Wednesday, July 2, 2008
Are single-family construction loans the worst-performing such loans
Question: What is a commercial real-estate loan? Answer: When the Federal Deposit Insurance Corp. refers to commercial-real-estate loans, it includes the traditional mortgages that a borrower takes on when buying an office building or shopping center. But also under the commercial-real-estate umbrella are construction loans, land development and other land loans even if these involve residential construction. Thus, a developer's construction loan to build a $300 million office tower is considered a commercial-real-estate loan, but so, too, is a loan to a small home builder. That home builder might borrow from his community bank to buy empty land, to put in new sewer lines in a subdivision or to build a new three-bedroom house -- all categorized as commercial-real-estate loans. Q: When regulators say commercial loans could cripple banks, which loans do they mean? A: Most of the pain -- so far, at least -- is related to residential overbuilding and moribund demand, causing builders to default on construction loans for single-family housing and condominiums. Land once planned for housing has plummeted in value and builders are still completing houses, only to see no buyers. Consider these numbers: U.S. banks had $264.4 billion in outstanding construction loans for single-family houses at the end of the first quarter of 2008 and an additional $280.8 billion for loans to build commercial properties such as office buildings. Yet, the delinquency rate was for 10.8% for the housing loans, compared with 3.6% to build commercial structures. Q: Are single-family construction loans the worst-performing such loans? A: No. Construction loans for condominiums earned that dubious distinction, although they make up a much smaller piece of the pie with $41.3 billion in loans outstanding. Condo loans' rate of delinquency (at least 30 or more days past due) was 13.6% in the first quarter of 2008, according to Foresight Analytics. And experts predict that percentage will rise considerably for the second quarter.