As the housing crisis unfolds, banks are continuing to suffer from increases in nonperforming construction loans.
Back in July, TheStreet.com Ratings discussed the special risks associated with construction lending, and listed the 20 banks with the
highest asset concentration in problem construction loans, based on March 2007 financial reports.
A construction loan is really a credit line, with the lender doling out money to purchase the lot and pay the general contractor as construction is completed. Close scrutiny by the lender is required, to make sure construction proceeds as agreed.
A major worry is "subcontractor risk," since a subcontractor can place a lien on the property at any time. If neither the borrower nor the lender have proof that the general contractor paid a subcontractor for completed work, the subcontractor's lien will probably not be lifted. This has played a major role in Coast Bank's construction loan difficulties, described below.
In the second quarter, overall construction loan quality continued to decline. Looking at an updated list of 20 banks with the most exposure to problem construction loans, it is clear that the situation has gotten critical for some institutions:
The following shows an alarming level of overall exposure to problem loans for most of the listed institutions:
Amboy National Bank of Old Bridge, N.J., is the largest institution on the list. The bank's problem assets doubled during the second quarter, with a ratio of adjusted nonperforming assets of 6.19%, as of June 30. Problem loans were split between residential and commercial construction loans and permanent mortgages. All of the nonperforming loans were categorized as nonaccrual, meaning the bank didn't expect principal repayment.
Philip van Doorn
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