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Wednesday, Jan. 14, 2009 | An exceptionally loud opponent of government regulation in the construction of housing in good times has found a new target to bark at in the market crash: banks.
Mick Pattinson, president of Barratt American, has rallied builders for years around common causes — lowering government fees for constructing homes and fighting back against development opponents.
Now, despite filing for bankruptcy protection late last month, Pattinson hasn’t lowered the volume. He gathered a gang of builders, subcontractors and laid-off employees who toted signs and chanted “Banks behaving badly!” outside three banks in downtown San Diego on Wednesday morning.
The Carlsbad-based homebuilder filed for Chapter 11 bankruptcy protection late last month after Bank of America foreclosed on more than 10 of the company’s ongoing projects in San Diego and Riverside counties. Pattinson says he was he was blindsided by Bank of America’s decision in August 2007 to freeze funding for Barratt’s ongoing construction. In the ensuing financial trouble, the builder stalled some housing projects, laid off more than 100 workers, left subcontractors in the lurch and slid toward insolvency.
In a newspaper column, from top posts in the local and state Building Industry Association, and through lawsuits against various cities for what he called excessive fees, Pattinson has developed a reputation for giving opponents a piece of his mind about what he considers impediments to homebuilding in the state over the years.
“I am not one who is at all embarrassed of what I do for a living,” he said.
Pattinson’s current case: banks created this housing downturn in the first place with reckless mortgage lending and thus shouldn’t be allowed to cut builders off from the funding they were promised. He’s assembled more than 160 builders nationwide to push for government intervention and regulation for banks. He’s made his company’s plight public, establishing solidarity with his builder friends and giving his laid-off employees a visible reason for their unemployment.
The company’s responsibility for its troubles takes a lesser place in Pattinson’s “What went wrong?” litany. But as the builder makes its predicament public, the story of what happened to Barratt American — whether caused by Pattinson’s favored targets or by the company’s own decisions — is a story of the pain in the local homebuilding industry, a sector already counting down the days to 2010, hoping for better times.
The bankruptcy of one of the region’s largest local homebuilders leaves in its wake a slew of subcontractors and unemployed workers, some of whom are now slipping out of business. The debts top $20 million for just the top 20 in a long list of hundreds of creditors in the company’s bankruptcy filing. The downfall of Barratt American, then, is also the story of sacrifice and distress from the smallest subcontractor to one of the largest local housing companies.
“Everybody had their snout in the trough,” Pattinson said. “When markets rise, we rise with them, and when markets fall, we fall with them. It’s a risk business.”
Now that the government has started spending hundreds of millions of dollars to help banks — who also made risks during the housing boom — Pattinson argues that bailout should be applied with a mandate that homebuilders like him be enabled to keep their businesses afloat. Government should make the banks lend again, he said.
For about two decades, Pattinson ran the local Barratt operations as a subsidiary of Barratt Group, based in Great Britain. In 2004, Pattinson and his fellow managers banded together to buy the U.S. operations of the company for $165 million, a deal that Bank of America partly financed and encouraged Pattinson to do, he said.
That year was about the peak for local homebuilding activity, followed by a peak for prices in 2005 and a still-bustling, but cooling, 2006. The company built projects in San Diego County and expanded operations to the Inland Empire.
Pattinson used his pulpit in his biweekly “The Equalizer” column in the North County Times to preach the perils of government fees attached to housing, even snagging top prizes in local journalism contests. He named a state politician the “hero” of homebuyers for his efforts to restrict cities from spending fees collected from new homes on fixing infrastructure issues not caused by that development. He lambasted Solana Beach for fighting the “mansionization” of that coastal city. He wrote a column entitled “How city policies ruin the housing market” and called the government-mandated affordable housing program an “Eastern Bloc practice.”
