Wednesday, August 26, 2009

Slump Spurs Grab for Markets

AUGUST 24, 2009


After spawning legions of victims, the recession is forging a class of winners.

....the survivors in the home-building industry so far tend to be the ones that -- for whatever reason -- reacted a bit earlier than their peers. Now, a few of the surviving home builders are cautiously starting to feed on their dead rivals.

"It was not a feat of strength to survive,'' said Robert Toll, the 68-year-old chief executive of Toll Brothers Inc., who led the company through three previous downturns. "It was following the experience we had gained in past housing recessions."

Toll Brothers and a few other builders stopped buying land in mid-2006, as the market showed early signs of strain, even as others plowed ahead. This let Toll stockpile cash by eliminating a major expense. Miami-based builder Lennar Corp. also accumulated cash by slashing home prices relatively early.

Now, Lennar, Toll and others are in the market to snap up land at deep discounts. Lennar, for instance, recently bought back a stake in a huge parcel of California land that it had sold two years ago -- at the top of the market. The deal values the land at about 18% of its value when Lennar sold it in 2007.

Toll, too, has bought land in recent months. Mr. Toll says he's being cautious in case housing slumps further. "We would rather be safe than sorry,'' he said in an interview last week.

Another lesson of the downturn: Surviving home builders financed their operations with debt that matured five to seven years out, providing them some breathing room. By comparison, struggling builders often had loans tied to specific real-estate developments now in default. That will likely force them to sell off the land at fire-sale prices.

"That's one of the places where we will pick up [land] in the future," Mr. Toll said.

Credit Suisse analyst Dan Oppenheim estimates that over the next few years the largest firms, led by a dozen or so publicly traded builders, will control as much as 35% of the new-home market, up from about 25% before the crisis.

The business of mortgage lending is also seeing a dramatic power realignment, partly due to bank acquisitions hammered out when housing-crisis fear was at its highest. Last fall, as stocks plummeted, Wells Fargo & Co. agreed to snap up Wachovia Corp. And in January 2008, Bank of America Corp. agreed to buy ailing mortgage lender Countrywide Financial Corp. for a fraction of its peak value.

Bank of America and Wells Fargo controlled nearly half of all mortgage originations in the first six months of this year, according to Inside Mortgage Finance. By contrast, in 2007, the top three lenders accounted for 37% of all mortgage originations. Countywide, the top mortgage lender for much of the boom, never crossed 20%.

Wells Fargo's market share jumped to 24% at the end of June, from 11% two years ago. Bank of America's share rose to 21% from 6.8% two years ago.

Lenders like Bank of America and Wells that didn't depend as heavily on exotic mortgage loans -- tongue twisters like pay-option adjustable-rate mortgages with negative amortization -- are now "picking up market share because the market has moved in their direction," says Fred Cannon, an analyst at Keefe, Bruyette & Woods.

The acquisitions may not prove to be home runs. Wachovia had certain risky mortgages and a significant portfolio of commercial loans that could leave Wells vulnerable if business stays bleak. A Wells spokeswoman said Wachovia's loan portfolio "has been performing within our expectations."

Bank of America's mortgage and insurance arm lost money in the second quarter, but mortgage-refinancing volume was up significantly. Countrywide "has made a positive contribution to the company's financial results in the first half of the year," said spokesman Jerry Dubrowski.

Write to Leslie Scism at, Matthew Dolan at, Ann Zimmerman at and Michael Corkery at

Printed in The Wall Street Journal, page A1