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Hammered homebuilders

Tighter mortgage standards slow buyers, new construction
by Ariella Cohen

Tess Monaghan, director of operations for New Orleans-based homebuilder Build Now, says many people own lots and want to rebuild but cannot find the necessary loans. (Photo by Frank Aymami)

Geraldine Frank has finally signed on the dotted line. After months of talking to bankers, brokers and insurers, the 59-year-old retired public school teacher has secured the loan she needs to make her Hurricane Katrina-damaged eastern New Orleans home livable again.

With that hurdle behind her, Frank feels like she is on top of the world. But she’s finding it a lonely place.

“With all these banks going under and everything, people are getting turned down,” Frank said. “Now everything seems OK for me, but I don’t know about the people in the house across the street or next to them or around the corner.”

The tightened loan standards imposed after the subprime mortgage crisis have made buying homes harder for people with below-average credit, even in states such as Louisiana where sub-prime loans were never widespread. And in Louisiana, where the average 663 credit score is 20 percent lower than the national average, stories of being turned down for bank loans are replacing tales of Road Home woes at the dinner table — and inside the homebuilder’s office.

“What we are hearing over and over is ‘I have a financing gap and I don’t know where to go,’” said Tess Monaghan, director of operations for New Orleans-based homebuilder Build Now.

Monaghan and her father, William Monaghan, a New York architect with New Orleans roots, established Build Now in the spring with the intention of rebuilding homes at an affordable price. There are seven Build Now models that can be built for less than $134,000, the average cost to build a home in the city pre-Katrina, excluding the foundation, porch and land costs.

Industry feeling pinch

The squeeze is being felt throughout the real estate industry.

At one Gretna real estate title company, Best Title Resource, five employees have been let go in the past half-year. More cutbacks are in the cards if banks don’t ease their lending restrictions soon.

“During good times, we would close 275 to 325 sales a month; now we are down in the 225 range,” owner Brent Laliberte said. “There are a lot of sales that aren’t getting done because the houses aren’t able to be financed at this time.”

In New Orleans, the collateral damage could be the recovery of neighborhoods such as Gentilly, the Lower 9th Ward and Desire where average incomes are low and many bought at a time when it was possible to secure a loan with a spotty credit record.

Only three clients have broken ground on Build Now homes, Tess Monaghan said. Recently, a fourth client chose a Build Now design to replace her flooded Gentilly home. She told Monaghan she could not finalize the deal, however, until she finds a way to borrow money.

“At the end of the day,” Tess Monaghan said, “there are thousands of lots that are owned by people who want to move back and cannot find the loans they need to do.”

“Until a year ago we were putting people in homes with a 550 credit score. We can’t do that anymore and some parts of the city are going to be slower to rebuild because of it,” said Mike Anderson, president of Essential Mortgage Co. and a former president of the Louisiana Mortgage Lenders Association.

In August, home sales were down in every metropolitan area parish except St. Bernard, according to the Gulf South Real Estate Information Network Inc. The largest drop in home sales occurred on the East Bank of Orleans Parish, where 144 homes changed hands over the month, a 44 percent drop from the same period a year ago when 258 homes sold.

On the West Bank of Jefferson Parish, where sales volume was the lowest in the region, only 75 contracts were signed over the course of the month, a 38 percent decline from 121 in 2007.

Buyers paid 1.2 percent less on average for homes, with the average price falling from $172,433 in 2007 to $170,345 this year.

Combo deals

The market downturn has caused homebuilders to adopt new business strategies.

When Slidell native Frank Mooney returned this summer to New Orleans from Florida to launch his building firm Zephyr Homes, he marketed his connections and experience with financial institutions and government programs.

“The programs and loans are out there for 90 percent of people,” Mooney said. “There are just more things to ask now, more variables and more possibilities.”

The city and the state have tried to respond to the need with no- or low- interest “soft second” mortgage programs. One recently- launched $27 million program will provide up to $65,000 to about 415,000 first-time homebuyers with incomes of less than 80 percent of the area median household income of $38,880. The Finance Authority of New Orleans, which is administering the three-pronged Path to Homeownership program, defines first-time homebuyer as someone “who has not owned a principal residence within the last three years or no longer owns a home because of a divorce or death of spouse.”

The easier-to-obtain mortgages are not, however, available to owners seeking to rebuild on lots they already own because of rules barring federal Department of Housing and Urban Development funds from going to the same group twice — the group in this case is recipients of Road Home grants. Loan programs aimed at New Orleanians rebuilding or with incomes higher than $38,880 are still awaiting the green light from HUD.

“Everyone agrees the rule should be waived,” said Mtumishi St. Julien, executive director of the Finance Authority of New Orleans, which is administering the program. “Unfortunately, we have been hearing that (the waiver) is imminent for quite some time.”

St. Julien said he did not know how much the soft second mortgage programs would help. Homebuilders agree.

“There have been a few things we have gotten but much, much more is needed,” said Jon Luther, executive vice president of the Home Builders Association of Greater New Orleans.