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AD&C Credit Crunch Imperils Housing-Led Economic Recovery
As the scarcity of credit for building new homes remains a major obstacle to the full-fledged housing recovery needed to lead the nation’s struggling economy to higher ground, participants at a June 25 NAHB audio seminar on the AD&C lending crisis reported that the association is making steady progress on this issue.
Case studies from builders and developers who have experienced financing difficulties have been a key component of NAHB’s efforts to alert policy makers to the problem. More than 125 examples of how the AD&C credit crunch has been harming businesses have been collected at www.nahb.org/adccasestudy, and panelists encouraged association members to continue to report on the financial constraints they have been encountering.
(Information on the AD&C lending issue has been compiled by NAHB and is available at www.nahb.org/adcresources.)
“We need more case studies, especially from builders or developers in relatively stable markets, which can clearly illustrate inappropriate regulatory actions,” said Chellie Hamecs, an assistant vice president in NAHB’s Housing Finance Department.
In the case studies provided so far, she said, the lack of financing has been the primary concern, followed by equity calls, stricter underwriting (including tighter terms and higher interest rates) and regulatory and appraisal issues. She said that builders have also raised concerns that their bank had received TARP funds but was not cooperating on a loan modification.
“AD&C financing is the industry’s most pressing problem,” said Hamecs. “We continue to hear from NAHB members that it is virtually impossible to get AD&C loans. This is a major impediment to the housing recovery, and NAHB has launched an all-out assault to address this issue.”
In the latest results from ongoing NAHB surveys on the availability and cost of AD&C credit, Hamecs said, conditions remained unfavorable in this year’s first quarter:
- Seventy-one percent of those polled stated that the availability of credit for new single-family construction loans worsened in the first three months of this year compared to the fourth quarter of 2008. This was slightly better than previous quarterly reports over the past year, in which those reporting declining availability of financing ranged between 70% and 75%.
- Eighty-two percent of those seeking land acquisition loans, or construction funds for multifamily housing, reported worse credit availability.
- Forty percent of the respondents reported tighter loan terms for outstanding single-family construction and land development loans.
- Of those reporting tighter terms on outstanding loans:
- Fifty-eight percent stated that lenders were requiring partial paydowns based on re-appraisals.
- Fifty-seven percent cited demands for increased collateral.
- Forty-three percent said lenders were refusing additional draws.
- Thirty-five percent said lenders had terminated lender-funded interest reserves and were requiring out-of-pocket interest payments.
- Nearly 30% reported that their loans had been called.
The most common reasons cited for tighter credit for new or outstanding loans, Hamecs said, were regulators forcing lenders to restrict credit or demands by lenders’ boards of directors.
“Federal banking regulators continue to maintain that they are not instructing institutions to stop making loans or to indiscriminately liquidate outstanding loans,” she said.
“Nevertheless, the bank regulators have raised concerns about real estate lending and are encouraging institutions to increase capital and loan loss allowances and to take other strong measures to manage problem loans,” she said. “Regulators also have expressed grave concerns over the high concentration of commercial real estate loans (the category that includes residential AD&C loans) in institutions’ portfolios.”
While federal banking regulators last November warned that excessively tight lending standards to businesses, consumers and other credit-worthy borrowers could exacerbate current market conditions, leading to slower economic growth, Hamecs said that reports from NAHB members in a number of different geographic areas suggest that bank examiners in the field may be adopting a significantly more aggressive posture.
“We understand that examiners are conducting more frequent bank examinations and requiring institutions to get updated appraisals on AD&C projects and to increase loan loss reserves,” she said. “Overly conservative appraisals are presenting further challenges by limiting sales and refinance opportunities and exacerbating pressure on outstanding mortgage and housing production loans. Some institutions appear to be overhauling and downsizing portfolios independent of regulator/examiner pressure.”
Hamecs cited appraisals as a major contributing factor to the current AD&C credit crisis, with foreclosed properties being used as comparables in appraising the value of new homes despite statements from representatives of the Appraisal Foundation and the Appraisal Institute that foreclosure sales should only serve as comps if they represent reasonable alternative options for the buyer of a new home.
“Reappraisals that understate value are resulting in unreasonable demands for increased equity from builders,” Hamecs said.
Among the problems that builders have been encountering with their lenders:
- Bank examiners are demanding that banks obtain new appraisals on properties for fully performing loans, which can result in the banks having to downgrade those loans, turning them into troubled “non-performing performing loans.” “This is a gray area heavily subject to examiner judgment, which can often lead to calls for additional equity or even to a good loan being called on the basis of an overly conservative appraisal,” she said.
- An increasing number of builders are being required to put up additional equity or collateral due to reappraisal of collateral or revaluation of their loan. “Most home building companies are small businesses and do not have the capacity to meet significant equity calls,” Hamecs said. The result is often foreclosure on a loan that had been performing. “Such actions can result in a cut-off of loans on other projects a builder is undertaking and can also have severe adverse consequences for other AD&C loans in the bank’s portfolio. Foreclosure on such loans is not in the best interest of the lender or the builder.”
- Banks are increasingly refusing to modify AD&C loans or to provide builders more time to complete their projects and pay off these loans. “Calling performing loans or forcing partially complete developments into foreclosures can result in unnecessary losses for a financial institution and significant losses for the local economy.”
To address this issue, she cited one builder who has worked with his lender to split a development/construction loan into two notes: one is a performing note that the builder has the capability to keep current and the second represents the balance of the loan that is no longer supported by the collateral, which has declined in value. “The idea is to allow time for the builder to pay off both notes as the project is developed and sales are realized in the future,” Hamecs said.
- The latest setback for builders, she said, is the rising number of bank and thrift failures. “Builders with outstanding loans that are placed under FDIC control are frequently unable to contact a decision maker to deal with routine, but time-sensitive matters related to loan draws or extensions."
To address customer problems with bank failures, the FDIC on May 5 announced an expansion of its ombudsman office to assist customers with loans at failed banks. The FDIC also has published “A Borrower’s Guide to an FDIC Insured Bank Failure.” The new guide provides information on what customers with loans can expect to occur in the receivership process — including the disposition of loans, workout steps taken on delinquent loans and an explanation of borrower rights. The guide also contains a section on lines of credit and construction and development loans.
Kirk Hartley, a sales manager for the Builder/Renovation Division of Bank of America Home Loans in California, said that AD&C financing for new housing is “almost non-existent” and that the situation is unlikely to ease up until next year.
“What I hear from my peers in the banking business is that they are working hard with the existing customer base they have to solve problems,” Hartley said.
Communication is key to resolving the many scenarios that have arisen between lenders and home builders, he said.
Builders and developers who are being hurt by the current AD&C squeeze should contact their members of Congress and provide them with a personal account of the impact of the credit tightening, advised NAHB lobbyist Scott Meyer.
“Elected officials are concerned about any issue that will delay economic recovery,” he said, and they are sensitive to the loss of construction and other jobs in their congressional districts.
Through testimony and meetings, lobbyists have already delivered the message on the AD&C crunch to many offices on Capitol Hill, he said, but when an NAHB member “explains how this impacts jobs, that raises eyebrows.”
When talking to their members of Congress, builders should ask their senators and representatives to convey their concerns to the congressional leadership. “We are not asking for a bailout,” said Meyer, “we are asking for a regulatory lifeline so businesses can succeed.”
For more information, e-mail Chellie Hamecs or call her at 800-368-5242 x8425; or contact Scott Meyer, x8144.
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