Sound familiar for home building companies? They’d done just about all they can to shrink their balance sheets for the worst of the downturn periods, and now time is nigh to drive topline performance. Question is can they? As we listen to the earnings calls among home builders over the next two weeks, we’ll be keen to probe both the analysis and the plan each company puts in place to sustain their hard-won momentum.

Collectively, with a few exceptions, the public home builders behaved as if 2010 will ramp nicely into a fully-formed if modest demand cycle in 2011.

The economy, a little like the stubborn low-pressure weather system that has settled in for a petulant stay in the Atlantic off the Carolinas and has blanketed the mid-Atlantic coast with a several-week muggy heat-wave, seems to be challenged by inertial as well as dynamic forces.

The one manifest source of big demand for capacity globally is Asia, which is shifting from overheated to a more sustainable level of growth. Europe is day to day, given its debt and credit landmines, and the U.S. seems to be an equal mix of pluses and minuses, with the pluses losing steam even as the minuses seeming to find a more stable high ground.

Clearly too, debate over policy, action, or a decisive plan to cease interceding at the government level sharply, and antagonistically, devides those who are most outspoken about righting the what has gone off in the economy. The conversation in too many cases crosses the line of argument into ugly ideologue, unbecoming of the nation’s spirit of resilience, tolerance, and particular manner of blending disparate interests.

We’re with New York Times Op-Ed essayist Roger Altman in assessing the moment’s need for business and policy-makers to call a time-out on their dance of death, because together U.S. business and government have a few of the answers Main Street wants right now.

The tension between President Obama and the business community is hurting both sides and may hamper economic recovery. Closing that divide requires the business community to mute its criticism, and the administration to make personnel and policy adjustments. Neither should be hard.

The summer of 2010 may go down as the period–similar to many stock market crashes–that retests lowpoints of both consumer and business confidence that occurred as the financial system came unhinged in the Fall of 2008.

Robert Shiller, in the book “Animal Spirits” he co-wrote with George Akerlof, talks about a term that makes all the sense in the world right about now: “the confidence multiplier.”  At the center of the word confidence, Shiller notes, there’s a Latin word root “fido,” which means “I trust.”

It’s the Summer of 2010. No one can make the 2009 Obama $790 billion stimulus package bigger now than it was. No one can make the George W. Bush 2008 $200 billion tax and spending stimulus package bigger now than that was.

The question of yet another stimulus plan comes now amid heightened rancor, fear, and suspicion in the ramp-up to November’s mid-term elections. Whether more stimulus would instill or asphyxiate a confidence multiplier is likely to get lost in the heat-wave debate between “Austerians” vs. the “Stimulites.”

That’s why, in looking this week at the latest data for housing starts, permits, and existing home sales, it would be a good BS meter to put them into a trailing three-month bucket, and compare the latest three months to the same three-month period in 2009.

This way, one can filter out some of the artificial timing moves that show up in the single-month release, and perform analysis based on reality. (HT to a reader Marvin Chosky for this recommendation).

Here, from blogger Econ Grapher, is a line-up of key data releases expected this week in the U.S. and global markets. And don’t forget the parade of 2nd Quarter earnings we’ll also be attuned to.

