Banks are getting out of the residential lending business and that means a lot of pain for a lot of home builders, Mick Pattinson, CEO of Barratt American Homes in Carlsbad, Calif., told an audience of roughly 90 builders Tuesday during the inaugural meeting of the Homebuilders' Coalition for Responsible Bank Behavior in San Diego.
Pattinson and Bob Cummings, Barratt American's San Diego division president, started the Coalition in June after realizing that many of their fellow builders were dealing with banks who were not treating them fairly and trying to force the builders into default.
Pattinson and Cummings have reason to feel that way. Barratt American, formerly a top 200 builder, had the funding of its $125 million credit line with Bank of America pulled unilaterally in late 2007 and is no longer building. Pattinson has said the company will get back to building normally around 2010.
The Barratt American executives, now joined by 90 other builders, are trying to sound an alarm to builders across the country that banks are on the hunt for assets and are willing to force builders into default to get their hands on those assets. Pattinson and others are calling this a contrived default, and Pattinson wants all builders to know, "Whether knowingly or not, they are on the path to default."
As banks try to cash out of residential construction and development, they are going after every penny they feel builders owe them--and then some. That includes suing for assets backing personally guaranteed loans such as many builders' own homes. In some cases, banks are starting their lawsuits before the builder has even defaulted.
Sounds far-fetched? It isn't. Most of the builders in the room Tuesday either are facing those circumstances or are preparing to.
Eliopulos, whose lawyers are fairing slightly better since IndyMac's federal takeover (though he still has no deal in place to release him from his bank debts), has turned his embarrassment and anger over how banks treated the company his father started in 1957 into determination not to let bankers break his spirit, and he wants other builders to take the same battle-hardened approach.
"These people are going to try to steal your soul and ruin you," he said. "I refuse to let these people beat me. I refuse to let them win."
There is reason to hope, said Bob Kline, principal of R.W. Kline, a real estate solutions company based in Scottsdale, Ariz., that works with builders and banks, who spoke during Tuesday's meeting.
"Very seldom do I see people not come out of it in some way," Kline said. But he went on to say that it will be difficult because, as Eliopulos and Pattinson have already learned, the banks will beat you down financially and emotionally. The problems builders are having with banks are being felt most acutely in big building states, California and Florida, Kline said.
In working with banks, builders should not necessarily just give up all their information voluntarily to try to be proactive, because there are cases where the banks have used that information against the builders. Kline estimates the back and forth between banks and builders will continue for two to four years.
"It's all about playing poker with lenders," Kline said.
But there are legal ways for builders to fight back--or at least become as much of a pain in the sides of the banks or whoever is now holding their loan that the loan holder gives up trying to squeeze the builder, lets them finish their project, or works out a more favorable deal. For the most part, these options are highly technical, and all builders should have good legal counsel now and even several specialists to try to play defense against their banks.
Even if a builder feels wronged and wants to sue a bank for an issue, that can be a long and cost-prohibitive process, said Mir Saied Kashani, an attorney who has had some success defending builders and fighting banks in California courts. A better strategy would be to watch the banks' actions and catch them on technicalities and mishandled legal issues, Kashani said Tuesday.
By tweaking the banks and even taking them to court, a builder might get a more favorable deal and might be able to get out from under some or all of their personal guarantees on loans, Kashani said.
While the Coalition will serve as a resource for builders, with access to Kashani, Kline, and others, as well as a support group of peers going through the same problems, Pattinson is determined the group also make its voice heard in Congress and in state legislatures. The group will lobby for reform and maybe even a chunk of the $700 billion bank bailout bill that Congress continues debating.
The group met Tuesday in the shadow of a television showing of Treasury Department Secretary Henry Paulson and Federal Reserve Chief Ben Bernanke pleading with members of Congress to approve the $700 billion bank bailout plan, and Pattinson couldn’t help but take a swipe at Bank of America and its willingness to buy troubled companies like Countrywide Financial and Merrill Lynch.
"They don't have money to help builders, but they do have $50 billion to buy Merrill Lynch," an incredulous Pattinson said. "I don't know how they sleep at night after rolling over on 27-year relationships."
Pattinson's worry is that after Congress passes its bailout plan, the banks will sit on the money they get and will not make new loans, crippling the economy and home building.
The goal of the Coalition is for builders to band together to defend themselves from banks and hopefully present a unified front to Congress demanding action.
Tuesday's meeting was held at the same hotel as the National Association of Home Builders Fall Board of Directors Meeting in order to get the NAHB's attention, which it did: several NAHB representatives were in the audience, and Pattinson planned to meet with more of them Wednesday to discuss the Coalition's concerns.
Ethan Butterfield is senior business editor at BUILDER magazine.
Learn more about markets featured in this article: San Diego, CA.