LONDON: Banks in the United States face a new source of write-downs and failures in the coming year, as loans made to developers to finance residential and commercial property development rapidly go bad.
Because these loans are old-fashioned and concentrated in smaller banks, their outcomes are particularly interesting, as they indicate that issues with the banking system go far deeper than the so-called toxic assets belonging to the largest lenders that have thus far gotten most of the attention and government aid.
They are also a great illustration of the difficulties of stopping a housing and deleveraging crash.
Called acquisition, construction and development, or ADC, loans, they total 8.4 percent of all bank loans, just below a 30-year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial space.
And because they depend on a reasonably healthy real estate market when projects are completed - someone who is willing to buy or rent the properties - they are now in deep trouble.
"Everyone in the media is focused on consumer foreclosures," said Ivy Zelman, a housing analyst at Zelman & Associates. "What they're not focused on is the builder-developer foreclosures, which are only in the early innings and which will continue to wreak havoc as these assets are liquidated at depressed prices. Until they are cleared, there can't be a stabilization in home prices."
Zelman thinks the pressure will cause "hundreds of banks" to close.
http://www.iht.com/articles/2009/03/10/business/col11.php
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