Day	Time (GMT)	Code	Event/Release	Forecast	Previous
MON	8:00	EUR	Euro-Zone Current Account s.a. (euros) (MAY)		-5.1B
MON	14:00	USD	NAHB Housing Market Index (JUL)	16	17
TUE	1:30	AUD	Reserve Bank of Australia Meeting Minutes
TUE	5:00	JPY	Leading Index (MAY F)		98.7
TUE	6:15	CHF	Trade Balance (Swiss franc) (JUN)		0.82B
TUE	8:30	GBP	Major Banks Mortgage Approvals (JUN)	52K	51K
TUE	8:30	GBP	Public Finances (PSNCR) (Pounds) (JUN)	16.0B	12.0B
TUE	12:30	USD	Housing Starts (MoM) (JUN)	-2.8%	-10.0%
TUE	12:30	USD	Housing Starts (JUN)	577K	593K
TUE	12:30	USD	Building Permits (MoM) (JUN)	-0.7%	-5.9%
TUE	12:30	USD	Building Permits (JUN)	570K	574K
TUE	13:00	CAD	Bank of Canada Interest Rate Decision	0.75%	0.50%
TUE	22:45	NZD	New Zealand Net Migration s.a. (JUN)		250
WED	3:00	NZD	Credit Card Spending s.a. (MoM) (JUN)		1.9%
WED	8:30	GBP	Bank of England Meeting Minutes
WED	14:00	AUD	NAB Business Confidence (2Q)		17
WED	14:00	USD	Ben Bernanke Testifies to Senate Banking Panel
THU	3:00	NZD	ANZ Consumer Confidence Index (JUL)		122
THU	4:30	JPY	All Industry Activity Index (MoM) (MAY)	-0.4%	1.8%
THU	7:30	EUR	German PMI Manufacturing (JUL A)	58.0	58.4
THU	7:30	EUR	German PMI Services (JUL A)	54.5	54.8
THU	8:00	EUR	Euro-Zone PMI Manufacturing (JUL A)	55.2	55.6
THU	8:00	EUR	Euro-Zone PMI Services (JUL A)	55.0	55.5
THU	8:30	GBP	Retail Sales ex Auto Fuel (YoY) (JUN)	2.4%	3.4%
THU	9:00	EUR	Euro-Zone Industrial New Orders s.a. (MoM) (MAY)	-0.1%	0.9%
THU	12:30	CAD	Retail Sales (MoM) (MAY)	0.5%	-2.0%
THU	13:30	USD	Ben Bernanke Testifies to House Financial Committee
THU	14:00	USD	Existing Home Sales (MoM) (JUN)	-8.1%	-2.2%
THU	14:00	USD	Existing Home Sales (JUN)	5.20M	5.66M
THU	14:00	USD	House Price Index (MoM) (MAY)	-0.3%	0.8%
THU	14:00	USD	Leading Indicators (JUN)	-0.3%	0.4%
THU	14:00	EUR	Euro-Zone Consumer Confidence (JUL A)	-17	-17
FRI		EUR	EU European Bank Stress Test Results Due
FRI	1:30	AUD	Export Price Index (QoQ) (2Q)	12.0%	3.8%
FRI	8:00	EUR	German IFO – Business Climate (JUL)	101.5	101.8
FRI	8:00	EUR	German IFO – Expectations (JUL)	101.5	102.4
FRI	8:30	GBP	Gross Domestic Product (YoY) (2Q A)	1.1%	-0.2%
FRI	8:30	GBP	Gross Domestic Product (QoQ) (2Q A)	0.6%	0.3%
FRI	11:00	CAD	Consumer Price Index (YoY) (JUN)	0.9%	1.4%
FRI	11:00	CAD	Bank Canada CPI Core (YoY) (JUN)	1.9%	1.8%

The Fed has been encouraging banks to ensure that credit-worthy small businesses can get the credit they need. Reacting to complaints that its own bank examiners are contributing to overly tight standards, the central bank is also conducting training programs with examiners to drive home the message that encouraging loans to small businesses that can repay is positive for the banking system.

Fed Chairman Ben Bernanke has taken up a crusade to urge lenders to, um, lend. Those banks did $710 billion in loans with small businesses as the downturn deepened in Q2 2008, and after a big TARP bail-out and a solid year of record earnings, the banks lent $40 billion less in the same quarter in 2010.

So, Ben says:

“The challenge ahead for lenders will be to determine how to assess the credit quality of businesses in an uncertain and difficult economic environment.”

Which is why this note is about private equity and hedge funds, not about banks

We recall the private equity false alarm that occurred in 2007 and 2008, as word spread that dozens of multi-billion funds had been set in motion for a big vulture fest. Other than a few bold moves, the most important being Morgan Stanley and MatlinPatterson’s, the landing of the vultures was a non-event.

