Builders: Banks putting cold chill on recovery hopes

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.