The Housing Chronicles Blog: Construction & development loans continue to plague FDIC-insured banks

Friday, September 4, 2009

Construction & development loans continue to plague FDIC-insured banks

As the real estate market -- especially for the commercial sector -- continues to fight against the economic currents, the percentage of construction and development loans held by FDIC-insured banks is rising, more than doubling from last year's levels. From a story:

Construction and development loans continue to be a trouble spot for FDIC-insured banks, which lost an aggregate of $3.7 billion in 2009’s second quarter.

The problem? “Increased expenses for bad loans,” according to the FDIC’s quarterly banking profile, which was released last week. The report covers nearly 8,200 institutions, including commercial banks and savings institutions.

Unfortunately for builders and developers of new homes, condos, offices, and retail buildings, the loans they have or need to develop new communities are a growing portion of those bad loans. According to the report, 13.45% of construction and development loans were more than 90 days past due for the three months ending June 30.

Overall, it is more than double the rate for all real estate loans, 5.64% of which fell into the noncurrent, or more than 90 days past due, category for the quarter...

At the same time, banks are taking possession of more and more construction and development-related assets. In the second quarter, FDIC institutions reported $13.5 billion in construction and development real estate owned (REO) property.

For context, FDIC institutions said they own $11.5 billion in 1-4 family residential REOS, meaning that banks currently had more construction and development REO property on their books last quarter than REOs such as foreclosed-upon single-family homes for the mortgages that they kept on their books rather than securitizing and selling to investors.

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