Merrill’s (MER) sale of its CDO portfolio for $0.22 cents on the dollar put a market value on an asset class that the rest of the industry had been praying would remain illiquid (and, thus, open to subjective valuation interpretation). This move raised the pressure on other firms, such as Lehman (LEH), to dump their own junk. Worse, it put a price on what that junk was actually worth.
And now Wachovia (WB) has sold a tiny slice of another troubled asset class–construction and land loans–for $0.50-$0.60 on the dollar. This move could force Wachovia and other firms to reassess the carrying value of the rest of their massive construction-loan portfolios, which could hasten additional multi-billion-dollar writeoffs. WSJ:
LandCap, a residential-land company headed by real-estate veteran Jeffrey Gault, has created a joint venture that will buy the loans which have a book value of $75 million to $80 million, according to people familiar with the deal. The loans are to home developers and collateralized by 2,900 house lots — which are in varying stages of development — in such states as California, Arizona, Florida and Illinois. Many of the loans are in some form of distress because of delinquent payments or plunging values of the collateral. Charlotte, N.C.-based Wachovia, which declined comment, will be a minority partner in the venture…
The LandCap venture bought the loans out of a pool of about $350 million in such loans that the bank put up for sale earlier this year. But that pool is just a fraction of Wachovia’s overall portfolio of construction loans. According to Foresight Analytics LLC, about 9.4% of Wachovia’s $24 billion in construction and land loans were delinquent in the second quarter. That is up from a 7.7% delinquency rate in the first quarter.
Other banks are facing similar problems as more residential projects fail. Foresight Analytics estimates that land- and construction-loan delinquencies reached 8% in the second quarter for commercial banks, up from 7.1% in the first quarter and 2.3% in the year-earlier period. Over the next five years, U.S. banks could write off as bad debt between $65 billion and $165 billion loans tied to residential construction and land assets, according to research firm Zelman & Associates.
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