Homebuilders Profit While Homeowners Eat Dirt

Editor’s Comment: Home builders made out like bandits as they were complicit in the rampant appraisal fraud that served as the keystone of the mortgage meltdown. Both the homes that were sold and the securities that were sold to fund the mortgages were inflated in the same way. But on the homeowner side there was the developer who would raise prices every 6 weeks giving existing home buyers the elation of getting rich and prospective home buyers the urgency of getting on the gravy train.

Without “comparable” asking prices and sales prices generated by developers who set up mortgage shops on the premises, the appraisals could not have been inflated so much. Without the inflated appraisals, Wall Street could not have moved (created) as much money as they did. Without new homes going up the illusion of a prospering economy could not have been sustained. So now we have the prospect of perhaps 30 million vacant homes over the next 20+ YEARS.

Everyone asks where the money went. It went into the pockets of those who were in on the game. And one of the sectors largely ignored up until now has been the home builders. Inflating the prices of homes by 50% or more meant incredible profit margins for home builders. So here we have it — huge salaries and bonuses going to the head of home building companies — and even continuing building in some areas where there is already a glut of housing for sale.

  • Maybe some smart lawyer can figure out a way to plead in the developer in this mess. Those developers that created mortgage brokering offices on premises must have had some interesting deals with the mortgage aggregators serving Wall Street.The “rebates” and “premiums” must have been sweet — and undisclosed contrary to TILA.
  • Maybe some homeowners who still own their homes and bought from the developer have a cause of action for economic fraud. And maybe the allegations are not much different than what is already in the complaints filed against mortgage brokers, appraisers, and other participants in the securitized mortgage scam that brought our country to the edge (we hope) of ruin.


Bailed-out homebuilders collect fat paychecks

While workers faced massive layoffs, housing execs raked in the dough

By Helen Chernikoff

updated 8:35 a.m. MT, Thurs., May 6, 2010

NEW YORK – No one rode the U.S. housing bubble higher than the company that calls itself “America’s Builder,” D.R. Horton Inc.

During the boom years, Horton and its peers sprawled across the map, opening new divisions and buying up smaller fry in an industry-wide frenzy of expansion and acquisition.

In 2006, the year home prices peaked, D.R. Horton’s sales did as well, with 53,099 home sales closed. Its founder predicted the company would break the 100,000-unit barrier by 2010.

Horton sold just 16,703 homes in 2009. Since the depths of the downturn in 2007, the company has lost more than $3.9 billion and laid off 53 percent of its workers.

But Horton has seen robust growth in one area: executive pay. The company’s founder and chairman, D.R. Horton, made $17.6 million from 2007 to 2009, as his annual compensation jumped from $2 million to $7.6 million, according to Equilar, a research firm that specializes in pay.

His chief executive, Donald Tomnitz, received a similar pay hike. Both will receive raises in base salary this year.

The two were not the only ones who profited handsomely during the most perilous stretch in their industry’s history, when homebuilders fired nearly half their workforce and lost more than half their market cap.

While Wall Street bankers have received far more scrutiny — and grief — for their fat paychecks, homebuilder executives have been doing quite well for themselves. In 2007 and 2008, the CEOs of the 10 biggest U.S. homebuilders earned an average of about $6 million a year each in total compensation.

And although banks and automakers got bigger bailouts from the government, homebuilders certainly got their share. This came in the form of tax benefits for buyers, tax refunds for builders and policies that kept mortgage rates low and foreclosures off the market.

“Without the government’s support, in all likelihood we would have seen more failures among the builders,” said Mark Zandi, chief economist at Moody’s Economy.com. “It’s almost hard to list all the things that have been done to support homebuilding either directly or indirectly.”

The federal homebuyer tax credit, which has provided up to $8,000 for homebuyers, cost taxpayers about $25 billion, Zandi said, while the tax refund amounted to a $5 billion cash cushion for big builders’ balance sheets. Individual states, such as California, helped out, too, offering their own baskets of tax benefits and breaks for homebuyers.

Of course, homebuilding executive pay — including that of Horton and Tomnitz — isn’t what it was at the top of the market, when predatory lenders pushed few-questions-asked loans on people who could not afford them. In 2005 alone, for example, Horton and Tomnitz each took home cash bonuses of almost $13 million.

Then again, some investors say homebuilders were overpaid during the boom, when Bob Toll of Toll Brothers Inc., R. Chad Dreier of Ryland Group and Larry Mizel of MDC Holdings Inc. took home compensation and stock sales in the hundreds of millions.

“Homebuilding is highly cyclical. You can’t blame that on corporate management nor should you give them credit when there is an upturn,” said Eric Marshall, director of research for Hodges Capital Management, which owns shares of No. 1 builder PulteGroup Inc. “CEO compensation needs to be better balanced, especially in cyclical industries.”

D.R. Horton declined to comment for this article.

Location, location, location
Homebuilding falls in a sector known as consumer durables. That’s the technical term for the big-ticket items that cost consumers not just money but often sleep — such as houses and some of the stuff inside them. Besides homebuilders, the sector includes companies like appliance maker Whirlpool Corp. and furniture retailer Ethan Allen Interiors Inc.

But CEOs whose companies build homes make more money — four to five times more — than their counterparts who manufacture couches and washing machines, said Robin Ferracone, executive chair at compensation consultant Farient Advisors. She and others attribute homebuilders’ outsized pay to a quirk of the industry: the involvement of founders and their sons in companies such as Horton, Toll Brothers, MDC Holdings, Lennar Corp. and Hovnanian Enterprises.

“When a homebuilding company goes public, it often doesn’t make that psychological transition to being a public company,” Ferracone said. “They pay themselves as if they were private.”

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