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Construction and Land Loans Look Ugly, Despite Extend and Pretend Lipstick
The FDIC bank data from the 2nd quarter reveals that banks, despite
extend and pretend, regulator passes, and kick the can down the road
policies, are still feeling the CRE crunch. Notice the “Construction and
land development” line below. Nearly 15% of bank assets are in
non-accrual status (dead money), almost 6% charged off, and merely 6.24%
recoverable.
This may or may not look bad to the average Joe Schmoe, but realize
how banks make money and do business. They lend out capital for more
than they rent capital for, and attempt to keep the difference as
return. The renting of capital is leverage, and the most conservative
bank out there is at least 10x to 12x levered (some are 20x to 30x
levered). This means that you need to multiply those gains and losses by
that amount less equity to truly determine how the banks are doing.
think of that 6% charge off rate less recoveries multiplied by the
leverage and you will see how well that business line is doing.
How does it look in raw numbers?
Last year I took the readers of my blog through a visual tour of the
condo market in NY from Chelsea Pier to Prospect Park Brooklyn. Even
the born and bred NYers were flabbergasted. See (again) “Who are ya gonna believe, the pundits or your lying eyes?”, “Who are you going to believe, the pundits or your lying eyes, part 2″ for a realistic, on the ground representation of the numbers above.
Take the information above in light of what was covered in Developing Implications on Loan Accounting Law: Mark to Market, Mark to Model, or Mark to Market Crash?, after all – as bad as the numbers may look they still don’t seem to match what we see in the street, ala “Who are ya gonna believe, the pundits or your lying eyes?” The reason why? Mark to Myth as yet to become Mark to Mayhem, but we are getting there, so be patient…
The Current Status Quo – Mark to Mayhem: FT Alphaville
- After suspension of mark to market in 2009, FASB standards may change as indicated by this table from Jason Goldberg at Barclays
- Author makes a point of “no one cares about mark to market until assets fall in price”
- Discrepancy in fair value to carrying value is as high as 15% to the downside
IASB 39 – A Little Simpler: FT Alphaville
- IASB will attempt to modify valuation methods to two possible options, mark to market and price at amortized cost
- No consensus on effects of assets that will face mark to market
- Determining fair value vs. amortized cost is as simple as the attached picture
Related Video: 
11:24 Bailout 4: Mark-to-model vs. mark-to-market
Related articles: Is the Threat to the Banks Over? Implied Volatility Says So
On that note, it would be a good time to revisit the FASB argument: About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules .
Remember, the change of these rules to the status of straight
silliness what kicked off one of the greatest bear market rallies in
the history of US publicly traded stocks. Now, nearly everything
financial (as it relates to M2M) is overvalued.
The mortgage loss and credit metrics
(updated for the 2nd quarter) that were originally used in the US
version of the (no)stress tests are available for download to professional subscribers.
There is a massive amount of data in this model that allows you to
independently track mortgage loss performance and credit metrics on a
state by state basis for subprime and Alt-A loans. See 
SCAP Assumptions Updated_09082010 Web Edition.
More on commercial real estate:
- Even With Clawbacks, the House Always Wins in Private Equity Funds
- Commercial
Real Estate Continues to Dropped into Foreclosure as the Landlords
of Said Properties Enjoy Skyrocketing Share Prices? Yep, Makes Plenty
of Sense - The
Conundrum of Commercial Real Estate Stocks: In a CRE “Near
Depression”, Why Are REIT Shares Still So High and Which Ones to Short? - The Shortlist of the Shortlisted “Stocks to Short for 2010″: What We See as the Most Profitable Bear Postions for 2010
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Reg, glad you focus on this instead of rehashing monthly trepp CMBS data as this is the true source of drain on bank capital and money velocity. What is also important to consider is how long these banks take to workout these non-performing construction and land loans. The only time I have seen significant movement is after the FDIC consummates a deal and a better capitalized asset owner is able to workout something with the borrower (sometimes old sometimes new borrower). These other banks just sit on these non-performing assets hoping they can build enough equity to deal with them but never do...dear FDIC - get it over with already.
Great stuff, Reggie. I would love to see you take on the financials, the increasing duration of their short-term-funded holdings, and just how gruesomely they get squashed when rates rise.
http://keynesianfailure.wordpress.com/2010/09/10/delayed-deleveraging-meets-the-keynesian-endpoint/
The only construction I see in these parts is new bank branches.
Our dealership was in the process of selling some land to a local hospital, but they just yanked the deal yesterday due to zoning issues...
apparently, it was located where military planes take off and land and they didn't want to risk a crash into a building of about 1500 people...
kind of sucks because the dealership was needing the money to keep "floating" down the economic stream towards Hell.
I can tell you from being in this business- not a single land deal has happened around here for over a year. Barring a swap or two maybe, other than that no land sales of any significance at all.
Land in 2nd life doesn't count. ;)
I wish I was clairvoyant and could relate "here" to someplace...
Speaking of Linden Lab, it is only a matter of time before they fold their datacenters and go home. If you can barely keep yourself fed, you are sure as hell not going to put your money into the 'virtual market'.
Building lots in premiere golf communities in North Carolina are now selling at 25% of their 2006-2007 peak, below the price per acre that the developer originally paid for the raw land. About 30% of the lots on offer are already bank owned, and that percentage grows every month. It’s tempting to buy one just for preferred access to the golf course. Unfortunately, if things don’t improve, that will probably go bankrupt too.
25% is good news. I am seeing 50% - 60 % haircuts.
I think he was saying 25% of the peak price....75% off...
I think