Market Trends
Resolve the Credit Crisis
With the economy on a rocky road to recovery, now is hardly the best time to put home builders out of business. But you can try telling that to some lenders until you are blue in the face.
Under intense pressure from their bank examiners to reduce their exposure to land acquisition, development and construction (AD&C) loans to builders and curtail their outstanding portfolio of real estate loans, many lenders are refusing to make loans for viable new housing projects and cutting off the funding for performing loans, or calling them. This is causing unnecessary foreclosures and losses on these loans. Performing loans are also being reappraised, reducing the value of the collateral and forcing borrowers to come up with large amounts of cash to keep their loans current. Some builders have also seen their funding dry up when their lenders were taken over by the Federal Deposit Insurance Corporation.
The credit crunch has been particularly acute in the housing sector, and builders recently surveyed by the National Association of Home Builders have reported continued deterioration in residential lending conditions. Simply put, the lack of credit for AD&C loans is a serious problem for the industry and is threatening to derail the fragile housing recovery before it has time to take hold.
Beyond its negative effects on home builders, the lack of AD&C lending has major implications for the economy and the nation. Over the next decade, population growth will trigger demand for at least 1.7 million additional homes per year. This translates into 5 million jobs and significant economic activity, including tax revenue. But without increased AD&C lending, this demand will not be met, jobs will be lost, and job creation will suffer.
Restoring the flow of credit to housing is critical for the industry to rebound, provide jobs and give meaningful life to the economy.
Congress needs to urge banking regulators to allow and encourage lenders to provide leeway for borrowers of residential real estate loans that are in good standing. Flexibility on re-appraisals, loan modifications and possible forbearance on loans to give builders time to complete and sell their lots and homes are obvious remedies.
Most home building companies are small businesses that do not have the capacity to meet significant equity calls. Which is why in the vast majority of these cases lenders would be better off working with these firms to modify or extend loans. The alternative -- requiring additional equity or shutting off credit -- often results in foreclosure on a loan that had been performing, and, in some cases, forces builders into insolvency.
Regulators should also allow financial institutions to extend credit for viable new housing production projects, even if the institution's concentration of real estate loans is above regulatory guidelines.
The downward spiral that has devastated housing in the last few years may be drawing to an end. That makes it all the more important to quickly resolve this credit crisis before any more businesses are forced to shutter their doors.
Earl E. McLeod, Jr.
Executive Director
Home Builders Association of Greater Columbia
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