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Building pressure

By Emmet Pierce
STAFF WRITER

Relations between lenders and builders have become increasingly strained in recent months, as banks around the country have pulled the plug on distressed housing developments.

CHARLIE NEUMAN / Union-Tribune Tim Hutter and his dog Emmy strolled past an uncompleted home at Magnolia Estates in Carlsbad. Work stopped in January when developer Barratt American lost its financing.

Just like the thousands of homeowners who face foreclosure, builders have been caught up in the national credit crunch that began last summer. In response, a group of them formed the Homebuilders Coalition for Responsible Bank Behavior recently with the idea of pressuring banks to modify distressed loans rather than simply calling them in.

Most of the roughly 80 member companies are located in California, but the group includes builders from Oregon, Missouri and Washington, D.C. In part, the organization aims to change lending practices by lobbying Congress for new regulations.

Some analysts say that lenders have no choice but to act when developers fall behind on payments or when falling property values undermine equity credit lines. But the builders say that makes it difficult for them to operate.

“I can't say they are doing anything illegal, but they are pushing the ethical and moral boundaries,” said coalition member Greg La Marca of G5 Enterprises. “It is difficult for us to guarantee the economy when we start a project, and that is what we feel we are being asked to do. We are unable to get any type of cooperation with workouts with the majority of our lenders.”

LAURA EMBRY / Union-Tribune Work at Mayfair Homes' Biarritz development near Balboa Park came to an abrupt halt in the summer of 2007.

Disturbing to builders is the fact that some banks are enforcing personal guarantees that make them personally liable for repaying the debt. Michael Hackard, a Sacramento-based attorney working with the coalition, says he expects many builders to file lender-liability lawsuits, alleging that lenders forced them into insolvency by not acting in good faith.

Ivy Zellman, a real estate market researcher based in Cleveland, says such builders have little chance of success.

Recent events such as the federal takeover of mortgage giants Fannie Mae and Freddie Mac have created a climate of lending reform. Zellman said banks are being urged by financial regulators to quickly put their financial houses in order.

“I think it is really hard for (builders) to try to fight back and sue banks for pulling financing,” Zellman said. “The reality is the love affair is over. The banks have to do what they have to do. They have capital requirements and regulatory pressure.”

Despite that pressure, longtime San Diego mortgage banker Daniel J. Auld said builders are correct to complain. Cutting off funding on unfinished housing developments “is bad faith lending on the bank's part,” he said. “I think they have an obligation to finish up. This is something that needs to be addressed.”

Many distressed homeowners in California have complained that lenders have been slow to respond to requests for loan modifications. Builders with distressed loans are in the same situation, said coalition organizer Michael D. Pattinson, president of Carlsbad-based Barratt American.

“We aim to help builders understand what is being done to them and put them in touch with qualified professional advisers, such as lawyers and work-out specialists,” Pattinson said of the coalition. “We are taking the stories of bad bank behavior to regulatory bodies and legislators in Washington, D.C., and individual states. We are focusing on ways to help builders address acute problems such as personal guarantees.”

One of the goals of the coalition is to enact regulations that require lenders to remain in development and construction loans for the life of the projects they fund. Pattinson said his own firm recently was forced to stop construction on several projects when its $125 million line of credit was frozen by Bank of America. The bank says it was forced to take action when the company missed payments.

Although banks face their own financial difficulties, Pattinson says they should consider the long-term effect of alienating builders, who gave them billions of dollars worth of business when the U.S. housing market was soaring.

In San Diego County, many properties doubled in value between 2000 and 2005. Lending practices loosened and money flowed freely as lenders, home buyers, builders and Wall Street investers rushed to take part in the housing boom. Many buyers were allowed to qualify for adjustable-rate loans based on low-interest teaser rates. When many of those loans failed, credit contracted.

Norm Miller, a professor at the University of San Diego's Burnham-Moores Center for Real Estate, says lenders should carefully weigh their options before cutting off builder credit.

Some banks “are going to have a hard time regaining business-as-usual relationships when this is all over and they need to think long term,” Miller said.