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Close Ties to Lenders Urged as Credit Crunch Spreads to Builders
In the latest indication that home builders should be working to maintain a healthy relationship with their lenders at this time, the Federal Deposit Insurance Corporation in a March 17 letter advised financial institutions to follow its 2006 guidance on commercial real estate lending. While the FDIC did not tell banks not to make CRE loans, it did remind them of the importance of prudent lending.
The tightening of credit standards and the sharp reduction in credit availability for home buyer mortgages has spread to the housing production loan market. Builders are reporting an adverse shift in terms and availability on loans for land acquisition, land development and home construction (AD&C) loans and businesses with outstanding loans are facing mounting challenges.
As a result of receiving current appraisals reflecting lower values on lots and homes, as well as market studies significantly scaling back absorption estimates, lenders are seeking additional equity for outstanding credits and balking at loan extensions.
With defaults on AD&C loans rising, the bank regulators have raised concerns about real estate lending and are reviewing the methodology used by banks in determining loan loss reserves and levels of delinquent and non-accrual loans for AD&C commitments. In this environment, banks are actively reducing exposure levels to home building credit.
This trend is likely to continue through the end of this year, according to NAHB. Although lending conditions are expected to show improvement in 2009 as the housing industry recovers, it is likely that regulators and lenders will remain cautious long after demand for housing bottoms out, putting a drag on the recovery. Association members are being encouraged to maintain open communication channels with their lenders.
“Timely communication and good-faith negotiations can minimize the pain from the credit crunch,” NAHB says. “Do not ignore calls or other forms of communication from the lender. If a lender is aware the builder is on top of the situation and seeking solutions, the institution will be more likely to engage in positive dialogue.
“More often than not, it is in the lender’s best interest to work with a builder on a loan to achieve the best outcome rather than to foreclose. The lender should be inclined to assist the builder in resolving factors impeding the timely construction, delivery and settlement of homes. The lender and the builder have a mutual interest in ensuring housing production is converted to revenues for the repayment of project debt.”
NAHB has developed a primer based on advice from banking experts and experienced builders on actions and options builders can pursue to achieve the best outcome on outstanding AD&C loans. “The consistent message is to take immediate steps to talk to your lender,” NAHB says.
To access the primer, click here. For more information, e-mail Michelle Hamecs at NAHB, or call her at 800-368-5242 x8425.
 Attend the Spring Construction Forecast Conference in April
Plan to attend NAHB's Spring Construction Forecast Conference on Thursday, April 24 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.
Can't attend? Watch the conference webcast live.
For more information, or to register for the conference or webcast, visit www.nahb.org/cfc.
 Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).
Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
 Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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