Construction Loans Threaten Some Banks

Following the retirement of CEO Ken Thompson and mortgage misery it inherited from Golden West Financial, this is a good time to focus on another area of risk for Wachovia(WB Quote) and other large banks: construction and land development loans.

On an aggregate basis, U.S. banks and S&Ls had $630 billion in construction and land development loans as of March 31. Of this total, 4.72% were considered nonperforming, compared to 3.15% in December 2007 and 0.95% in the same period the prior year.

Nonperforming loans include those that are past due 90 days or more. If we include all loans delinquent 30 days or more, 7.19% of construction loans were delinquent as of March 31, up sharply from 4.98% in December 2007 and 2.03% in March 2007.

Many of the 10 U.S. banks with the largest construction portfolios have serious levels of delinquent construction loans:

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While Charlotte, N.C., rivals Bank of America NA (held by Bank of America(BAC Quote)) and Wachovia lead the list with the largest construction and land development portfolios, these loans represented less than 2% of total assets for Bank of America NA and 3.6% for Wachovia Bank NA.

The Wall Street Journal published a short piece on Tuesday discussing Wachovia's delinquent construction loans, which comprised 7.68% of total construction loans as of March 31, exceeding the industry aggregate average. This is a rapid increase from 4.73% in December 2007, 1.65% in September 2007 and 0.59% in March 2007.

Considering the likelihood that all the delinquent loans will go bust, Wachovia is looking at $1.84 billion in problem construction loans. After factoring in foreclosure costs, expenses associated with hiring new contractors to complete projects and long marketing times to sell them when completed, Wachovia's losses on these loans could "easily top 50%" according to a veteran special assets manager.