Builders Forced to Find New Lenders or Cut Operations : Thrifts: The new S&L; bailout law sharply limits the amount that a single contractor may borrow. The impact is widespread.
After weeks of planning, Signature Homes executives decided to buy 100 acres of land in the thriving Riverside County suburb of Rancho California last summer as the site for the firm’s new San Martin development.
Just as escrow was about to close, the savings and loan association funding the deal abruptly backed out to comply with the new federal thrift bailout law. The legislation sharply curtailed the amount that can be lent to a single builder, leaving Signature in the lurch.
“We almost lost the project . . . just at the last minute,” said Norm Stuard, president of the El Toro-based home-building firm.
As a solution to its funding crisis, Signature teamed up with another home builder to jointly develop the 298-house tract. Now, instead of being the exclusive domain of Signature, Stuard said the San Martin tract will include a mix of its houses and those of Lewis Homes of Upland.
Signature’s experience demonstrates the impact that the new federal S&L; restraints are having on small home-building and real estate development firms. As one of their primary sources of funds has dried up, builders have had to seek out new lenders or cut back operations.
“I was fairly surprised at how widespread the impact is,” said David Seiders, chief economist for the National Assn. of Home Builders in Washington.
A national poll conducted among the association’s members in November found that about two out of five home builders who said they use thrifts as a source of funding have been notified that they can expect to receive smaller loans in the future. In the 13 Western states including California, the figure climbed to about half of the home builders doing business with thrifts.
In addition, many builders said they have been notified that savings and loans will no longer participate in joint ventures.
The S&Ls;, too, are upset about the bailout law, which was signed last August. Thrift executives complain that the law wipes out many of the trusting, mutually beneficial relationships that have been built over the years between smaller S&Ls; and developers.
“It’s limited the medium-sized and smaller institutions from retaining the relationships (they) have built in the last decade,” said Daniel Wolfus, chairman and president of Hancock Savings & Loan Assn. in Los Angeles. “It’s shrunk the pie for small and medium institutions and prevents borrowers from getting the best financing.”
Both lenders and home builders warn that the ultimate effect is likely to be consolidation in the home-building industry and higher costs of housing that reflect the increased difficulties of obtaining financing.
The bailout law reduced by about 85% the amount that a thrift can lend to a single borrower. The provision was intended to spread loan risks so that an institution does not ride on the fortunes of a single borrower.
For smaller thrifts, the practical effect of the measure is to severely limit the size of projects that can be financed. “In general, the smaller institutions are going to get hit the hardest,” said Dean Cannon, president of the California League of Savings Institutions in Los Angeles.
Hancock’s Wolfus said a thrift with capital of $10 million--the amount it keeps as a final reserve against losses--would have a maximum loan limit of $1.5 million to a single builder, which does not amount to much more than a medium-sized condominium building at a time when costs are reaching $100,000 per unit.
“By trying to cut the abuses, they have curtailed an ongoing relationship with your customer base,” Wolfus said. “Sure there are abuses, but people are going to abuse things whether it’s 15% or 50%.”
Like smaller thrifts, smaller developers are being hit the hardest in the wake of the new law. That is because they lack cash reserves or the clout to line up alternative financing.
The loss of S&L; funds hits hard against home builders, who often need large loans to get their projects started. Signature’s Stuard said even a moderately sized project nowadays of 50 to 100 homes can require up-front costs of $1.5 million to $3 million to get started.
“That’s a lot of money. I don’t have that kind of cash,” he said. “I now just have less places to go” for financing.
Like Signature, Akins Development Co. in Newport Beach is working on residential projects in tandem with larger firms. Akins co-founder Bruce Akins said such arrangements are just one of the methods that smaller firms will need to survive without savings and loans.
“We anticipate (firms) such as insurance companies that have a great amount of equity money to invest will see the window left open by the exit of S&Ls;,” he said.
He added that insurance companies and pension funds tend to be “long-range thinkers” that will stick with developers through periodic business downturns.
Hopkins Development Co. in Newport Beach has paired itself with a major pension fund. Three years ago, the Massachusetts State Retirement System bought a 50% stake in Hopkins, catapulting the firm from “the triple-A minors to the big leagues” by providing a new source of investment capital, said John Withers, Hopkins’ senior vice president for residential development.
Backing of the big pension fund frees Hopkins from financing worries to “focus most of our energy on developing,” Withers said. Hopkins owns major shopping centers in Orange County and specializes in residential and commercial projects in redevelopment areas.
Some home builders started making their move away from the thrifts well before widespread failures and tales of abuse culminated in passage of the bailout bill.
“I think the S&L; handwriting was on the wall for a long time,” said Skip Beck, vice president of finance for Warmington Homes in Costa Mesa. “For two years my goal has been to decrease our dependence on the S&L.; You may have to look a little harder for a partner on a certain deal, but other sources will fill the gap.”
S&LS; MAKE FEWER BUILDING LOANS
The federal thrift bailout law has forced many savings and loans to make fewer home building and development loans. The change has hit small builders hardest. A recent survey* by the National Assn. of Home Builders indicated that many thrifts have told builders the new law is forcing them to restrict their loan activity. Thrift Action on Building Loans in percent Must reduce building loans in future U.S.: 36% West**: 45% Will not renew or extend a current loan U.S.: 23 West**: 27 Will not make new loans until current ones paid off U.S.: 24 West**: 28 Can no longer enter joint development ventures U.S.: 21 West**: 45
Sources of Building Loans
Only commercial banks are a greater source of funds to builders for land acquisition, site preparation and development than savings and loans, according to a recent survey by the National Assn. of Home Builders.
Percentage of builders obtaining loans for: Acquisition Development Construction Institution U.S. West** U.S. West U.S. West Savings and Loan 41 47 37 51 48 50 S&L; Service Corp. 10 13 9 19 9 14 Commercial Bank 59 64 67 74 70 73 Mortgage Co. 9 11 6 14 13 16 Private Investors 20 34 15 19 9 11 Other 12 11 9 12 8 13
Totals add to more than 100% because some builders have multiple funding sources. * The National Assn. of Home Builders in Washington surveyed 1,195 homebuilders in November. The results are based on 293 responses. ** Includes California, Alaska, Hawaii, Oregon, Washington, Montana, Arizona, Nevada, Colorado, Idaho, New Mexico, Utah and Wyoming.
