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March 20, 2007
Fallout from the subprime bust
Much ink has been spilled on the number of subprime lenders that have failed (and if you're keeping score at home, the Implode-O-Meter provides an up to the minute list.), only now are observers starting to question whether there's going to be fallout in other sectors. The last housing bust, of course, took down the S&L industry. Commercial banks in recent years have assured Wall Street that they were adequately diversified between consumer, business and mortgage lending, but this chart on the Calculated Risk blog (a really good housing site, with lots of meaty analysis) suggests that to compensate for weak C&I lending, banks went whole hog on real estate lending.
What isn't known is how much of that is lending is for commercial real estate projects and how much is residential. I know that some economists argue that commercial real estate historically follows the trend of residential, just two quarters later, but I tend to think that the commercial real estate loans are probably solid. I don't see much evidence of rampant overbuilding that creates the kind of "see through" office towers that were built in the early 1990s.
Another question I have is whether the homebuilders will suffer any fallout from bad mortgage loans. To prime the pump for their homes, many large builders formed their own mortgage units, which employed whatever lending standards were necessary to fill all those homes after they were built. Granted, most of those mortgages were sold off to investors, and some were guaranteed by HUD. But what if the investors (or HUD itself) either demands the builders take back the mortgages or simply sues the builders for shoddy underwriting? The Charlotte Observer just published a pretty exhaustive series on Beazer Homes, which was one of the more aggressive builders in Charlotte in recent years, erecting nearly 2,000 homes there over the past decade. But the Observer's reporting suggests that Beazer was pretty aggressive in its underwriting to get those homes filled--perhaps way too aggressive. Today, 13% of those homes are in foreclosure--and nearly 20% in one particular subdivision that the Observer highlights, figures that are above the failure rate of other builders. It's a fair question to ask whether Beazer ends up with any legal liability as a result of these foreclosures.
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