Now, however, conditions are ripe. Traditional capital isn’t working in the arena. The timing–if not the direction or trajectory–is such that the worst has come, which means that exit strategies and strike points now lie with in a three- to five-year comfort zone for this type of money.

The best news of all, if you’re a fund (not if you’re a builder or developer), is the need, which there’s plenty of and it’s plenty urgent. If builders and home building companies don’t build for long enough, their principals and brain trusts start into existential crises vs. curb cuts and dry wall calculations, which is not good for the universe.

So, we started hearing that private equity money was beginning to move in earnest on a project basis starting around six months ago, notably with the GoldenTree InSite folks, Wheelock, Starwood, Oak Tree, Angelo, Gordon, John Paulson, and a few others.

Now we’re hearing that private builders who are willing to muster up 35% to 40%  or so of their own skin in the game can get 60% to 65% financing from any number of private equity sources.

Word from the wise is that it’s less about the size of the investment required or conjecture on how fast a given market will come back, and more about “sponsorship,” i.e. Does the home builder operator have a good regional brand, a track record, and a strong history of repaying what’s owed?

Mitchell Hochberg, one-time president of WCI’s northeastern region and a longtime private builder in the New York metro, rates private equity activity and readiness to pounce as a 7 on a scale of 1 to 10.

“It can be a lifeline for strong, regional private builders,” says Hochberg, who’s a partner in Madden Real Estate Ventures, and has been working as an advisor to a number of funds.

Meanwhile, Ben Bernanke’s Fed is trying to demystify a complex issue for federal examiners and the banks they’re regulating. From the Journal:

Lending to creditworthy borrowers is in their interest, Bernanke said, since “that’s how they earn their profits.”

Go figure, or better yet, sit down with some one who’s got a private equity fund and talk business.

On the heels of last month’s LGI-GoldenTree InSite Partners agreement to venture on a lot acquisition initiative, and David Weekley Homes’ similar $25 million land venture fund with Midway Cos., MHI is teaming up with Wheelock Street Capital, and has closed on an initial $15 million purchase of 3,000 homesites in the Austin, Dallas, and Houston markets.

Per an MHI press announcement, “The diversified portfolio will include product for buyers ranging from first time buyers to second time move up buyers. MHI will manage the land development responsibilities. Both firms will work to market the homesites for sale to homebuilders.”

Frank McGuyer, CEO of MHI, is quoted in the press release, saying, “We are excited about the relationship with Wheelock. Their experienced team understands our business, and we’ve learned that we share similar acquisition and development philosophies. The formation of this venture will allow us to take advantage of some of the great opportunities we are seeing in our markets right now, leveraging our knowledge of the Texas markets with the capital backing of Wheelock.”

Lacking access to conventional bank lines to reload on lots that have market-corrected prices, private home builders are turning to investment funds that have got some urgency to deploy capital sooner than later, and which have begun to bet that the residential real estate market has bottomed.

This way, on a selective and more targeted basis, the remaining private builders with strong balance sheets and a visible track record of unit volume can position themselves to ramp up earlier in the recovery cycle and plan to grow faster.

MHI, which builds under the brand names Pioneer, Plantation, and Coventry Homes, and Carmel Builders, ranks in the top 30 of Builder magazine’s Builder 100.

Attempts to reach principals at MHI and Wheelock Street Capital by telephone were not answered as of our deadline.

With the added companies, the basket of publics under analysis now numbers 14. While there’s a change to the top of the rankings list–Standard Pacific CEO Ken Campbell’s total compensation package eclipses that of M.D.C. Holdings’ Larry Mizel–there’s no difference in who’s at the bottom. NVR CEO Paul Saville, who runs the company with the best financial performance in the business, is also the lowest paid of his industry peers.

The NVR proxy statement notes: “At Mr. Saville’s request, the Compensation Committee froze his base salary at its 2006 level for the third consecutive year as a cost savings measure, despite his leadership during a  period in which NVR has significantly outperformed the industry.”

