FDIC Bank Takeovers Hurting Home Sales, Builders Report

Home builders with outstanding construction loans are reporting that they are having to stop work on new housing developments and are losing sales as the result of failed banks and thrift institutions being taken over by the Federal Deposit Insurance Corporation (FDIC).

“Builders with outstanding loans that are placed under FDIC control are frequently unable to contact a decision maker to deal with routine but time-sensitive matters related to loan draws or extensions,” said National Association of Home Builders (NAHB) President and CEO Jerry Howard in a Nov. 20 letter to FDIC Chairman Sheila Bair.

“Some builders have encountered what seem to be arbitrary criteria on whether or not loans receive continued funding,” Howard added. “Again, these developments are unnecessarily turning good loans into problem assets that will significantly exacerbate the losses that must be absorbed by the FDIC and the building and banking industries.”

Reports of severe financing problems stemming from FDIC bank takeovers have started proliferating among builders in Texas, a part of the country whose housing markets have been performing notably better than the national average.

One builder, for example, complained that he has been unable to receive a draw on his construction loan for more than four weeks and, as a result, has been unable to finish work on homes that have already been sold. He said that there is a possibility that the FDIC will also require another appraisal of his homes, which would cause more delays and further jeopardize the viability of his project.

In his letter, Howard praised the efforts of the FDIC to limit mortgage foreclosures, but noted that housing production loans are now experiencing the same kind of severe stress afflicting the home mortgage credit sector.

“Home builders are having extreme difficulty in obtaining credit for viable projects, and those with outstanding construction and development loans are experiencing intense pressure as the result of requirements for significant additional equity, denials on loan extensions and demands for immediate payment,” he told Bair. “In many cases, performing loans are rendered nonperforming as a result of these actions.”

Howard asked for an opportunity to meet and work with the FDIC to address “this serious and urgent issue.”

Skies Darkening in the Sunshine State

In a Nov. 24 press conference by the Florida Home Builders Association, builders in the state said that solvent, credit-worthy businesses are being forced “to the brink of disaster” by lending institutions that are making additional capital calls to maintain lines of credit, calling in loans not in default and altogether eliminating credit.

Jay Carlson, the association’s president and a builder in Port Charlotte, said that the state’s housing industry has been “struck hard” by the economic downturn and that things are getting worse.

For the year ending in September, Carlson said, Florida lost more than 75,000 construction jobs and at the end of that period had 54,000 homes in some stage of foreclosure and a 20-month supply of unsold properties. Since then, he noted, there has been further deterioration.

Lending institutions are reappraising the value of underlying assets on construction loans, he said, requiring builders and developers to come up with large amounts of cash to restore loan-to-value ratios. Lenders are taking adverse action on good loans, forcing builders into insolvency. “The current method to recapitalize is exacerbating the problem,” Carlson said.

Earl Snyder, a veteran FHA/VA home builder in Englewood, said that he has run into problems finishing eight homes in various stages of construction ranging from slab to almost finished. Six of the homes have already been sold to buyers with FHA mortgages. Although he was never late on loan payments, after being taken over by the FDIC his bank gave him 60 days to repay a $2.5 million construction loan. Snyder has subsequently sought credit from 15 other lenders, and not one of them would make him a loan.

Snyder said he has building material, employee and subcontractor costs to pay, yet he cannot receive an approved and authorized draw from his loan and is in jeopardy of losing his business because he is being forced  to suddenly pay off his loan before maturity.

A meeting with representatives of the FDIC was not productive. “We are in dire straits,” Snyder said. “We’ve got to do something.”

“The industry is on its knees and asking for help, and in return will help the economy,” said Chuck Fowke, the Florida HBA’s first vice president and a custom builder in the Tampa area. “We want to stop foreclosures on builders’ lines of credit when they are in compliance” with the terms of those loans, he said.