Builders: We’re Feeling the Credit Freeze, Too

Interestingly, home builders are now crying foul as access to the loans they need to finance land acquisition, loan development and home construction are drying up — so called AD&C lending, or residential construction lending. HW has covered the emerging problems in this area recently, including significant concerns from banking regulators, and as losses in this area of lending mount, many community and regional banks are pulling back sharply on their lending activities in this area.

“With private securities markets in disarray and banks retrenching, a bona fide credit crunch is underway,” said Bob Mitchell, the former president of the National Association of Home Builders, in testimony yesterday to the Senate Small Business Committee.

“This credit crunch actually appears to be worsening despite the concerted efforts of central banks here and abroad,” he added.

“Tighter mortgage lending terms have made it difficult for home buyers to obtain financing to purchase new homes. Likewise, there have been dramatic adverse swings in the cost and availability of AD&C loans for home builders.”

Mitchell said that funding for residential development and construction projects has been severely limited or blocked entirely at federally insured depository institutions, and called for — what else? — Fannie Mae and Freddie Mac to come riding to the rescue. Fannie Mae currently has a small AD&C loan purchase program, while Freddie Mac currently doesn’t participate in the market.

“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.”

Mitchell also said he wanted Federal Home Loan Banks to begin accepting housing production loans as collateral for the secured advances they make to member institutions, and suggested that the FHA begin insuring portions of these loans as well.

Carryback provisions under fire
Home builders have come under intense pressure for provisions in a current housing relief bill that would establish a loss carryback and other tax breaks that would save businesses — particuarly homebuilders, who have swung to strong losses recently — roughly $11 billion dollars.

The provisions have been hotly contested by community groups and industry pundits, some of whom say the carryback provisions are tantamount to a taxpayer handout for home builders. From Bankrate.com’s Holden Lewis earlier this week, some perspective:

On Feb. 12, the president of the NAHB announced that the association’s political action committee would stop contributing to congressional candidates until further notice …

Translation: “Members of Congress, you’ll get your campaign money after we get our bailout from the taxpayers.”

How much of a threat was this? In the 2006 election cycle, the NAHB’s PAC was the third-biggest contributor to federal candidates, handing out $2.9 million …

One day after the NAHB threw its tantrum, Sen. Harry Reid, D-Nev., introduced the Foreclosure Prevention Act. Last week, just seven weeks later, the Senate approved the Foreclosure Prevention Act, which includes an $11 billion tax break to the home building industry.

The act isn’t expected to pass as-is, given the White House’s staunch opposition to the bill and House leaders’ determination to put together their own bill. Nonetheless, Lewis’ observation should at least provide some food for thought the next time you hear a Democratic senator bellowing on about a need “to do more for consumers.”

The NAHB’s Mitchell, however, argued that the carryback provisions — along with other aspects of the Senate proposal — were vital to helping the industry get back on track.

“The NOL carryback in Senate bill H.R. 3221 simply allows businesses to accelerate their claim of NOL deductions that under present law would be claimed in the future,” said Mitchell. “The need for these deductions today is critical.”