Banks Re-Establish Credit Lines with Home Builders

By Allison Bisbey

SEP 17, 2012 10:29am ET

Home builders are buying up more land in anticipation of a stronger housing market, leading them to take on more debt.

While the biggest builders are obtaining most of their financing from the public debt and equity markets, where enthusiasm about a housing market recovery is running high, they are also re-establishing revolving lines of credit with banks, in many cases for the first time in several years.

On Sept. 7, D.R. Horton said it had entered into a five-year, $125 million senior unsecured revolving credit facility with Royal Bank of Scotland. Initially, RBS is providing the entire commitment, but the facility has an uncommitted $375 million accordion feature that could increase it to $500 million, subject to the availability of additional bank commitments, among other conditions. The bank had terminated its previous facility in 2009.

D.R. Horton is rated BB- by Standard & Poor’s, Ba2 by Moody’s Investors Service and BB by Fitch Ratings.

“We are excited about the profitable growth opportunities we are seeing across our home building markets, and we believe this is an opportune time to add a revolving credit facility to our capital structure,” Donald R. Horton, the company’s chairman, said in a press release.

In July, Beazer Homes negotiated a commitment letter with four financial institutions for a $150 million secured revolving credit agreement, replacing a much smaller, $22 million facility. Beazer is rated B- by S&P, Caa2 by Moody’s and B- by Fitch.

And Lennar entered a new, unsecured revolving credit facility, effective May 2, 2012. The $410 million facility, which matures May 2, 2015, has an accordion feature under which it can increase to a maximum of $525 million, subject to certain conditions and the availability of additional bank commitments.

Lennar is rated B+ by S&P, B1 by Moody’s and BB+ by Fitch.

Builders are going to need the financial flexibility, especially if they accelerate their spending on land and development. Fitch anticipates that such spending will rise moderately to sharply this year versus 2011, meaning most builders will burn more cash than they generate from home sales. As a result the ratings agency expects at least a few more public builders will re-establish revolvers.

A majority of the public builders that Fitch tracks negotiated amendments to revolving credit agreements late in 2007, 2008, and 2009, and many builders then terminated their facilities during the past two and a half years.

At the time, many builders didn’t need revolvers because they were generating more cash than they were spending on new land and didn’t want to pay the fees for facilities they weren’t using. For example, D.R. Horton has used internally generated funds to repay more than $4 billion in debt since the downturn, according to Moody’s. However, the ratings agency expects the home builder’s cash flow to be negative this year as it replenishes and adds to its land position.

Another possible motivation for terminating revolvers, according to Robert Rulla, a director at Fitch, is that home builders wanted to avoid covenant restrictions associated with revolvers. Many ran afoul of these covenants during the downturn when they took writedowns on options to buy land.

In some cases, builders substituted much smaller lines that were solely in place to back letters of credit, which builders need in any kind of operating environment to issue performance bonds or satisfy option deposits. (Performance bonds are guarantees provided to a community that funds will be available for the roads, utilities and other infrastructure needed to support new homes.) Such letters of credit lines were generally collateralized with cash, while many large public builders are obtaining revolvers that are unsecured.

The biggest builders also have access to public debt and equity markets, where enthusiasm for a housing recovery is running high. On Sept. 11, D.R. Horton priced $350 million of 4.375% senior unsecured notes due in 2022, its second offering this year. On Sept. 5, Toll Brothers priced a private offering of $250 million aggregate principal amount of 0.50% exchangeable senior notes due 2032. Toll Brothers is rated BB+ by S&P, Ba1 by Moody’s and BBB- by Fitch.

And in July, Beazer completed public offerings of its common stock, tangible equity units and a private placement of $300 million of 6.625% senior secured notes, netting $466 million, according to Fitch. (It also called for redemption of all of its $250 million 12% senior secured notes due 2017 and repaid $20 million under its outstanding cash-secured term loan.)

Both stock and bond markets have responded positively to upbeat readings on real estate. On Aug. 23 the Federal Housing Finance Agency reported the biggest quarterly jump in housing prices in more than six years, going back to the fourth quarter of 2005. It said U.S. house prices rose by 1.8% on a seasonally adjusted basis in the second quarter of 2012 compared with the first quarter and by 3.0% compared with the same quarter last year.

Confirming the trend, on Aug. 28 the S&P/Case-Shiller Home Price Index showed that the national composite was up 1.2% in the second quarter of 2012 over a year earlier and up 6.9% over the previous quarter. In a separate report on Aug. 23, the Department of Commerce said seasonally adjusted single-family new home sales for July were 372,000, a 3.6% increase over June and a 25.3% increase over July 2011.

