Deutsche Bank: Construction Loan Defaults to Skyrocket
• Ritholtz.com/blogConstruction loans are structured with upfront reserves — meaning that it takes much longer for CRE defaults to occur. Low short-term interest rates also means reserves can last longer — BUT, as DB notes, Once reserves are exhausted, defaults will skyrocket. • By far the riskiest type of loan product in bank portfolios; • Substantial portion represents loans to homebuilders; • Market currently penalizing properties with vacancy issues extremely severely; • Newly constructed (or only partially constructed) properties are the poster children for vacancy problems in CRE; • Values of most newly constructed properties are down massively; • Expect extremely high default rates and extremely high loss severity rates, both likely to be in excess of 50%; • Total expected losses of 25% or more.
