Builder bankruptcies on the horizon?

From Bloomberg:

U.S. Homebuilders Face Bankruptcy Risk in ’08, Lawyers Say

The collapse of the subprime mortgage market may push some big U.S. homebuilders toward Chapter 11 beginning next year, according to bankruptcy advisers and lawyers who specialize in the real estate industry.

The weakest publicly held builders are staying out of bankruptcy by relying on the profits they made when sales boomed and on the public debt they sold in those years, said Ronald Greenspan, a lawyer and financial adviser to the creditors of four bankrupt subprime mortgage lenders. Homebuilders issued $3.6 billion in public debt in 2005 and 2006, though only $600 million of that comes due this year, Greenspan said.

“There is no sword over the industry’s head yet,” said Greenspan today at a conference of the American Bankruptcy Institute in Washington. “That doesn’t mean the industry is not wounded. Instead, the breaking point could come in 2008 or 2009.”

The real estate market has been powered the past few years by subprime homebuyers who typically have shaky credit histories. Now that those loans are no longer being made, demand for new homes will plunge, pushed down even further by the more than 1 million homes currently in foreclosure, Greenspan said. At least 30 home lenders halted operations or sought buyers in the past 12 months, including five that went bankrupt since last November, according to Bloomberg data.
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Kara Homes Inc., the New Jersey builder known for so-called McMansions, became one of the first major, closely held home builders to file for Chapter 11 protection in October. Such regional builders are likely to precede any of the big public companies into bankruptcy, Kara’s bankruptcy lawyer, David L. Bruck, said today in an interview at the conference.

“You are going to see the smaller companies get bit earlier,” Bruck said. By next year, or the year after, some of the larger companies will be forced to restructure as the housing crunch continues, he said.

“It’s only a matter of time,” Bruck said.