Builders and developers asked to dig deeper to pay down loans

At creditors tighten up lending requirements to builders and developers, many are asking clients to pay down existing loans. For smaller, private builders, this can mean tapping personal assets such as savings accounts, 401k savings and even home equity lines. From a Nation's Building News story:

A recent snapshot of builders and developers in a special survey by the NAHB Economics Group has found that acquisition, development and construction (AD&C) credit has tightened since last year.

In addition, while not a majority, significant numbers of builders and developers have been asked to pay down outstanding construction and land acquisition or development loans, according to the study.

More than 80% of all the respondents reported that the availability of new credit for land acquisition and land development had tightened this year compared to the second half of 2007.

Sixty-nine percent of the respondents said that credit had become more constricted over that timeframe for single-family construction loans, while 29% responded that loan availability remained about the same.

On the multifamily production front, 78% reported worsening conditions for construction loans, and 20% said they had seen no change...

Of those who had been asked to pay down land acquisition or land development loans, personal savings was the source of the money for 54% of the respondents. Twenty-six percent took out equity from an investment property, 21% took out equity from their primary residence and 20% said they borrowed from an investor or sold personal assets.

About 8% of those buying down loans borrowed from their 401(k) accounts and 5% borrowed from a friend or relative.

Credit crunch increasingly impacting homebuilders

Not surprisingly, loans for builders to purchase land or fund land development and home construction is also being impacted by the general credit crunch. From a story in the Nation's Building News:

The mortgage credit crunch has spilled over into land acquisition, land development and home construction (AD&C) lending, increasing the challenges faced by builders in the current housing downturn, NAHB told the Congress last week...

Residential AD&C loans are used to purchase land; develop lots; build a project’s infrastructure such as streets, curbs, sidewalks, lighting, and sewer and utility connections; and construct homes.

Presently, funding for viable residential development and construction projects has been severely limited or blocked entirely at federally insured depository institutions, which are the sole source of housing production credit for the small businesses that comprise most of the home building industry, Mitchell told lawmakers.

“The current financing quagmire for home builders vividly illustrates the importance of developing additional sources of AD&C credit,” said Mitchell. “Furthermore, there is no secondary market for residential AD&C loans where community banks and thrifts could turn to help manage their balance sheets and obtain liquidity for additional lending.”

He noted that a viable secondary market for AD&C loans would directly benefit builders and lenders by transferring risk away from lenders; increasing the availability of funds so that projects could be more reliably completed; and mitigating the devastating impact of equity calls on builders, or transfers of partially completed projects to banks under capital and/or regulatory pressure.

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.
  
  
• 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.
  
  
• 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.
  
  
• 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.”