Bank regulators fret about construction loans

updated 11:58 a.m. ET March 5, 2008

WASHINGTON - Loans to homebuilders and other developers are the latest slice of the credit market under duress, and analysts say banks could face hundreds of millions of dollars in losses as a result.

As commercial and residential real-estate prices decline, banks of all sizes face a growing number of loan defaults from builders unable to sell houses, and from developers whose malls and other properties turned out to be less desirable than anticipated.

These problems, if they worsen, are likely to rattle shaky credit markets and could cause more banks to fail in the coming years. They come after the prolonged real estate boom made such lending seem exceptionally safe, and default rates had been low.

Those seemingly safe loans are proving to be anything but secure. For example, Dallas-based Comerica Inc. set aside $108 million for loan losses in the fourth quarter of 2007, primarily because of bad real estate development loans the bank made, particularly in California and Michigan.

Construction and development loans are loans made to builders for properties such as strip malls, office buildings and residential developments. They have been a key source of profit for small and midsize banks.

The percentage of those loans that are 90 or more days past due rose to nearly 3.2 percent at the end of 2007, up from less than 1 percent a year earlier, and is now at levels not seen since the early 1990s, according to the Federal Deposit Insurance Corp.

At a community bankers’ conference on Wednesday, FDIC Chairman Sheila Bair said banks that were cautious about their lending should be able to weather the slowdown. Those that weren’t so careful won’t be so lucky.

“If you competed fiercely for deals, turned a blind eye to the loose terms that were available in the market or took on significant undiversified concentrations, you may well get hurt if we have a sustained slowdown in real estate,” she said, according to remarks prepared for the Orlando, Fla. meeting.

MORE FROM REAL ESTATE

Real estate Section Front

Foreclosure is a problem for celebrities too Mortage rates fall slightly, but still above record Pending home sales climb in May Foreclosure help available to more homeowners Mortgage applications decline Home prices fall, but trend is easing Reclaiming blighted neighborhoods New-home sales slip, missing expectations Home sales climb, but at a sluggish pace Housing market may return to normal in 2012 Real estate Section Front   Add Real estate headlines to your news reader: