Lending Regs & Appraisal Practices

by Joel Barkman

As we head into another year of economic uncertainty nearly two-thirds of single-family home builders are reporting a severe lack of credit for housing production, threatening the fragile housing recovery before it has time to take hold.

Across the country, home builders and developers are reporting deterioration in credit availability and intensifying pressure on borrowers with outstanding loans. Lenders are cutting off loans for viable new housing projects and producing unnecessary foreclosures and losses on, Acquisition Development and Construction (AD&C) loans.

In our ongoing "Revive Housing, Restore America" grassroots campaign, the National Association of Home Builders (NAHB) members are asking their members of Congress to improve housing credit conditions as one of four crucial steps to support housing as the framework for creating jobs and pulling the nation's economy out of recession.

In the latest NAHB survey of AD&C financing conditions, 63% of builders stated that the availability of credit for single-family construction loans worsened in the second quarter of 2009.

Builders reporting deteriorating credit conditions cited the following reasons:

80% said that lenders are lowering the allowable loan-to-value ratio.
76% reported that lenders are not making new loans.
75% stated that lenders are reducing the amount they are willing to lend.
62% said that lenders are requiring personal guarantees or collateral not related to the project.

Two-thirds of respondents reported putting single-family construction projects on hold until the financing climate gets better.

While federal banking regulators continue to maintain that they are not instructing institutions to stop making loans or to indiscriminately liquidate outstanding loans, builders responding to the survey said the top reason that lenders have given them for restricting the availability of new loans or for tightening the terms of outstanding loans is that "regulators are forcing lenders to do it."

NAHB believes that regulators and lenders should provide leeway to residential construction borrowers who have loans in good standing by providing flexibility on re-appraisals, loan modifications and perhaps forbearance on loans to give builders time to complete and sell their inventory.

Builders are also urging Congress to assist in correcting problems with the appraisal process. Inappropriate appraisal practices and the AD&C lending crisis that has choked off credit for home builders threaten to prolong the current housing and economic downturn, NAHB told Congress earlier this year.

Testifying before the House Small Business Committee's Subcommittee on Finance and Tax, NAHB Chairman Joe Robson said these two issues "are placing enormous pressure on home builders' bottom lines and, for many, endangering their ability to survive the economic downturn. Additional credit resources could be extremely helpful to them and other small businesses to bridge the divide and survive to the eventual economic recovery."

While stabilized new and existing home sales, a declining inventory of unsold homes and reported increases in single-family housing starts are among signs that the housing downturn is bottoming out, Robson said the appraisal and credit crunch problems are headwinds that continue to buffet any significant housing recovery.

"The inappropriate use of distressed and foreclosed sales as comparables in determining new home values is needlessly driving down home prices and forestalling an economic recovery," he said, citing a recent NAHB survey that found 26% of builders losing sales because appraisals on their homes are coming in below the contract sales price.

Declining home and land values hurt not just the building industry, but also property owners and potential property owners. Those wishing to take advantage of historic housing affordability and record low interest-rates are finding it to be a very challenging market in which to borrow money due to artificially low appraisals.

These appraisal practices are a major contributing factor to the current AD&C credit crisis. Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans.

NAHB will no doubt continue the fight. Urging housing and federal financial regulators to adopt clear, concise regulatory guidelines that will allow appraisers to develop realistic valuations based on sales that are truly comparable.

Still not sure how jumbled lending regulations and flawed appraisal practices will affect you in 2010? "Just Ask a Builder."

As always e-mail your questions or comments to joel@goldenrulebuilders.com or write to "Ask a Builder" at P.O. box 294, Catlett, VA 20119.

Barkman is president of the Fauquier Chapter of The Northern Virginia Building Industry Association

Barkman is president of the Fauquier Chapter of The Northern Virginia Building Industry Association.

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