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.
It is also a number that is on the rise. That 13.45% figure represents a more than 2.5 percentage point increase from 2009’s first quarter, and future reports will probably bring more bad news. “I think it’s going to get worse before it gets better,” said Steven Friedman, national director of housing for Ernst & Young.
In total, FDIC institutions reported $536 billion in construction and development loans outstanding for the second quarter.
Not surprisingly given the growing delinquency rates, chargeoffs are increasing. As of June 30, FDIC-insured institutions charged off a net of 1.73% of their real estate loans overall. In the construction and development category, they have written off a net of 4.42% of those loans in 2009.
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.
In comparison, in the second quarter, those figures were roughly equal—about $11 billion for each of those categories of REOs.
Alison Rice is senior editor, online, at BUILDER magazine.