Why Banks Still Love Homebuilders

The housing market, blissfully unaffected by the economic slowdown, continues to be blessed by Federal Reserve interest rate cuts. First, the banks that lend to homebuilders are opening their pocketbooks wider than ever. And low mortgage rates are attracting new buyers to the market, who would not have considered buying a home six months ago.

The banks are willing to take on new business because the Fed has moved to widen their profit margins. Banks borrow short-term funds and lend long. Because the Fed has dramatically cut short-term rates, while long-term rates have remained comparatively stable, banks are trying to push out as many mortgage and construction loans as they can. One measure of how generous the banks have become: the Federal Deposit Insurance Corp.'s May 9 survey of 1,800 banks' lending practices. The number of banks that often make risky construction loans increased 12% in the six months ended Mar. 31, to nearly one-third of all banks, says the survey. The loans are risky because they're made to finance homes that are built before finding a buyer, or are made for 100% of a property's value.

Banks haven't slowed a tic since the end of March. "There's been no letup," says Josef Poncik, co-owner of Poncik Construction Inc., a Richmond (Tex.) builder. In fact, Poncik says he's got more capital to work with. "We've started a few more houses than normal."

Are banks getting ahead of themselves by making more risky loans? Some bankers, including Richard Roberto, president for community development at European American Bank, think some lenders are being too aggressive. But with the spread between long- and short-term rates widening after each Fed cut, the banks can afford to take on more risk. And if the Fed policy turns around the economy, the banks really will be golden.

By Heather Timmons in New York

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE