Banks Out of the Woods? Maybe Not

A few items to consider in this article would be the fact that bank write-offs of these loans hit an all-time record high at 2.9% and that the reason why the commercial real estate bomb is taking so long to detonate is that many of those loans are for 7 to 10 year periods - offering banks additional time to extend and pretend.

Unless there is a sudden and massive turn in the fortunes of American business in general, that bill will eventually come due.

MORE than $1 in every $10 that American banks have outstanding in loans is lent to a troubled borrower, a ratio far higher than previously seen in the quarter-century that such numbers have been compiled.

Bad Bank Loans Soar

The problems are greatest in construction loans for single-family homes, where nearly 40 percent of the loans either are delinquent or have been written off as uncollectible. But they are also high in mortgage loans for single-family homes, where $1 in every $8 of loans is troubled.

The figures were released this week by the Federal Deposit Insurance Corporation, as it announced that the number of banks in trouble had risen sharply, and forecast that the rate of bank failures would increase.

The report served as a stark reminder that the banking system remained in perilous health, despite large bailouts of major financial institutions. Many smaller banks are especially exposed to commercial real estate loans, where problems are growing.

The F.D.I.C. also reported that the amount of outstanding loans and leases at all American banks was falling, even after adjusting the numbers for loans that were written off. The total volume of loans and leases outstanding at the end of 2009 was $7.3 trillion. That figure peaked in mid-2008 at just under $8 trillion.

There are many reasons for the figure’s decline, and it is hard to know how much was caused by bankers’ seeking to husband resources to deal with future losses, and how much by a simple refusal to lend to any but the safest borrowers.

Some of the decline may have been caused by a reduction of borrowing by businesses and even homeowners who drew down lines of credit when the credit crisis was at its worst and have repaid them, confident that they will be able to borrow again if they need the funds. And some may reflect continued hesitance by American consumers and businesses to increase their borrowing at a time when the economy remains weak.

As can be seen in the accompanying chart, banks charged off 2.9 percent of the outstanding loans in late 2009. The F.D.I.C. said that was the highest rate since the agency was formed in 1934. In addition, 5.4 percent of all loans were at least 90 days behind, and another 1.9 percent were more than 30 days overdue.

If there is any reassuring news in the figures, it may be that fewer loans are now going bad. The proportion of loans that are 30 to 89 days behind in payments has fallen since peaking earlier in 2009, while the percentage of loans more than 90 days behind has continued to rise.

Commercial real estate loans are widely viewed to be an area of coming problems, in part because such loans are normally made for periods of seven to 10 years, in anticipation that they will then be rolled over into new loans. Many properties are no longer worth anything close to the amount owed, making such rollovers doubtful. Still, many such loans require payments of interest only, or of only minimal amounts of principal, so it is possible for borrowers to stay current until the loans mature.

At the end of 2009, 6.3 percent of such loans were either behind in payments or were being classified by banks as doubtful for repayment. That figure may be held down by a regulatory change. A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only.

Just how rapidly that becomes worse may depend on how many banks choose to “pretend and extend,” renewing the loan and hoping property values will recover.

NYT