As reported by Wall Street Journal today, federal regulators warned 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.

A New Phenomena: 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.

The Result: banks have begun to dump their inventories of bad loans at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses:

•  IndyMac Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540 million in loans made to finance land purchases and housing construction projects. Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar.

• Cleveland-based KeyBank, a unit of KeyCorp., is trying to unload $935 million in loans tied to land and residential developments,

• Wachovia Corp. is shopping a $350 million loan portfolio, according to two people who have seen the offerings.

Home builders are falling behind on loan payments, and the value of the land and housing developments that serve as loan collateral is plummeting.

It is predicted that over the next five years, U.S. banks could “charge off” as bad debt between 10% and 26% of their loans tied to residential construction and land assets, which would amount to about $65 billion to $165 billion, according to a report sent to clients Thursday by housing research firm Zelman & Associates.

Geographic Worries: The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can’t easily absorb losses, and at banks with big exposure in states hit hard by the housing crisis.

• Banks in Arizona have 36% of their total loans tied to construction and development. 

•   In Georgia that number is 34%, and 

•  In North Carolina it’s 28%.

Just the Facts:

• Construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975.

• The rate of foreclosures on homeowners hit a record, as did the rate at which they fell behind on their mortgage payments. 

•  In the first quarter, 6.35% of mortgages were at least 30 days delinquent, not including those already in foreclosure, a rise of 1.51 percentage points from the year-earlier period.

A Historical Perspective: Here is why there is cause for concern. Putting all of this into some historical perspective, note that at the peak of the housing boom, during the second quarter of 2005, luxury-home builder Toll Brothers Inc. signed 3,120 contracts. In its latest quarter ended April 30, buyers signed just 929 contracts for new homes in the builder’s 300 communities across the nation.

Tags: Home Builder Defaults

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