Conference Call Highlights: Bank Investors Should Worry about Private Homebuilders

Includes: BAC, C, ICFI, IYR, JPM, WFC, XHB
by: Judy Weil

Large homebuilders—to varying degrees of course—have a relative cushion of liquidity. The ability to raise money in financial markets is not one shared by private homebuilders. Public homebuilders can write off their losses (and then get that money back in tax rebate clawbacks) or just sit tight while waiting for the market to turn. Private homebuilders rely on banks for financing and that seems to be all but dried up.


Although the housing crisis is nearly two years old, many banks had refrained from cracking down on small home builders, [but] they are starting to do so.

Small and medium-size builders account for about 70% of new-home construction in the United States.

For now, many of the large, publicly traded home builders... can meet their obligations.

“They’re better capitalized and they have cash on hand,” said Ivy Zelman, a housing analyst. “They’re in a much better position than the private builders.”

National Association of Home Builders: At least 20,000 [private] builders — about a fifth of the total nationwide — have closed up shop in the last two years.

With the industry still owing hundreds of billions of dollars in loans made at the market peak, many more face insolvency in the coming months and years. “Probably north of 50% will fail,” Ms. Zelman said.

More than 15% of loans for single-family home construction were in some form of default by September 2008, up from 10% in January of that year, according to Foresight Analytics, a housing analysis firm. Still, until recently, banks had largely chosen to keep past-due borrowers afloat, in the hope that a housing recovery might pave the way for them to repay their debts in full.

Only now, with the economic outlook darkening, are lenders stepping up foreclosures of troubled loans. Zelman... estimates that losses on land and construction loans could eventually reach $165 billion.

It would appear that more public than private homebuilders will be left standing at the end of this crisis, as private builders fail at spectacular rates. But what about the banks that loaned those private builders money? Using Bank of America’s rising loan loss provisions in its latest quarterly results as an example, will banks have enough to cover $165 billion in losses?

From Bank of America Corp.’s Q408 conference call: (NYSE:BAC)

On the commercial side we added approximately $460 million to the reserves for small business, broad based deterioration in the non-real estate commercial portfolios as well as the home builder portfolio.

Our commercial portfolios, new charge offs increased $399 million in the quarter to $1.36 billion or 159 basis points, up 46 basis points from the third quarter… If you exclude small business from commercial domestic our total commercial loss rate is about 99 basis points. Further excluding commercial real estate where losses have been concentrated in home builders, the loss rate is 65 basis points.

Commercial NPA’s rose $1.7 billion to $6.8 billion. Nearly 56% of commercial NPA’s was in the commercial real estate business spread across home builders, retail and apartments.

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