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Wednesday, August 5, 2009

Construction Loans at Small Banks Next Financial Crisis: Only if the Government via GS stops buying bank stocks!

*Deutsche Bank has been a little gloomy these past few weeks, and now they think Commercial Real Estate loans are the next giant shoe to drop. Ordinarily I would agree 100% with them. However, since Geithner and Helicopter Ben via GS have been buying up banks stocks to ensure they don't get Shorted into the abyss (where an insolvent institution should reside and insolvent they surely are you fools), then my money is on 2011 being 1932 AND 1937. And only WWII brought us up from the long term depths of our depression. Even PROZAC won't help them then.

from DB via TheBigPicture
Interesting piece from Deutsche Bank on rapidly deteriorating Construction loans. DB predicts that “construction loans will be the epicenter of bank loan problems”

• By far the riskiest type of loan product in bank portfolios;
• Substantial portion represents loans to homebuilders;
• Market currently penalizing properties with vacancy issues extremely severely;
• Newly constructed (or only partially constructed) properties are the poster children for vacancy problems in CRE;
• Values of most newly constructed properties are down massively;
• Expect extremely high default rates and extremely high loss severity rates, both likely to be in excess of 50%;
• Total expected losses of 25% or more.

In a reversal of the Residential Real Estate market, the exposure for large money center banks is low — smaller regional and community banks have the highest construction loan exposure.

Construction loan exposure for smaller banks has nearly doubled since 2004

Construction loans are structured with upfront reserves — meaning that it takes much longer for CRE defaults to occur. Low short-term interest rates also means reserves can last longer — BUT, as DB notes, Once reserves are exhausted, defaults will skyrocket.

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