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NAHB Gets Relief on New Housing Bank Capital Regs
As a result of advocacy efforts by NAHB, the Federal Reserve Board at the end of last month moderated bank capital requirements that would have had a negative impact on the cost and availability of residential acquisition, development and construction (AD&C) loans.
In an ongoing process to revise the 1988 Basel Capital Accord, which is used by U.S. banking regulators as the framework for establishing capital regulations, the Federal Reserve approved a new version of Basel II that exempts residential AD&C loans from higher capital charges if they meet the banking agencies’ real estate lending guidelines for loan-to-value and borrower equity.
The Fed’s proposal was issued for public comment on March 30, and identical proposals are expected to be issued shortly by the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Prior to the Fed’s action, Basel II revisions to the accord, which would apply primarily to large international depository institutions, raised the amount of capital that banks must hold for many AD&C loans. The Basel II capital requirements for all AD&C loans would have been higher than other assets on bank and thrift balance sheets, and capital charges would have increased for many multifamily mortgage loans.
The current Basel II prototype would significantly lower the capital costs for residential mortgages. Under the current system of bank capital standards (Basel I), banks are required to hold less capital for many housing-related loans than for other assets. For example, almost all mortgages and certain multifamily and pre-sold single-family construction loans are assigned a 50% risk weight, which is equal to a 4% capital requirement.
A Cause for Concern
NAHB has been actively involved in the Basel overhaul since the process began in 1998, and also has been focusing its concern on the Basel IA capital requirements being formulated by the federal banking agencies for financial institutions that do not adopt Basel II. An advance notice of these proposed rules was issued for public comment last October.
While not as comprehensive as Basil II, Basel IA changes currently contain a bias against residential construction financing and could result in higher capital charges for loans than under Basel II. Of particular concern is a provision that would require banks to hold more than the currently required 8% capital charge for AD&C loans that do not have a substantial amount of borrower equity, or in the case of construction loans, are not pre-sold.
In a Jan. 18 letter to the banking agencies, NAHB emphasized the low risk profile of residential construction loans compared to non-residential loans, as demonstrated by data from the Office of Thrift Supervision (OTS), and urged that they be classified in a lower risk category.
NAHB First Vice President Brian Catalde and NAHB staff met at the end of last month with the Comptroller of the Currency John C. Dugan and OTS Director John M. Reich to discuss home builders’ concerns over the Basel IA proposal. Both agency heads indicated that they will be considering the association’s suggestions.
Basel reform has been moving at a glacial pace, and Basel II would not fully take effect until 2009. No implementation schedule has been set for Basel IA.
For more information, e-mail Michael Carrier at NAHB, or call him at 800-368-5242 x8529.
Want to Know the Housing Starts Through 2014?
Find out in HousingEconomics.com’s Long-Term Forecast. HousingEconomics.com includes downloadable Excel tables featuring the housing starts forecast, GDP, demographics and more.
To learn more, visit www.housingeconomics.com.
 Attend the Spring Construction Forecast Conference in April
Plan to attend NAHB's Construction Forecast Conference on April 27 at the National Housing Center in Washington, D.C. The conference brings together the nation's premier housing economists and finance experts for an in-depth examination of the economic outlook for the housing industry.
For more information, visit www.nahb.org/cfc.
Seiders Predicts 'Soft Landing' on the NAHB Economics Blog
NAHB Chief Economist David Seiders says a "soft landing for housing is still in the cards" on NAHB's economics blog, “Seiders on Housing” — an informal Internet-based forum dealing with economic issues, housing trends, survey research and other topics affecting the housing sector of the economy.
Log onto the blog at http://nahbblog.blogs.com and get direct access to Seiders' expert opinions, projections and responses. Then let Seiders know what you think by giving your perspective.
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