National Home Centers, a leading pro dealer with a dozen locations serving Northwest Arkansas, expects its sales this year to be down by more than 20 percent, to $150 million. "We don't have a lot of demand for our products right now," says National's executive vice president and CFO, Brent Hanby, who notes that there are 2,300 unsold homes in his market, which is suffering through what he calls a "full-scale depression." It's gotten so bad in some markets that builders "can't even get financing to start a house," he says. More problematic is the acceleration of foreclosures that is leaving many of National's customers and suppliers unpaid for work they've completed on homes that end up on the auction block.

"Contractors and home builders are having trouble, and this has become a huge credit issue for suppliers," Hanby told BUILDER last week. The problem, as he sees it, has also extended into Eastern Oklahoma and Southern Missouri, which National's yards also serve.

To call attention to this "silent and underlying issue," Hanby pleaded his case in a passionate letter he sent recently to Arkansas Gov. Mike Beebe, the state's two senators Mark Pryor and Blanche Lincoln, and his congressman John Boozman. One of the main points of that letter is that Arkansas's "weak" lien laws allow banks to buy foreclosed houses on courthouse steps, rendering liens filed against those homes or projects by contractors and suppliers "worthless and extinguished." Hanby told BUILDER he knows of two big developments-an $18 million condo project in Fayetteville, Ark., and a 300-unit project in Gulf Shores, Ark.-where suppliers with liens on those assets are claiming they should be ahead of banks as creditors.

Hanby also suggests that banks need to get a better handle on what construction loans are actually being used for. He accuses some contractors, which are typically strapped for cash, of drawing money but using it for purposes other than buying materials and paying subs, for instance operational expenses such as car payments or insurance premiums, or even personal expenses.

All of this is having a snowballing effect on Northeast Arkansas's economy, says Hanby. "We now have our local cities ... and school systems with budget shortfalls due to lower tax revenues, and they specifically mention housing as the main reason," he wrote. "Many of the local and national banks are experiencing record loan defaults, non-accruing loans, and record foreclosures."

Given the 10-year boom his region's housing market enjoyed prior to the recent downturn, Hanby believes that lawmakers should be urging lenders to give contractors and suppliers more time to recover "or there will be even larger consequences than what we face today." Hanby also offers two possible solutions: 

  • That lenders fund construction-related loan draws through title companies. He notes that this has been an accepted practice in Missouri for years, but that title companies have been exiting this part of their businesses to avoid liability.

  • That lenders request lien waivers prior to issuing draws. "There are too many draws given out which ended up being used for several other things besides the improvements on the specific jobsite for which they are intended," wrote Hanby. "I am having conversations almost daily with homeowners asking, 'Where are the money go?' Many banks are now asking themselves the same thing."

When BUILDER spoke with Hanby, he had only heard back from Pryor, who said his influence is limited because this is a state matter.