Home builders are reaping the benefit; in a report published last week, Moody’s said three market-implied ratings it tracks have progressed significantly for the average home builder compared with the same time last year. Compared with the B1 level of a year ago, the average CDS-implied rating for a peer group of U.S. home builders is now two notches higher at Ba2.

The five-year median CDS spread for this peer group plunged from around 598 bps in September 2011 to 339 bps at present, or 43%, and the CDS-spread for every company in the peer group fell. By contrast the average CDS-spreads for U.S. financials, U.S. industrials, and the median B1-rated companies remained mostly flat.

Standard Pacific performed the best in the CDS market last year, its CDS-implied rating improving by four notches, from B3 to Ba2. The other nine companies’ CDS-implied ratings rose between one and three notches.

Smaller, typically private home builders don’t have it so good. Fitch expects they will be restrained in their construction activity by their banks’ subdued lending, as was the case in 2009 and 2010. “Much of what a private builder tends to build is what we call speculative homes, construction begun before an order is taken,” said Bob Curran, a managing director at Fitch. “By its nature, it’s somewhat risky.”

Housing reform AWOL on the trail

By Ken Harney

09/14/2012

WASHINGTON – Call it the political elephant in the room: 1.2 million families across the country are now at some stage of foreclosure, 3.8 million homeowners have been foreclosed upon since September 2008, 11.4 million are underwater on their mortgages, $6.5 trillion in home equity has been lost by owners since 2005, home building and sales are intimately linked with job creation, yet the subject of housing policy was virtually a no-show in either the Democratic or Republican conventions or in the party platforms.

Given the huge impacts that the housing and mortgage crashes have had on millions of voters and workers, you would think housing would have been high on both parties’ priority lists. They’d say: OK, here’s how we’re going turn this crucially important situation around – getting builders building again to pre-boom historical levels, helping out the good folks who paid their loans on time even when underwater, plus making sure banks make loans available to credit-worthy buyers who want a mortgage rather than penalizing them for the banks’ own past mistakes.

But Mitt Romney didn’t mention housing policy at all in his speech to the Tampa convention. President Obama barely touched it, saying that “I’ve shared the pain of families who’ve lost their homes.” The Republican platform panned the Obama administration’s response to the housing crisis as having “done little to improve, and much to worsen, the situation.” The GOP solution: privatize pretty much the whole mortgage finance system, kill Fannie Mae and Freddie Mac – which currently fund about two-thirds of all new home lending – and cut the role of the Federal Housing Administration, which is the primary source of mortgage financing for first-time and minority purchasers who have moderate incomes but less than 20 percent down-payment cash.

The Democratic platform claimed credit for assisting 5 million struggling homeowners “restructure their loans to help them stay in their homes” – a total far beyond most analysts’ estimates for the Home Affordable Modification Program and related federal efforts. The left-leaning Firedoglake blog called the 5 million claim “dishonest nonsense on housing,” and added that the platform’s numbers failed to account for “the (mortgage) modifications that went into redefault or the trial modifications that were canceled and squeezed the borrower by demanding the difference between the original payment and the trial modification immediately.” Last month, an independent research study by federal and academic economists reported that rather than the 3 million to 4 million families originally projected by the White House to be assisted with modifications by HAMP, the actual number will be barely one-third that target.

The Democratic “platform plank on this issue is so disingenuous,” wrote David Dayen on Firedoglake, that “it makes Paul Ryan’s convention speech look scrupulously honest.” In The Nation, another publication on the political left, commentator George Zornick ridiculed the Democratic platform’s boasting of a “crackdown” on the fraudulent lenders who helped create the subprime crisis, noting that “no high-ranking Wall Street officials or firms have been held responsible for the subprime catastrophe” that they facilitated by buying and securitizing poorly underwritten, toxic mortgages.

The Republican platform, meanwhile, blamed the whole subprime mess and housing collapse on Fannie Mae and Freddie Mac, even though private investment banks such as Lehman Brothers and Bear Stearns played far larger roles in the securitization money machine that fueled the subprime mania. The roles of Wall Street and the big banks get no direct criticism by the Republicans, even though the private secondary market they control would be the foundation for any new system of mortgage finance under a Romney administration.

Even on a subject that has broad popular support among voters – continuing tax benefits for homeownership, particularly the mortgage-interest deduction – the parties waffled. The Democratic platform avoids the issue entirely; Obama has proposed reducing the mortgage write-off for owners with incomes above $250,000. The Republican platform drafters initially rejected any pledge of support but later relented with language agreeing to continue the deduction if Congress fails to enact comprehensive tax reforms.

