New Thrift Industry Rules Present Problems for Real Estate Developers

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By Iver Peterson For more than 20 years, the Cardinal Federal Savings and Loan bank in Owensboro, Ky., financed the land acquisition and construction costs of Tommy Thompson's house-building business, and Thompson hardly expected that relationship to change when he recently took an option on another piece of developable land.

But despite Thompson's two decades of credit worthiness, Cardinal turned him down, citing new federal rules governing the country's problem-plagued thrift industry.

The rules, enacted last August as the Financial Institutions Reform, Recovery and Enforcement Act - FIRREA, as it has come to be known - are intended to avoid another savings and loan crisis by curtailing the share of its assets that a savings association may lend to a single borrower.

Under the regulations, real estate development loans, the source of most of the problems that troubled thrifts have gotten into around the country, have been assigned the highest risk factor, compared to other loans like home mortgages and Treasury notes.

That means these lenders must now have more capital in reserve for such real estate acquisition, development and construction loans - ADC loans, for short - than the safer forms of debt.

Many developers believe that, as a result, many of the thrifts will simply refuse to make the loans for them to acquire land and build housing.

``It seems to me that unless you have a long-term relationship with a bank, they're really not interested in any new business,'' said Josh Weiner, the head of Weiner Homes Corp. of Neptune, N.J., a medium-sized developer. ``The banks have become more and more conservative and more and more frightened about what the regulators are going to do.''

Barbara Alexander, managing director of the Construction and Building Products Group for Salomon Brothers, the investment bankers, said that the country could lose 100,000 new housing starts a year for the next five years because of the credit crunch the new regulations are creating for residential builders.

She echoed the view of housing industry officials that Federal limits on the amounts that may be lent to a single builder will drive housing prices up, either by raising the builders' costs or reducing the supply of new housing.

The value of all acquisition, development and construction loans from the major housing construction lenders ``likely will slide by 10 to 15 percent in 1990, and then fal considerably more in 1991,'' Alexander told the National Association of Home Builders in January.

``In addition, with few incentives - and a plethora of disincentives - for such lending, the likelihood of a quick revival by such lenders is remote.''

The thrift institutions also lament the crimp the new federal rules put on their ability to lend to developers. But secretly, some analysts say, they may be pleased to have a valid reason for turning down their old customers in a sluggish and - in many regions - an overbuilt market.

Home buyers feel the pinch, too, when builders whose credit has been stopped by a lender are unable to complete all the planned phases and amenities in a housing development.

In some New Jersey projects where early buyers have invested their money and moved in, roads have been left unpaved, sewage hookups have not been made and half-built houses have been left abandoned.

Thompson, the Kentucky builder, has not just thrown in the towel. He has begun talking with a commercial bank, which will lend him less and charge him more than he used to pay at Cardinal Federal. A result, the builder said, will be a smaller project with fewer houses.

``Not only was it frustrating to have to find another source of acquisition and development loans,'' Thompson said, ``but we couldn't hire the people we were planning to employ, and in the meantime, another developer came in and started a project that will compete with ours. …