NAHB: Little Thaw in Severe Credit Crunch

Credit availability for acquisition, development and construction (AD&C) loans remains a critical problem for the housing industry and shows little signs of easing, according to NAHB’s national survey of home builders and developers for last year’s fourth quarter.

The only good news from the survey is that the real estate credit crunch appears to be in the process of bottoming out, with roughly more than half of those polled reporting that credit conditions in the fourth quarter were about the same as in third quarter.

Unfortunately, the number of survey respondents reporting that they have access to credit has hit alarmingly low levels, with conditions steadily worsening from the final quarter of 2007 through the middle of last year.

“Looking ahead, the housing industry today is in a questionable position to meet the demand for housing that is expected to steadily grow as the economy improves,” said NAHB Chairman Bob Nielsen. "Without access to credit, the hands of builders are tied, and this raises sobering implications for the housing recovery that is still trying to gather the momentum it needs.”

With housing market conditions just about back to normal in many parts of the country, “it is disturbing that very few builders are reporting that loan availability has actually improved,” Nielsen said.

Fifty-four percent of those seeking single-family home construction loans in the fourth quarter reported that credit availability was about the same compared to the previous quarter. However, for the prior three years, the most frequent response was that credit availability was worsening. Only 8% said credit conditions were improving in the fourth quarter.

Among those seeking multifamily construction credit, 52% said credit conditions were about the same as in the third quarter. However, from the last quarter of 2007 through the middle of last year, the vast majority of respondents reported that loan availability for multifamily construction financing was getting worse quarter after quarter. In the fourth quarter, only 12% saw signs of improvement.

Builders and developers reporting that their credit situation continues to deteriorate cited a number of factors. Specifically, lenders are:

  • Lowering the allowable loan-to-value ratio (77%)
  • Refusing to make new loans (76%)
  • Reducing the amount they are willing to lend (69%)
  • Requiring personal guarantees or collateral not related to the project (59%)
  • Raising the interest rate (51%)
  • Increasing documentation requirements (50%)
  • Refusing to make “relationship” loans (48%)
  • Requiring out-of-pocket payment of interest or borrower funding of interest (46%)
  • Increasing pre-sale/pre-lease requirements (37%)
  • Raising other fees (37%)

Many respondents say that they are also experiencing adverse treatment regarding an outstanding AD&C loan. Ninety-two percent of builders who reported their financial institutions are tightenig the terms on their outstanding single-family construction loans say their loan was performing prior to the lender's decision to tighten, while 94% of the multifamily construction loans called into question were also in good standing.

Those reporting problems with their outstanding loans said that financial institutions are tightening the terms by:

  • Requiring a partial pay-down based on a new appraisal (67%)
  • Demanding additional assets as collateral (54%)
  • Terminating lender-funded interest reserves and requiring out-of-pocket interest payments (35%)
  • Refusing to allow additional draws (33%)
  • Calling the loans (27%)
  • Other (17%)

As a result of the poor financing climate, 58% of builders are putting single-family construction projects on hold.

Fully half of multifamily developers say they are also waiting to build until credit conditions improve, at a time when rising occupancy rates indicate increasing tightening in the available stock of rental apartments in many parts of the country.

Bank Officers Report Ongoing Tight Lending

Meanwhile, the Federal Reserve’s January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices reports little change in the tight lending conditions by banks to businesses and households The quarterly survey is based on responses from 57 domestic banks and 22 U.S. branches of foreign banks.

With respect to commercial real estate lending portfolios — which include builders’ AD&C loans — banks reported no change in credit conditions, although 20% of banks indicated that they had reduced the size of the loans allowed.

With respect to consumers' residential real estate lending, the Fed report showed no changes in prime mortgage lending, but 15% of banks reported tightened lending on non-traditional mortgage products. However, a special question of the survey found that 35% of banks expected to increase residential real estate lending during the first half of 2011. This result was true for both large and small banks.

On the whole, the Fed survey is consistent with NAHB survey data of builders’ responses with respect to the direction of tight lending practices, particularly with respect to AD&C loans, but builder responses suggest the situation is considerably more severe than the banks are saying.

With the businesses of many small builders continuing to languish, NAHB’s top priority is to restore the flow of AD&C financing as quickly as possible.

The association is continuing to urge regulators to issue more flexible guidelines that will encourage banks to maintain funding for AD&C loans in good standing that fall below their underlying value. NAHB has also been calling the attention of regulators and members of Congress to the fact that, without credit to build viable new projects, the housing industry can neither revive, nor can it provide the engine of job growth that the economy so desperately needs.

Builders Encouraged to Speak Up

To help members locate available financing sources, NAHB is using exclusive networking channels such as its Finance Pavilion at the recent NAHB International Builders' Show and the online Finance Forum on

NAHB is also encouraging its small builder members to take advantage of an important new opportunity to address their concerns regarding credit availability. 

The Federal Deposit Insurance Corp. (FDIC) recently announced the creation of a new hotline and website to allow small business owners — including builders — to weigh in directly with the agency about any specific problems they may have in obtaining credit. 

Builders are encouraged to act now and call 866-924-6242, which will patch them through to the FDIC hotline, where a live representative will take their information. The hotline’s operating hours are 8 a.m. to 8 p.m. EST, Monday through Friday.

NAHB members can also go to the FDIC website at and click on the Business Assistance Form at the bottom of the page to provide details about lending or credit problems they are having with a specific bank or lending institution.

While NAHB is launching new initiatives to combat the credit crisis, strong member participation is vital to raise greater awareness of the AD&C credit problems builders are facing and to find constructive solutions that will restore the flow of credit to housing. 

Along similar lines, NAHB is seeking stories from home builders and developers who have been unable to obtain AD&C financing for viable projects or have experienced difficulties regarding an outstanding AD&C loan. NAHB would also like to hear from its associate members about how the lending climate is affecting their bottom line.

These first-hand accounts are essential to help NAHB make a strong case to regulators, policy makers and the media about the severe financing problems builders are experiencing and the need to quickly end the freeze in home building credit that is impeding the housing recovery. 

NAHB will not share any of a builder's case data without obtaining prior permission from them.