Workouts for private builders could take another 2-3 years

We recently hosted a conference featuring David McCain of MPKA, which is a consulting firm that provides financing and debt restructuring advice to homebuilders. Private builders may still require another 2-3 years to fully work through legacy real estate transactions that usually carried full recourse for the borrower. This recourse element has complicated restructurings as most private builders have personal asset holdings that are real estate centric and therefore do not carry the liquidity necessary to quickly address non-performing loans. Many small banks are still not aggressively pursuing loan restructurings given limited capital reserves that could be further strained by recognizing a writedown on a failed loan. Home prices have declined 31% since the peak, which implies that land prices are down more than that given relative stability in the value of construction materials. At this stage of the cycle, modifying existing loan terms is less common while foreclosure and liquidation are becoming more prevalent, which implies continued opportunities for public builders to acquire attractively priced land for at least the next two years. We estimate that ~40% of deliveries for the industry this year will come from newly purchased land (since the beginning of 2009), which carries a gross margin benefit of at least 200bp over legacy lots.