Housing and Small Bank Woes

Just how far will the fallout from the mortgage mess reach?

The March 3 Wall Street Journal offers a look at the potential trouble for small banks. The following points are worth noting:

• “Cash-strapped, heavily leveraged builders are falling behind on interest payments as the housing downturn drags on and dwellings sit unsold. Now, many of the small banks that financed builders are caught with accumulating portfolios of delinquent loans and face increased pressure from banking regulators to reassess and hedge these troubled loans.”

• At least one estimates pointed to perhaps as many as 150 small banks failing in the next few years.

• Foresight Analytics estimated that in the fourth quarter of 2007, “loans from all federally insured banks and thrifts to builders of single-family houses that were 30 days or more past due hit 7.5%, up from 2.1% a year ago,” while delinquencies from condo construction loans hit 10.1% versus 2.6% a year ago.

Is there a bright spot here? Well, it’s relative. It also was reported that that in 1988 and 1989, the number of banks that went under due to bad commercial real estate loans was more than 1,000.