Randy Pollack

Last November, Key Bank informed Novi, Mich.–based Crosswinds Communities that it was in default on an $18.3 million note with an $11.5 million balance. Crosswinds’ CEO, Bernie Glieberman, had personally guaranteed that note, and to get out from under this obligation, he found an investor willing to purchase the note’s collateral—115 lots and 19 completed or partially completed homes—at a price Key agreed to in May.

Banks now expect this kind of initiative from builders that are struggling to service construction debt and revolving credit. ­National lenders have been taking hard lines with builders about paying down loans or have abruptly shut off ­financing, sometimes even when loans aren’t in default. More than one-third of 344 builders that the NAHB polled in May said their lenders had ordered new appraisals on their single-­family construction loans. That same month, nearly two-fifths of builders polled by the housing research firm Zelman & Associates said their ­lenders were “not willing” to work out ­underperforming loans. Zelman predicts that lenders could charge off between 10 percent and 26 percent of their loans to builders over the next five years, compared to only 0.7 percent in 2007.

The loss of financing and credit is impacting builders in different ways. Having curtailed construction to less than one-fifth of the homes it started four years ago, one Southern California–based builder wasn’t disrupted too badly when Key Bank last December stopped financing its $23 million note, of which $15 million was a revolver. Key declined the builder’s offer to buy back the balance on that note at 50 cents on the dollar, even after the loan became one of 83 (including Crosswinds’), with balances totaling $932.1 million, that Key Bank repackaged and put up for bid. Numerous lenders, including IndyMac Bank, PFF, and Wachovia, have likewise marketed bundles of loans to investors, with mixed success.

On the other hand, Kalian Homes of Red Bank, N.J., had two projects started in Mississippi that never got to the model phase because one lender cut off financing after woeful buyer demand prevented Kalian from servicing its debt. (Kalian Homes exited Mississippi this summer, having closed only 35 homes there in 2008 versus more than 650 annual closings during boom years.) “It made no sense,” laments Patrick Kalian, the builder’s president, about his bank’s decision. The infrastructure had been installed and many of the homes partly completed. “A building halfway ­finished is worth zero. I know one community could have sold at least half of the houses, at a discount I admit, but the banks would have gotten some cash” instead of taking back land and houses.

Banks’ stances on workouts vary ­widely, and Kalian acknowledges that the majority of his lenders have been open to discussions. The good news for builders around the country is that many banks are still trying to help them survive. “Even when ­assets are underwater, there’s a solution,” says Steve Huntley, a partner with ­Huntley, Mullaney, Spargo & Sullivan, a Roseville, Calif.–based workout advisor whose builder clientele has included Reynen & Bardis, which owes lenders nearly $1 billion. But solutions often depend on improvements in the economy’s health or the infatuation of private equity with the housing sector. Neither of these solutions is an immediate certainty.

Learn more about markets featured in this article: Los Angeles, CA, Anderson, IN.