As Loans Dry Up, Builders Work for Banks By Jim Carlton Wall Street Journal 03-01-2010

As Loans Dry Up, Builders Work for Banks
Lenders Seize Half-Built Subdivisions, Then Offer Contract Jobs to Finish Them
By Jim Carlton
The Wall Street Journal
March 1, 2010

Home builders in some of the nation's hardest-hit housing markets are going to work directly for banks, in a little-used arrangement that is helping to ameliorate conditions in some battered local economies.

The builders traditionally got loans from banks to build homes, but that credit has largely dried up. The contract work builders are getting is welcome as many of them struggle to stay afloat.

Randy Schaefer, who has been building homes in this city since 1981, recently began working for a bank for the first time. In September, construction lender Housing Capital Co. hired him to help finish a subdivision of 170 homes in the desert outskirts here. While Mr. Schaefer is only being paid a flat fee instead of any profit on the three to four homes a month he has agreed to build, it enables him to keep his eight workers employed.

"It helps stop the bleeding," said Mr. Schaefer, 58 years old, who slashed his work force from 17 after the housing market tanked in Las Vegas starting in 2007. "It's not my first choice, but it helps keep me in business."

Like Mr. Schaefer, builders from California to Florida are starting to contract their services to lenders, many of whom have been left holding unfinished homes after the original builder went belly up. While there are no data on the trend, many builders are taking this work for the first time, particularly in markets like Nevada, Arizona and California, says Stephen Melman, director of economic services for the National Association of Home Builders.

The trend helps preserve relationships between builders and lenders in a strained time for the two. In some of these situations, home builders are working for the same institutions that won't lend money to them. While banks have hired builders before for fees, the trend is more prevalent now as more financial institutions own foreclosed properties, experts said.

The pattern wasn't as widespread in past downturns, when builders more commonly responded by taking cost-cutting steps such as reducing the number of homes they built and trimming their staffs, industry officials said. "There was always some credit [for] them before, but now there's practically none," said Irene Porter, executive director of the Southern Nevada Home Builders' Association. "That's the big difference."

The shift also helps the banks. In Atlanta, Beazer Homes USA Inc. in November was selected by Hearthstone Inc., an institutional investor in Los Angeles, to build and market homes on 462 lots over the next two to three years after another builder on the job went out of business. Hearthstone President Mark Porath said the company initially faced selling the lots for a loss after the first builder went bust. Now with Beazer on board, Hearthstone stands to eke out a small profit, he said.

Beazer officials said the deal—its biggest ever with a bank—allows it to expand in a market they feel has growth potential without facing much downside risk. Beazer is being paid "more a fixed than variable" payment for its work, with some "upside" compensation if certain goals are met, said Beazer Chief Financial Officer Allan Merrill.

The trend also enables more construction workers to stay on the job. In Las Vegas, the December unemployment rate was 13.1%, according to state estimates, compared with 10% nationwide. Although Las Vegas's numbers aren't broken down by occupation, industry officials say construction workers account for many of the jobless.

Overall, the number of single-family homes constructed and sold in Las Vegas plunged 85% to 5,271 in 2009 from 36,051 in 2006 as prices fell as much as 50% over the same time, according to the Southern Nevada Home Builders Association. Membership in the group has dropped by half to about 325 from 750 in 2006.

Banks own thousands of unfinished homes across Las Vegas. Housing Capital, for instance, foreclosed on 1,000 lots in the area, including 250 in a partially built development in Henderson, Nev., said Ross Wakeham, a manager of the Costa Mesa, Calif., construction lender.

But the lender faced steep losses if it sold the lots as they were, he said, such as getting as little as $75,000 on a partially completed two-bedroom condominium for which it had lent $165,000. Last year it hired builder Signature Homes to finish some of the homes, paying roughly $12,000 per condo. Housing Capital was then able to sell some of the condos for $120,000.

"We'll never get our losses back, but you are trying to residual a little bit more on your land," said Mr. Wakeham, whose firm hired also Mr. Schaefer's company for another subdivision.

Meanwhile, Housing Capital's work has helped Signature Homes keep building roughly 50 homes a year, though that is still down from the 800 it was building in 2006, said Richard Plaster, president of the Las Vegas firm. The builder, which hasn't previously worked for a bank, has also expanded into developing rental units to keep busy, he said.