Rug? What rug?
Ever stepped on a throw rug and gone flying?
Or had a rug pulled out from under you?
The former is your own inattentiveness, the latter is malice aforethought.
Sign here …
Which then is the proper metaphor for what happened to Dave Brown of
New York Times tell it, the rug was pulled:
Banks Foreclose on Builders With Perfect Records
As we’ll discover, this headline is wrong … but let’s save that for the Times’s unintentional-comedy correction.
So he was confounded a few months back when one of his banks, spooked by the decline in his company’s revenue, suddenly demanded millions of dollars in additional collateral to continue carrying loans on his projects.
From the New York Times:
Dave Brown, a builder in
How dare they?
He was unable to come up with the money, and in October, JPMorgan Chase foreclosed on five of his developments.
That last statement will be shown to be false.
Shortly thereafter, Brown Family Communities, 33 years in the business, decided to shut its doors.
And that one too …
“They treated me like a deadbeat who missed his car payment,” said an embittered Mr. Brown, 76. “They wanted their money now.”
Actually, they were entitled to their money ‘now,’ for although the Times buries the lede, they do fee up late in the story:
Many loans in the building industry are of short duration, coming up for renewal at least once a year.
It’s called a ‘bullet loan,’ and aside from being shot term, it’s also recourse to the borrower.
In finance, if the borrower makes interest payments, and then the whole sum becomes due and payable at once (a balloon), it’s called a bullet loan.
If you have a bullet, you better be able to handle the balloon
When I describe such a loan to neophytes, I bring my finger up to my temple, to show where a bullet points.
Now the thing you have to understand, finance Neo, is how to dodge the bullet.
Mr. Brown, in other hands, leaped into the financial void, hoping and expecting to be caught by another lender willing to make the same loan—or by his current lender extending his maturity. That’s understandable … but when the bank declines to renew, that’s not a screw job.
Not quite
This allows banks to take a fresh look at the financial health of a borrower, as well as the assets securing their debt. A steep fall in cash flow or a decline in the value of the collateral — usually building lots or half-built houses — can mean an automatic default, whether a borrower has missed payments or not.
Significantly, and unstated in the Times article, ‘default’ does not mean automatic foreclosure. Rather, it means the lender activates certain latent rights, one of which is foreclosure; that gives the lender leverage to ask for more collateral, which in this case Mr. Brown was presumably unable to supply.
It was a combination of these factors that put an end to Mr. Brown’s home-building company, Brown Family Communities.
Not false but not the whole truth either
“You can’t handle printing the whole truth!”
In 2005 and 2006, with loans from JPMorgan Chase and the big finance company GMAC, Brown Family Communities bought hundreds of acres of land on the far outskirts of
Flinging himself into the void!
– in towns like Goodyear and Buckeye, where development was rapidly transforming cotton and alfalfa fields into malls and upscale subdivisions.
Google thinks Goodyear is 22 miles west of
The company was emerging from a record year in 2005, selling an average of 85 homes a month and booking revenues of $352 million.
In other words, Mr. Brown was perfectly willing to make a huge bet on continued growth.
In early 2008, GMAC, citing the depreciating worth of assets the company had used as collateral, shut off construction loans for two subdivisions under development. Though Brown Family Communities had yet to miss a payment, renegotiating the debt proved impossible, and GMAC — struggling with huge problems of its own because of the global credit crisis — foreclosed on the neighborhoods.
“They were in chaos,” Mr. Brown said of GMAC. “We couldn’t even get them on the phone.”
Implicit in Mr. Brown’s formulation is that he hoped to persuade GMAC not to foreclose, not that he was calling to make the payment.
In late July, JPMorgan Chase followed suit, freezing construction loans on five subdivisions it had financed.
Ergo, there must have been defaults.
In one otherwise finished subdivision, a half-dozen of Mr. Brown’s partially built homes stand amid weeds, their wooden frames slowly bleaching in the desert sun. In another, chain-link fences surround houses that appear only days from completion.
I’m sympathetic, but nobody made Mr. Brown take the money.
They made me take the money
Buyers were lined up for several of the homes before the bank halted construction, Mr. Brown said. But they are long gone.
“Now you talk about good business sense — the bank wouldn’t allow us to finish them,” he said. “Did the bank get millions less than if they had handled it differently? Yes.”
Entirely possible. Unfortunately, it’s neither illegal nor a contractual breach for the lender to be stupid.
Meantime, new construction has collapsed, sending workers in search of employment. Brown Family Communities had a full-time staff of 160 at its peak, not including the thousands of subcontractors at work on hundreds of home sites. Now, only a handful of employees are left.
Mr. Brown found it excruciating to fire the people who had helped him build his business.
To be more precise, he laid them off. Firing is what you do when an employee isn’t performing.
Yes, they do
“They’d come in and say goodbye and we’d have a good cry and then they’d go on their way,” Mr. Brown said. “There’s nothing out there for them. The real estate market’s gone.”
When I first saw this story, I thought, It’s only pulling the rug out if it were there in the first place. This is like sitting back to the chair you thought would be there, but isn’t.
When I went back to check it, the Times had added this excuse-me correction:
Correction: January 29, 2009 An earlier version of this article misstated the actions that JPMorgan Chase took against Brown Family Communities, a borrower in
What most people envision when they think ‘court receiver’
There goes the story’s headline.
Appointing a receiver doesn’t take the asset from the borrower – rather, the receiver simply gains financial and operational control over the asset. Those buyers whom Mr. Brown says he had lined up? They could have bought from the receiver.
The article also may have left an incorrect impression that Brown Family Communities went out of business after the bank took control of the properties.
Yes, I think that when you write, “He was unable to come up with the money, and in October, JPMorgan Chase foreclosed on five of his developments. Shortly thereafter, Brown Family Communities, 33 years in the business, decided to shut its doors,” you ‘may have left that impression.’
Second plank gone.
The builder had announced its intention to go out of business before the bank acted, blaming its financial straits on earlier steps taken by JPMorgan Chase and other banks.
We’re throwing in the towel, have mercy
Summing up: the Times wrote a story headlined Banks Foreclose on Builders With Perfect Records, except that:
The bank cited didn’t foreclose – it appointed a receiver.
The builder didn’t have a perfect record – it was in default.
The builder wasn’t put under by the bank – it had decided to dissolve before the bank acted.
Under those circumstances, if you were the bank, and your money were hostage to unfinished houses being completed by a builder who’s just announced they’re throwing in the towel, would you sit still?
From the New York Times:
An unfinished house is the result of abruptly withdrawn bank financing in a development near
Whose failure prevented its finishing? The bank’s or the builder’s?
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