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NAHB Steps Up Efforts to End Severe AD&C Credit Crunch
Expanding efforts this spring to restore the flow of credit that is needed for the production of housing, NAHB is seeking case studies from its members who have run into problems with their lenders.
“Turmoil in the housing credit and broader financial markets is now affecting every corner of our nation’s economy, but the effect on financing for housing production is especially severe and is resulting in economic hardship in communities throughout the country,” 47 members of the U.S. Congress said in a March 27 letter to Treasury Secretary Timothy Geithner.
“Home builders are experiencing an untenable constriction in terms and availability on land acquisition, land development and home construction (AD&C) loans and builders with outstanding loans are facing mounting challenges,” the letter said. Lawmakers were asked to send the letter by delegations of builders who made visits to Capitol Hill last month during the annual NAHB Legislative Conference.
Stories from builders on their difficulties with lenders will provide documentation as the industry seeks relief from today’s severe AD&C credit crunch, which is a major impediment to the housing recovery that is needed to restore the health of the nation’s faltering economy.
The stories will be used to convey the seriousness of the issue to regulators, legislators and others who are in a position to help resolve the current situation.
Of particular interest to NAHB are stories coming from builders or developers in relatively stable markets that illustrate vividly the inappropriateness of specific regulatory actions.
NAHB members are encouraged to share their financing experiences by filling out the online template located at: www.nahb.org/adccasestudy.
 “Lenders are now making demands on existing loans that appear unrelated to sensible regulatory requirements,” the letter to Sec. Geithner said. “These demands are increasingly impairing previously performing loans and, in some cases, forcing builders with viable projects into insolvency, and frustrating the purpose of the Troubled Asset Recovery Program (TARP), which was to allow lenders to extend credit to deserving borrowers and stabilize the economy.”
The letter was forwarded to Sheila Bair, chairman of the Federal Deposit Insurance Corporation; John Dugan, comptroller of the currency; John Bowman, acting director, Office of Thrift Supervision; and Federal Reserve Chairman Ben Bernanke.
NAHB has noted that while policy makers have correctly been expending the necessary resources to prevent banks from foreclosing on home owners, that same approach is not being taken on loans to home builders and developers.
The small home building businesses that have disproportionately fallen victim to the cascading freeze in home building credit depend almost entirely upon commercial banks and thrifts for housing production credit.
As it continues to meet with decision makers in Washington to resolve the crisis, NAHB will be recommending several solutions:
- Regulators should encourage lenders to work with residential construction borrowers who have loans in good standing by providing flexibility on re-appraisals, loan modifications and perhaps forbearance, to give builders sufficient time to complete projects and sell their inventory. By not extending loans, banks are depriving builders of the opportunity to find buyers as the housing market enters its peak selling season.
- Institutions that have received funds from TARP or the new Financial Stability Plan (FSP) should be required to account for how these funds are being used in lending on new projects and/or working out more flexible terms to facilitate continued funding and eventual repayment of performing AD&C loans.
- Up to $20 billion in TARP and FSP funds should be allocated specifically for AD&C loans to provide banks with additional capacity to accommodate loan modifications and workouts.
The monies would be voluntarily requested by banks. In order to access the capital, the recipient would have to demonstrate to their regulator that the net present value of working out a loan would be higher than a foreclosure or sale to a hedge fund or other opportunistic investors. Forbearance approved by the regulator would be provided for a limited period of time detailed in the plan to allow the parties to have sufficient time to execute the workout.
Institutions would classify such forbearance on an affected loan as a performing asset as opposed to a troubled debt under capital regulations.
- In addition, the TARP funds could be used to buy down an interest rate for a home buyer who is purchasing a home from a builder whose AD&C project is subject to the plan.
For more information on providing NAHB with case studies on financing problems, e-mail John Dimitri, or call him at 800-368-5242 x8529.
For information on the AD&C credit crunch and solutions to alleviate it, contact David Ledford, x8265.
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