The Housing Chronicles Blog: Are homebuilders asking Congress for too much?

Monday, April 21, 2008

Are homebuilders asking Congress for too much?

In a recent post, I discussed a recent presentation by reps from the NAHB on how the credit crunch is now impacting loans for land purchases, development and construction.

My friend Brian, a banker with a mid-sized regional bank, took issue with this story and has written a response, which follows below:

To broaden sources of AD&C credit, Mitchell called for:

  • Fannie Mae to ramp up activity in its AD&C loan purchase program and for Freddie Mac to create a similar program. Federal Home Loan Banks to improve AD&C liquidity by accepting housing production loans as collateral for the secured advances they make to member institutions. These institutions were not set up to be collateral lenders. Collateral lending represents a much higher tier of risk taking than cash flow lending. The source of repayment for these loans is the completion and sale of the project, not an individual's capacity to repay a loan over time. This would incrementally worsen the risk profile of these psuedo-government agencies over time, resulting in higher insurance costs for all depositors, which would be required to increase the reserves associated with the much higher loan loss rates associated with AD&C loans. Simply put, he is asking the tax payers to bear equity risk of banks and developers.

  • The Federal Housing Administration to help increase competition in the AD&C market by insuring the construction portion of these loans in order to attract new originators such as mortgage banking companies. “As in the case of the end-loan mortgage market, FHA could be a crucial stabilizing force in AD&C lending in turbulent times such as these,” said Mitchell. Looking to add to the basket of implicit government guarantees. The developer and bank should assess these risks up front. He wants to create a securitization mechanism for construction loans. Securitizations ultimately depend on cash flow for repayment, and not project completion and resale. Looking for Wall Street to be collateral lenders made possible by Uncle Sam's mitigation of repayment risk through an implicit guarantee that would make securitiaztion possible.

  • Wall Street specialists to develop a prototype private security instrument for AD&C loans. In particular, changes to tax provisions relating to Real Estate Mortgage Investment Conduits and Taxable Mortgage Pools could be helpful in securitizing construction loans. Wall Street doesn't go to Washington when it wants to develop new products. Again, security instruments are repaid from cash flow, not resale. Wants third parties to assume risks that builders arguably cannot quantify themselves. If the builders and banks are incapable of quantifying and valuing this risk (as they are now), then the he wants Washington to legislate a better fool theory.

  • Banking regulators to take a balanced approach when evaluating bank lending, especially in regard to AD&C loans. “Small businesses, including small builders, are vital to the economy, and arbitrary or unreasonable regulatory restrictions would only serve to harm many builders, and potentially, many banks,” said Mitchell. “It would be ironic and tragic to have the positive work of the Fed undone by bank regulators taking a totally different vision and approach when it comes to lending matters.” Lambast the Activist Judges if you don't agree with their ruling and seek to throw them out. The regulators are concerned with individual bank and aggregate banking system solvency. The Fed is concerned with monetary policy and keeping markets liquid. These objectives are not necessarily counter to each other.

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