The health of the economy is heavily depen¬dent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Fed and Treasury Department have been pressing banks to raise capital so they do not to further restrict lending. However, banks with swelling portfolios of troubled housing loans are struggling to unload some of their real-estate debt.
As homebuilders continue falling behind on their loan payments, the value of the land and housing developments that serve as loan collateral continue to plummet. Over the next five years, U.S. banks could "charge off" as bad debt between 10% and 26% of their loans tied to residential construction and land assets, which would amount to about $65 billion to $165 billion, according to a report by housing research firm Zelman & Associates. This compares with charge-offs of about 10% of construction-related bank assets, totaling $31.6 billion, when adjusted for inflation, during the last housing downturn in the late 1980s and early 1990s. In 2007 and the first quarter of this year, banks wrote down just 0.7% of such assets, according to Zelman, so more charge-offs are brewing, especially now that mortgage rates have resumed rising with the latest inflation fears.
The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that cannot easily absorb losses, especially banks with big exposure in states hit hard by the housing crisis. For example, banks in Arizona have 36% of their total loans tied to construction and development. The Zelman report said construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975. As a result, it appears that a second wave of bank charge-offs is brewing and delinquencies rise.
Nationwide, roughly 1.3 million homes were in foreclosure at the end of the first quarter according to the MBA. The foreclosure rate increased by 0.43% in the first quarter to 2.47% on a seasonally adjusted basis, while the number of loans that were at least 30 days past due climbed by 0.53% to a stunning 6.35%. Four states accounted for 89% of the increase in foreclosures, namely Arizona, California, Florida and Nevada. Experts also pointed out that high prop¬erty taxes, especially in California and Florida, are compounding the rising delinquency problem. The housing bubble is still deflating in Arizona, Califor¬nia, Florida and Nevada as the housing crisis is now encompassing prime borrowers in more expensive neighborhoods.
