Remember when the debt crisis was “contained” to sub-prime mortgages? So do we. (That was last August, and one of the smart folks who told us that was Ben Bernanke, the man who is now turning the dollar into toilet paper). In any event, banks like Bank of America (BAC) and Wachovia (WB) now face a new problem.
While the mortgage mess has yet to completely sort itself out (1 in 11 mortgageholders still face loan problems), banks are seeing rising delinquencies in land and construction loans. With a glut of houses on the market, coupled with a weak economy, condo and home builders are struggling to make their debt payments (WSJ):
Home builders are falling behind on loan payments, and the value of the land and housing developments that serve as loan collateral is plummeting. 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 sent to clients Thursday by housing research firm Zelman & Associates. That 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.
Thanks to the wake-up call from Bear Stearns, many banks have raised additional capital, which should leave them less prone to outright failure. The credit markets are also showing some signs of improvement.
But there’s a difference between the credit crunch (a drying up of liquidity) and the debt problem (non-performing loans). The point here is that even once the tens of billions of bad consumer mortgage debt have been flushed from the balance sheet, banks will be struggling with a whole new class of bad debts. These, in turn, will crimp earnings and future lending–and, in so doing, slow the economic recovery.