Builders Urge Congress to Remedy AD&C Lending Crisis
Alleviating the acquisition, development and construction (AD&C) lending crisis that has been choking off credit for home builders with devastating results took center stage on March 24 as more than 500 builders from across the country converged on Capitol Hill for the annual NAHB Legislative Conference.
“Our message to members of Congress was right to the point,” said NAHB Chairman Joe Robson. “The economy will not rebound until we get credit flowing again to the housing sector. It’s time to put the housing industry back to work and get the economy moving again.”
Also, hundreds of NAHB members who were unable to attend the day-long conference participated by calling the Capitol Hill offices of their representatives and senators to deliver the same message.
Builders visiting with their lawmakers urged their members of Congress to sign onto a bipartisan draft letter sponsored by Reps. Brad Miller (D-N.C.) and Gary Miller (R-Calif.) to Treasury Secretary Timothy Geithner and other regulators calling attention to the drastic impact that the ongoing financial crisis is having on the nation’s home builders.
The congressional letter notes that lenders are now making demands on existing AD&C loans that appear to exceed sensible regulatory requirements.
“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 says.
“Financial institutions should not be compelled to turn performing loans into ‘troubled’ assets,” the letter continues. “In many cases, rather than shutting off credit, lenders would be far better served by working with borrowers to extend performing loans. Again, it is not in anyone’s interest — not lenders, not builders, not the economy as a whole — to force sound and viable borrowers into insolvency.”
Examiners are conducting more frequent bank examinations, and requiring institutions to update appraisals on AD&C projects and to increase loan loss reserves. Overly conservative appraisals are presenting further challenges by limiting home sales and refinancing opportunities and exacerbating pressure on outstanding mortgage and housing production loans.
The heightened regulatory scrutiny is having an impact on borrowers, and many builders are rapidly drawing down interest reserves and having to put up additional equity as appraised values decline.
The latest setback for home builders is the rising number of bank and thrift failures. Builders with outstanding loans that are placed under the control of the Federal Deposit Insurance Corporation are frequently unable to contact a decision maker to deal with routine, but time-sensitive matters related to loan draws or extensions.
NAHB believes that in the vast majority of these cases the institutions would be better off working with the borrower to modify or extend the loan, rather than requiring additional equity or curtailing credit.
In their meetings with representatives and senators, builders called for action on the following NAHB legislative priorities:
- Housing’s Impact on the Economy. Noting that housing and related industries account for about 15% of gross domestic product in normal economic times, lawmakers were urged to support efforts to keep housing at the top of the federal agenda; the national economy will not recover until the housing sector does.
- Housing Tax Incentives. President Obama’s fiscal 2010 federal budget proposal would cap the value of the mortgage interest and real estate tax deductions for home buyers and home owners. This would increase the cost of housing for many middle-class families, particularly in high-cost areas such as California, the Northeast and other major metro markets. Chipping away at these deductions is not the answer to raise additional revenues in the current economic climate; it will only hurt the ailing housing market and economy. NAHB urged lawmakers to reject this proposal in the President’s budget because it would undermine the nation’s housing markets, which are reeling under the current recession.
Within 48 hours following the Legislative Conference, the House and Senate Budget Committees each approved their respective $3.5 trillion fiscal 2010 budget proposals using Obama’s blueprint as a guideline. Unlike the Obama plan, the House and Senate versions would not cap the value of itemized deductions such as the mortgage interest and real estate tax deductions.
Housing Finance System Reform. While it is essential to correct the regulatory shortcomings that contributed to the ongoing crisis in the credit and housing finance markets, NAHB urged lawmakers to carefully study proposed legislative solutions to ensure that they will not impede the availability of financing for creditworthy mortgage borrowers or unnecessarily limit homeownership opportunities.
NAHB also recommends retaining a specific charter for institutions specializing in housing finance (thrift charter) and establishing housing finance focus and expertise in any future bank regulatory structure. Finally, NAHB called on Congress to continue to provide support to the primary and secondary mortgage markets in order to ensure available and affordable mortgage credit in all geographic areas and under all economic conditions.
- “Card Check” Legislation. NAHB opposes the Employee Free Choice Act, commonly known as the “card check” bill. Now pending in both chambers of Congress, the legislation would allow workers to form a union if a majority sign pro-union cards, without a secret-ballot election; stiffen penalties for employer violations; and require mandatory arbitration if an employer and union fail to reach an agreement on an initial contract within 90 days. NAHB opposes all efforts to eliminate the secret ballot election as part of unionization.
In a significant development, Sen. Arlen Specter (R-Pa.) announced on the day of the Legislative Conference that he will vote to block the bill, dealing a serious blow to proponents of the legislation, which requires the support of at least 60 senators to move forward. With Specter’s announcement, all 41 Republicans in the Senate are expected to hold firm in opposition to the legislation.
- Seller-Funded Downpayment Assistance Reform. Reps. Al Green (D-Texas) and Gary Miller (R-Calif.) on Jan. 16 introduced H.R. 600, the FHA Seller-Financed Downpayment Reform Act of 2009. The bill would reverse the prohibition on seller-funded downpayment assistance and implement key reforms by establishing eligibility thresholds based on a borrower’s credit score. NAHB urged House members to cosponsor H.R. 600 in order to reinstate and reform this critical tool to strengthen the Federal Housing Administration's role in the support of homeownership.
- National Green Building Standard. NAHB is now offering an American National Standards Institute (ANSI)-approved green building standard as an alternative to private programs such as the Leadership in Environment and Environmental Design (LEED) and Green communities. Builders called on Congress to oppose green building mandates, especially for private rating systems and to oppose arbitrary increases in state energy code compliance in federal legislation that cannot accommodate a framework of “robust sustainability” for green programs. Lawmakers were also urged to support increasing and extending key energy efficiency tax incentives for residential energy efficiency, including IRS code sections 45L, 25C, 25D and 179D.
To view more details on the issues discussed at the Legislative Conference, including short videos on the AD&C lending crisis and protecting housing tax incentives, click here. To read legislation, click here and enter the bill number in the box at the center of the page.
For more information, e-mail Molly Murray at NAHB, or call her at 800-368-5242 x8282.
Photos by Keith Jewell and Steve Rusnak