Tight Credit for Builder Loans Could Prolong Housing Slump
The mortgage credit crunch has spilled over into the housing production loan market, threatening to prolong the current housing downturn, NAHB told Congress on April 30.
"The mortgage credit crunch will continue to be the most significant factor impacting the home building industry into the foreseeable future," Scott Eckstein, a home builder from Naperville, Ill. and president of the Illinois Home Builders Association, told the House Small Business Subcommittee on Finance and Tax. "There is deep concern that the dislocations in the financing markets will increase the depth and length of the housing downturn."
Despite concerted efforts of central banks here and abroad, Eckstein said that the credit crunch appears to be actually worsening.
"Tighter mortgage lending terms have made it difficult for home buyers to obtain financing to purchase new homes,” Eckstein said. “Likewise, builders are reporting an adverse shift in terms and availability on loans for land acquisition, land development and home construction (AD&C)."
Residential AD&C loans are used to purchase land; develop lots; build a project's infrastructure such as streets, curbs, sidewalks, lighting, and sewer and utility connections; and construct homes.
Builders with outstanding AD&C loans are facing mounting challenges because lenders receiving current appraisals that reflect lower values on lots and homes are seeking additional equity for outstanding credit and balking at loan extensions.
"Defaults on AD&C loans are rising. In this environment, banks are actively reducing exposure levels to home credit," said Eckstein.
To broaden sources of AD&C credit, Eckstein called for:
- Fannie Mae to ramp up activity in its AD&C loan purchase program and for Freddie Mac to create a similar program.
- The Federal Home Loan Banks to improve AD&C liquidity by accepting housing production loans as collateral for the secured advances they make to member institutions.
- The Federal Housing Administration to help increase competition in the AD&C market by insuring the construction portion of these loans in order to attract new originators such as mortgage banking companies. "As in the case of the end-loan mortgage market, FHA could be a crucial stabilizing force in AD&C lending in turbulent times such as these," said Eckstein.
- Wall Street specialists to develop a prototype private security instrument for AD&C loans. In particular, changes to tax provisions relating to Real Estate Mortgage Investment Conduits and Taxable Mortgage Pools could be helpful in securitizing construction loans.
- Banking regulators to take a balanced approach when evaluating bank lending, especially in regard to AD&C loans. "Overly pessimistic assumptions about future home sales and values will result in an unnecessary extension of the credit crunch and housing recession," said Eckstein.
"Draconian restrictions on lending or forced reductions in AD&C concentrations will only serve to exacerbate the present crisis and delay, or even prevent, future recovery," said Eckstein."
Meanwhile, stimulating demand for homes and stabilizing housing prices during the important spring home buying season would do the most to relieve the financing and other business difficulties faced by home builders, he said.
As Congress continues work on housing stimulus legislation, Eckstein urged lawmakers to pass a final bill that would provide a temporary home buyer tax credit, allow businesses to carry back net operating losses beyond the current two years and expand the mortgage revenue bond program.
For more information, e-mail Dave Ledford at NAHB, or call him at 800-368-5242 x8265.