Bank Workout - Maximizing the Value of Residential Collateral

Mark Twain said "A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain." While the statement is humorous and may be close to what many home builders and developers think of their bankers the truth is that if the bank asks for their "umbrella" back today they are likely to get back a lot less than they hoped.

2007 will be remembered by all in the housing industry as the year of the correction. It is not the "Bubble" that the headlines want to proclaim. The Bubble did not burst and leave worthless residential real estate. The correction did reduce the value of what some would say was over valued land and houses.

Builders and developers just a few years ago were worried about finding enough land to meet the demands of the market. They struggled to keep a responsible eighteen months supply of lots out in front of them. The prices soared because no matter how high the price went the market absorbed it.

When the market slowed suddenly, the eighteen months supply became five years or even a decade of supply and the interest became an overwhelming burden. This oversupply of vacant lots and development land, even more than the completed but unsold housing stock, may continue to plague builders and developers for some time.

It is said that "time heals all wounds." Whoever said that was not paying interest. There is no magic solution to all the problems but there are ways to minimize the damage to individual projects.

So what can the lenders to the housing industry, who have become partners in the very real sense of the word, do to preserve their assets and help their customers of today and the future?

Banks must be willing to look at their residential portfolio and attempt to identify companies in trouble. Nearly every builder, particularly those with finished homes or lot inventories are experiencing some degree of stress. The bank must be able to offer management support to those customers whose business model and projects can be adjusted to the changed market. This may include an analysis of the builder's construction process and management controls. It might also include an analysis and revision of the business model either company wide or on a project basis. It is important that this work be done by seasoned construction management professional including accountants and not just accountants.

If the bank must take over a project either through bankruptcy procedures or by voluntary surrender of the assets the banks must be in a position to immediately physically preserve as much of the asset as possible. They must have resources in place to look at the project and identify emergency items that must be performed to keep the asset from be destroyed or devalued. For example they need to be able to look at the work-in- process, the physical work not the numbers in the balance sheet, and be able to identify things that need to be done to prevent deterioration: lock up, weatherize, maintenance, etc. If a house is thirty percent complete and the roof is not installed quickly the house may deteriorate where it is worth less than zero. Not only is the asset no longer usable but it needs to be torn down and removed.

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