Many home builders are wondering if the U.S. Treasury, as part of a $700 billion federal bailout of the financial industry, will buy construction loans--a move that could protect builders from free-falling land values and their increasingly nervous creditors.
Builders do currently find themselves in a difficult banking situation. Many banks are re-appraising builders’ assets and finding that they are not worth as much as the loans taken out to buy and develop the projects. To solidify their balance sheets, banks are demanding builders make cash payments to cover the difference between the new asset value and the loan value. That is a challenge for builders, many of whom signed personal guarantees for their business loans. With the housing market suffering, many builders do not have enough cash to close that gap.
So, with the $700 billion bailout now underway, BUILDER is hearing from builders wanting to know if the feds will not only buy bad home mortgages, but also troubled land acquisition, development, and construction (AD&C) loans. The prospect of such assistance was also a hot topic at an emergency meeting at NAHB's fall board gathering in San Diego last month.
At this point, though, the answer to the question is still unknown. While Congress did give the Treasury the authority to do so in the economic rescue legislation, the Treasury has not said whether or not it will buy such loans.
But the prospects for doing so don't look terribly promising; housing experts do not expect to see builders receive any debt relief on those loans from the federal government. “The sympathy of the government is with homeowners, not builders,” said David Seiders, NAHB's chief economist, who this week announced he was retiring after more than two decades at NAHB.
But he noted that the Treasury plan to address mortgage assets could help builders by stabilizing house prices.
A big reason the government is prioritizing home owners is the relative magnitude of the two problems.
“There are only 34 banks who have more than 10 percent of their balance sheet in single-family construction loans, and their loans total $17 billion,” said John Burns, president of John Burns Real Estate Consulting of Irvine, Calif. “That is a lot of money, but it is nothing in comparison to the size of the mortgage problem.”
The Treasury has discretion to buy assets of its choosing as it works to stabilize U.S. financial markets and unfreeze credit conditions, and just last week Treasury Secretary Henry Paulson announced that $250 billion will be used to buy ownership in some of the nation’s largest banks, calling it "a plan to make capital available on attractive terms to a broad array of banks and thrifts, so they can provide credit to our economy.”
The banks will be expected to use that money to fund new loans and keep homeowners out of foreclosure, not conserve it to protect their balance sheets. “At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it,” Paulson said in a statement.
According to Patrick Newport, a U.S. economist at Global Insight in Lexington, Mass., that effort could encourage and enable banks to lend money to builders for new projects.
Ethan Butterfield is senior editor, business, at BUILDER Online.
Learn more about markets featured in this article: Los Angeles, CA.