Wednesday, March 11, 2009

Just When You Think You've Reached Bottom

At Calculated Risk, there is the following bit of worrisome (if not exactly surprising) intelligence:
From James Saft at Reuters: Builder loans are the forgotten land mine in U.S. credit crisis (ht Michael)
Banks in the United States face a new source of write-downs and failures in the coming year, as loans made to developers to finance residential and commercial property development rapidly go bad.
Called acquisition, construction and development, or ADC, loans, they total 8.4 percent of all bank loans, just below a 30-year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial space.

[CR Note: or just C&D loans for Construction & Development]

"Everyone in the media is focused on consumer foreclosures," said Ivy Zelman, a housing analyst at Zelman & Associates. "What they're not focused on is the builder-developer foreclosures, which are only in the early innings and which will continue to wreak havoc as these assets are liquidated at depressed prices. Until they are cleared, there can't be a stabilization in home prices."

Zelman thinks the pressure will cause "hundreds of banks" to close.
Of particular concern is that ADC loans are concentrated in smaller banks, which tend to have deep ties to local developers. ADC loans account for 47 percent of nonperforming loans at small banks, compared with 14 percent at larger banks.
This really isn't a new topic - the FDIC issued a report on emerging risks in 2006 that clearly showed that medium sized institutions ($1-$10 billion in assets) had excessive exposure to C&D loans. And it is really the mid-sized institutions, not the smaller institutions (although plenty of those will fail too because of bad C&D loans).
When there's a crash, I suppose it's unlikely that some few or several parts of the system will be spared the general failure.

Which invites (it doesn't 'beg') the next question: What, where, and on whom is the next shoe gonna fall?

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