Austin Kilgore | 01.21.09 www.dsnews.com

In the more than two years that the country's housing sector has been on the decline, banks have refrained from cracking down on small home builders, but that trend is changing, according to a report in The New York Times.

Like so much of the housing crisis, most of the action is taking place in America's Sun Belt. Overdeveloped areas have banks scared that builders won't be able to sell of their inventories and are demanding significant collateral to keep carrying loans on development projects.

Dave Brown, owner of Brown Family Communities in Tempe, Arizona, told the Times he hadn't missed a single interest payment on his loans, but a few months ago, JPMorgan Chase demanded millions of dollars in additional collateral, and ultimately foreclosed on five of Brown's developments, forcing the 76-year-old builder to shutter his company that had been in business for 33 years.

Brown told the Times, “They treated me like a deadbeat who missed his car payment. They wanted their money now.”

The loans builders get for developments are short-term, and can come up for renewal as often as once a year. Banks can force an automatic default if the value of the collateral for the loan takes a dive, regardless if a builder misses payments or not.

New homes face stiff competition from the glut of foreclosed properties on the market. The foreclosed homes are priced below the cost of building one.

According to the Times, small and medium-size homebuilders account for 70 percent of new-home construction in the United States, and like so many others in the country, are struggling.

Steve Fritts, associate director of risk management policy at the Federal Deposit Insurance Corporation, told the Times, “The reality is we’re seeing conditions in home construction and home finance that are the worst since the Depression.”

According to an estimate by the National Association of Home Builders, at least 20,000 builders — about a fifth of the total nationwide — have closed up shop in the last two years.

Builder trade groups are calling for federal relief similar to the bailout many banks have received from the Troubled Asset Relief Program. They are asking for a tax credit of up to $22,000 for new-home purchases and for the government to drive down interest rates to 3 to 4 percent by purchasing more mortgages and securities.

But critics told the Times such a plan would artificially re-inflate home prices and encourage building at a time when inventory levels are too high.