TAKING STOCK

The industry is under siege: relentless margin compression and costly regulatory scrutiny have beleaguered the business for the past few years, and now credit problems add to our woes. Can anything be done to rise above already-lowered analyst estimates for 2008?

Here's where I see things stand:

• Housing issues are very regional. Some markets still enjoy housing expansion and solid markets, although slow-down has been prevalent. Absorption rates are growing, as is inventory, while the number of QUALIFIED buyers is shrinking. Industry bailout (the $100 billion credit infusion by the mega banks) and Fed help might mitigate this trend, but it is indeed felt everywhere to some degree. Some markets have been hit very hard (Michigan is a prime example), while others are holding their own (Texas). Loan demand across the board and stable credit quality still exist in many markets.
• Housing issues depend on the product. In many markets high-end custom homes are still doing well, and starter homes and languishing. Again, painting the entire industry with a broad brush does not provide an accurate picture of the situation.
• Local builders are doing better than national builders as a general statement. Not all builders are hurting, but the pain national builders are feeling, which results in 30% discounts, plasma TVs and fully furnished houses and $100K price break as lures for qualified buyers, will ultimately impact the entire market, including the smaller builders who have little market power.
• Many loans are "dead man walking". Many builders have pulled away from projects, leaving the land unimproved and staying on the sidelines. They continue to service their debt, but the real question is, how long can they pull this off? A performing loan does not indicate an untroubled loan&
• If it grows like a weed it probably IS a weed (Bill Perotti). In Bill's immortal words, if it's too good to be true, it probably is. We've seen it time and time again, but the lessons are hard to learn.

Should we just wait and take out medicine? Certainly not. Here are some thoughts:

• Use only experienced lenders. I know they are few and far in between, but finding the right lenders and testing them repeatedly on your credit philosophy is essential during these times.
• Make sure workouts don't pour good money after bad. Some lenders continue "working out" loans when the borrower is beyond salvation. Ensuring this doesn't happen is important.
• Don't become too inward focused as you work problems out and anticipate more down the pike.
• Seek opportunities. "Formula" banks are pulling away from whole sectors, thereby making the usual mistake of painting everyone with a broad brush. Opportunities exist in every sector, including home builders, even if they are under attack. Take advantage of your balance sheet and flexibility and pursue the healthy builders and other housing-related providers who can't get credit today. Of course, deciding who's healthy is the key question, but shutting down entire practices should not be a community bank limitation.
• Enjoy the somewhat expanded margins that appeared after the sub-prime scare since lenders finally realized they were not being paid for the risk they've been taking.