So why has housing, which traditionally leads the economy out of recessions, suddenly become a political orphan this election? Could it be that both parties feel vulnerable about any serious discussion of their own roles in the crash – regulators blind to widespread irresponsible lending during the Bush years – and the painfully inadequate response to the foreclosure explosion during Obama’s? Or the possibility that neither side has politically viable solutions for fixing the system?

Try both.

Regulatory Bill Sparks Alarm Among Reform Advocates

By Kevin Wack

SEP 12, 2012 4:38pm ET

WASHINGTON – Supporters of financial reform, caught off balance by an end-of-the-year push in the Senate to subject a wide range of new regulations to greater scrutiny, are reacting frantically to what they see as a threat to undermine the Dodd-Frank Act.

The source of their anxiety is legislation introduced early last month by Sen. Rob Portman, R-Ohio. The bill has a chance to move quickly to a vote on the Senate floor, although that possibility became more remote Wednesday when a potential committee vote on the measure was delayed until Nov. 15.

The legislation has the support of Democratic Sen. Mark Warner, and its opponents fear that other Senate Democrats will join him.

“The bill has really been one of these D.C., under-the-radar-screen efforts to really gut some stuff that if it was brought to the surface would never pass muster,” said one Democratic Senate aide who expressed alarm. “People are not paying attention. It’s going to catch people off guard.”

The bill would require independent federal agencies – including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Securities and Exchange Commission and the Commodity Futures Trading Commission – to conduct more rigorous analyses of the regulations they propose.

The Federal Reserve Board would get an exemption from the bill’s requirements for its monetary policy duties, but there is some confusion on Capitol Hill about how far the central bank’s exemption would extend.

Agencies contacted for this article declined to comment on the record. But the FDIC, the Fed, the CFPB and the SEC have all expressed concerns to lawmakers about the legislation, according to a Senate source.

Spokespeople for Portman, Warner and Republican Sen. Susan Collins, another co-sponsor of the legislation, did not return calls seeking comment. But industry supporters of the bill argue that their foes are exaggerating its potential impact.

While the measure would require independent agencies to compare the costs and benefits of a proposed regulation, and then to submit that analysis to the executive branch for review, nothing would stop the agencies from moving forward with a regulation even if the executive branch found the analysis lacking, the legislation’s supporters say.

“We think that as we try to implement the regulations, the cost-benefit analysis is a crucial piece of the overall analysis,” said Scott Talbott, senior vice president of public policy at the Financial Services Roundtable, which supports the bill. “The goal here is to implement the new policies under Dodd-Frank, but we have to be careful not to undermine the economic recovery.”

James Ballentine, executive vice president of congressional relations at the American Bankers Association, said his organization welcomes any effort that would allow a full analysis of the new regulations the banking industry is facing.

“And to the extent that this bill or any other bill would allow a fair analysis of, or review of these regulations, we would certainly appreciate it,” he said.

Portman, the first-term Ohio senator who is sponsoring the legislation, was director of the White House Office of Management and Budget during President George W. Bush’s administration. His bill would give new authority to the Office of Information and Regulatory Affairs, which is located inside OMB.

Portman was reportedly a candidate to be Republican presidential candidate Mitt Romney’s running mate, and his proposal bears some similarities to what Romney has promised to do in the regulatory sphere if he’s elected.

The legislation would allow the president to require independent agencies to take up to 13 additional steps before issuing a new rule. Among those potential requirements is a cost-benefit analysis, which is already required of executive branch agencies such as the Environmental Protection Agency.

Later on, regulatory officials at the White House would issue a written determination of whether the independent agencies had fully complied with the required analysis.

A negative assessment would not technically tie the agency’s hands. But financial reform advocates argue that, practically speaking, poor marks would prevent agencies from moving forward with new regulations, because the administration’s ruling would be powerful ammunition in industry lawsuits against the new regulations.

“The litigation that’s going to be created from this act is almost unbelievable,” said Dennis Kelleher, president of Better Markets, a non-profit group that advocates for financial reform. “Now if you’re the industry, that’s great.”

“They’re called independent agencies because they’re independent of the executive branch. What this bill would do is actually subordinate them to the executive branch,” Kelleher added. “This really is a historic, breathtaking reversal of the way government has protected people in this country for the last 80 years.”

