April 14 (Bloomberg) -- The collapse of the subprime mortgage market may push some big U.S. homebuilders toward Chapter 11 beginning next year, according to bankruptcy advisers and lawyers who specialize in the real estate industry.
The weakest publicly held builders are staying out of bankruptcy by relying on the profits they made when sales boomed and on the public debt they sold in those years, said Ronald Greenspan, a lawyer and financial adviser to the creditors of four bankrupt subprime mortgage lenders. Homebuilders issued $3.6 billion in public debt in 2005 and 2006, though only $600 million of that comes due this year, Greenspan said.
``There is no sword over the industry's head yet,'' said Greenspan today at a conference of the American Bankruptcy Institute in Washington. ``That doesn't mean the industry is not wounded. Instead, the breaking point could come in 2008 or 2009.''
The real estate market has been powered the past few years by subprime homebuyers who typically have shaky credit histories. Now that those loans are no longer being made, demand for new homes will plunge, pushed down even further by the more than 1 million homes currently in foreclosure, Greenspan said. At least 30 home lenders halted operations or sought buyers in the past 12 months, including five that went bankrupt since last November, according to Bloomberg data.
None of the major, publicly traded homebuilders have declared bankruptcy, though there are signs many are in financial trouble, Greenspan said, declining to name specific companies. The value of shareholder's equity for some companies equals or exceeds the value of the undeveloped land the companies have under contract, he said. As the housing downturn continues, that land will fall in value.
The perceived risk of owning the bonds of some of the biggest U.S. homebuilders has increased since a wave of bankruptcies hit the mortgage industry that caters to homebuyers with poor credit histories.
Credit default swaps have more than doubled in price since Feb. 1 for the second-biggest builder by revenue, D.R. Horton, Inc.; the fourth biggest, Pulte Homes Inc.; and the biggest luxury home builder, Toll Brothers Inc.
The cost of swaps on $10 million worth of Toll Brothers debt, for example, jumped to $136,750 Friday from $58,500 on Feb. 1, according to according to CMA Datavision.
Kara Homes Inc., the New Jersey builder known for so-called McMansions, became one of the first major, closely held home builders to file for Chapter 11 protection in October. Such regional builders are likely to precede any of the big public companies into bankruptcy, Kara's bankruptcy lawyer, David L. Bruck, said today in an interview at the conference.
``You are going to see the smaller companies get bit earlier,'' Bruck said. By next year, or the year after, some of the larger companies will be forced to restructure as the housing crunch continues, he said.
``It's only a matter of time,'' Bruck said.
