Wednesday, June 25, 2008

Legend Homes

Legend Homes filed for bankruptcy protection on June 10 in U.S. Bankruptcy Court in Oregon. Legend was a small private builder, with only 770 lots owned, and its woes will not have a major effect on the Housing situation.

However, there was an article a couple of weeks ago in Builder Magazine, that shed some detail on the causes of the filing.

One interesting fact was that Legend Homes had a positive net worth when it filed. The court papers list $258 million in assets and $198 million in liabilities. Of course the asset value may have been stale at the time of the filing. Also, Jim Chapman, the president of Legend Homes, said in the article that the company was current with all loan payments to banks. So why am I writing about this? Chapman went into detail about how Key bank, one of Legend's lenders, tried to squeeze the company to put up more collateral:

"He points specifically to Key Bank, from which Legend has borrowed $22.3 million. Chapman says that Key attempted to use an earlier margin call to coerce cross-collateralization. “They wanted to take 100 percent of the closings on homes they didn’t even have construction loans for,” says Chapman. “And their approach has been to reappraise the land, say ‘here’s the margin’ and then ‘please remit $9 million.’ They’ve been very difficult.”

I assume this same thing could happen to a major publicly traded builder as well. Could this trip housing down even further? What if thousands of lots were forced onto the market suddenly? Just something to think about.

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