The bill, which has not been the subject of a Senate hearing, is currently under consideration by the Homeland Security and Governmental Affairs Committee, chaired by Connecticut Sen. Joseph Lieberman, an independent who caucuses with the Democrats.

The committee was considering holding a vote on the measure in September, but it informed members Wednesday that its meeting will be delayed until after the elections, and that no decision has been made on whether the bill will be among those considered at that time.

Delaying the vote until after Election Day could make it easier for vulnerable Democrats such as Sens. Jon Tester and Claire McCaskill, both of whom are members of the committee, to vote no.

There is still a possibility that the legislation could be attached to another bill during the lame-duck congressional session that will follow the Nov. 6 elections. At that stage, it would need the support of at least 13 Democrats to reach the Senate’s routine 60-vote hurdle.

An important player in the Senate deliberations will be Warner, the Virginia Democrat whose support for the bill has increased its chances of becoming law. He has long been interested in subjecting the costs of new regulations to greater scrutiny, proposing in 2010 that each new regulation be met with the repeal of an existing one.

The Obama administration has not weighed in publicly on the bill, though last year it threatened a veto of a related House measure that had some Democratic support.

In the Senate, opposition to the legislation may also emerge from committees that would see their authority over independent agencies diminished. Agencies such as the Nuclear Regulatory Commission and the Consumer Product Safety Commission would be affected by the bill, in addition to the financial regulators.

Senate Banking Committee Chairman Tim Johnson, D-S.D., expressed apprehension about the legislation’s potential impact on Dodd-Frank.

“Chairman Johnson doesn’t want cost-benefit analysis to be a means to watering down Wall Street Reform,” said Sean Oblack, a Johnson spokesman.

If selling short, expect a hit

By KENNETH R. HARNEY

Sep 7, 2012

With generous new guidelines from Fannie Mae and Freddie Mac likely to stimulate large numbers of short sales by underwater homeowners, what impacts can these sellers expect to see on their credit scores?

It’s a crucial question because short sales typically cause FICO scores to plummet, sometimes by 150 points or more. This, in turn, complicates sellers’ credit capabilities for years and makes additional borrowings – whether for auto loans, credit cards or new mortgages – tougher and more expensive.

The issue arises now because Fannie Mae and Freddie Mac – the dominant sources of home loan funds – recently outlined plans to approve short sales for underwater borrowers who are current on their loan payments, provided they face an imminent “hardship.” Though the numbers of participants in the plan won’t be known for months, the two companies combined have approximately 3.7 million underwater mortgages in their portfolios on which borrowers are making their payments on time, according to federal regulators.

Short sales traditionally have been associated with extended periods of delinquency by borrowers. The technique itself – where the lender agrees to accept less than what’s owed and the property is sold – usually has been employed as an alternative to foreclosure.

As a result, FICO credit scores – the major risk predictive tool used in the mortgage industry – have severely penalized borrowers who opt for short sales. VantageScore, the FICO rival created by the three national credit bureaus, also hits short sellers with triple-digit point losses.

In a recent blog post, Frederic Huynh, FICO’s senior scientist, said statistical reviews of short sellers by the company concluded that they “represent a high degree of risk” to lenders. More than 55 percent of short sellers in a sample of borrowers between 2007-09 went on to later default on other credit accounts after completing the sale transaction. This ranks them in “the same heavyweight (risk) class” as people who’ve been foreclosed upon, filed for bankruptcy, had a tax lien or collection account.

But hold on. Won’t underwater homeowners who qualify for the upcoming short sale program be fundamentally different? Won’t they have solid mortgage payment histories despite being underwater? Why should they have to take the same heavy hits to their scores earned by people who didn’t pay their mortgage for months on end?

Good questions, but it appears that these sellers won’t get the break they deserve. The current scoring system, credit experts say, isn’t set up to recognize – or properly report – short sales by on-time mortgage customers to the national credit bureaus. And the credit score companies aren’t currently planning to make any changes to the penalties their models assign to people who participate in short sales.

Anthony Sprauve, a spokesman for Fair Isaac Corp., developer of the FICO score, says that “in general,” when a “loan (is) paid off for less than the full balance,” it is “classified as a severe negative item” by the FICO scoring model. And “there are currently no plans to change,” Sprauve added.

Sarah Davies, senior vice president for research and analytics for VantageScore Solutions LLC, said in an interview that her company won’t likely modify its scoring algorithms either, despite the fact that the seller was not delinquent and came to a mutually satisfactory resolution with the lender.

