From the NAHB -- Working with regulators, lawmakers and banks to try to end the stranglehold on acquisition, development and construction (AD&C) loans that has emerged as a major impediment to a housing recovery, NAHB has compiled more than 100 case studies from builders across the country to show policymakers how the credit crisis is undermining efforts to restore the health of the nation’s economy.
“The studies confirm what we’ve been hearing from builders in the field,” said NAHB Chairman Joe Robson. “Builders and developers are reporting excessive credit restrictions, where lenders are cutting off loans for viable new housing projects and producing unnecessary foreclosures and losses on AD&C loans. We cannot get the economy back on track until we restore the flow of credit that is vital for the production of housing.”
NAHB’s latest builder survey of AD&C financing conditions found that credit for these loans has tightened significantly over the past year. The situation remains critical, and banks increasingly are asking for additional equity based on low appraisals that underestimate the economic value of housing projects.
In addition, there are increasing reports of tightening terms or conditions on outstanding loans in which lenders are requiring partial pay-downs based on re-appraisals, seeking increased collateral on existing loans or refusing to allow additional draws on lender-funded interest reserves.
Further, heightened regulatory scrutiny suggests that bank examiners in the field are adopting a significantly more aggressive posture and some institutions appear to be overhauling and downsizing portfolios independent of pressure from regulators and examiners.
Overly conservative appraisals are also limiting sales and refinance opportunities, putting yet more pressure on outstanding mortgage and housing production loans.
The rising number of bank and thrift failures is also compounding the problem. Builders with outstanding loans placed under Federal Deposit Insurance Corporation (FDIC) control are frequently unable to contact a decision-maker to deal with routine, but time-sensitive issues related to loan draws and extensions.
The case studies received by NAHB include examples of how the AD&C credit crunch is jeopardizing even builders in relatively stable markets.
Among the accounts that have been received:
A Midwest builder describes how a local lending institution seized by the FDIC is causing significant hardship for his company. Four of the builder’s notes matured just prior to the takeover of the bank. While the builder had the opportunity to work these issues out with the bank, the FDIC receiver has provided no leeway and is calling the loans. The FDIC plans to auction off the builder’s loans for roughly 20 cents on the dollar. The builder has completed construction on the homes and simply needs some time to sell them during the spring home buying season. However, the FDIC has refused to renew the loans.
A builder in the Southeast has a loan scheduled to be renewed in August. The bank has informed the borrower that he must move the loan to another bank or pay off the entire loan, even though it is in good standing and the bank is still funding current construction. The likelihood of another bank lending money on the project is low because many local banks have imposed a freeze on this type of lending. The builder reports that even if he were able to obtain alternative financing, the terms would be much stricter.
If the builder cannot get the loan refinanced with another financial institution, his current lender is going to require a new appraisal and it will make an equity call to bring the loan-to-value ratios in line with the original terms. The cost of refinancing will be high due to appraisal costs, legal fees and additional loan origination fees. A $12,000 fee was paid for the original loan in 2007.
The bank is unwilling to negotiate and says this tough stance is a result of changes handed down by its corporate office. The builder has been frustrated in his attempts to negotiate because he is unable to talk with officials at the corporate office and his local bank contact has no decision-making authority. Since the project is viable and the guarantors are solid, the bank simply needs to allow the builder to continue building and selling as many units as possible, which would allow the bank to avoid any financial loss. Under this scenario, the builder reports he would make little or no profit, but his personal and business financial position would be preserved.
By acting unreasonably, the bank risks impairing the financial condition of the guarantors. “Many good projects will go bad simply due to the bank’s actions to satisfy bank auditors,” the builder said, adding that it appears that the bank is under regulatory pressure to rid itself of “high risk” loans. The bank has also received billions of dollars of Troubled Asset Relief Program (TARP) funds.
A builder in the Pacific Northwest is having difficulties getting a loan extension from his bank. The bank ordered a re-appraisal of the company’s inventory of homes, which shows the value has declined, and is now requiring additional equity from the builder. The bank has also insisted that the builder put up additional collateral, which he has refused to do. However, the builder has offered to deposit and pre-pay one-year's worth of interest payments to the bank to service the loans, in exchange for a favorable interest rate. The bank wants to increase the interest rate, which is currently at 6%. The builder has excellent credit and the loan is current. If the bank rewrites the loan to a higher rate, the builder will surely default; that is why he is asking for an extension under more favorable terms. The bank, which has received millions of dollars in TARP funds, has refused to consider the builder’s plan to reduce the loan rate by 1%.
While home sales have been slow, the builder has been able to lease homes and use these proceeds to pay the interest on his loan. The bank now appears ready to make more demands for additional collateral rather than work with the customer, who over the years has paid it hundreds of thousands of dollars in interest, even if this forces him into default.
A Northeast builder cannot get his bank to continue funding a 20-home, 80-condominium public golf course community. Infrastructure for 36 homes and condos is in place and the builder is in the process of working with the city to see whether his special permit can be amended to allow for market changes. The bank has cut off the builder’s access to an approved credit line to continue with the infrastructure work.
The bank is taking 100% of all proceeds, leaving the builder nothing to fund operations, even though he has been doing business with his bank since 2004 and remains current on his payments. The builder is interviewing other local banks to see if a cash offer can be made for the loan. A solid cash offer for the note would most likely be accepted except for the fact that the bank has attached the builder’s personal assets and other business assets as well as the assets of family members as security.
“Rather than calling loans or taking other damaging actions, these examples show that banks would be acting in their own best interest by modifying or extending loans for borrowers who are not in default and have projects worthy of completion,” said Robson. “This would allow borrowers to develop alternative repayment plans, adjust their finances or find other funding sources until they are able to complete and sell the homes.”
NAHB will continue to meet with federal regulators and members of Congress and share the results of its case studies where appropriate. In calling on Washington policymakers to move swiftly to resolve the crisis, NAHB will be recommending the following solutions:
Regulators should encourage lenders to work with residential construction borrowers who have loans in good standing by providing flexibility on re-appraisals, loan modifications and perhaps forbearance, to give builders sufficient time to complete projects and sell their inventory. By not extending loans, banks are depriving builders of the opportunity to find buyers as the housing market enters its peak selling season.
Institutions that have received funds from TARP or the new Financial Stability Plan (FSP) should be required to account for how these funds are being used in lending on new projects and/or working out more flexible terms to facilitate continued funding and eventual repayment of performing AD&C loans.
The federal government should allocate funds specifically for AD&C loans to provide banks with additional capacity to accommodate loan modifications and workouts.
The monies would be voluntarily requested by banks. In order to access the capital, recipients would have to demonstrate to their regulator that the net present value of working out a loan would be higher than a foreclosure or sale to a hedge fund or other opportunistic investor. Forbearance approved by the regulator would be provided for a limited period of time, as detailed in the plan, to allow the parties to have sufficient time to execute the workout.
Institutions would classify such forbearance on an affected loan as a performing asset as opposed to a troubled debt under capital regulations.
In addition, the funds could be used to buy down a rate for a home buyer who is purchasing a home from a builder whose AD&C project is subject to the plan.
NAHB members are encouraged to share their financing experiences by filling out the online template.