Lending Horror Stories Proliferate in Florida
In its efforts to focus attention on lending practices that are pushing solvent, credit-worthy home builders to the brink of financial disaster, the Florida Home Builders Association has documented real-life cases from around the state in which the industry’s ability to provide housing is being placed in jeopardy.
“Banks are making additional capital calls, and they are calling loans not in default, eliminating lines of credit, and in many cases, altogether doing away with construction finance,” said Jay Carlson, president of the association.
“Many of the builders affected by these extreme lending practices survived the recession of the early 1990s and the downturn of 2000. They have superior credit records, pay their loans and bills on time, they employ thousands of Floridians, and have good, solid business practices,” Carlson said.
“Yet many of them are only 30 to 60 days away from closing their doors for good,” he said. “That will result in thousands of more Floridians joining unemployment lines, and the state’s budget will lose even more critically needed revenue.”
More than 75,000 construction-related jobs have been lost in the state just over the past year.
Among the current lending crisis stories reported by the Florida home builders at the end of last month:
- Beverly Hills: A respected workforce housing builder in Citrus County was seeking a renewal/extension on his $6.5 million development loan. Initially the bank indicated that it would renew the loan and was proceeding with sending loan documents for processing. However, the bank then sent the builder a notice of non-renewal. During the time he was waiting for the extension, the bank was scheduled to make previously approved construction draws. That never happened. The loan was then placed into the high-risk special asset category even though it was current and not in default. Now the bank has called the loan to be paid in full.
- Bonita Springs: A leading custom home builder in Lee County has had his lines of credit frozen even though all of his loans are current and not past due. Some of his banks are reappraising his properties and wanting loan reductions based on new appraisals. Other banks want either principal reductions without reappraisals or proceeds from sales. One lender is raising his interest rate from prime plus 1/2 of a percentage point to prime plus 2.5%. In effect, this builder has been left without available funds to actually build homes on his sites.
- Englewood: A workforce housing builder with 40 years experience as a general contractor is in danger of losing his business. With a credit score of 848, and having never been late on loan repayments, this builder is four weeks into a 60-day call on a $2.5 million loan. The Federal Deposit Insurance Corporation (FDIC) took over his bank in receivership four weeks ago. Nearly $50,000 in approved and inspected draws was to have been made the day the FDIC took over the bank. Instead, the FDIC froze all accounts, is not paying out the draws and has called in the loan. The clock is ticking on his 60-day payment date. It should be noted that this builder primarily sells FHA/VA homes and the homes are sold for a turn-key price of $129,000.
- Estero: A development company has seen its rarely used lines of credit reduced from $150,000 to $75,000. Now the credit lines are up for review and the developer has been told that the bank will likely not renew them. If by some chance they are renewed, the bank will require additional real estate as collateral — at a time when most real estate in this region is upside down so there won’t be additional collateral available.
- Miami: A large-volume South Florida company has received capital calls on all of the loans it has with various lending institutions. It paid the first loan call-in of $3 million but was unable to immediately pay the second call, thus forcing the loan into default. Attempts to outline a workout plan with this bank have gone unanswered. A third bank performed a discounted appraisal based on the sales pace and concluded that it needed a $2.8 million principal reduction on its loan. This loan has gone into default and has been sent to the “special assets department” even though interest payments are being made. A fourth bank is calling in a $2.4 million loan. A fifth bank is now threatening a loan call. Recent financing changes are making the current downtrend in valuations worse, and the company is concerned that its business will not survive 2009 unless the situation improves soon.
- St. Cloud/Orlando: A seasoned small-volume home builder under contract with individual borrowers is being refused rightfully owed construction draws from his bank. The individual borrowers closed on their construction loans so that the builder could construct homes on their lots. However, the bank placed these loans into a “special asset department” even though they were being paid on time and were not in default. Now the bank is holding back 20% of the funds instead of the typical 10%, and it has indicated that if a future draw inspection results in anything greater than 80% completion, the Certificate of Occupancy (CO) and other final documents will be required. For example, if the builder were at 72% completion yet the inspection found an 82% completion, then the builder would need to pay the impact fees, obtain the CO and hand over an 80% finished house, leaving no funds to pay subcontractors and trade partners.
- Pensacola: A long-time developer with a small development loan recently had to pay down the loan to current value after his bank conducted a reappraisal of his 2004 approved and funded loan. Prior to the reappraisal, the development was progressing without problems, and 210 lots were pre-sold. The pay-down cost the developer and his partner $4 million. In addition, many of the 210 pre-sold lot owners are now closing on their homes; however bank financing has become so strict that the pre-sales are falling apart. Instead of the typical downpayment, banks are now requiring up to 50% down.
- Tampa: A well-established Tampa Bay area small-volume builder has two outstanding loans. One bank is treating him well; the other is not. This builder has a $1.8 million bank loan covering pre-built units that he has not been able to sell under current market conditions. The builder and his attorney approached the bank asking it to consider a sale at less than the loan amount, among other options. The bank has not responded. The loan matured on Aug. 31; however the bank never contacted the builder to extend the loan or to discuss it. On Oct. 14, he received a default/demand letter to pay the loan in full or face legal action.