Troubled construction balances grew in each category (that we track) in the second quarter of 2009. Over all distressed construction jumped more than 17% from the first to the second quarter in 2009. We track 90+ Day Late, Nonaccrual, and OREO (bank owned property) balances. Total construction loan problems topped $85B in Q2.
Construction loans in the US that are more than 90 days late moved up 12.48%. 90 Day Lates are the precursor to nonaccrual loans and often spell the beginning of the end for construction projects. US banks reported $7.2B in construction loans that are 90+ days late, an increase of just under a billion dollars.
Construction loans reported as “Nonaccrual” moved up 16.88% in the 3rd quarter to $64.8B. Nonaccrual typically spells imminent foreclosure in a real estate and construction environment like the one we’re in.
Construction OREO is bank owned construction projects. Typically these are construction projects the lender has acquired through foreclosure. Construction OREO jumped 22.06% to $13.47B. This jump is an indication that lenders are still not ready to sell at foreclosure auction prices but would rather try their hand at acquiring, possibly completing, then selling the property through traditional means.
Much of the construction distress that we’re seeing today can be traced to liberal condo lending not just in the obviously difficult areas (like Florida, Nevada, and California) but across the US.
Lenders will have to sort out how to handle the mounting volumes of distressed construction projects. Nonaccrual balances point to a 5-fold increase in construction OREO by later this year. Investors, brokers, and developers are positioning themselves to assist banks with this surge of construction problems.