Land Loans: Another Shoe about to Drop

[davelj]

Earlier last week I spoke with a friend who recently met with the CFO of one of the largest private builders in SD County and, among other things, he told my friend that various large banks and investment banks were “discreetly” looking for pricing on large plots of land throughout Southern California for which they had underwritten raw land loans that will soon be Past Due. The non-binding verbal bids are apparently coming in at 20%-40% of the underwritten loan value on average. And some of the plots are deemed “virtually worthless” because development will be unlikely to occur for so many years in the future.

This CFO suggested that we’re about to see a wave of write-downs by both local, regional and national banks for such land loans.

Fortunately, land loans don’t represent a large portion of most banks’ loan portfolios. However, it’s large enough to sting when you have to write them down by 50% or more.

[Bugs]

Most land loans are written at or below 50% of the value of the property, just to avoid undue exposure from market corrections like this. It can be bad, but unless they were stupid about their underwriting it’s not as bad as it might otherwise appear.

[Bugs]

Most land loans are written at or below 50% of the value of the property, just to avoid undue exposure from market corrections like this. It can be bad, but unless they were stupid about their underwriting it’s not as bad as it might otherwise appear.

[Bugs]

Most land loans are written at or below 50% of the value of the property, just to avoid undue exposure from market corrections like this. It can be bad, but unless they were stupid about their underwriting it’s not as bad as it might otherwise appear.

[Bugs]

Most land loans are written at or below 50% of the value of the property, just to avoid undue exposure from market corrections like this. It can be bad, but unless they were stupid about their underwriting it’s not as bad as it might otherwise appear.

[Bugs]

Most land loans are written at or below 50% of the value of the property, just to avoid undue exposure from market corrections like this. It can be bad, but unless they were stupid about their underwriting it’s not as bad as it might otherwise appear.

[drunkle]

bugs:

what do you think of the probability that land appraisals during the past run up were taken at face value simply due to the “sure thing” that real estate was? ie., everyone was stupid about their underwriting for the past few?

[drunkle]

bugs:

what do you think of the probability that land appraisals during the past run up were taken at face value simply due to the “sure thing” that real estate was? ie., everyone was stupid about their underwriting for the past few?

[drunkle]

bugs:

what do you think of the probability that land appraisals during the past run up were taken at face value simply due to the “sure thing” that real estate was? ie., everyone was stupid about their underwriting for the past few?

[drunkle]

bugs:

what do you think of the probability that land appraisals during the past run up were taken at face value simply due to the “sure thing” that real estate was? ie., everyone was stupid about their underwriting for the past few?

[drunkle]

bugs:

what do you think of the probability that land appraisals during the past run up were taken at face value simply due to the “sure thing” that real estate was? ie., everyone was stupid about their underwriting for the past few?

[asragov]

There is no need to reprice bank loans that are sitting on the balance sheet, if they are current. That is, even if the land is falling in price, as long as the borrower is making payments, there is no need to mark them down. We generally don’t live in a world where assets (loans, at least) are marked to market.

However, if the borrower defaults, and the bank has to sell the land, it will certainly show a loss if it sells the land for less than the loan.

Bugs is correct – land loans are *typically* very, very conservative. If lenders have been too aggressive on this front, they are going to get seriously slammed.

[asragov]

There is no need to reprice bank loans that are sitting on the balance sheet, if they are current. That is, even if the land is falling in price, as long as the borrower is making payments, there is no need to mark them down. We generally don’t live in a world where assets (loans, at least) are marked to market.

However, if the borrower defaults, and the bank has to sell the land, it will certainly show a loss if it sells the land for less than the loan.

Bugs is correct – land loans are *typically* very, very conservative. If lenders have been too aggressive on this front, they are going to get seriously slammed.

[asragov]

There is no need to reprice bank loans that are sitting on the balance sheet, if they are current. That is, even if the land is falling in price, as long as the borrower is making payments, there is no need to mark them down. We generally don’t live in a world where assets (loans, at least) are marked to market.

However, if the borrower defaults, and the bank has to sell the land, it will certainly show a loss if it sells the land for less than the loan.

Bugs is correct – land loans are *typically* very, very conservative. If lenders have been too aggressive on this front, they are going to get seriously slammed.

[asragov]

There is no need to reprice bank loans that are sitting on the balance sheet, if they are current. That is, even if the land is falling in price, as long as the borrower is making payments, there is no need to mark them down. We generally don’t live in a world where assets (loans, at least) are marked to market.

However, if the borrower defaults, and the bank has to sell the land, it will certainly show a loss if it sells the land for less than the loan.

Bugs is correct – land loans are *typically* very, very conservative. If lenders have been too aggressive on this front, they are going to get seriously slammed.

[Author]

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