Terry Clemans, executive director of the National Credit Reporting Association, an industry trade group, says this is all inherently “unfair” for borrowers who’ve continued to make timely payments on their loans. Crushing them with deep credit score penalties “doesn’t reflect the fact that these people are actually excellent credit risks. They simply encountered an extraordinary situation” – namely, the national home value bust – which put them underwater.

A Fannie Mae spokesman, Andrew Wilson, said his company has no control over how short sales – whether of people who paid on time or those who didn’t – are scored. However, when borrowers do a short sale rather than force the lender to foreclose, Fannie rewards them: They are potentially eligible for a new mortgage again within two years after a short sale. People who go to foreclosure, by contrast, may not be able to get a new Fannie loan for up to seven years.

Bottom line: At the moment, if you’re underwater and plan to use the new Fannie-Freddie short sale program later this year, don’t bank on any special favors when it comes to your credit score. It looks like you’re going to have to take a big hit, despite all your on-time payments.

Putting more short sales in play

By KENNETH R. HARNEY Aug 31, 2012

If you’re underwater and facing financial distress, what might Fannie Mae’s and Freddie Mac’s new short sale reform policies mean for you? Potentially a lot – even if you are current on your mortgage payments and never imagined that a short sale and principal reduction could be in the cards.

Here’s what’s involved. Starting Nov. 1, owners whose loans have been purchased or guaranteed by Fannie or Freddie may qualify for a short sale if they fit key hardship criteria including: unemployment; divorce; long-term disability; a change of employment that is more than 50 miles from the current home; a business failure; death of the primary or secondary wage earner; or a natural or man-made disaster.

Short sales allow borrowers and lenders to avoid the crushing costs of foreclosure by bringing in a new purchaser for the house at what is normally a price well below the amount owed to the lender. In a successful sale, the distressed owner receives a write-down of the portion of the principal not covered by the new buyer’s price.

In what could be a far-reaching change, Fannie and Freddie will allow borrowers who are current on their mortgage payments – not seriously delinquent as traditionally required – to qualify for short sales, provided they fit the “hardship” criteria. Borrowers who are considered “most in need,” that is, they are far behind on payments, have depressed credit scores and are facing financial stress, will be eligible for streamlined processing of short sales, involving reduced documentation and much speedier resolutions than usual.

Under rules that took effect in June, loan servicers already are required to operate on fast timelines for short sale requests. They are supposed to respond to borrower requests for short sales within 30 days of receipt of an offer by a purchaser, and must give applicants a final decision within 60 days of receipt of a completed short sale package.

In the past, short sales often have been drawn out and contentious, sometimes taking nine months or more to close. They have also had a high rate of failure and cancellations, when buyers get frustrated and bail out of the transaction after waiting for banks and loan servicers to make decisions and process paperwork. Banks that hold second mortgages or credit lines secured by the house have been another choke point. As lien holders, they can block the entire transaction if they feel they are not being properly compensated along with the first mortgage holder, and have frequently blown up deals with their demands. Under the new Fannie-Freddie rules, second lien holders will be entitled to a maximum of $6,000 out of the proceeds of the sale.

The broadening of short sales to those who are current on their mortgage payments but encountering serious hardships could help huge numbers of underwater homeowners. Though the Federal Housing Finance Agency has no estimates of how many borrowers might be assisted by the change, its acting director, Edward J. DeMarco, has said that 4.63 million loans in Fannie’s and Freddie’s combined portfolios are underwater, and that approximately four-fifths of these are current on payments.

To Alexis Eldorrado, managing broker of Eldorrado Chicago Real Estate LLC, a firm that specializes in short sales, opening up the market to people who have continued to make on-time payments despite having negative equity “is a very big deal.” Elizabeth Weintraub, a short sale expert and author based in Sacramento, Calif., said she “was blown away” by the revised policies. She added that the new rules won’t solve all the problems, however. For example, banks owed large sums on second mortgages may not be satisfied with the $6,000 maximum payoff to release their liens, even though they know that in a foreclosure their second liens likely would be worthless – the first lien holder must be paid first.

Among other key changes in Fannie and Freddie short sales:

- Members of the armed forces who receive permanent change-of-status orders and are underwater will be automatically eligible for short sales, even if they are current on their loan payments.

- In states where Fannie and Freddie have the legal right to pursue “deficiencies” when short sale proceeds do not pay off the existing debt, they will waive that right and instead ask borrowers who have sufficient assets or income to make “cash contributions” or execute promissory notes to cover part of the shortfall.

To find out whether your loan is owned by Fannie or Freddie, visit either FannieMae.com/loanlookup or FreddieMac.com/corporate.