WSJ: Construction Loans Could Be Next Big Headache
The Wall Street Journal had an interesting article today (“Small Banks Reckoning Day Is Coming” (subscription required), Wednesday July 2, C2) on rising delinquencies on construction loans made to builders by regional banks. This chart of soaring delinquency rates on these loans tells the story: Construction Loan Delinquency Rates.
Nearly 1 in 3 (2182) of the 6,919 banks analyzed by The Wall Street Journal had construction loan portfolios exceeding 100% of their total risk based capital.
Essentially, as these home, condo, apartment and commercial builders are unable to sell their properties because of the real estate bust, they are having trouble paying back their loans. Eventually, many will default forcing huge writedowns at regional banks. If the writedowns are big enough, some of these banks may go under.
Regional banks likely have a lot more pain ahead of them (KRE 1 Year Chart – regional banking index).
This kind of thing suggests that we are still only early in the process of unwinding all the leverage and bad bets made during the boom years.