I have an on-going interest in all the real estate shenanigans and the impact on the economy. See prior screeching about this. Today I read this article on banks foreclosing on builders not in default and I don't know what to think. (Yes, yes, I know, it's a NYT article. Hey, just because it's in there doesn't always mean it's wrong. Just. Nearly always)

Random thoughts and a question for those who can actually subtract 9 from 15 below the fold.
I'll admit my initial reaction, which I'm sure is the intended one, is wtf, why is a bank foreclosing on those who are not even late on a payment?  It's not until you dig deeper that you learn that these aren't mortgages but appear to be the revolving lines of credit being used by home builders to finance construction.  Presuming that I am understanding this correctly, the commercial paper is defaulting due to undercapitalization upon renewal of the credit lines.  In other words, this is a prospective look at if the builders can pay as opposed to a credit check to see if the builder is a good risk.  As I understand it, the builder is putting up homes that are now worth x but still asking for y to build them.  The banks are refusing to do so since the likelihood is strong that the builders will end up being late or not making the payments due to being unable to move the homes.  The language in the loan agreements permit automatic default if this is the case.  I welcome any corrections to what I am sure are my misunderstandings. 

I am a bit torn about this.  Look, it's a very very hard truth that you can't ask the banks to pretend that values haven't plumetted.  On the other hand, the banks are part of the problem that created this situation.  Yanking lines of credit from credible borrowers doesn't strike me as the best business decision.  If a business was able to survive with a clean payment history to this point, it seems a bit premature to presume that the good company will drown with the bad companies.  

But where should the line be drawn?  It is idiotic and counterproductive to continue dumping money into a market where you cannot expect a return.  I watched this on a small scale locally.  A builder started work on a spec home about a month before the bubble burst.  Every day I drove past this house and I watched it go up.  And every day I thought "you are so screwed".  It was done about 5 months ago and has been on the market ever since.  It's a gorgeous home and someone's going to get a deal on it.  Eventually.  What I took from the article is that we're talking about this on a grand scale.  So how long can a bank be expected to wait for buyers to reappear?  What if there is an extremely high statistical likelihood that any builder, no matter how savy, cannot keep making the payments?  Should a bank ignore that?

On the other hand, I am wary of the trend to consolidate everything, including the trades.  There is mention in the article that the large, publicly traded home builders are able to weather this due to greater capitalization and a bit easier access to the credit markets.  I am concerned that the solution to this will be to force Joe The Builder to join up with SuperMegaBuilderCorp. in order to survive.  Yeah, I do have a streak of being for the little guy in me and that rubs me the wrong way.

I'm not sure there's a point to this other than my being perturbed at the manner in which this was presented.  I don't know, I am going to go out on a limb and presume this is why the Head Moron was reluctantly in favor of the first bailout.  The alleged intent was to free up the credit markets which hopefully would have avoided this type of situation.  I might not wholly agree with that, but that was a decent position.  So the bailout goes through and the markets still constrict.  This does not precisely give one faith and hope and change and unicorns for the upcoming trillion dollar plan.

So anyway, on the off chance anyone made it to the end, I'm curious.  What do y'all think?

Posted by: alexthechick at 05:05 PM | Comments (14) | Add Comment
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