NAHB Working to Keep Credit Flowing to Small Builders
NAHB reported last week that it continues to make encouraging progress on both the legislative and regulatory fronts in restoring the health of the nation’s housing market, with efforts intensifying in response to the tightening of acquisition, development and construction (AD&C) financing.
During the board of directors meeting in Washington, D.C. earlier this spring, association leaders noted that lenders increasingly were asking builders and developers to pay down their loans, which was viewed as especially threatening to the small businesses constituting the core of the NAHB membership.
According to data collected before the current housing slump, nearly 70% of NAHB’s builder members construct fewer than 25 homes a year. More than two-thirds of the NAHB members had total annual revenue of less than $1 million, with 88% generating less than $5 million in total annual sales. Those figures have significantly declined along with the 66% plunge in housing production that has occurred since the peak of the housing upturn in early 2006.
For builders who have been caught in the most bruising cyclical housing downturn in generations, being required to provide lenders with additional capital to keep projects going can impose formidable challenges on struggling businesses, especially in the hardest-hit parts of the country where sales have floundered, the directors said.
“NAHB is not going to sit on the sidelines and watch as lenders tighten credit for the acquisition and development of land and construction of new homes,” said NAHB President Sandy Dunn. “Even in a slow market, reasonably priced and readily available credit is the lifeblood of the home building industry, and we are working hard to make sure that banks and regulators don’t overreact and worsen an already difficult situation.”
Monitoring AD&C Credit Conditions
To better inform decision makers in the nation’s capital on credit conditions within the industry, NAHB’s Economics Department is stepping up its surveying efforts with quarterly polls of the membership on AD&C lending and more detailed monthly surveys of builders’ experiences with outstanding loans.
The initial survey, details of which were reported in the June 2 edition of Nation’s Building News, found that a majority of NAHB members have not yet had to renegotiate outstanding loans with their lenders. However, a significant minority has had to make adjustments, and the additional capital has come largely from their personal savings and equity in principal residences.
NAHB is currently soliciting information from its members on their recent problems with AD&C credit and will be compiling case studies that will be shared with regulators, members of Congress and policy members.
“We are looking for instances where lenders are refusing loans or asking unreasonable terms on viable projects, or where lenders are inappropriately cutting off or squeezing outstanding credit,” said David Ledford, NAHB’s staff vice president for housing finance and housing policy. He can be reached by e-mail, or call 800-368-5242 x8265.
Working With Lenders
Small builders who are contacted by their lender should consult a valuable online resource that NAHB has made available to its members, Ledford suggested.
The “Builders Guide to Working With Lenders to Resolve AD&C Problems” is 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.
“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.”
Credit Squeeze Impedes Recovery
While NAHB has been working steadily on Capitol Hill for enactment of housing and economic stimulus legislation, association leaders have also been meeting behind the scenes to discuss the urgent need for keeping credit flowing as housing moves into position to stage a slow recovery beginning toward the end of this year.
In recent weeks, NAHB delegations have met with Federal Reserve Board Chairman Ben Bernanke and the heads of the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
“At each of these meetings, our message has been that the credit squeeze on builder loans threatens to prolong the housing downturn,” said Dunn, “and we have asked them to work with us to ensure that AD&C loans for builders remain available at a reasonable cost.”
Dunn also noted that progress is being made to restore mortgage credit for home buyers, with Fannie Mae and Freddie Mac announcing that starting this month they were reversing a decision to impose higher downpayment requirements in “declining” markets. The return to a more accommodative policy for home builders was one of the top concerns of a resolution passed by the NAHB Board of Directors at its May meeting.
Modernizing the FHA
For small builders who have lost prospective buyers because credit is no longer available for subprime borrowers — which includes a significant segment of the first-time buyer market — Dunn said that modernization of the Federal Housing Administration is moving forward and holds the greatest potential for addressing this problem. Provisions to modernize the FHA are a major component of housing stimulus legislation in both the House and Senate.
“The FHA is the only mortgage program largely available today that will provide up to 97% financing and allow for credit blemishes,” Dunn said.
At the grassroots level, some state and local home builders associations have been holding meetings to foster a dialogue between their members and lenders in the community.
Channing Pfeiffer, executive vice president of the Tidewater Builders Association, said that a series of seminars on how small businesses can protect themselves in today’s changing environment have been well attended by builders. The meetings, he said, have opened up an informal exchange of information between builders and bank presidents, attorneys, real estate brokers and other builders who have experienced previous housing downturns and know how to survive them.
Bob Aston, president of Portsmouth, Va.-based TowneBank, was the latest lender to address the Tidewater builders, Pfeiffer said. The financier advised local builders to look for diversified business opportunities that they can pursue until the market regains its full health, which may not be for a couple of years.
In general, small builders are being advised not to expect to find the same market conditions in the upturn as those that prevailed during the housing boom.
In their visits to home builders associations around the country, the NAHB Senior Officers are reminding members to take advantage of NAHB resources geared to helping small businesses weather the housing downturn. For a related story in this issue of NBN, click here.