You know it’s bad when a home builder is forced to sell its own properties — the model homes it uses to attract buyers — and sign leases on them instead. In the midst of a boom in residential mortgage refinancing activity and recent efforts to stave off foreclosures through voluntary modification programs and foreclosure moratoriums, it sounds reasonable that struggling home owners are either refinancing out of their current mortgages or getting out of the home owning sector and back into the renter’s market in order to make ends meet. Apparently, such is now the case with at least one luxury home builder. An Irvine, Calif.-based residential land development and home building company announced Friday it had sold 17 model homes for $25 million — that’s an average $1.47 million each — to an unnamed investor who turned around and leased the homes back to the company. California Coastal Communities, Inc. (CALC) said it received $22.5 million up front for the transaction with an additional $2 million deferred payment and a $500,000 reserve payable for conversion of the model homes for sale to home buyers after the eventual termination of the lease. “The sale and leaseback of the model homes at our Brightwater project increases our liquidity and improves our company’s financial position during this extraordinarily difficult time in the housing market,” said company CEO Raymond Pacini in a press statement. The company used $10.2 million of the sale proceeds to make repayments to its investor and reduce the payments that will be due in 2009. With another $10.7 million paid to reduce the balance outstanding under its revolving credit agreement — which allows the company to re-borrow the funds — the company boasts just $16 million in total liquidity. Though not a relatively large number to begin with, the company’s liquidity appears neutralized altogether when taken in beside the outstanding inventory at a single community. The company reported the backlog of inventory at its Brightwater community, where the models were sold, stands at seven — that’s seven homes, not seven months — with a combined value of $16.6 million. Although the company sold seven Brightwater homes during the fourth quarter 2008 at an average of $2.1 million, it only “delivered” 40 in all of 2008 — and that total includes the sales of the models. So, the company’s backlog of inventory at Brightwater alone accounts for roughly a third of the its total business for fiscal year 2008, not accounting for the models sold and leased back. “The continuing loss of consumer confidence during the financial crisis worsened in mid-September, and coupled with the moribund state of the residential mortgage market, has negatively impacted our new orders in the fourth quarter,” Pacini said. “We are hopeful that the federal government’s measures, designed to revive the mortgage market and restore consumer confidence, will enhance our efforts as we begin the 2009 selling season.” The Federal Reserve Bank of New York said on Monday morning that it had begun buying mortgage-backed securities guaranteed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae as part of an earlier announced $500 billion program. In an announcement over the holidays, the Fed suggested that its purchase program will run through the second quarter 2009– a much tighter window than most analysts had projected — and the government has said it intends to pay for the program by printing more money, which may likely lead to inflation and other negative responses. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.