estate projects are failing.
The biggest worry about interest reserves mainly has involved small banks because of their heavy concentration in construction lending. These loans normally ranged from $1 million to $10 million to home builders, land investors and developers of commercial properties such as shopping malls and office buildings.
At the end of the first quarter, the $280 billion that small banks had outstanding in construction loans represented about 45% of all such loans, according to Foresight Analytics.
Tags: Construction Loans, Small Banks
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