But soon it was clear Pattinson had a larger challenge to face — the crash of the local housing market. The last two years provided a sharp drop in sales and prices as mortgage options dried up and home-buying fever cooled. The third quarter of 2008 was the worst quarter in 30 years for the region’s new homebuilders, according to MarketPointe Realty Advisors.
Pattinson blames the crash in the market to the opaque systems banks were using to fuel the housing frenzy. The banks didn’t explain how they were operating, he said. He claims the real estate industry couldn’t anticipate how bad the downturn would be.
But especially near the end of the boom, Pattinson and the region’s homebuilders had clues the system was on shaky ground.
Barratt American had a mortgage lending arm that turned away some would-be buyers who couldn’t qualify for the loans. Pattinson’s sales team began seeing those same customers who’d been turned down coming back to purchase a house. They’d gone to a mortgage broker with less stringent requirements, and they were back. The company couldn’t discriminate against those buyers, Pattinson said.
But could the builder have used that trend to foresee tough times ahead?
“We knew it was going to end,” he said, quickly revising his own words. “I say ‘we knew’— that’s an overstatement.”
Pattinson describes a builders’ gathering in the beginning of 2007 where he made a presentation about the softening market. But the market had already been coming down for more than a year.
“Turning around a homebuilding company is like turning around an oil tanker at sea, you can’t do it on a sixpence,” he said. “And yes there were some windfall profits. I don’t dispute that but everybody was taking a piece of the action.”
Including the banks, he said. When it became apparent last March that Bank of America wasn’t going to unfreeze the loans, the company stopped paying its interest on the loan. The bank started foreclosure proceedings on 11 Barratt projects, including City Square townhouses in Escondido, Aragon condos in La Mesa, the Nantucket subdivision in Leucadia and Magnolia Estates in Carlsbad.
Right up until last summer, when the bank began foreclosing, Barratt was working on its under-construction projects. That meant there were scores of subcontractors still framing, designing, grading, installing pools and pouring cement as the builder went through its financial fights with the bank.
John DeMaria owns DeMaria LandTech Inc., and is listed as a creditor in Barratt’s Chapter 11 filing. He’s owed more than $450,000. His company worked on pools and common areas in the Magnolia Estates project. When the builder kept sending requests for more work, DeMaria kept hiring workers to do it. Eventually, he wound up with a backlog of invoices that Barratt American was unable to pay.
“I took a home equity line on my personal house to pay their bills and now I have to sell my house,” he said. “It’s horrible.”
DeMaria cashed out his retirement to cover his own backlog of payroll taxes and deferred expenses. He’s selling his two acres in Leucadia to rent for a while. But he doesn’t blame Barratt.
“It’s not really their fault; I don’t have any ill will toward them,” he said. “I’m about the most resilient person you could ever have. There’s sacrifices you have to make if you want to do well.”
Pattinson said the human impact of this situation is distressing. And his own laying off of more than 100 employees, the vast majority of his personnel, impels him to keep fighting the banks. He does assign a smaller portion of blame to his company’s own decisions.
“What mistakes did we make? You could argue we made the mistake of buying the company a year before the market peaked, or that we didn’t move fast enough to liquidate debt after we bought the company,” he said. “But we were not in bad shape. What’s happened to us is a reflection about the panic in the lending industry.”
Analysts don’t see much unique about Barratt’s operations during the boom, or its plight, other than Pattinson’s willingness to bare his wounds.
“I think they had a great reputation — they got into the urban market, did some innovative stuff, they were pretty much a normal, middle of the road San Diego County local builder,” said Peter Dennehy, vice president of Sullivan Group Real Estate Advisors. “They were doing the things that everybody was doing.”
Gary London, local real estate analyst, said most local homebuilders are in the same boat as Barratt.
“Should they have been more effective managers of their own portfolio? Of course they should have, but you know they’re not without company,” London said. “I think all of us in the industry had some of the same burdens, made of the same misjudgments. And the lenders aided and abetted that. There’s plenty of blame to go around.”
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