Life on the Courthouse Steps
The story of Zudhi Karagjozi is as old as America itself. From a modest beginning selling real estate in Queens, NY, Mr. Karagjozi grabbed his first rung on the ladder, continued to climb, and when he was done he was the proud owner of Kara Homes, one of the largest builders in New Jersey. Like so many before him, he too rose from his immigrant beginnings to the very zenith of the American Dream.
Unfortunately, for Mr. Karagjozi that dream has turned into something of a nightmare. In fact, according to a story in the Asbury Press, it has landed him on the courthouse steps.
There, stood a troubled Mr. Karagjozi last Monday, outside the courtroom in US Bankruptcy Court in Trenton, pleading his case to anyone that would listen.
"I just need help," he said according to the story. "I don't have any powerful people behind me. I'm just a self-made, hard working person trying to well by my homebuyer."
But his pleas fell deaf ears. Inside the courtroom his many creditors, some of them close friends, plotted their next moves as it became increasingly clear that his once soaring business would never be the same.
"His luck ran out," said Jonathon Bristol, an attorney for one of Kara's creditors. "He rode the crest and took a long, hard fall."
Unfortunately, he wasn't the only one that fell-his customers did too. Having already purchased a home from Kara, numerous customers reacted nervously to the prospect that their homes could remain unfinished and their down payments lost.
But Kara Homes was not alone in its misery. On Tuesday, shares of Technical Olympic USA (TOA: NASDAQ) plunged 33% after the homebuilder disclosed that one of its creditors, Deutsche Bank, was beginning to make some noise too.
The builder, which operates Engle Homes and Newmark homes, among others, said in an SEC filing that it had received a letter from Deutsche Bank. In it, the bank alleges that the company's Transeastern venture has failed to comply with its obligations under the credit agreement.
As a result, "multiple potential defaults and events of default" have triggered an acceleration of direct financial obligations which would require Technical Olympic USA to pay all of its outstanding debts to the bank. It was the last thing the company needed to hear.
In fact, it was so bad that its release prompted immediate talk of bankruptcy. That's because it was also learned that its outstanding and collectible debt to Deutsche Bank came to the stunning sum of $675 million.
Given the state of the company's balance sheet, that is a figure that could bury them. Like so many other builders, they too are heavily leveraged, owing some $1.10 billion to their creditors, all the while sitting on only $39.60 million in cash.
Even that it is not so crystal-clear. In fact, it is rather murky from a reporting standpoint, since so much of the debt incurred by these "joint ventures" can be kept off their books altogether.
For its part, the company continues to insist that it will be able to meet its financial obligations. But Deutsche Bank continues to press their case.
"We fully intend to honor whatever obligations we may have under the loan guarantees," said Antonio B. Mon, company president and chief executive, in a statement.
However, he went on to say, "It is our belief that the circumstances being experienced by the Transeastern Joint Venture today are clearly a reflection of the venture's inability to sell and deliver the volumes of homes necessary to support the capital structure due to the downturn in the Florida housing market."
In other words, they owe way more than they make and like Kara Homes they just can't seem to foot the payments.
This is what makes creditors nervous in the first place, and it's what lands so many companies on the courthouse steps-even the big ones.
By the way: Analysts at UBS weighed in on the new home market on Monday. They said home prices will fall 10% on average in 2007 and that it will likely take three years to clear the huge inventory of unsold homes currently on the market.
All of this, says UBS analyst Margaret Whelan, "will translate into sharp earnings and sales declines for the nation's publicly traded builders." Whelan predicts earnings will fall 26% in 2006 and 46% on average in 2007. Sales, she expects, will plummet 30% in 2007.
Mortgage Matters will return next week.
The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at email@example.com. and I will be happy to help you with them.
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