When gauging the overall health of the housing market, much of the focus tends to be on the number of homes sold in a particular month or quarter and the prices buyers paid.
Equally important to the industry, however, is access to capital, something that has been in short supply since the housing market crashed. While most community banks remain skittish about making construction loans to homebuilders, there are signs that may be changing.
This week Raleigh-based VantageSouth, the community bank that now includes what used to be Crescent State Bank, launched a Builder Finance Division that will target small- and midsized homebuilders in the Carolinas and Virginia.
The new division is made up of veterans from RBC Bank’s Builder Finance unit, which PNC decided to wind down after it acquired RBC in March. VantageSouth is led by former top executives of RBC, so the decision to get back into a business they know well isn’t surprising.
But the move wouldn’t occur if executives didn’t think the market was improving.
“It’s a sign that you’ve got some return to normalcy,” said Tony Plath, a finance professor at UNC Charlotte. “The healthy conditions of maybe 2005 and 2006 are never going to appear again. At the same time, there’s a return to healthy, normal good business in that market. Housing is improving in a substantive way, or at least enough that the little banks, some of them, are wiling to step back into the market.”
Steve Jones, VantageSouth’s president and formerly RBC’s market president for the Carolinas and Virginia, said the plan is to lend anywhere from $40 million to $70 million over the division’s first year of operation. Builders will need to have a strong balance sheet and management track record, and to prove that they have successfully weathered the last few years.
“We’re not going to be open up for every builder that’s out there today still,” Jones said. “But we are going to deploy capital in the markets and with the builders that we feel make sense.”
RBC’s Builder Finance unit became a major drag on that bank’s finances, but Jones notes that VantageSouth will have a smaller footprint. While RBC made loans to homebuilders in 17 states, VantageSouth will operate in just three that saw double-digital increases in residential building permits last year.
“When you look down at RBC most of those problems weren’t in North Carolina, South Carolina and Virginia,” Jones said. “ I think what we’ve done is carved out the best of what we had at RBC/Centura.”
Plath said most community banks aren’t in a position to make such loans because they still have too much real estate on their books. Over the past 12 to 18 months, he said, some large, well-capitalized banks, such as Wells Fargo, that historically haven’t been active in builder financing have been getting into the business.
Low risk, better returns
While the improving housing market is a factor, so is the fact that in a low interest rate environment, banks are finding it increasingly difficult to make money on loans to commercial and industrial businesses.
“The margins are so small and the competition is just so extreme for the few borrowers that are out there because all the banks want to book those kinds of loans,” Plath said.
By comparison, the homebuilder market has become fairly low risk with better returns. The market downturn was so severe that it wiped out any builders that were undercapitalized, and those that survived now operate much more conservatively.
“You’ve got much less risk and the loan spreads for the banks are stronger,” Plath said.
VantageSouth believes there’s an underserved market of small- and midsized builders that are eager to do business with a community bank.
“I think we start with a bit of a clean slate and are able just to learn from the lessons of the past,” Jones said.