There are two publicly traded home building companies whose proxies get filed later in the year as a rule, Avatar in late April, and Comstock during the late Summer or early Fall. Even counting the CEO compensation packages of those other two companies, only one CEO may actually earn less than Saville. Can you name him?

It’s important to note that although Standard Pacific CEO Ken Campbell’s compensation package jettisoned him to the top of the rankings, his base salary in 2009 was on or below par with many of his peers, at $703,833. Where his numbers balloon is in the $10 million options package, which, like many long-term incentive packages is earned out over a several year period, and is pegged to his driving SPF share values long-term.

It is also interesting to us that as executive compensation at public companies falls under greater and greater scrutiny, greater percentages of total compensation are getting lashed to longer term financial and operational performance metrics. So we see companies such as Standard Pacific, Brookfield, Hovnanian, Beazer, KB and Ryland design greater reward around increased alignment with shareholders’ longer term interests, vs. quarterly revenue and profit yardsticks.

When you factor in the large compensation package Campbell pulled down, it actually pulls up the average total compensation in 2009 from negativeland to positive, compared with 2008. Without the four we added, we observed that comp packages had slipped by 26% vs. a year earlier. When we add in StanPac, Pulte, M/I, and Meritage, we get a  positive reading, up by 6% compared with the year earlier.

For straight out “bonuses,” Ken Campbell’s $615,000 signing bonus led the pack, while Mezger’s $2.75 million, Mizel’s $2.5 million, and Tomnitz’s $2.34 million, were the highest non-equity annual incentive awards for driving the companies toward full-recovery.

Another increasingly important factor in measuring company leadership performance are designations from third parties such as J.D. Power home buyer satisfaction ratings, and Fortune magazine’s “100 Best Companies to Work For” list.

Right now, the Fortune list, which published in February, includes no home builders. Fortune has listed five home builders on its “Most Admired Companies,” list.  Alas, since the PulteGroup merged Centex into Pulte, only four of them stand alone. When you look at Fortune’s most admired scores, it’s conspicuous that home builders’ top score–KB Home’s 6.58–is the third lowest top score of any industry.

Most pure numbers folks would say that having no home builder among the 100 “best companies to work for” and the third lowest ranking of all industryies in the Fortune “most admired” list would represent opportunity.

Matter of fact, at least one of the CEOs of the below-ranked group of home building company leaders, regards being on Fortune’s “best companies to work for” list as tantamount to success.  There’s probably a high correlation, you’d think, between associate fulfillment, customer satisfaction, and sustainable profitability in home building.

It’s just that public home building companies–most of them anyway–grew too fast in the first part of the decade past to bother with tending to employee engagement, focus, and satisfaction. There was too much money to be made to ignite a culture of collaboration, trust, and transparency.

Well, if we look at the following list in a year, the comparisons of 2009 to 2010 in compensation will have a great deal of reliance on how shareholders respond to the way the company runs this year, rather than as a result of fixed annual incentives based on individual quarterly hurdles. That’s probably the way it should be.

Here’s the list. Click on it twice to view the large table.

Source: Big Builder analysis of company proxy filings.

Where strategy focuses as much on cash preservation as it does on driving topline sales and revenue growth, the honcho who wields both the axe and the gift bag tends to be the chief financial officer.

CFOs as a group performed heroics in doing their part to retrieve a collective $2.3 billion in tax benefits traced to net operating losses in 2009.

Here’s a chart from SNL Financial that maps out how each builder did in its most recent financial reporting period:

Courtesy of SNL Financial

In 2010, a big issue for public home builders will be retaining the services of talents who provide credibility and integrity behind fairly complex financial performance reporting. Trust is in short supply at the nexus of Wall Street and Main Street, and a good CFO is often the only thing between keeping the trains running and total chaos.

Still, most CFOs compensation in 2009 reflected red ink performance of their respective mother ships, with few bonuses (in cash, especially), and stock and option awards blistered by the performance of stock prices that have taken major hits.

