by Calculated Risk on 9/05/2009 07:59:00 AM

From Floyd Norris at the NY Times: Construction Loans Falter, a Bad Omen for Banks

Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.
...
It is in commercial real estate construction — be it stores or office buildings — that the pain seems likely to rise. At the end of June, $291 billion in such loans was outstanding, down only a few billion from the peak reached earlier this year.

“On the commercial side,” said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, Calif., “I think we are fairly early in the down cycle.”

See the great charts in the article.

The article makes the point that the local and regional banks were unable to compete with the larger banks for credit card loans (and residential mortgages too). So the smaller banks ended up overweighted in Construction & Development (C&D) and CRE loans. That isn't look good now, and most of the bank failures during the next couple of years will probably be because of CRE and C&D defaults.

I was looking back at some old posts, and I started writing about how CRE typically follows residential real estate back in 2006, and also about the excessive C&D and CRE loans concentrations of local and regional banks. Here is an excerpt from a post in March 2007:

The housing crisis is now front page news, but there is little discussion about U.S. bank exposure to CRE loans. If a CRE slump follows the residential real estate bust (the typical historical pattern), then the U.S. commercial banks might have a serious problem.

The pattern is always the same: residential leads, CRE follows. And some lenders (and developers) never learn.