With the housing production credit crisis taking a severe toll on the nation’s small home building firms and threatening future job growth and the fragile economic recovery, the National Association of Home Builders (NAHB) has called on Congress to take tangible steps to improve access to credit for small builders.
“With the spigot for housing production loans cut off, and the threat that the uncertainty from new rule-making under the Dodd-Frank financial services law will further impact the ability of small community lenders to service the credit needs of our industry, it is clear that congressional action is needed to help open the flow of credit to home builders,” NAHB Chairman Bob Nielsen, a home builder from Reno, Nev., told members of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.
“Without such action,” he added, “there can be no housing recovery, which has major implications for our nation’s ability to recover from the current economic downturn.”
Builders are coming under increased pressure from lenders — including calls for additional equity, denials on loan extensions and demands for immediate repayment on acquisition, development and construction (AD&C) loans – even when their loans are current. Lenders are often citing regulatory requirements or pressure from bank examiners to reduce AD&C loan exposure as the rationale for their actions.
“While federal bank regulators maintain that they are not encouraging institutions to stop making loans or to indiscriminately liquidate outstanding loans, reports from my fellow members and their lenders across the nation suggest that bank examiners in the field are adopting a much more aggressive posture,” said Nielsen.
To address this situation, NAHB has presented banking regulators with specific instances of credit restrictions, provided data showing no difference in credit access across market conditions and requested specific changes to current regulatory guidance.
To date, these efforts have yielded no concrete results, which is why NAHB will soon be offering a formal legislative blueprint to Congress that focuses on fixing specific instances of regulatory excess while helping to ensure adequate credit availability to home builders.
Nielsen stressed that problems in the housing sector resulting from the economic impact of the credit crunch have placed an enormous toll on the nation’s economy. The sharp decline in home building from the 2005 peak – a drop of one million units – has translated into 1.4 million lost jobs for construction workers and the loss of $70 billion in wages. Factoring in the effect of the housing plunge on industries that provide materials and services to home builders, the total impact of the housing slump has been the loss of more than three million jobs and $145 billion in wages in all housing-related industries.
“NAHB estimates that over the next decade there will be a need for at least 1.7 million additional homes per year,” said Nielsen. “This translates into five million jobs and significant economic activity. Without increased AD&C lending, this future demand will not be met, job loss will occur and job creation will suffer.”
Qualified Residential Mortgage
On a related topic, NAHB urged the federal banking regulators to take an expansive interpretation regarding forthcoming credit risk retention rules required by the Dodd-Frank Act concerning the definition of a Qualified Residential Mortgage (QRM). The law requires lenders to have “skin in the game” by holding a small percentage of each loan that they sell into the secondary market. What is still to be determined is how the risk retention rules will be established and what definition regulators should apply to include an exemption from the QRM requirements for certain high-quality, lower-risk mortgages.
If agencies establish a QRM standard that is significantly tighter than current credit standards, which are already tougher than they have been in decades, Nielsen warned that millions of creditworthy borrowers would be deemed, by regulatory action, to be higher-risk borrowers.
“As a result, they would be eligible only for mortgages with higher interest rates and fees, which would prohibit many potential first-time home buyers from purchasing a home, especially if the definition includes an excessively high minimum downpayment requirement,” said Nielsen.
Further, an overly restrictive QRM definition would also drive numerous current lenders from the residential mortgage market, including thousands of community banks, and enable only a few of the largest lenders to originate and securitize loans.
“This sharp dilution of mortgage market competition would have a further adverse impact on mortgage credit cost and availability,” said Nielsen. “We therefore urge the agencies to define the QRM’s parameters in a way that facilitates a housing recovery and ensures access to conventional mortgage credit for all buyers and refinancers, while preserving high quality, empirically sound underwriting and product standards.”