Banks Face Tough Times if Residential Construction Loans Go Bad

Charlotte, N.C.–Wachovia is the second-largest construction loan provider, which may put the lender–and other banks–in a dangerous position as the housing market continues to falter, The Wall Street Journal reports.At the end of the first quarter, Charlotte, N.C.-based Wachovia had $23.9 billion of debt outstanding to single-family home, condominium, office building, store and other commercial project developers, according to Foresight Analytics, a research company based in Oakland, Calif.Wachovia’s delinquencies at the end of the quarter were 7.7 percent, above the 7.2 percent industry average–and the amount of bad construction loans are expected to increase. Roughly $12 billion of Wachovia’s construction loans are tied to single-family-home, condo and other residential projects, some of which paid for land that has decreased in value since its purchase Foresight said. Construction loans comprise 6 percent of the company’s total loan portfolio. A Wachovia spokeswoman said the company plans to “aggressively and thoughtfully manage our exposure.”Because many construction loans were made with “interest reserves,” money earmarked to pay for interest while projects continue–which, once depleted, leaves developers unable to pay debt service on troubled projects–analysts have forecast bad construction loans could increase.If many construction loans falter at the same time, banks could see significant losses.