With all the talk over the last year and a half about commercial real estate [CRE] being the next shoe to drop while not dropping, this post is about reminding us of what was really the issue. This can give perspective of the relative order of magnitude of future problems and their consequences.
The real bank killer has been construction and development loans [C&D], with the next possible culprit not even close. This is a chart detailing the type of collateral for real estate loans of closed banks.
SFR: Single Family Residential (Source)
Careful with those construction and development loans:
- They are large
- with short term maturities
- no cash flow to soften the blows
- collateral price has collapsed
- and no demand in the near term for all that construction
So the problem with C&D loans is part the probability of default but even more consequential is its severity.
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“Collateral Damaged: The Marketing of Consumer Debt to America” by Charles R. Geisst is a detailed and captivating examination of the history and growth of consumer debt in America. The book scrutinizes the political, cultural, social, and financial forces that converged to inflate America’s tremendous bubble in consumer credit. Geisst reaches all the way back to the debt problems of King Edward III and beyond to begin his historical review. Every step of the way forward, Geisst describes the various innovations lenders have created to bypass usury laws, to create credit and expand debt levels, and to extract profits even from borrowers least capable of servicing their debt. This process transformed America’s treatment of debt from an onerous burden to a necessary evil to a miraculous treasure chest of opportunity to live beyond one’s means.