Not Building Because of Banking

by Joel Barkman

Amidst growing signs that housing is on the mend, builders attending last month's International Builders' Show (IBS) in Las Vegas turned their sights on repairing a badly broken housing finance system to restore the flow of credit for home mortgages and acquisition, development and construction (AD&C) loans.

Major banks and traditional lenders remain under the sharp scrutiny of the regulators and may not currently be reliable sources of financing for new residential projects.

Not because our partners in the lending industry aren't working for us - the lending crisis seems to be stemming from the appraisal process. Projects are being halted - even for clients with excellent credit - due to negatively adjusted loan-to-value ratios caused by "bad" real estate comps in the area.

A 3,000 square foot home may cost $450k to build, but the 3,500 square foot home down the street just "short-sold" for $300k. That is the problem and there goes the deal. Nobody wins.

Home sales and production are expected to steadily improve this year, but activity will remain slow as "distressed" properties continue to affect the market.

Many small builders may have to tide themselves over for the short term by continuing to diversify. While remodeling has emerged as the primary "sideline" of some local builders, attempting to weather the slump, remodeling in this community has been - and always will be a mainstay for me and my team.

But weather we are dealing with a new home or a remodeling project, financing and value is paramount. There is little doubt that the housing finance system will play a big part in our local economy moving forward.

In their deliberations on Jan. 21, the NAHB Board of Directors approved a resolution that set a significant framework for restoring and improving the secondary mortgage market and housing finance system.

"The implementation of major changes to the housing finance system, while intended to correct flaws in the previous structure, must be undertaken thoughtfully and carefully to avoid severe adverse consequences for home buyers, home builders, the financial markets and the U.S. economy," the directors said in their resolution.

The resolution envisions a secondary market in which mortgages would be packaged and sold as securities, with the federal government establishing a fund to provide a guarantee of timely payment of principal and interest to investors in the securities.

The secondary market entities that benefit from the federal securities guarantees would pay a fee to capitalize the fund, which would be designed to mitigate the federal government's risk so that it would only be exposed in the case of a "catastrophic" occurrence.

"There should be continued availability of financing for long-term (at least 30-year) fixed-rate mortgages, as well as mortgage products with well-understood risk characteristics such as certain standard adjustable-rate mortgages and multifamily products," the resolution said.

"There should not be overly rigid adherence to loan-to-value limits that results in inappropriate rejections of creditworthy borrowers," the resolution said. And, "mortgage originators, lenders and investors should have appropriate accountability and liability for their instruments in which they are involved."

However, the regulatory side will likely stay extremely conservative. There seems to be a disconnect between what the Obama Administration is hoping to accomplish in increasing the availability of credit and the regulatory constraints being placed on banks.

NAHB leaders will continue to work on this crucial issue as the Congress and Administration move forward this year with legislative proposals on the longer-term future of Fannie Mae and Freddie Mac and the housing finance system. Meanwhile I am proud to work alongside our local lenders who are struggling just the same to come up with solutions that will guide us through this challenging economy.

BB&T has been one of the local building industry's biggest allies - you can be sure that Vickie Pittman, Ray Knott, Lisa Burnside, and the rest of their staff are on your side as well.

And with individuals like Nan Fortune from Prosperity Mortgage in Warrenton, it's never just about making "the sale". She has given mortgage advice to my clients even when there is no sale.

Like you, I am ready for a prosperous year moving forward, but let's start locally - with responsible lending, smart building, and informed clients.

If you're not building because of banking, there may be a solution, 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 past president of the Fauquier Chapter of The Northern Virginia Building Industry Association.

Read Joel's column weekly in the