COVER STORY: Home Building
Is the Bank at Fault?
Some banks release borrowers' money to contractors with little proof that the home under mortgage is actually being built.
For Wood, the bad news got worse. Liens started pouring in on the house that was nearly complete, filed by subcontractors and suppliers who had never been paid. Then, Wood discovered that Battle’s firm had drawn $80,000 of his Coast Bank loan for work on his other home but had never started construction. “The bank allowed the builder to draw $80,000 without ever touching the lot,” Wood says. “I am now out close to $90,000 for a lot that was never cleared — I don’t think anyone ever even walked on it.”
Today, both shareholders and borrowers are suing Coast Bank over $110 million in loans it made to 482 borrowers building homes through CCI. Battle’s firm, which filed for bankruptcy in April, drew a total of $66 million from Coast from the loan funds before it stopped working on the homes.
|» “CCI did not have the management team”
nor the wherewithal to build 30 houses a year, let alone 300.”
— Attorney Alan Tannenbaum
Sarasota lawyer Alan Tannenbaum, who is representing more than 100 of the borrowers, argues the mortgages were fraudulent. He charges that Coast Bank and American Mortgage Link schemed to extract excessive fees from lot closings and construction-period interest — with no regard for whether there would be enough money left to build the home, or for whether CCI could actually build it.
“CCI did not have the management team nor the wherewithal to build 30 houses a year, let alone 300,” Tannenbaum says. “Yet the lenders made no effort to qualify CCI as a builder able to perform.”
According to depositions in Battle’s banktruptcy case, American Mortgage Link earned a $5,000 “marketing fee” for each mortgage closed through the bank, as well as 2% in points on the loans.
Securities and Exchange Commission documents show the former Coast Bank executive vice president for lending, Phillip Coon, earned $434,000 in compensation in 2006, most of it in commissions based on the value of real estate loans originated in his department. Coon, who could not be reached, was fired last February.
Tramm Hudson, a veteran Florida banker who is acting as special counsel to Coast Bank, says Tannenbaum is glossing over the contractual and other obligations of home buyers, who have their own responsibility to check out contractors. “They borrowed the money to construct a home on their own free will — they did not have a gun to their head,” Hudson says. “Things didn’t work out the way they planned, but they still have a contractual obligation to repay the loan.”
While the CCI case is extreme (some of CCI’s customers went through other banks with the same outcome), it highlights questions asked by many Florida home buyers who’ve been left with liens or untouched lots: Where was the bank? Why aren’t banks more rigorous in making sure contractors have completed work before they release consumers’ loan funds?
Home-construction loans can be structured in different ways. Borrowers can set them up so that they themselves write checks to their contractors. Bret Rock, a spokesman for the Florida Bankers Association, says that when banks release the money directly, they generally hire independent inspectors to make sure construction is proceeding. In addition, they require contractors to sign affidavits promising all subcontractors and suppliers have been paid before releasing new draws.
Hudson says Coast Bank did both of those things and adds that when Battle’s customers signed their contracts, they agreed to give Battle the money for their lots, at the time selling for around $35,000, as well as up to 15% of the overall cost of the loan for permits, fees and related items before any work began. That’s how it’s possible, Tramm says, that someone like Wood could be out $90,000 on a $35,000 lot.
Commercial and public construction projects typically are able to avoid such situations because they often require surety bonds, says John Wiseman, president of the Florida Home Builders Association and CORE Construction in Florida. Bonds add to the overall cost of construction but ensure major businesses or school boards won’t lose money if a contractor has trouble paying the bills or goes bankrupt in the middle of the job. “If we keep seeing this sort of story in Florida,” says Wiseman, “I think you’ll see more consumers as well as banks requiring surety bonds for home loans.”