FDIC Reports High Volumes of Delinquent Construction Loans
By Kelli Galippo • Dec 13th, 2010
Nationally, one out of every six dollars of construction and development (C&D) loans issued by banks, roughly 16% of all C&D loans, are at least 90 days delinquent as of September 30, 2010. Another 2% are 30 to 90 days delinquent.
Fourteen percent of all C&D loans in the 12th Federal Reserve District (Alaska, Washington, Oregon, California, Idaho, Nevada, Utah, Arizona and Hawaii) are more than 90 days delinquent. 3.7% of all types of bank loans in California are more than 90 days delinquent.
This trend in delinquencies has remained largely unchanged in the last three months. The rate of delinquency on C&D loans is eight times greater than the rate of delinquency for any other type of real estate or personal loan.
The volume of C&D loans held by banks nationally has decreased by 28% since 2009, from $493 billion to $385 billion at the end of the third quarter of 2010.
Vacancies and unemployment continue to plague the Golden State, leaving many newly-built or recently-improved commercial properties burdened with sizeable C&D loans with no way to pay them back.
Consider the following example: at the end of 2007, a bank lends a business funds to construct an office or warehouse (or improve an existing property) and collects prepaid interest for 18 to 36 months so the business can be up and running and able to generate income. The Millennium Boom peaks and ushers in the Great Recession. The economic condition that existed when the loan was entered into no longer exists, and the business is not able to generate sufficient revenue, trapping it without the means of paying back the loan.