Credit Basics
Homebuilders partook in risky mortgages, union study shows
Friday, August 15, 2008
South Florida Business Journal - by Brian Bandell
Most scrutiny of mortgages has focused on banks, but a new study is spotlighting the loan practices of Lennar Corp. and other major homebuilders.
Lennar has called foreclosures its toughest competitor, but it could end up competing against itself as sales of freshly completed homes vie with residences foreclosed upon by its finance arm.
A study by a labor union found that the Miami-based company and other major homebuilders were writing some risky loans to their homebuyers. Lennar (NYSE: LEN), one of the nation’s largest homebuilders, trailed only Related Group in South Florida sales in 2007. It is also the region’s sixth-largest public company, with overall sales of $10.2 billion in 2007.
Most major homebuilders have in-house mortgage lending operations that a majority of their buyers utilize, and buyers often get incentives for choosing them over outside financing. Most of these loans are sold to banks and Wall Street firms. Sometimes, the homebuilder retains limited liability for defaults, but not always.
“Many times, the homebuilders are able to push a deal through that wouldn’t have gotten through on its own,” said Howard Dvorkin, founder of Fort Lauderdale-based Consolidated Credit Counseling Services, which helps borrowers and banks deal with debt. “They had something riding on it, and they were pushing these to financial institutions.”
The study by the Laborers International Union of North America (LIUNA) found that homebuilders such as Lennar, D.R. Horton and Pulte Homes wrote more second mortgages and subprime loans when sales and prices peaked in 2006. That year, one-third of all Lennar mortgages came with a piggyback loan, which can leave homeowners with no equity in the property, according to data LIUNA obtained from federal regulators. And 61 percent of Lennar’s second mortgages were subprime.
‘Get it done’
Yaniv Alcalay, president of Global Equity Mortgage in Boca Raton, said that’s standard practice for homebuilder lending departments. “Homebuilders pushed anything just to get it done,” said Alcalay, whose company has helped major homebuilders write mortgages.
That spawned some riskier practices, such as loans that used buyer-stated income without documentation and introductory teaser rates that later adjusted upward, Alcalay said. As a result, he has seen many foreclosures in recently completed homebuilder communities in South Florida, which forced builders to slash prices on their current products.
The LIUNA report focused on large homebuilder communities in the Phoenix metropolitan area, where more information about mortgages is available than in South Florida records. It found that about a third of Lennar-written mortgages in 2006 were five-year adjustable-rate mortgages (ARMs) and 7 percent were option ARMs, where borrowers could pay less than the accruing interest for two to three years. Lennar actually wrote fewer five-year ARMs in 2005, but made 17 percent of its Phoenix mortgages option ARMs.
LIUNA said resets of five-year ARMs could increase interest rates up to six percentage points. That means the foreclosure trouble has just begun, said the labor union, which opposes government subsidies for builders.
“In the overall housing market, in terms of inventory and the price of homes we are looking at, this could potentially affect the whole market, especially for homes they are trying to sell now,” said Jordan Ash, a researcher for LIUNA.
A Lennar spokesman declined comment on the report. According to company filings, Lennar now offers mostly fixed-rate mortgages. As of May 31, it held $202.9 million loans for sale and $63.4 million in loans for investment.
Lennar’s financial services division, which includes mortgage and title service, lost $3 million in the quarter ended May 31, down from a $14.2 million gain in the comparable period last year.
Centex prepares for $137M loss
Dallas-based Centex Corp. (NYSE: CTX) booked an allowance reserve to cover future loan losses of $137.1 million, or nearly 20 percent of its $700.5 million in mortgage holdings as of June 30. It wrote off $22.2 million in the second quarter due to these loans.
Loans not accruing interest because they were at least 90 days past due accounted for 29.5 percent of Centex’s mortgage portfolio.
A longtime South Florida builder, Centex is currently marketing three communities in Palm Beach County.
Centex spokesman Eric Bruner said the company only holds mortgages until they can be sold. The loans are funded by a warehouse facility set up by banks, which only accept the mortgages under certain terms and can make the company buy them back if they default within six months, he said.
Fort Worth, Texas-based D.R. Horton also retained limited liability for some of the loans it sold. Based on the troubles in the housing market, it boosted its loan loss reserve to cover loan recourse to $33.1 million as of June 30, up nearly 35 percent over the past nine months. The company is currently marketing seven communities in South Florida.
Bloomfield Hills, Mich.-based Pulte Homes (NYSE: PHM), which has built in South Florida for years, reported increases in its nonperforming loans and foreclosed properties in the second quarter. It boosted its loan loss reserves to $14.6 million for its $301.6 million mortgage portfolio, most of it held for sale.
RealtyTrac does not follow foreclosure filings by community or builders, but the Irvine, Calif.-based company’s research found South Florida ZIP codes with the most foreclosures were in Homestead, Miramar, Pembroke Pines and Pompano Beach. National homebuilders, including Lennar and D.R. Horton, heavily built out the first three of those cities.
The foreclosure rate tends to be higher in communities with a lot of new development, said Rick Sharga, RealtyTrac’s VP of marketing.
“As builders got desperate to unload inventory, they were some of the worst offenders,” he said.
Jack McCabe, president of Deerfield Beach-based McCabe Research and Consulting, worked in sales for Centex in North Carolina several decades ago. Back then, homebuilders made standard loans, but they turned to more risky mortgage products when they saw other lenders get into the action. Wall Street investors paid more for bundles of high-risk loans, he said.
“Homebuilders basically shot themselves in the foot,” McCabe said. “They have to write off these mortgages, and now they have foreclosure sales in these neighborhoods that they have to compete with.”
