Real-Estate Woes of Banks Mount

Wall Street Journal (06/06/08) P. A1; Corkery, Michael; Karp, Jonathan; Paletta, Damian
With land values on the decline and home builders finding it difficult to make their loan payments, more and more banks are attempting to shed problem residential construction loans at a discount. IndyMac Bancorp Inc., for instance, is unloading $540 million land-purchase and construction loans, with winning bids ranging from 20 cents to 60 cents on the dollar; KeyBank and Wachovia Corp. are among the other banks selling such loans. According to Federal Reserve Vice Chairman Donald Kohn in testimony before the Senate Banking Committee, "As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans." Federal Deposit Insurance Corp. Chairman Sheila Bair has expressed concern about banks lacking diversification or those with large residential exposures, while Office of Thrift Supervision director John Reich noted that small banks are being hit hard and that the number of savings-and-loan associations vulnerable to failure climbed to 17 from 12 over the past couple months. Despite the fact that banks are generating capital and increasing their loan-loss reserves, Zelman & Associates predicts that charge offs during the next five years could account for 10 percent to 25 percent of banks' residential construction and land assets, or $65 billion to $165 billion.