Many U.S. banks are facing new liabilities as they begin to sell off inventories of foreclosed construction projects taken over from homebuilders who exited the market leaving behind uncompleted housing tracts.

And providing risk management and insurance services for banks that have become the owners of the unfinished residential construction projects may generate business from a battered sector of the economy for insurers and brokers, observers say.

The banks' new activity is occurring as the housing industry sees a glimmer of hope that the extended plunge in building may be close to the bottom, they add.

The U.S. Commerce Department reported that house and apartment starts fell 12.8% during April compared with March. But a 42.2% decline in multifamily unit construction weighted the report's findings. Single-family home construction, in contrast, rose 2.8% in April compared with March. Overall, housing starts in April still were about one-third the level of when the recession began in late 2007.

Several insurance observers said the single-family unit growth represents a silver lining for the housing industry, which began to decline before the U.S. recession took hold.

“It is a positive sign,” said Tom McCall, executive vp and a construction expert in Los Angeles for Lockton Cos. L.L.C. “The sad news is we have gone the last three years without any positive sign. So whenever starts are up, it's major news.”

Although the report reveals the plunge in housing starts may be near its bottom, his clients expect building activity to hover near the bottom for an undetermined period, said Bob Gore, executive vp for Willis HRH Residential Construction in Irvine, Calif.

Overall pricing for insurance was already soft before the housing market collapsed, which then crushed demand for general liability and other insurance that homebuilders normally purchase, several experts said.

In some cases, insurers had to return premiums when homebuilders failed to construct the number of units they had expected.

“Premiums (were) going down and along came the falling economy and that killed the whole thing,” as many homebuilders suspended operations, said Ken Laderoute, vp of underwriting at Burns & Wilcox Ltd., a Farmington.Hills, Mich.-based managing general agency. “Right now we are in a pretty soft market.”

Yet even with relatively little demand, underwriters new to homebuilding continue to enter that market today in search of new business during the recession, Mr. Gore added. “They are chasing fewer dollars.”

New opportunity for homebuilders and the insurance industry, however, may flow from banks that now need insurance products and services normally sold to builders, said George Dale, president of Los Angeles-based Wrapid Specialty Inc., a risk management consultant specializing in wrap-up construction projects.

Banks have begun hiring contractors to complete abandoned tracts so they can sell off the housing acquired through foreclosures. The properties the banks acquired are referred to as real estate-owned properties.

Banks also are shopping for risk management and insurance for their REO projects.

Wrapid recently “restarted the wrap-up administration” for three construction projects “where we were all of a sudden contacted by the bank, or contacted by a new builder” that was taking over the project for the bank, Mr. Dale said.

Wrap-ups are insurance arrangements that project owners often use to cover contractors in building projects. In this situation, banks are purchasing wrap-up construction coverage rather than allowing contractors and subcontractors to buy their own insurance and include the expense in their bid price.

As the role of banks has shifted from housing construction lenders to sellers, banks are now becoming his clients more so than homebuilders, Mr. McCall said.

As lenders, banks and other lending institutions protected themselves from liability stemming from home building and sales by requiring builders to name them as additional insureds on the builders' policies.

But now as sellers, banks are on the hook for general liability and construction defects.

“The banks have never had to look at that liability,” Mr. McCall said. “They always transferred that risk off to the building entity. Now the bank is the owner and they have a different liability than they ever did.”

Foreclosed units are being sold by newly established real estate-owned property departments within banks. The REO departments typically are handling construction insurance arrangements without the involvement of bank risk managers, Mr. McCall said.

Risk management and liability considerations are substantially more complicated, though, for REO projects than for traditional homebuilding arrangements where a builder starts and completes a project and purchases its own insurance, several sources said.

Unlike new projects built from the ground up, for example, REO properties typically sit uncompleted and vacant, which exposes them to weather and vandalism along with a potential for liability stemming from defects.

The REO projects have therefore created demand for services such as those provided by companies that analyze partially completed housing projects to determine the expense of completing them.

Likewise, brokers say they are helping REO departments manuscript general liability policies to meet their specific needs. In some cases, brokers say they are also helping them transfer coverage from general liability policies originally sold to builders no longer associated with the project.