The disappearance of seller-financed down payments, coupled with mounting foreclosures and a serious drain on available capital, pose a triple threat that could push considerably more private builders over the edge into bankruptcy by the end of this year.
That's the bleak assessment of current market conditions that Tom Eggleston, the president and CEO of C.P. Morgan Communities, shared with other builders and investors during a conference call that JPMorgan hosted yesterday.
Much of the call was devoted to the elimination of seller-funded down-payment assistance (DPA) in the recently passed federal housing bill, effective Oct. 1. More than 55 percent of C.P. Morgan's buyers need that assistance to purchase a house, Eggleston estimated. Michael Rehaut, JPMorgan's housing analyst, projected that its elimination could reduce the total number of new-home buyers by 17 percent.
Possibly more problematic for builders will be the deadline Congress imposes on when homes purchased with DPA mortgages need to close. Eggleston speculated that this deadline could be as early as Nov. 1, which means that a buyer of virtually any home currently under construction would not be able to accept down-payment help from a seller or third party. The earlier the deadline, the greater the possibility that more purchase agreements will get canceled.
Eggleston didn't see many viable options to DPA mortgages. Financing offered through a program by the Veterans Administration and the U.S. Department of Agriculture is "limited" and "quite stringent," he said. State and county programs often aren't all that well capitalized. Eggleston did note, though, that the housing bill offers a $7,500 credit to first-time home buyers who might be able to get an advance on that credit from tax-planning agencies such as H&R Block. (Rehaut pointed out, however, that the advance might not be available until the first quarter of next year, at the earliest. And how many buyers actually apply for that credit—which is in the form of a 15-year loan—remains to be seen.)
The elimination of DPA mortgages, though, could pale in its impact on the housing market next to the rising tide of foreclosures that are coming back onto the market, and the inability of home builders to recapitalize their companies. Eggleston thinks that foreclosures could represent two-fifths of closings in many markets and might increase to half by the middle of next year. He also thinks no more than one-fifth of distressed homeowners will avoid foreclosure as a result of the housing legislation.
He's more concerned, though, about accelerated demands by lenders for collateral reappraisals, which has led to a significant reduction in the value of assets that back the loans builders use to run their businesses. Eggleston expects lender demands to continue through the next year, which in his estimation will only put more companies on the brink of insolvency. Before the conference call, Eggleston was on record stating his belief that 80 percent of all private builders would be in workout with their banks by year's end.
John Caulfield is a senior editor at BUILDER magazine.
Learn more about markets featured in this article: New York, NY.