Overdue Real Estate Loans Continue to Plague Banks

Latest FDIC report finds more than 16% of construction and development loans are at least 90 days past due.

By Craig Webb

Nearly one out of every six dollars that banks currently have out in construction and development loans--16.63%--are at least 90 days past due as of Sept. 30, and another 2.23% are 30 to 90 days in arrears, according to the latest Federal Deposit Insurance Corp. (FDIC) Quarterly Banking Profile released Nov. 23.

Those numbers are marginally better than the 16.87% of construction and development loans that were noncurrent as of June 30 and the 2.36% of such loans that were 30 days to 90 days overdue. But those past-due rates remain up to eight times larger than comparable figures for other types of real estate loans and loans to individuals.

The troubles that banks have had with construction and development loans helps explain why construction and development loan volume has shrunk 28.2% over the past year, from $493 billion as of Sept. 30, 2009, to $386 billion at the end of 2010’s third quarter.

So far this year, banks have charged off 5.28% of their construction and development loans outstanding, according to the FDIC's latest quarterly report of banking conditions. That's up from 5.14% as of the end of the second quarter, a sign that banks appear to have charged off about all the construction and development loans they're going to handle. On June 30, the total value of construction and development loans outstanding was $383.3 billion, or roughly $30 billion more, which is another indication that banks have been reducing their construction and development activity.

In contrast, the value of construction and development-related real estate of which banks have taken ownership has risen from $18 billion as of June 30 to $18.45 billion as of Sept. 30.

The number of banks that the FDIC has put on its list of problem institutions rose by 31 from the second quarter to total of 860 as of Sept. 30. That's the highest level since the first quarter of 1993, despite the fact that net income for the 7,760 FDIC-insured banks reporting jumped to $14.5 billion in this year's third quarter from $2 billion in the year-earlier period.

There were slight differences in the percentage of noncurrent construction and development loans in the third quarter depending on the bank's size and region, according to the report.

For example, FDIC-insured institutions with fewer than $100 million in assets have labeled just 10.33% of their real estate construction and development loans as being more than 90 days overdue, while banks with more than $10 billion in assets had 18.03% of their construction and development loans noncurrent.

By region, rates for noncurrent real estate construction and development loans ranged from 11.03% for the Dallas region (composed of Arkansas, Colorado, Louisiana, Mississippi, New Mexico, Oklahoma, Tennessee, and Texas) to 21.76% for the San Francisco region (which includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington, Wyoming, and the Pacific Island territories).