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March 5, 2008 - Commercial Construction Loans: The Next Trouble Spot?

March 5, 2008
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U.S. regulators said yesterday that commercial construction loans, as well as credit cards and home equity loans, might be the next trouble spot in the continuing credit crunch, according to Reuters.

Federal Reserve Vice Chairman Donald Kohn told a Senate Banking Committee hearing that the Fed was keeping a close eye on credit card, home equity and commercial real estate loans as banks cope with a widening range of credit risks.

“The delinquency rate on commercial mortgages held by banking organizations almost doubled over the course of 2007 to over 2 percent,” Kohn said. “The loan performance problems were the most striking for construction and land development loans - especially for those that finance residential development - but some increase in delinquency rates was also apparent for loans backed by nonfarm, nonresidential properties and multifamily properties.”

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 expected, according to The Associated Press.

Construction and development loans - for strip malls, office buildings and residential developments - have been profit-makers for small- and mid-size banks. Yet the percentage of those loans that are 90 or more days past due rose to nearly 3.2 percent at the end of last year, up from less than 1 percent in 2006.

Credit ranking agency Moody’s Investor Service noted that the performance of commercial mortgage-backed securities could be challenged this year by a weakening economy and uneasy financial markets, reported the AP. Tighter lending could cause commercial real estate prices to drop between 12 percent and 17 percent.

Kohn noted that home equity lending has recently emerged as another area the Fed is keeping a close eye on “as banking organizations report increased delinquencies and losses in home equity lines of credit, especially in light of falling housing prices in some markets.”

And the credit mess in the residential market could spill over to other areas, such as credit cards or auto loans.

“Thus far, the quality of other consumer loans has remained satisfactory,” Kohn said. “However, the delinquency rates on credit cards and consumer installment loans at banking organizations increased over the second half of the year. Moreover, although household bankruptcy filings remained below the levels seen before the changes in bankruptcy law implemented in late 2005, the bankruptcy rate rose modestly over the first nine months of 2007 and could be a harbinger of increasing delinquency rates on other consumer loans.”



Overall January Construction Spending Down

The Department of Commerce released construction spending figures on Monday; January 2008 spending (seasonally adjusted) was down 1.7 percent from December’s figures and 3.3 percent from January of last year. Construction spending has now declined for the past four months.

Seasonally adjusted residential construction spending fell 3 percent below December figures, and nearly 20 percent from January 2007; private nonresidential construction spending fell 1.2 percent from December, but increased about 17 percent since January of last year.

Public construction was down 0.2 percent (seasonally adjusted) since December, but up 6.6 percent since January 2007. Sewage and waste disposal rose 3 percent from last January, but water supply spending decreased 5 percent in the same period.

Private healthcare construction spending decreased 1 percent from December figures, but rose almost 5 percent from January of last year. Public healthcare construction spending declined slightly at 0.1 percent from December yet increased nearly 14 percent from the same period last year.

Educational construction spending rose in both sectors - private construction rose 2.1 percent since December and jumped nearly 22 percent since last January. Public construction in that area rose only 0.6 percent since December, but rose 11 percent since January 2007.

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