Fitch Ratings reported that U.S. banks' residential construction portfolios will continue to exhibit stress through 2008 due to continued devaluation of real estate, especially in more volatile housing markets.



The weak housing sector has had a negative impact on performance in certain areas of lending such as mortgage loans and home equity, as well as residential construction portfolios. Fitch has taken several rating actions over the last several months incorporating the potential for further asset quality stress in segments of the loan portfolio exposed to the housing downturn.

In a special report, Fitch reviews the largest U.S. banks' exposure to residential construction and pays particular attention to those with the highest concentration when compared to equity capital. As a whole, large U.S. banks have a relatively manageable exposure to residential construction, especially when compared to smaller U.S. banks. Nevertheless, the likelihood of additional charge-offs in 2008 is high due to several issues affecting the housing market, including macroeconomic trends. The report explores factors causing stress in residential construction portfolios, such as home price depreciation, over-supply of properties and limited availability of credit.

Doriana Gamboa, Director in Fitch's Financial Institutions group stated: "If the housing downturn and correction of real estate values continues, the likelihood of future defaults in residential construction portfolios will be high, and the level of loss given default is likely to increase." While the exposure to residential construction appears manageable for most large banks, the deterioration of asset quality during the first quarter in 2008 was rapid. Gamboa further stated: "Pressures in this segment of the loan portfolio are expected to continue through 2008 and possibly 2009 as the housing market remains volatile and real estate prices have yet to stabilize."