Latest article on builders taking on the banks now online

For my latest column in Builder & Developer magazine, I covered the Building Industry Coalition for Economic Recovery's efforts to force banks to deal fairly. From the article:

With the federal government partially nationalizing the banking system, large investment banks a thing of the past, more bank failures on the horizon and nervous lenders still hoarding cash, it’s hard to predict what the future holds for the building industry. But if the recently formed Building Industry Coalition for Economic Recovery (www.pathtosolutions.com) has anything to say about it, the chaos in financial circles certainly shouldn’t be taking down developers and homebuilders with it.

The coalition, formerly named the “Homebuilders’ Coalition for Responsible Bank Behavior” (www.pathtodefault.org) was formed earlier this year in San Diego by a collection of private builders, attorneys and work-out specialists, and hopes to force lenders to play by a consistent set of rules versus what the group’s members say have been a series of contrived defaults that have led not only to foreclosed projects, but hibernating or bankrupt development companies. At the same time, the coalition’s 110 members (as of October 2008) – whom are now geographically dispersed across the country – are focused on assembling the type of intelligence required to warn other builders about to face similar circumstances.

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Builders taking on the banks

With large investment banks a thing of the past, more bank failures on the horizon, the American financial system in disarray and lenders hoarding cash, it’s hard to predict what the future holds for the building industry. But if the recently formed Coalition for Responsible Bank Behavior (www.pathtodefault.org) has anything to say about it, the chaos in financial circles certainly shouldn’t be taking down developers and homebuilders with it.

The coalition, formed earlier this year in San Diego by a collection of builders, attorneys and work-out specialists including Barratt American President Michael (Mick) Pattinson, hopes to force lenders to play by a consistent set of rules versus what the group’s members say have been a series of contrived defaults that have led not only to foreclosed projects, but hibernating or bankrupt development companies. At the same time, the coalition’s 85 members – whom are now geographically dispersed across the country – are focused on assembling the type of intelligence required to warn other builders about to face similar circumstances.

“The banks aren’t straightforward with customers regarding bank policy or decision making, so we’re left to piece together the jigsaw puzzle, and now can forewarn other builders who aren’t yet in the process but know what’s coming,” explained Pattinson to me in a recent phone interview.

The short-term goals of the coalition are quite specific, intending to leverage the political power of a key economic sector and put pressure on a banking industry that’s already proven itself to be less than responsible. These goals include raising the consciousness of both banks and builders about an entire industry in peril, encouraging builders to fight banking abuses, enlisting the media to tell the builders’ stories, contacting federal and state agencies and carefully documenting any patterns of poor and unethical bank behavior.

At the heart of the issue are inconsistencies between banks in their work-out dealings with builders. Citing regulatory issues that tie their hands, many banks are reportedly forcing their clients into defaults when other banks continue to work in tandem with builders to maximize the return of assets. And the stakes are significant: according to the coalition’s website, many lenders are selling foreclosed properties at 30 to 40 cents on the dollar when they could be getting twice that amount by avoiding the foreclosure process in the first place. Moreover, by forcing builders into default or bankruptcy, an entire supply chain of subcontractors, suppliers and consultants don’t get paid, leading to more layoffs and exacerbating the housing recession.

In many cases, these defaults aren’t due to the natural progression of a transparent series of steps but the contrived inventions of banks desperate to hold onto as much cash as possible. “In many cases, the banks encourage the builder to continue with the hope of potential loan renewal,” states the coalition’s website. “The banks seek to be made whole while the builder exhausts its cash. When the cash is depleted, the bank informs the builder they will not continue funding.”

So how does the lender justify such decisions? By relying on a ‘made to order’ deflated appraisal that backs up its findings – which, in a twist of irony, is the polar opposite of the puffed-up appraisals that helped mortgage lenders justify lending on $600,000 homes really worth closer to $500,000 during the boom years. In both cases, the true victims seem to be analytical objectivity, and eventually, the U.S. taxpayer.

Over time, the coalition also has other solutions it’s exploring to help an industry avoid similar scenarios in the future, such as eliminating the personal guarantee and making construction loans, like many purchase mortgages, non-recourse. Another major goal is to revamp the current commercial appraisal process so the process is transparent to the borrower, halting ‘mark-to-market’ rules that include panic-stricken sales comps and which don’t adequately reflect stabilized values, and initiating a three-appraisal rule to compete against sole in-house appraisals which tell the lenders exactly what they want to hear in order to declare a technical default.

Finally, the group suggests that the timetable required for a work-out on a multi-million dollar development should be expressed not in weeks or months but three to five years, and future loans should last the life of the project. Given the list of half-finished projects strewn across the country, I’d imagine that a host of cities, counties and homebuyers would certainly agree that the current solutions simply aren’t working.