Still, in all, they’re not doing too badly. All in all, CFOs across our 9-company universe earned an average of $1.9 million in total compensation, versus $2.6 million in 2008, a plummet of about 26%

Base pay in most cases, held at 2007 and 2008 levels, with D.R. Horton CFO Bill Wheat’s $250,000 representing the low, and Joel Rassman at Toll Brothers the high at $1 million.

Consistent with the fact that its CEO Paul Saville ranked lowest in his peer group, NVR principal financial officer Dennis Seremet had the most modest total comp package of the pack.

Here’s the way they rank (note: we only have nine due to the fact that other public company proxy statements with information on the compensation of their named executives are still forthcoming).

Click twice on the table for a larger view.

Source: Big Builder analysis of company proxies.

First an explanation of what we mean, then a take on why we’re saying it now.

If private home builders don’t get that money, many, many more of them will go dark. They need that money for two reasons. One is to build through houses they’ve either sold already or can sell if they’re ready. The other is to buy some of the lots with new price tags like the national, public builders are doing.

These two reasons are precisely the reasons banks are averse to handing it over right now. They’re averse doing anything that puts more exposure on their books. It’s the last thing many of these banks can tolerate.

Big banks are now profitable, but give it five minutes and the jig will show up as a jag. Small banks–many of them anyway–have so much exposure to the X factor that is real estate valuations that one can still only guess how widespread the damage is. One running count is that 644 banks are on the “Unofficial Problem Bank” list.

Private home builders are in a fix because most of them depend heavily on banks, and banks are in a fix. The recent increase in the Fed discount rate doesn’t mean a lot to most of us, but it certainly doesn’t bode well for businesses that draw on bank capital with the intensity that home builders do. If it’s more expensive for banks to borrow, it’s going to be more expensive for their commercial customers to do so, one way or another, and it will be in shorter supply.

Private home builders are already seeing reason to clump 2009 and this year, 2010, as the two worst years of the downturn. They’re already seeing the cost of the money they draw on go into the stratosphere. They’re already seeing that the hard-won ability they had to borrow money for their home building company without personal guarantees is rapidly going by the wayside. They’re already seeing capital sources developing virtually usurious interest rate tiers as reminders of what risk the banks are going to do any business at all with home builders.

This is short-sighted, no? The health of a bank lender ultimately will depend on its community of customers, including home builders, which pay back the money owed at interest, and hire people to build, who in turn stock the foodchain of consumer demand through the economy.

We see what has happened to construction spending. It’s down 61.4% since its peak this time in 2006.  We know ourselves that home builder business units are a 30% shadow of what they were this time in 2006. We know that many good, smart people are out of work. Some of them saved their personal pennies for rainy days. Many of them have been out so long they’ve just lost their unemployment benefits.

Fact is, as soon as you name one way that private home builders are superior to public home builders, you’ll get an argument–a valid one, too–from a public builder that contests that. Still, private home builders are better at some parts of this business. Why else would public companies have paid so highly for them in bygone years?

We feel that private home builders are where home building culture, home building design innovation, and home building real time supply-and-demand knowledge occur at a superior level. Private home builders, in fact, are the reason some of the public home builders are as good at what they do as they are.

Here’s what Tom Lewis, founder and owner of 20-something year-old regional home building power in Phoenix, T.W. Lewis, told us about losing his No. 2 man, Kevin Egan, this month:

“It got so that there were too many chiefs and not enough braves. Kevin created an incredible, cohesive, collaborative organization focused on excellance here. That’s what we will miss.”

The industry can ill afford to see private home builders fall into a state of credit-lock paralysis for the next year to 18 months. Just as public home builders meet a need for housing at an affordable level, using highly iterative manufacturing techniques, scaled purchase of products and labor, and negotiating muscle on land prices, private home builders meet that need on a more zeroed in basis, in smaller tracts, in trickier circumstances.

The way it’s going, though, we’re not going to see very many private home builders around to meet that need very much longer unless there’s a break in the impasse on lending to home builders.

The nation’s most afflicted local economies need jobs to jam the negative feedback loop that has jobs, home defaults, declining asset values, lower earnings, and more layoffs locked in a vicious cycle. If banks become part of the solution of loosening credit to small businesses, the negative loop will begin to flow the opposite way.

