The Housing Chronicles Blog: Upside-down builders holding on for dear life

Sunday, November 16, 2008

Upside-down builders holding on for dear life

Boyce Thompson, Editorial Director for Builder magazine, has a great story now posted online at the web site. Entitled "Upside Down," it tells the story of how banks have been working with private builders when the value of their holdings fall below the loan amounts they've extended.

For the current issue of Builder & Developer magazine, I wrote about builders taking on the banks and who insist they're not being treated fairly. According to Boyce's story, however, the larger economic fall-out may have pushed lenders as far as they can go, which will likely mean far fewer builders when the dust finally settles.

In concert with the economists who head up Beacon Economics, MetroIntelligence has increasingly been working with banks, developers and builders to re-evaluate their land holdings and operations against forecasts of regional economic conditions, and we've been finding many of the same issues with our clients. From the story:

Three years into the worst housing downturn since the Great Depression, three dozen major builders have declared bankruptcy. Yet for every builder that has gone under, hundreds more are on life support, hanging on only because their lenders choose to look the other way...

Nearly everyone in the industry knows someone who remains in business, struggling mightily to generate enough cash to pay off debt and fund operations, only out of the good graces of a lender. From a financial perspective, these companies are upside down, without the assets to pay off their debts. As we move into the winter months, with builders and lenders both starved for cash, the pace of builder liquidations and bankruptcies is likely to markedly increase...

The banks, of course, would like an immediate repayment in full of loans they’ve made. But most builders don’t have the money, or the inclination, to do this, especially if they have gone to outside equity for funds, and those equity sources are looking for a 20 percent to 25 percent return.

“That leaves the banks with only three choices,” says one builder who has been negotiating with his banks for more than a year. “They can foreclose and pursue any guarantees, which is likely to put the builder out of business. They can continue funding the build-out of the neighborhood with the hope of maybe getting full repayment or minimizing their losses. Or they can accept a discounted repayment of the debt.”

Click here for full story.

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