Commercial Loans Now Nightmare for smaller Banks
In my life time commercial real-estate markets have always been a lagging economic indicator not a leading indicator. When my younger brother who owns a Florida excavation company told me business was still booming in 2007 despite the tumbling housing market, I predicted he'd see a big fall off by 2008.
Now that it has come true, just how bad is it? The "experts" I listen to, including FDIC chairwomen Sheila Bair expect more defaults and bank losses on commercial loans. The FDIC agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsized businesses.
First the good news (I hope, It's still a lagging economic indicator)
The New York Times (Sept. 4th) published an article which stated,
Even as the economy may be recovering, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade.
The NYT chart below shows how, the mole hill of commercial loans more than 30 days past due in 2006, has turned into a mountain of past due debt this year.
Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.
Construction loans were a primary source of revenue for many banks, particularly smaller ones without a national presence. Other types of loans were not easy to make. A handful of big banks came to dominate credit card loans, for example, and corporate loans were often turned into securities.
From the WSJ, Commercial Real-Estate's $1Trillion Time Bomb:
In contrast to home loans – the majority of which were made by only 10 or so giant institutions – thousands of small and regional banks loaded up on commercial property debt. As a result, commercial real estate troubles would be even more widespread among the financial system than the housing woes. At the present, more than 3,000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans.
Now for the bad news (we've only just begun)
So, while plenty of leading economic indicators show positive signs and that the American single family housing market has improved, commercial real-estate construction seems likely to get worse.
How much worse can it get? Well, I hope the WSJ headline is over stating the problem, "Commercial Real-Estate's $1Trillion Time Bomb".
Banks have been taking losses and cutting back their commitments for a couple of years on home construction. At the end of June, $173 billion in construction loans related to single-family homes was outstanding, barely more than half the peak level reached in the fall of 2006, when the housing market was booming. At the end of June, $291 billion in commercial real-estate loans was still outstanding, (down only a few billion from the peak reached early this year).
So, as the ROCK would say, "Can you smell what's cooking" ? I sure hope these signs of rising problems are true to the history of CRE as a lagging economic indicator. I sure hope this is no a replay of the 1965 Barry McGuire top hit: "Eve of Destruction"
For three video reports listen to Commercial Construction Outlook. Facts from a Sept. 1st Reuters Article: More Failed Construction Loans Foreseen For Banks.
Delinquency rates on loans for construction and land in the second quarter were three times what they were at the peak of the real estate boom in late 2007.
California-based Foresight Analytics has 466 banks on its watch list of those in danger of going underThe delinquency rate for apartment construction hit 9.1 percent in the second quarter, up from 6.8 percent in the first quarter. The delinquency rate for nonresidential commercial construction loans rose to 10.4 percent, up from 8.8 percent. (Reporting by Ilaina Jonas; Editing by Gary Hill)
Disclosure: At this time I have no long or short positions in real-estate (other then my personal real-estate properties).