It’s an industry problem–for both public and private home builders–if private home builders play through this year with two arms tied behind their back. We’re not saying they’re not willing to try.

But smarter people might see that collaborative competition might be a notion that will speed an improved outlook for everybody.

The focus was FHA and HAMP.

On a scenario for tougher standards of qualification for borrowers, here’s Donovan’s now-familiar refrain:

[Borrowers] 

they would need to bring more cash to the closing table upfront. We’re looking at exactly the way to do that and, again, to try to ensure that we’re limiting the riskiest borrowers in our programs. So we’ll announce by the end of January exactly how we’re going to do that.But we’re looking at things like larger down payments, looking at, for example, we just lowered the percentage of what we call seller concessions. So, effectively, discounts to build into their loan upfront, which can make the loan somewhat riskier. So there’s a set of things that we’re looking at that combined together we think will help make FHA loans safer.

As for the oft-maligned Making Homes Affordable mortgage loan modification program, Donovan comes out swinging at the banks.

So those trial modifications, even though they’re not permanent, are lowering payments, are helping to avoid foreclosure. And the vast majority of those we didn’t expect to be permanent modifications at this point, because the end of the trial period hasn’t come up yet.

What we said, though, is that we are very concerned about the low number that have converted at this point. We are concerned that the servicers, frankly, aren’t doing a good enough job.

So, we need to watch closely and see what happens over the next month and beyond to see that banks are doing a better job. And if they’re not, there are going to be some serious consequences in terms of the way that we oversee the program. And we’re going to look at others ways to try to get these modifications to the permanent stage.

Still, lots of analysts are calling for an okay December and a Santa Clause rally–though tepid.

You’d think the Yankees won the World Series, or  something.

We love that line “past performance is no guide to future returns.”

I can’t even begin to count how many times I’ve heard those words in the last year. It seems as if everyone believes that we are all smarter for the experience of surviving an economic tsunami, a tidal wave of fiscal destruction. I’ve got news for the collective all, bankers, contractors, builders, suppliers, magazine publishers, cable TV outlets, jet sellers and yacht brokers….the list is endless:   We aren’t any smarter now and we weren’t idiots way back when.  

The key difference between the then and now is really only the fact that we are now forced and are therefore begrudgingly willing to deal with issues that were glaringly obvious. How do I know this?    I’ve lived in a pressure cooker for the past 12 months and have worked for a company that was forced to confront every single issue and problem head on in order to survive. Without fail at each meeting someone says the magic phrase, ‘If we only knew then what we know now.’ In retrospect I should have started an over and under pool on the length of time between the basic introduction and the uttering of the phrase.  

Here’s what we knew then:

• Developers had no business dictating a ‘lot to package’ price for their lots. Market forces should have driven what we paid for lots. Gutting profits to pay egregious lot costs destroyed the long term financial strength of the developer’s clients and thus destroyed the developers themselves. If you extract the golden egg you will most certainly kill the goose.
• Bankers can be your friends but the relationship with their institutions is only a money deal and friendship isn’t going to rule the day. The fact that you can (or could) borrow doesn’t have any relation to whether you SHOULD borrow. Thankfully building speculatively isn’t in the cards in the near future; it shouldn’t have been a big part of the past either. At the end of the day you can have more fun for less money betting black or red on a Vegas roulette wheel.
• If you’re a builder, build. If you’re a developer develop. If you are banker loan money, collect payments. Do what you do best and nothing else. It’s simplistic but true. Never do anything that someone else is better at just to try and gain competitive position or make more money. Greed is good……for nothing.
• You can’t eat wood unless you’re a termite. Holding on to real estate in a slumping market is a bad plan. It was bad in the 1920’s, the 1970’s, and the ‘90’s and certainly in 2007/2008. You can’t get away from taking your lumps. If you have children I have an example for you. I have a six year old. Getting him to take medicine is tough. I always make him do it though since it will make him better. It’s true in real estate too. The market sets pricing. Pay attention to the market. 
• There’s only 52 weeks in the year. Make every one of them count. I’m not just talking about the obvious like selling houses and closing quickly. Manage better and constantly. Innovate, create, motivate…..anything except stagnate. 
• It’s not what you make it’s what you keep. Profit is a worthy prize. Unit volume, dollar volume and other bragging rights measurements are just worthless if gained at the expense of fiscal performance.

