Bonfire of the homebuilders

But by early this year, Opteum's home-loan business was going sour. The investment banks and their clients were rejecting builder-originated loans as too shaky and likely to go into default, Haas explains. Some homes were turning out to be worth less than builders had claimed, and some borrowers didn't have the income noted on applications. "Homebuilders were getting sloppy, and Wall Street was giving more scrutiny," Haas says. In June, Opteum decided to get out of home-loan brokering.

Until the market turned, the growing heft of the largest developers made it easier for them to obtain Wall Street financing for their mortgage businesses. Once dominated by modest local firms, the industry in the past two decades has seen the emergence of sizable publicly traded corporations such as Pulte Homes, Lennar, and Centex, each of which has a market capitalization of $7.5 billion to $8.5 billion. The 10 largest builders together had revenues of $98.8 billion last year, up from only $9.3 billion in 1992. Public companies built 27 percent of all new homes in 2006, compared with 8 percent in 1992. And in Denver, Las Vegas, and Phoenix—markets that were scorching hot until recently—public companies put up 55 percent or more of the new houses.

Busy developers that provided Wall Street with equity-underwriting business discovered they had friends in the investment banking world. "Once builders got larger and a little bit more predictable, they were able to borrow money from various credit markets, borrow from Wall Street, and expand more easily," says Thomas W. Smith, a building industry analyst with Standard & Poor's Equity Research, which like BusinessWeek is owned by The McGraw-Hill Companies.

For a while during the boom the big builders could do no wrong in Wall Street's eyes. The Dow Jones U.S. Select Home Builders Index surged 290 percent from October, 2002, to July, 2005, as the profits of the 10 biggest developers more than tripled. But the pressure to beat quarterly expectations didn't relent when more and more new subdivision homes remained empty. Providing loans to financially marginal buyers was one way some developers tried to prop up their financial performance, says S&P's Smith. "You're trying to support earnings at high levels, so it's conceivable that greed gets into people's minds," he adds.

Now the bust is taking a brutal toll. In January, industry analysts predicted that the 10 biggest builders would have average earnings per share of $3.69 for 2007; the latest forecast is for a loss of $1.18.

Sheer overbuilding, a symptom of every housing bubble, is the most obvious explanation for the new ghost towns sprinkled around the country. But increased builder lending helped feed the trend. Statistics are scarce because developers don't break out their lending revenues, but some analysts track "capture rates," or the percentage of home sales financed by builders themselves. Pulte Homes, the largest developer by market cap, had a capture rate of 90 percent last year, up from 64 percent in 2000, according to Daniel Oppenheim of Banc of America Securities. No. 3 Centex had a rate of 80 percent for the fiscal year that ended in March, up from 61 percent.

By the time marginal buyers fall behind on their payments, the builder has usually sold off their loans to Wall Street. But the human fallout can be found in neighborhoods around the country.

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