Builders Call on Congress to Improve Access to Credit

With the housing production credit crisis taking a severe toll on the nation's small home building firms and threatening future job growth and the fragile economic recovery, NAHB on March 2 called on Congress to take tangible steps to improve access to credit for small builders.

"With the spigot for housing production loans cut off, and the threat that the uncertainty from new rule-making under the Dodd-Frank financial services law will further impact the ability of small community lenders to service the credit needs of our industry, it is clear that congressional action is needed to help open the flow of credit to home builders," NAHB Chairman Bob Nielsen told the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.

"Without such action," Nielsen added, "there can be no housing recovery, which has major implications for our nation's ability to recover from the current economic downturn."

Builders are coming under increased pressure from lenders — including calls for additional equity, denials of loan extensions and demands for immediate repayment on acquisition, development and construction (AD&C) loans — even when their loans are current, he said.

And lenders are often citing regulatory requirements or pressure from bank examiners to reduce AD&C loan exposure as the rationale for their actions.

"While federal bank regulators maintain that they are not encouraging institutions to stop making loans or to indiscriminately liquidate outstanding loans, reports from my fellow members and their lenders across the nation suggest that bank examiners in the field are adopting a much more aggressive posture," said Nielsen.

To address this situation, NAHB has presented banking regulators with specific instances of credit restrictions, provided data showing no difference in credit access across housing markets — many of which are returning to normal conditions — and requested specific changes to current regulatory guidance.

To date, these efforts have yielded no concrete results, which is why NAHB will soon be offering a formal legislative blueprint to Congress that focuses on fixing specific instances of regulatory excess while helping to ensure adequate credit availability to home builders.

Members of NAHB’s Housing Finance Committee and staff are also in the midst of pursuing a range of other initiatives, including new funding programs and regulatory relief. Although some of these efforts are still in their beginning stages, the association is vigorously pursuing such initiatives as:

  • A national debt/equity fund
  • A state housing finance agency (HFA) taxable bond construction lending program
  • AD&C loan insurance
  • A production financing/rent-to-own program
  • Reforms to the appraisals process, including:  
          1) improvements in the quality of appraisals in distressed markets  
          2) establishment of appraiser qualification requirements for valuations of new construction
          3) improvements in state oversight of appraisers and appraisal requirements

Nielsen stressed that problems in the housing sector resulting from the economic impact of the credit crunch have placed an enormous toll on the nation's economy.

The sharp decline in home building from the 2005 peak — a drop of one million units — has translated into the loss of 1.4 million construction jobs and $70 billion in wages.

Factoring in industries that provide materials and services to home builders, the total impact of the housing slump has been the loss of more than three million jobs and $145 billion in wages in all housing-related industries.

"NAHB estimates that over the next decade there will be a need for at least 1.7 million additional homes per year," said Nielsen.

"This translates into five million jobs and significant economic activity,” he said. “Without increased AD&C lending, this future demand will not be met, job loss will occur and job creation will suffer."

Nielsen delivered a similar message on the urgent need to open up the lines of credit for new housing production in a March 7 address to the board of directors of the National Association of Counties during its annual legislative conference in Washington, D.C.

Qualified Residential Mortgage

On a related topic, NAHB urged the federal regulators to take an expansive approach in defining a Qualified Residential Mortgage (QRM) in the forthcoming credit risk retention rules required by the Dodd-Frank Act.

The law requires lenders to have "skin in the game" by holding a small percentage of each loan that they sell into the secondary market.

What is still to be determined is how the risk retention rules will be established and how regulators will define the terms of certain high-quality, lower-risk mortgages that will be exempted from the risk retention requirements.

Nielsen warned that if agencies establish a QRM standard that is significantly tighter than current credit standards — which are already tougher than they have been in decades — millions of creditworthy borrowers would be deemed, by regulatory action, to be higher-risk borrowers.

"As a result, they would be eligible only for mortgages with higher interest rates and fees, which would prohibit many potential first-time home buyers from purchasing a home, especially if the definition includes an excessively high minimum downpayment requirement," said Nielsen.

Further, an overly restrictive QRM definition would also drive numerous current lenders from the residential mortgage market — including thousands of community banks — and enable only a few of the largest lenders to originate and securitize loans.

"This sharp dilution of mortgage market competition would have a further adverse impact on mortgage credit cost and availability," said Nielsen.

"We therefore urge the agencies to define the QRM's parameters in a way that facilitates a housing recovery and ensures access to conventional mortgage credit for all buyers and refinancers, while preserving high quality, empirically sound underwriting and product standards," he said.

For more information, e-mail Scott Meyer at NAHB, or call him at 800-368-5242 x8144.