Lennar Executives Find Some Leeway in Tight Underwriting

Executives at Lennar Corp. said in an earnings call Tuesday they are finding some marginal loosening in residential loan underwriting that has been too tight, noting some reductions in overlays and downpayment requirements accommodated by mortgage insurers.

CEO Stuart Miller told listeners to the call that demand has been constrained by an “overly restrictive” mortgage market, “the landscape is improving” and “lenders beginning to reconsider overlays.”

Miller’s comments were made as he addressed investor concern about the recent rise in interest rates during the call.

“Mortgage rates have moved…toward more normalized levels,” he said, noting that although he believes the increase should not be a surprise given improvement in the economy. Despite this, Miller said, “It seems that the timing has caught investors off-guard.”

But the company’s stock was up at midday. Just before 12:30 p.m. on Tuesday, it was trading at $35.52, up from the previous day’s close at $34.99. In percentage terms, it was up 1.51% on the day at that time, compare to 0.71% for the Dow.

Earnings released earlier in the day had shown that the company during the second quarter earned on a net basis $137.4 million or $0.61 per diluted share in the second quarter ended May 31, as compared to $452.7 million or $2.06 per diluted share during the same period a year ago. However, this was due to a partial reversal of a deferred tax asset valuation allowance of $403 million or $1.85 per diluted share.

The company’s executives called 2013 a “transitional year” for Lennar and said more profitability should emerge by the fourth quarter.

Lennar executives said they believe the company is well-positioned as, regardless of interest rates, supply of both for-sale and rental property segments it serves are low relative to demand and the kind of economic recovery that would cause rates to rise would create even more demand for housing.

They also said they believe demographics are favorable and there will be a “decoupling” of families living under one roof that will contribute to a continued housing recovery.

They acknowledged that land and labor shortages as well as increased costs have been challenges in meeting demand but said they fell they are well-positioned to address these concerns, particularly in terms of land availability.

“We feel pretty strongly that the housing recovery is intact and likely to continue for some time to come,” Miller said.