Conference Calls Show Regional Banks Squeezing Homebuilders

Construction loans are increasingly the source of non-performing assets for regional banks, and so they are taking steps to shrink their builder loan portfolios or restrict builder access to credit lines. The possibility of a highly-leveraged, large public homebuilder failing is still a possibility.

Texas Capital Bankshares Inc. Q3’08 Conference Call (TCBI)

George Jones, President, CEO:

Real estate loans… comprise [95%] of the nonaccruals. The increase in nonaccruals of approximately $30 million from Q2 really centers around four particular credits. The first one is a $9 million construction loan to a large homebuilder to construct smaller homes in the greater Houston area. While Texas really has remained their best market, their projects in Arizona and other areas have drained cash from the company. They are really unable to meet their obligations.

[Note: Even a homebuilder with exposure to the relatively unscathed Texas housing market, is still losing money in Arizona and elsewhere. Texas may not be enough to save them.]

 

Cullen/Frost Bankers Inc. Q3’08 Conference Call (CFR)

Dick Evans, Chairman, CEO:

Potential problems were $42.4 million on September 30th, up from $33.4 million as of June 30. One primary borrower contributed to this increase, a home builder for $13.1 million.

Comerica Inc. Q3’08 Conference Call (CMA)

Ken Zerbe – Morgan Stanley:

I think you said that you expect to sell some of [your homebuilder] loans in fourth quarter, whereas your current statements were more than you expect to sell all of the loans in the quarter… What's changed on the margin to get you a little less confident that those can be sold quickly?

Dale Green, Chief Credit Officer:

I don't believe that I've ever said that we were going to sell them all in the fourth quarter simply because that would be a lot to get accomplished in the market…We always talked about tiering the portfolio… We've been in the last year working to sell the bulk of those loans… We would hope that… 10 to 15 loans approximately would be able to be concluded in the fourth quarter.

[Note: Banks are speeding up the pace of offloading their construction portfolios.]

Prosperity Bancshares, Inc. Q3’08 Conference Call (PRSP)

David Hollaway, CFO:

Where we [had] let [builders just draw on the lines, we now do it a lot differently… We look at every deal before they go into it and if a builder has two specs or three specs that haven’t been selling for a long time and wants to do some more specs, we’re not allowing that to happen right now.

[Note: Having a credit line may not mean much anymore for a builder. Banks are restricting access to credit lines for struggling builders.]

 

BB&T Corp. Q3’08 Conference Call (BBT)

Chris Henson, CFO:

We've reduced… the size of our… residential construction portfolio from $8.768 billion at the end of the first quarter to $3.28 at the end of the third quarter… Obviously we’ll not finance any new developments… We’ll work with builders if they have reasonable economic expectations that they can work through the problems… Other builders weren’t cautious… And so, it's not practical to help them through this cycle.

[Note: No financing for new developments. No help for builders that are on the edge. Only the safest homebuilders will get credit.]

 

One interesting note on the bottom of the housing market:

CH: I think if we hadn’t had this upset in the capital markets, we were clearly seeing the end of the real estate cycle. We’d have been having a recovery next spring. I hope that will still happen, but I don't know what the economy is going to do to it.

 

Comments

[User 265729]

Poor homebuilders...

I cry every night thinking about how some homebuilder is not building a zillion more homes and selling and reselling them in the form of a giant bubble that will allow consumers to finance their SUV's and get $$$ from home equity loans.

Then I weep for the lady with the fat rear in that SUV with a cell phone glued to her ear, running everything in her way over on her way to pick up her little "darlings" at soccer practice.

I just weep... Poor, poor, homebuilders...

2008 Oct 23 11:00 PM

[billddrummer]

Hi Judy,

Thank you for this resource!

We're seeing the same trends in Northern NV. Homebuilders who have a 20+ year track record in this market are seeing their credit lines frozen, properties seized by banks that formerly 'rode the wave' and extended their construction commitments, and playing hardball by increasing interest rates and fees and asking for additional collateral.

Some builders have been forced into bankruptcy because of the changed climate.

I'm familiar with one builder who had a spec house for sale for more than 2 years ($400,000 asking price). The bank foreclosed, his contractor's license was revoked, and the company filed bankruptcy, directly throwing 50 people out of work.

In response, there are 'hard-money' lenders stepping in with high fees, low LTV requirements, and ruinous interest rates. One lender here has been successful making construction loans at 13% with 4-5 points, and a 65% maximum LTV. But that's the only place that money's available for construction financing.

Until the banks that specialize in construction financing re-enter that market, don't expect a lot of new homes to be built. And that will take years, as the current NPAs are slowing worked out.

All the best,

Bill

2008 Oct 24 11:17 AM

[von Murgenthal]

and the point of the story: don't ever trust a banker !

2008 Oct 24 11:32 PM

[billddrummer]

To von Murgenthal,

I don't look at it as not trusting the banks, as much as I look at it as not trusting markets to continue to increase forever. After all, the banks made millions on A & D and construction loans, as long as houses kept selling. At the peak, you could buy an undeveloped parcel (financed with an acquisition loan), get approvals in 3-6 months, start developing (with a development loan) the day after your lots were approved, start vertical construction on models within a few weeks (financed with a construction loan), open the sales office (financed), start taking deposits on production homes, and build houses in the new subdivision within a year. At that point, the bank was out of development and vertical financing, because the new mortgage paid off your construction loan within a year.

The frenzy got so bad here that people were bidding on production housing before trailers had been placed at the subdivision sites!

All those loans generated interest and fee income for the banks, and as long as the inventory was turning, there were no problems getting financing even for land.

When the bubble burst, the game changed. Suddenly banks found themselves holding partly developed subdivisions and partially completed houses, while developers couldn't extend financing on projects that had stalled.

So before painting the banks with the broad brush of non-trust, I'd look a bit deeper.

And to Judy,

Thanks again for keeping up with this most historic of times. This truly ranks as a monumental, and perhaps permanent, sea change in the real estate industry.

2008 Oct 27 01:38 PM

[helplessobserver]

It looks like BBT has gotten a handle on its riskiest loans by shrinking the home and construction loan portfolio by about $5B. After taking a dive from $43 to $18 the stock has stabilized around $30 - $35. BBT will, in my opinion, be a survivor and come out of this mess a stronger bank.
Full disclosure: own 1000 BBT shares, happily collecting a nice dividend.

2008 Oct 27 10:01 PM

[Poor me]

In the past ten years the value of a home grew way beyond what should have been a rational increase, a bubble. It has finally popped. Maybe the price of a home, and its growth will be more realistic for a while. When a small 50 year old outdated home needing TLC can go from $40,000 to $85,000 in ten years, well, something isn't quite right.

2008 Oct 30 02:41 AM