Greenspan Says Major Homebuilders Face Chapter 11 Bankruptcy in 2008, 2009

The collapse of the subprime mortgage market may push some big U.S. home builders toward Chapter 11 bankruptcy protection starting 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 profit 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. Home builders issued $3.6 billion in public debt in 2005 and 2006, though only $600 million of that comes due this year, he said.

"There is no sword over the industry's head yet," Greenspan said Saturday 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 in recent years by subprime homebuyers, who typically have shaky credit histories. Now that such loans are no longer being made, demand for new homes will plunge, pushed down even further by the more than one million homes now in foreclosure, Greenspan said. At least 30 home lenders have halted operations or sought buyers in the past 12 months, including 5 that went bankrupt since November.

None of the major, publicly traded home builders have declared bankruptcy, though there are signs that many are in financial trouble, Greenspan said, declining to name specific companies. The value of shareholder equity for some companies equals or exceeds the value of the undeveloped land that the companies have under contract, Greenspan said. As the housing downturn continues, that land will fall in value.

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Credit default swaps are financial instruments based on bonds and loans that are used to speculate on a borrower's ability to repay debt, and were created to shield bondholders from default.

Kara Homes, a New Jersey builder, was one of the first major, closely held home builders to file for Chapter 11 bankruptcy protection, in October. Such regional builders are likely to precede any of the big public companies into insolvency, said Kara's bankruptcy lawyer, David Bruck.

By 2008 or 2009, some of the larger companies will have to restructure as the housing crunch continues, he said, adding, "It's only a matter of time."