I received the below article today in a Real Estate Newsletter and while I think the headline “Credit Woes to Threaten Housing Recovery?” is a little alarmist, the article did ‘hit a nerve’ with me. The report is that banks are not lending money to home builders for housing production. The bankers say the regulators will not let them, however, the federal banking regulators maintain that they are not instructing the banks to stop making loans or to indiscriminately liquidate outstanding loans. This – the bankers inability to help their customers at the expense of the regulatory environment - has been an irritant of bankers for years.
To give you some history, prior to my career as an Austin real estate agent, I spent 15 years in community banking as a CFO/COO managing the bank’s operations and finances. I worked directly with Bank Regulators and loved it! Really, I enjoyed the regulatory exam process and liked working with the bank examiners. As a result, I have a unique perspective and ability to understand both sides--that of the community banker and that of the regulator.
Community bankers want to help you. They want your business. They want to lend you money. They want to find creative ways to make and build a relationship with you as their customer. In fact, the Community Reinvestment Act of 1977 ensures that banks meet the ‘convenience and needs of communities including the need for credit services as well as deposit services.’
The FDIC wants to protect your money deposited in the banks. They want the banks to invest in the communities they serve by making loans, but they recognize that the banks are leveraging your money and want to make sure it is protected which is where the regulator guidance comes in. In order for banks to do business, they must follow the banking laws and regulations and respect the guidance set forth by the FDIC and other supervisory entities.
What is going on currently is with bank failures of the past year, the regulators are scrutinizing banks closer than ever. In an effort to protect the consumer’s money, the government has added additional banking oversight related to managing liquidity and concentrations in commercial real estate (i.e. land development and construction loans).
Banks that have been active in making construction loans are now finding that the regulators feel that for the amount of risk in today’s economic environment, the banks need more capital and liquidity relative to the amount of construction loans on their books and in turn, the regulators are giving banks weak ratings and criticism. Effectively, the message to the bankers is that you can no longer continue to do business the way you have been. You need to reallocate your assets and liabilities to fit into a parameter that the FDIC has deemed reasonable. In order to avoid supervisory action, the banks address the issues and invest excess cash into assets other than loans. So while the federal regulators do not ever specifically tell a bank to stop making loans, their oversight is specific enough that the end result is that the bank cannot make the loans unless they receive additional capital from investors which is hard to come by these days and doesn’t always make financial sense.
So, go easy on your banker. He wants to help you.
Credit Woes to Threaten Housing Recovery?
RISMEDIA, September 30, 2009—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, according to a new builder survey of acquisition, development and construction (AD&C) financing conducted by the National Association of Home Builders (NAHB).
“Across the country, home builders and developers are reporting a deterioration in credit availability and intensifying pressure on borrowers with outstanding loans,” said NAHB Chairman Joe Robson, a home builder from Tulsa, OK. “Lenders are cutting off loans for viable new housing projects and producing unnecessary foreclosures and losses on AD&C loans. With the pending expiration of the $8,000 first-time home buyer tax credit, these challenges threaten to halt any positive developments we have seen in the housing market in recent months.”
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 and 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 cited 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.
“There can be no meaningful economic recovery until the flow of credit is restored to housing,” said Robson.
For more information, visit www.nahb.org.
Lori Wakefield is a REALTOR with Keller Williams - Lake Travis specializing in West Austin Real Estate - Lake Travis, Lakeway, Westlake, Waterfront and Luxury Homes
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