S&L; Mess Slashes Loan Funds to Home Builders : Lenders: Half of builders surveyed say their savings-and-loan institutions have already notified them that they're reducing amount they can loan the builders.

By CATHERINE COLLINS

March 25, 1990 12 AM PT

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WASHINGTON — The wave of savings and loan reform has left the home-building industry adrift without the usual financial institutions to throw them a life preserver.

Historically, almost half of the builders nationwide have used savings and loans to finance their projects.

But a new survey by the National Assn. of Home Builders discloses that about half of those builders have received notice already that their savings and loans have reduced the amount of money they can lend them because of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).

And because their outstanding loans already exceed the new limits, many builders have been cut off completely.

“The problem is that the brakes have been slammed on and no transition rule was provided,” said Bert Ely, financial institutions consultant in Washington.

It is possible that all this will have little personal impact on the average consumer, although any housing slowdown will be felt throughout the economy. The market has not been kind to builders lately, and many have cut back on production already. Many have had to offer a grab bag of special incentives just to move current inventories.

But if enough builders are forced to reduce production and if some are forced out of business, the delicate balance between supply and demand could slip the other way. If demand exceeds the supply, the consumer could end up paying more for a new home.

The home builders’ problems are twofold. Immediately upon becoming law last year, FIRREA reduced the maximum total amount a savings and loan can lend to any one borrower from 100% to 15% of the thrift’s capital.

This limit means that despite previous loan commitments, a savings and loan often can lend only a portion of the amount a builder might require to build a housing project, or even to finish one already in progress.

A second provision also requires a savings and loan to hold more of its capital in reserve when making a land acquisition, development and construction (or “AD&C;”) loan to builders.

Because such loans carry the standard risk of 100%, the new regulations require savings and loans to hold 6.4% of a loan in reserve for duration of the loan. That amount will increase gradually to 8% by 1993.

Lenders may prefer to make less risky loans for which they have to set aside less capital.

Making life even more difficult for the struggling home builders, the new law requires thrifts to treat undisbursed construction loans--loans-in-process--as if they were on the books already.

If those loans don’t meet the new requirements, the extensions on which builders usually rely to finish projects will not be forthcoming. In fact, many loans are coming due in the midst of housing projects.

Home builders have descended upon Washington to lobby, not for a change in the new FIRREA regulations, but a two-year transition period in which they can find new financial sources.

Phil Jobe, a Dallas home builder since 1969, testified before the House Subcommittee on General Oversight and Investigations about his own struggles after FIRREA’s new regulations caused his lender to stop all funding.

“We have continued to run the properties, paying our operational expenses out of our pockets. . .,” he said.

“We have had to terminate good employees, (we’ve) been unable to pay some suppliers, our projects have been shut down, and we now face lawsuits and tax liens from local communities because of our inability to obtain any loan advance to pay property taxes.”

The situation is serious enough for builders across the country that Martin Perlman, president of NAHB, caused a minor ripple at a press conference recently for his candor when he said, “. . . we are skating on very thin ice, and we may be getting dangerously close to a housing recession.”

Perlman’s comments produced a sympathetic, although polite denial from the National Assn. of Realtors.

“They have a tendency to be a little more conservative,” said Norman Flynn, NAR president. “Housing construction has slowed down, but they will still have a strong year. We don’t see the housing market on thin ice.”

NAHB’s chief economist, David Seiders, reduced the organization’s previous prediction for 1990 housing starts from 1.44 million to 1.38 million.

However, Perlman said, without some sort of legislative or regulatory relief from the new FIRREA requirements the number of housing starts could drop another 100,000.

Residential housing construction usually accounts for 5% of the gross national product, according to NAHB.

Perlman warned that losing another 100,000 starts would have a ripple effect on the economy: 176,000 jobs in the construction and related industries would be gone, $4.6 billion in wages would be lost, along with $1.55 billion in combined federal and state tax revenues and $160 million in local property taxes.

Despite their immediate problems, Perlman said, home builders support the reform of the savings and loan industry. They are not asking for permanent changes in the law. What builders need, he said, is a two-year transition period to adjust to the new regulations and find alternate financing.

Usually single builders don’t borrow enough to interest pension funds or insurance companies in investing. But builders are looking for a way to pool the loans and create an “investment vehicle” to attract such deep-pocket investors.

“To be candid,” Perlman said in an interview, “during the negotiations for the thrift bailout bill, our plate was full. We tried to digest a 10-course meal in just a few moments. There wasn’t enough time for the usual hearings and debate. We did not recognize the full impact of the new regulations.”

But the question remains of whether relief can come in time to make any difference to builders already caught midstream without the financing to finish projects.

“Legislation is not going to move quickly,” Ely said.

“Their (the builders’) problem cannot be seen in isolation. There are so many problems out there with the savings and loan bailout legislation. Once Congress starts to move any legislation, 20 more bills will get attached to it, and it will sink of its own weight.

“In many ways, builders should have seen this coming. Savings and loans have fallen into bad political favor and it has been evident for some time that banking and thrift regulations would converge, meld together. We have been moving in the direction of a more disciplined lending system.”

Some builders did have the foresight, or good luck, to avoid this problem. Some have even tapped into that silver lining on the cloud hanging over the building industry.

Ira Norris, president of INCO Homes, which builds moderately priced homes in Riverside, San Bernardino and Los Angeles counties, gets all his financing from two major California banks.

“I haven’t walked into a savings and loan since 1977,” he said. “For us, banks have always made more sense. Although without this crisis I wouldn’t look nearly as smart.”

Norris finds himself in the enviable position of profiting from the regulations that have landed many of his colleagues in trouble.

He is busy putting together investment groups that want to become partners with builders unable to come up with the necessary equity to do business with their savings and loans. Norris’ investors will have a total of $20 million to $30 million to invest annually.

“It will give us additional volume, built by other builders, on land they have acquired,” he said.