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Special Reports
Construction Lending
Corus Blames Housing Woes for First-Quarter Loss
By Alton Gary Simpson
Due to weakness in the residential housing market, Corus Bankshares Inc. here,
a nationwide commercial real estate lender headquartered here that specializes in condominium loans, reported a
loss of 39% from $43.4 million, or $0.75 per diluted share, in the first quarter of 2006, down to $26.4 million,
or $0.46 per diluted share, for the three-month period ending March 31. Excluding security losses, 2007 earnings
would have been $36.3 million, or $0.63 per diluted share, as compared to $43.7 million, or $0.75 per diluted share,
in 2006, a decline of 17.1%. "With a loan portfolio consisting, almost exclusively of condominium construction
and conversion loans, the nationwide slowdown in the residential housing market is impacting Corus' business,"
said Robert J. Glickman, company president and chief executive officer. "Evidence of this slowdown is clear
from the decline in loan originations, the resulting decline in loans outstanding and an increase in problem loans."
He added that it would be unsurprising to see an even greater impact on earnings over the next several quarters
or even years, dependent on when the market improves. He also said that it is too early to gauge what impact the
subprime implosion had on the company, noting that the effects on Corus Bankshares are indirect. "Corus does
not make, purchase or hold any subprime mortgages at all," said Mr. Glickman. He said that the company doesn't
directly invest in any residential home mortgages to individuals or in any pools of residential home mortgages.
But, he did acknowledge that the tightening of lending criteria because of the fallout from the subprime implosion
could have an adverse effect on condominium developers who sell condominium units to individuals and thus on its
bottom line.
As a direct result of the slowdown in the residential housing market, Corus has seen an increase in the number
of problem loans and increased provisions for credit losses. Most of the company's problem loans are concentrated
in the condominium conversion loan portfolio. "We have a total of 48 condominium conversion loans totaling
$1 billion, of which nine loans totaling $458 million are of particular concern," said Mr. Glickman. "In
all but one case, either the borrower or a mezzanine lender subordinate to us has supported the loans with substantial
amounts of additional equity. For those problem loans where the borrower or mezzanine lender chooses not to take
the necessary steps to resolve issues, we will not hesitate to foreclose."
The problems in the company's construction portfolio can be broken down into three categories: * Deals where construction
is at risk of coming to a halt. * Deals where there are material cost overruns that are not being covered by borrowers,
completion guarantors or sponsors. * Deals where construction is complete, but either sales are weak to the point
where the loan appears to be partially at risk or presale buyers walk away from their contracts. "As of March
31, 2007, there is only one loan in our portfolio where construction problems put completion of the project in
doubt," said Mr. Glickman, adding that the company is hopeful that the problems will be resolved in the coming
months.
He said that Corus' exposure was higher than originally anticipated from uncovered cost overruns and that there
were several loans that have experienced that problem. However, he said that the company had planned for that risk
at the outset.
Mr. Glickman noted that the company's greatest source of potential risk comes from deals where construction is
complete but weak sales or cancelled contracts have put its loans at risk. Although it hasn't happened, he said
that the Florida market, in particular, poses a particular risk because it is know as a "pre-sale" market.
"One of the main factors in our underwriting was the existence and strength of the pre-sale contracts,"
said Mr. Glickman. "Generally, the sales contracts in Florida required a nonrefundable earnest money deposit
of 20% of the purchase price. If a condominium buyer does not close on their unit, they must forfeit their deposit.
So far, we have seen very few cancellations of contracts on our projects. However, if that were to change, a surge
in buyer cancellations could be especially painful for Corus."
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