It really bugs me when the large size members of the financial press are a few days behind the news, but often they dredge up an interesting factoid in their careful process of vetting an article.
In the 7/9/08 Wall Street Journal article today, there's an interesting sentence which should have been a major story in and of itself:
"At the end of the first quarter IndyMac said it classifies as nonperforming 52% of its $1.06 billion of loans outstanding to home builders, mostly in California".
So how many dollars of these "commercial" construction loans are outstanding or committed to be disbursed as of today, and what percentage of them are nonperforming?
What percentage of these construction loans which are performing will become nonperforming as IndyMac goes off task, and delays payment of borrowers draw requests?
Completing construction of half built projects requires tons of cash. Completion is the only realistic means of recouping the major portion of a troubled construction loan.
During the last recession, in my experience, there were no experienced homebuilders willing to buy defaulted tracts and complete them. The risk of construction defect claims, arising out of the predecessor builder's work, are just too great. As a result, the construction lender is forced to complete the projects using the borrower in default or a receiver for the project to do the remaining construction work.
A $500 Million portfolio of defaulted construction loans usually means a $750 Million to $1 Billion cash outlay, in total, when the construction lender budgets for the cost of completion and sale by the borrower in default.
Who, exactly, is going to do the lender's work to get these projects completed and sold? The disheartened IndyMac staff? New hires for FDIC? Consultants for FDIC?
Or will these projects simply be left to rot in the hot sun and winter rains, with FDIC recovering little or nothing on them, at a loss of $500 Million to the taxpayers who will ultimately bail out FDIC?
If IndyMac inadvertently screws up its remaining, performing construction loans, by failing to fund the construction draws to complete those projects, the numbers above could easily double.
In addition, the numbers published by the Wall Street Journal seemingly do not take into account IndyMac's niche program of lending money to individuals who are having custom homes built for themselves. How much money is outstanding on those loans? How much money is needed to make disbursements to complete those houses? Who is going to be the lender for the balance of the term of those loans?
If cash strapped IndyMac defaults on its obligations under the performing construction loans, both for tracts and custom homes, the costs of defending litigation where injured borrowers seek to extricate their property from IndyMac's half funded construction mortgages will be immense.
Senator Schumber was right in saying that no one was or is minding the store, in terms of OTS and FDIC allowing IndyMac to drift along at its own pace towards the precipice.
_________________ Aristotle
As Yogi Berra said "It's like deja vu all over again."
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