Spec houses and their lenders

I just spent a fascinating time with a guy I know who shared some loan data with me on who owes what on which spec houses in town.Things are really getting interesting. There are a ton of spec houses out there with over-due mortgages in amounts that greatly exceed what the house is worth. Looking over the list, I was amazed that any sane banker would ever have loaned so much on marginal land, yet lend they did, and now aren’t they sorry.

Hudson City Savings Bank, for instance, whose president sounded so rational and cautious on the radio one day that I wrote glowingly about him here, has loans on dead houses in Greenwich that must have been made without ever consulting a knowledgeable real estate agent. Builders are always sure that they can bring a project home a winner, but any lender who listens to them and doesn’t get an objective opinion probably deserves what it gets, which will be a bad loan.

HCSB is not alone, naturally, and isn’t even the most exposed lender – it’s woes just caught my eye. The trouble with trying to get one of these buildings on the cheap is that, according to my friend, so many of their loans are cross-collateralized with other projects. Drop the price on one and the entire house of cards comes down. So the builders persist in clinging to their high asking price, knowing that they’ve signed personal guarantees that will wipe them out if everything due is called, and unable to unwind the mess one string at a time. Their bankers had better get busy making that untangling possible.

One doomsday scenario that I hope won’t happen: there are some very well financed vultures out there considering buying entire portfolios of bad loans from banks. They’d then foreclose on, say, 15 -20 spec homes and auction them off to the highest bidders. If this were to happen, everyone would suffer, first because auction don’t bring in top dollar and in fact often fail, driving the value of a house into the dirt and second, those that do sell will set a new comparable value so low that even loans that are current would fall outside their loan to value ratios and be declared in default, thereby triggering still more sales. Death spiral.

Any vultures who tried this would be cutting their own throats because they’d be destroying the value of their new portfolio of houses but as we’ve all witnessed, common sense and enlightened self interest are scarce in the housing/finance field these days. Hmmm.


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14 responses to “Spec houses and their lenders

  1. CEA

    Am I understanding you correctly, that these spec houses are now worth less than their loans, and would now have to be the dreaded “short sales” that take forever, even if there IS an actual buyer?

    If so, this is “stalemate”. Bankers don’t want to do the short sale and builders don’t want to admit it. Won’t happen until it’s forced to, e.g. when the builder finally can’t make the loan payments. It will be a few months, not a few weeks. It’s a ginormous game of “chicken”.

  2. anonymous

    Fascinating insights, CF

    Will be interesting to see how this house of cards falls….consider how long it took between first whiffs of DebtCrisis in mid ’07 and Sept ’08’s Meltdown…and the DebtCrisis continues….

    Suspect late ’09 will be when Greenwich RE will become more “dynamic” w/these builder mortgages entering distress, unemployed IBers adding used houses to inventory, etc etc

  3. Anonymous

    One way or another you have to get through all of this inventory before we see any sign of a recovery. The way things look we have about 2 years!

  4. Stanwich

    Cf, I disagree with your the logic of your possible doomsday scenario. Securitization will greatly complicate matters and draw it out longer. Once a securitized loan is in default it needs to be taken over by the special servicer who then must figure out what to do with it. The special servicers have conflicting interests because many times they are owned by the banks that made the loans and securitized them. Special servicers want to fee these bonds to death, that’s how they fatten their margins.

    In addition, there is no way for vultures to get a portfolio of loans because of securitization. They can only buy the bonds or the assets (after the special servicer forecloses), they can’t get to the loans. There are very few loans still held by the banks. In the past six months most banks have sold any loans on their balance sheets, best to take their lickings now in the midst of the financial turmoil instead of when the smoke clears.

    This process has much farther to play out and the current proposal scoming out of DC will only drag out the de-leveraging/falling values of real estate.

    • christopherfountain

      Stan, I’m with you on securitized loans but what surprised me today was discovering how many loans are still in-house.
      As an aside, I also was interested to see how many of these building mortgages have been rolled over and how much cash ($100,000s of thousands) came in and what interest rates (8.25%, say) came out. You look at some of these houses, calculate how long their builders have been sucking wind on them and paying for the privelege of doing so and, wow. Someone’s not going to have a merry Christmas next year.

  5. anonymous

    Interestingly, Greenwich prob has had more spec over-building than any upscale suburb in US during this Bubble….and is residential (and business) home of much of the world’s financial industry….what a combustible, amusing mix

    In early ’90s, peak-to-trough for RE prices in NYC and LA was a ~5yr process…no reason to believe today’s cycle will be any quicker….that puts a Greenwich pricing bottom as a ’12 or (likely) later event….

  6. Anon E. Moose


    Be sure to post the auction dates. Thanks.

  7. DebtVulture

    Hudson City holds most, if not all, their loans. I’m sure most of the local banks hold a lot of their loans still.

  8. Owl

    i would have to imagine that these bankers would have relied on an “as completed” appraisal of the builders project in order to lend the $$….do ya think there are a few appraisers on the lamb yet?

    • christopherfountain

      I do. As Bernie Madoff himself said when asked the question by the FBI, “there is no innocent explanation.”

  9. Too good. Now, take a look at the commercial, non-recourse construction realm. Insurers, pension funds and banks have dumped money all over the sand states to put up cheesy strip malls that will never have a single tenant. The builders finish off the project (hey, the money is non-recourse!), finish and walk away.

    This kind of stuff will start to go completely sour by this Summer. Then, the real fun will start.

  10. I have looked over your blog a few times and I love it.

  11. ff

    Most construction loans are not securitized, because of their short duration (two years, generally). The banks actually go out and raise cash. Its the 30 year jobs that are securitized. Those loans you speak of are on the actual books of the actual banks, and can be the surce of their demise. The owner loans are OK.

  12. AngryVulture

    DebtVulture or CF: do you know the $ amount of spec loans in Greenwich held by Hudson City? Who are the other culprits? How do you get that data? Down at Greenwich town hall?