Yet another look at builders’ struggle with lenders

Posted by pcbasentry on January 23, 2009

January 21st, 2009 in Blogs
Official Fine Homebuilding Post, editor

The National Association of Home Builders has diligently called attention to instances where banks call in homebuilders’ loans or demand additional collateral at renewal time, even though the builders are current on their payments.

And now The New York Times has addressed the subject in a feature on the front page of its business section. Headlined “Banks foreclose on builders with perfect records,” the story cites the example of Brown Family Communities, a builder in Arizona that, despite never missing an interest payment on its loans after 33 years in the business, faced foreclosure on five of its developments and, shortly thereafter, shut down.

A director of risk-management policy at the Federal Deposit Insurance Corporation, which insures bank deposits, noted that bankers’ interest in reducing risk typically outweighs the merits of a client’s long, flawless history of payments on short-term loans, particularly if that client serves a market as battered as homebuilding.

While the largest builders likely have enough cash to weather the downturn, that’s not true for many of the small and medium-size builders, who account for about 70 percent of new-home construction. The NAHB estimates that at least 20,000 builders — about a fifth of the total nationwide — have closed up shop in the last two years, the Times article notes.

Of ongoing concern, market observers say, is that as much as half that nationwide total may end up insolvent by the time the market turns around. Which is to say that even builders who are up to date on their interest payments or still managing to sell houses are getting trampled.

“The behavior of the banks is unprecedented,” Mick Pattinson, a homebuilder from Carlsbad, California, who has organized a national coalition of builders to draw attention to what they regard as unreasonable treatment, told the Times. “Yes, there was overleveraging in the industry. But the aftermath doesn’t need to have been as brutal as it has been.”


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