Small Banks: What's in Bailout for Us?

You can find more stories like this in our On the Brink series.

Community banks saddled with stalled construction projects are growing increasingly concerned that the federal bailout being negotiated in Congress might leave them behind.

The $700 billion bailout talks between the Treasury Department and lawmakers on Capitol Hill have focused on loan modifications meant to help people avoid foreclosure and caps on executive compensation for banks and other entities that sell problem loans to the federal government. A group of lawmakers, including Sen. Christopher Dodd (D., Conn.) and Rep. Barney Frank (D., Mass.), on Thursday afternoon said a framework for an agreement had been reached, but did not offer specifics at this time.

A serious problem, as reported in the Wall Street Journal, is that there has so far been no mention of the bailout including purchases of distressed construction and land loans. This is especially important to community bankers, many of whom have a high concentration of nonperforming construction loans on their balance sheets. While these loans are not categorized as residential mortgages and have not been sold to Fannie Mae (FNM), Freddie Mac (FRE) or other entities and been repackaged into securities, they are closely tied to the housing bubble and its collapse.

On an aggregate basis, U.S. banks and S&Ls had $627 billion in construction and land loans as of June 30. Out of this total, 6.08% were considered nonperforming (past due 90 or more days or in nonaccrual status), compared to 4.74% in March and just 1.32% in June 2007.

If we include all loans past due 30 to 89 days but still considered performing, 8.09% of all construction and land loans were delinquent as of June 30, compared to 7.20% in March and 2.35% in June 2007. While roughly $50 billion in delinquent construction loans is quite a figure, it is small potatoes when considering Treasury Secretary Henry Paulson's $700 billion proposal.