While it’s undoubtedly sad that long-standing relationships between banks and builders have deteriorated to this point, it’s understandable that part of the conditions of a $700+ billion taxpayer bailout should have required both mortgage and commercial lenders to act with objectivity, fairness and transparency. Concludes Pattison, “We need every state and Washington, D.C. to ask lenders to explain themselves. If this isn’t the biggest fraud in the history of the world, then I don’t know what is.”

Builder speaks out against fickle banks and impact fees

Mick Pattinson, president of the homebuilding company Barratt American, has recently been very vocal about banks which have declined to renew revolving credit facilities (thus potentially putting more builders out of business) as well as cities which became overly reliant on impact fees for new development during the boom, thus driving home prices even higher. Mick was one of the first builders I met when entering the building industry as a consultant, and Barratt is known for building very solid, high-quality homes (and no, they're not a client). As other builders keep mum on these issues, it's ironic that it takes a Brit to speak his mind. From a BuilderOnline.com story:

Exposing the duplicity of lenders and municipalities in the downfall of home builders is the latest crusade for one Southern California-based builder that is fighting desperately to keep his own company afloat.

Barratt American, formerly one of the 200 largest home builders in the country, is for the moment “essentially out of the game” as far as production building goes, says its president, Mick Pattinson. He spoke with BUILDER by phone from London, where he’s been attempting to raise new financing after Bank of America told his company last spring that it would no longer fund Barratt’s $125 million credit facility...

But Pattinson isn’t twiddling his thumbs waiting for the housing market to rebound. He’s focusing more of his energies on calling attention to what he says have been two negative forces that crippled the housing industry: banks abandoning distressed builders, and municipalities squeezing builders for higher impact fees, which in his market can exceed $100,000 per house.

Pattinson doesn’t hide his disdain for Bank of America, or for much of the lending community, either, which he insists pulled the financing rug out from under builders at their greatest time of need. “Builders are mad as hell, but they’ve been reluctant to put out their dirty linen about how they’ve been screwed over.”

So to force banks to “explain themselves” to lawmakers and the public, Barratt is working with the Homebuilders Coalition for Responsible Bank Behavior, a newly formed group that he says now involves 43 builders. Most are located in California, but the Coalition also includes builders from Oregon and Washington D.C. The group is developing a Web site, and plans to lobby in California and nationally. (It is close to hiring a public relations person.) Pattinson isn’t sure how much dust the Coalition can kick up, but he claims it’s already gained some traction with officials in Sacramento, California’s capitol.

Lawmakers there are also weighing builders’ complaints about how municipalities have used residential development as their own piggy banks by imposing impact fees that, during the boom years, “got to the point where the housing industry wasn’t working anymore,” says Pattinson. He’s been railing for years against impact fees, which makes him the perfect choice to chair a fee reform task force that the California Building Industry Association recently formed.

Pattinson is buoyed that several California towns have passed fee payment deferral statutes. And if towns start going bankrupt because the housing downturn is depriving them of fees to which they’ve grown accustomed, Pattinson expects more municipalities will be forced to consider weaning themselves from this revenue stream.

Private builders increasingly under duress

Recently I've been hearing increasing reports of subs and suppliers not getting paid by homebuilders. In the case of Barratt, it's been due to cash flow problems resulting from its longtime lender, Bank of America, declining to provide new financing. From a BuilderOnline.com article:

This week, Barratt American expects to have short-term loans in place, secured through the sale of “unencumbered assets,” to shore up a cash-flow problem caused by a significant decline in its business. That decline recently led Barratt’s primary lender, Bank of America, to cut off the Carlsbad, Calif.-based builder after a 28-year relationship.

“I call it ‘constructive default,’ ” says Mick Pattinson, Barratt’s president and co-owner, who spoke with BUILDER on Friday. “We’re not in default, but the bank wouldn’t renew our two loans.” He explains that his company had a $125 million credit facility with Bank of America, of which $100 million were available when the bank informed Barratt seven months ago that it would not go forward with its lending. Barratt drew another $30 million of that facility, although at higher interest rates, until Pattinson balked at the expense and found himself without a line of credit to tap...

“We’ve been stymied without cash,” Pattinson tells BUILDER. His company’s inability to pay its bills has triggered more than 40 lawsuits filed mostly by subcontractors with liens against the company’s assets that guarantee payment for labor and materials.

Pattinson confirmed he has been in London seeking private equity money, where “we’ve been getting a good reception.” (Pattinson is British and Barratt was once based there.) He is confident that he’ll find new financing from overseas sources, and can settle disputes with vendors or contractors. “They understand how we got here, and we’ve had relationships with some of them for 10, 15 years.” The bigger problem for his company, and builders in general, is that domestic capital has dried up. “Right now, you couldn’t get cash from a bank to build a house if your life depended on it,” he laments.

What irks Pattinson is how Bank of America rewarded his company’s decades-long loyalty by throwing Barratt under a bus the minute business went soft. “When times were good, we had banks lining up in our lobby for our business, but we told them we were with Bank of America. Now, when times are bad, we get screwed. The banks are a disgrace.”