Lending for builders to remain tight until at least 2010

It's interesting these days to listen to economists or pundits who read through reams of data and declare, "There's plenty of credit -- just not at the price you want!" and then actually sit down with those who are trying to get deals done, and it's a very different story.

Yesterday some colleagues and I had lunch with a wealthy private investor (who claims to have access to $1.5 billion cash and another $500 million in other sources), and for people like him, the lack of credit -- which he doesn't need -- is providing him with some great opportunities, although he also remains on the sidelines because the spread between what sellers want and what buyers are offering is in the 25% range. For now, and likely through 2010, most buyers of land and many commercial properties will be families and groups of friends with money to invest, because credit is expected to remain tight for at least another 12 months. From a BuilderOnline.com story:

Builders immediately saw banks tighten up credit last fall, when the financial crisis began, and the government’s billion-dollar bailout to the banking industry seems to have had little effect. Builders can’t get money to buy land. They can’t get loans to develop lots. They can’t convince banks to joint-venture with them on partially finished developments, even when the bank already owns the land and would have minimal risk...

Unfortunately for builders, the current tight credit situation is likely to continue into 2010, according to experts interviewed by BUILDER in recent weeks. The reasons are myriad: a struggling economy, capital pressures, consumer credit problems, banking consolidation, and regulatory and accounting uncertainties, and of course, falling home prices...

Unfortunately for builders seeking capital, real estate loans represent a major factor in those losses.
Last year, banks reported net charge-off rates of 0.99% for all loans and 0.73% for real estate loans for the first quarter. This year, those figures doubled, to a net charge-off of 1.94% for all loans and 1.44% for real estate loans.

A similar trend occurred in noncurrent loans, which are at least 90 days past due. Overall, banks said 3.77% of all loans were noncurrent in the first quarter of this year, compared to 1.72% one year ago. A prime offender? Real estate, where the percentage of noncurrent loans jumped from 2.21% in 2008’s first quarter to 4.89% for 2009’s first quarter. Within that category, construction and development lending is the most troubled, with nearly 11% of such loans more than 90 days past due.

Even worse from the banks’ perspective, the bulk (61%) of the industry’s current $7.7 trillion in loans outstanding is in real estate loans, including $567 billion in construction and development lending...

Many banks, already weighed down by significant numbers of real estate owned (REO) properties, are wary of adding any additional land investments to their books, even in relatively low-risk joint ventures where the bank supplies the REO land and builders simply construct the homes.

Just like builders and homeowners, falling land values have eroded the value of banks’ land assets, forcing them to raise capital to protect against potential losses. In this declining market, they must also boost their reserves enough to satisfy bank examiners, who expressed worries about commercial real estate lending exposure at banks as early as 2006...

Accounting rules add another wrinkle. For accounting and financial risk reasons, regulators may not approve of a bank’s continued involvement in a real estate project and want the lender to realize any gains or losses as soon as possible. As a result, banks are doing everything they can to exit land deals quickly because if the project drags on (which is certainly likely in today’s weak market and struggling economy), bankers may need to account for that dirt differently due to its “troubled status,”...

Lack of resources may be another issue, particularly at smaller banks. At the same time as builders are begging and pleading for funding, lending institutions are dealing with a host of other challenges requiring time and resources—new credit card laws, personal and corporate bankruptcies, foreclosures, and mortgage modifications. They simply may not have the people, time, or expertise to carefully evaluate a builder’s proposal, no matter how promising.