Construction and Land Loans Look Ugly, Despite Extend and Pretend

by: Reggie Middleton

The FDIC bank data from the 2nd quarter reveals that banks, despite extend and pretend, regulator passes, and kick the can down the road policies, are still feeling the CRE crunch. Notice the “Construction and land development” line below. Nearly 15% of bank assets are in non-accrual status (dead money), almost 6% charged off, and merely 6.24% recoverable. (Click to enlarge)

This may or may not look bad to the average Joe Schmoe, but realize how banks make money and do business. They lend out capital for more than they rent capital for, and attempt to keep the difference as return. The renting of capital is leverage, and the most conservative bank out there is at least 10x to 12x levered (some are 20x to 30x levered). This means that you need to multiply those gains and losses by that amount less equity to truly determine how the banks are doing. think of that 6% charge off rate less recoveries multiplied by the leverage and you will see how well that business line is doing.

How does it look in raw numbers?

Last year I took the readers of my blog through a visual tour of the condo market in NY from Chelsea Pier to Prospect Park Brooklyn. Even the born and bred NYers were flabbergasted. See (again) “Who are ya gonna believe, the pundits or your lying eyes?”, “Who are you going to believe, the pundits or your lying eyes, part 2″ for a realistic, on the ground representation of the numbers above.

Take the information above in light of what was covered in Developing Implications on Loan Accounting Law: Mark to Market, Mark to Model, or Mark to Market Crash?, after all – as bad as the numbers may look they still don’t seem to match what we see in the street, ala Who are ya gonna believe, the pundits or your lying eyes?” The reason why? Mark to Myth as yet to become Mark to Mayhem, but we are getting there, so be patient…

The Current Status Quo – Mark to Mayhem: FT Alphaville

  • After suspension of mark to market in 2009, FASB standards may change as indicated by this table from Jason Goldberg at Barclays


  • Author makes a point of “no one cares about mark to market until assets fall in price”
  • Discrepancy in fair value to carrying value is as high as 15% to the downside

IASB 39 – A Little Simpler: FT Alphaville

  • IASB will attempt to modify valuation methods to two possible options, mark to market and price at amortized cost
  • No consensus on effects of assets that will face mark to market
  • Determining fair value vs. amortized cost is as simple as the attached picture


On that note, it would be a good time to revisit the FASB argument:

About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules

. Remember, the change of these rules to the status of straight silliness what kicked off one of the greatest bear market rallies in the history of US publicly traded stocks. Now, nearly everything financial (as it relates to M2M) is overvalued.


The mortgage loss and credit metrics (updated for the 2nd quarter) that were originally used in the US version of the (no)stress tests are available for download to professional subscribers. There is a massive amount of data in this model that allows you to independently track mortgage loss performance and credit metrics on a state by state basis for subprime and Alt-A loans.

Disclosure: Anticipating shorts on REITS and banks, biding my time