There’s no substitute for the absolute unfiltered truth. Don’t take this to mean that any of us aren’t truthful. We’re just really good at dressing up the truth in fancy presentation, award winning brochures and other really wonderful disguises. Subtlety isn’t really necessary with your tradesman, your bankers, your lawyers, or your employee’s and even more so when a crisis is looming. 

When it was finally clear that we had no choice but to find a way to reorganize we approached the situation with open doors and full candor. We armed everyone who would be affected by our filing with facts and clearly stated our intentions to stay open and find a way to continue the company.   In the end it was astonishing that we rallied almost everyone who had a stake in the survival of the company around the single focused goal of survival for the future.  

We moved through our case and encountered only a few challenges, all without success against the company. We found subcontractors willing to speak on our behalf.  We had customers who took the stand to tell how they only wanted their homes finished. In the end our survival has cost everyone involved dearly. 

We are forever changed by the experience.  We certainly aren’t smarter but we’re certainly more in touch with acting quickly on the things that we know to be true.

I would encourage everyone to make a list of the things that you should change. Tick them off one at a time quickly.  You don’t need a market study, a consultant, or anyone else. You’ve gotten where you are with your street smarts, prove your worth. There’s no time for delay.

Find something that you’ll never, ever do again.  There’s an old real estate joke about the real estate prayer: ”Give me one more great market and I promise that I won’t buy a boat and a plane.”  My brother Bob, the owner of St. Lawrence Homes, has his one thing to never do again.  He told me that if he ever bought another piece of raw ground to hit him over the head.   Under my desk right now is a Louisville Slugger.Maybe we are smarter now than we were.

But he’s got two problems:

• One is that his new product line is residential over retail and office units, and he can’t get banks to appraise the residential units in a way that reflects any value in the commercial units.
• Two, he’s had not one, but two potential mortgage lenders come back with word that FHA loans now require a minimum 640 credit score for borrowers.

Getting his units valued and getting his customers loans for places where buyers could qualify on the remaining 60 days of the $8,000 first-time buyer tax credit are now big sudden headwinds, after all the investment and construction operational speed and efficiency in getting the product ready to go online before the tax credit expiration.

FHA loans, which dropped to single-digit percentage share of new-home mortgages in the first part of the decade thanks largely to the proliferation of subprime and other exotic mortgage products, now account for six or more out of every 10 new-home loans, and without the FHA to back lenders now, many borrowers would be out of options.

On Sept. 4, The Wall Street Journal reported:

Some economists say the FHA’s lending has been crucial to preventing a deeper bust in property. Thomas Lawler, an independent housing economist, said “the alternative could have been a complete meltdown of housing finance” that would have ultimately led to much larger losses. Critics have said the FHA, which has never had a chief risk officer, isn’t able to manage such a large portfolio in an unstable market.

Policymakers have used the FHA to stabilize the housing market by pushing it to offer credit with far easier terms than that offered by most private lenders. For example, it will back loans with down payments as low as 3.5%.

As default rates in FHA loans notch up–7.8 of FHA loans are late 90-days plus, i.e. in default, per Inside Mortgage Finance   –  stress gets added to their guidelines to banks. This means more nail-biting for home buyers who may have qualified at a lower credit score even a month ago.

These stories are legion.

In a virtually no-debt available environment, private home builders are pulling out the stops to meet the market at least half way. They’re virtually locked out of lending for cheaper land reloads, and loans to go vertical are almost as scarce.

This latest set of tidings out of the banks make it abundantly clear why more and more privately funded home builders say “bank” like it’s just another four-letter word.