Developers and other investors are seeking to buy distressed construction loans, but bankers remain reluctant to sell them.
Analysts say banks are still in the early stages of taking back properties from developers and generally have not been aggressive in charging off nonperforming construction loans. Doing so can deplete capital — something many banks cannot afford to do right now.
In addition, some bankers have been holding out for market conditions to improve in hopes of reducing losses, analysts say. Others are waiting for the Treasury Department to announce details of the public-private partnership that will purchase toxic assets and hoping it will take nonperforming construction loans.
"Everyone is waiting for the government to come in and somehow defray the losses on construction loans," said Matthew Anderson, a partner at the Oakland, Calif., market research firm Foresight Analytics LLC.
Potential buyers have been offering roughly 20 to 30 cents on the dollar for construction loans on bank balance sheets, he said, but banks are asking for 60 to 70 cents. Analysts say the bids reflect strains on the buyers' financing and the anticipation of more bank failures.
However, the demand has helped the Federal Deposit Insurance Corp. unload construction loans it inherited from failed institutions.
Bill Cobb, the president of Granite Loan Management LLC, a Denver construction risk mitigation company that evaluates bank portfolios for investors, said prices for distressed construction loans sold by the FDIC have risen in the past year to 25 to 40 cents on the dollar, from as low as 12 to 20 cents a year ago.
Bidding for FDIC assets "is now fairly strong, because the first players in made a lot of money and got everyone else's interest," Cobb said.
The FDIC says that it has $16 billion of assets in liquidation from failed banks, and that last year it sold $1 billion of nonperforming loans — the vast majority of them home mortgages — for an average of 37.5 cents on the dollar. (It also sold $571 million of performing loans for 92.9 cents on the dollar.) It does not break out construction loans in its inventory or sales figures.
One prospective buyer for banks' construction loans is J Carter Witt 3rd, the president of Silverwing Development Corp., a residential builder in Concord, Calif.
Witt said he recently wanted to buy a number of assets from a bank, but it refused to sign a letter of intent, wanted multiple buyers to commit to a price and gave buyers only 14 days to conduct due diligence.
Sales are being held up for large residential projects that typically involve two to eight lenders, he said, because the lenders cannot agree on a sale price, and participation agreements have no mechanism for one bank to take control.
As a result, Witt said, many large projects are sitting unfinished with no chance of being sold, despite multiple offers.
"They're holding on to the assets, which are deteriorating," he said. "No one can agree on how to unwind them."
Brad Hunter, the chief economist and national director of consulting for Metrostudy Corp., a Houston market research firm, said many banks are "stuck in limbo," because they have depleted their capital and cannot afford to take writedowns on bad construction loans.
"If they did have to dig into their loss reserves and Tier 1 capital, then it's pretty clear there would not be enough capital there," Hunter said. "The fear of having the capital loss from writedowns is what's keeping the sales from taking place, and yet everyone is anxious for the sales to happen."
David Zelman, the president of the research firm Zelman & Associates, said many bankers are "still in the denial phase" about the price they are willing to accept to get construction loans off their balance sheets. Prices have dropped to distressed levels, he said, because the loans do not generate cash flow and have little chance of doing so in the near future.
James Deitch, the chief executive officer of the $235.4 million-asset American Home Bank, a Mountville, Pa., division of First National Bank of Chester County, said the potential buyers' difficulty obtaining financing has stymied sales of construction loans.
"The issue is not so much the illiquidity of the builders themselves but no functioning market to be able to finance the loans," Deitch said. His division held $57.2 million of construction and development loans as of Sept. 30, of which 3.68% were noncurrent.
Witt agreed that the field of buyers is "extremely limited," because many construction projects are half completed, and "no one is lending on real estate."
He suggested two ways bankers could engage buyers: Offer them financing, in the form of particpating loans where the lender shares in the income or resale proceeds, and sell assets in larger quantities, rather than trying to get the highest price for individual properties.
"This is an issue where the paradigm has shifted, because the banks have so much product to sell," Witt said.
According to Foresight Analytics, of the $592.2 billion of construction loans outstanding, 11.4% were delinquent last quarter, the highest share since the third quarter of 1993.
Loans for the construction of single-family homes posted the biggest jump in delinquencies — to 18% in the fourth quarter from 15.2% in the third quarter and 7.6% a year earlier, Foresight said.
"Defaulted construction loans aren't the only problem weighing on banks right now," Anderson said. "There's a general unwillingness to flush anything out at huge discounts."
The uncertainty is feeding the inertia, Anderson said.
"If banks had the sense that they had hit bottom, and it was up from here, there would be a greater willingness to unload all the problem loans," he said. "But broadly speaking, they're still looking into the abyss and really don't know where or when things will bottom out, which would help move the market."