Housing woes cut into small builders

Housing woes cut into small builders

Companies struggle in sluggish home market as government scrambles to contain the damage.

Michael Corkery / Wall Street Journal

TWINSBURG, Ohio -- In the first wave of the housing crisis, homeowners across the U.S. lost their properties to foreclosure. Now, many of the nation's small and midsize home builders are on the ropes.

Bill Whitlatch, longtime owner of one of the leading home builders here in northeast Ohio, is among the casualties. Three years ago, he borrowed from regional banks to start six developments in the Cleveland area. Soon the region's home market turned cold. Buyers vanished. Whitlatch drained his personal savings of $2 million to keep his company going.

It wasn't enough. In September, the company filed for bankruptcy protection. Now owing about $1 million to dozens of subcontractors, and $8 million in debt to his banks, Whitlatch is selling the family home he designed.

"I couldn't come up with any more money, and I couldn't generate any more sales," says Mr. Whitlatch, 68, who says he had planned on selling his company and retiring.

Though he and other local builders didn't know it at the time, Cleveland's housing slump was one of the first manifestations of a national slowdown. Now, plummeting home sales across the U.S. have left many builders with unsold inventory and land. Some are falling behind on interest payments, beginning to face foreclosures on developments and, like Whitlatch, sometimes reaching into their own pocket to keep operations going.

Many smaller builders financed their developments with recourse debt, which means that if they default, banks could seize homes, cars and other personal assets.

The U.S. government is now scrambling to contain the damage from the housing market's unraveling. Last week, federal regulators cleared the way for mortgage finance giants Fannie Mae and Freddie Mac to inject as much as $200 billion into the mortgage market, a credit-boosting move that could help builders' sales.

The relief may come too late for those like Whitlatch. "There are a lot of companies on the brink" of bankruptcy, says Ricardo Chance, a managing director at KPMG Corporate Finance LLC, who is helping troubled builders in the Midwest, Northeast and Arizona restructure their businesses