Investment propertyNAHB Pushing for ADC Secondary
Armed for the first time with data showing the superior performance of construction
loans, the National Association of Home Builders is stepping up its pursuit of additional sources
of production financing.
Capital market support for production lending is "one of NAHB"s highest priorities" for
2003, Assistant Staff Vice President Michelle Hamecs said at the group"s annual convention in
Las Vegas last month.
The push is coming at a time when builders are having little trouble finding the backing
they need to buy land, develop it and put up houses. But Hamecs, recalling the severe credit
crunch that plagued the business in the early 1990s, said "we all remember the bad old days...and
we don"t want to go back there."
As a "first step," NAHB researchers believe they finally have the evidence they believe
they need to prove to regulators that residential construction mortgages perform well relative to
other types of real estate loans.
Federally insured depository institutions, mainly commercial banks and, to a lesser
degree, savings and loans, are the chief source of acquisition, development and construction
funding for home builders, providing up to 90 percent of the money they need. But these lenders
report performance data on a level of aggregation that makes it difficult to evaluate.
However, the NAHB has obtained information from the Office of Thrift Supervision that
was not previously available to the public. And it demonstrates what the organization"s
leadership has been saying for years, that "the loss experience on single-family construction loans
has been very close to the very low rate" on permanent mortgages granted to consumers.
Over a 13-year period from 1990 to 2002, the net charge-offs as a percentage of average
loan amount has been just 0.283% for one-to-four construction loans vs. 0.155% for permanent
loans. The next lowest category is permanent loans on five-plus-unit residential structures, which
had a charge-off rate of 0.444 over the same period.
"The bottom line," Hamecs said, is the net charge-off rate for one-to-four-unit residential
construction loans is "just a hair above" that for home mortgages.
Whether this will be enough to convince banking regulators to distinguish residential
ADC financing from more risky commercial real estate lending remains to be seen.
But just in case it"s not, the NAHB also is asking for more detailed reporting that
separates information on residential and non-residential production mortgages and additional
reporting lines for acquisition, development and construction loans.
On another front, meanwhile, the association is hoping to convince someone to build a
secondary market for housing production loans similar to the one that exists for the mortgages
taken by most every home buyer.
"A secondary market for ADC loans will insure a reliable flow of money to our members
and result in lower costs to their buyers," said new NAHB President Kent Conine, a builder-
developer from Dallas.
Because production loans are perceived as riskier and more difficult to manage, major
banks typically lend only to larger, well-heeled builders and developers. Those building more
than a 1,000 units annually also can obtain funding through syndications, stock offerings or
equity partnerships, while mid-size builders doing 150-1,000 units a year usually tap into
pensions funds, equity funds or other sources.
Their smaller colleagues usually must deal with small local or community banks. But they
are slowly but surely losing their locally-based sources to wave after wave of mergers or failures.
Then there"s the high cost of ADC funding, which is, of course, passed on to the ultimate
buyer of the property. Without going into detail, suffice it to say lenders earn a sizable profit
relative to the risk incurred, especially on loans to build houses that are sold before the first
shovel of dirt is ever turned.
To date, the government-sponsored enterprises which keep the money flowing to home
buyers have exhibited little interest in keeping the money rolling in to home builders.
During the "90s credit crunch, Fannie Mae initiated a program to purchase participations
of up to 50 percent in single-family construction loans. And the company now purchases
combination construction-to-permanent mortgages made to buyers, not their contractors.
Freddie Mac has not been involved at all because of charter restrictions that limit it to
dealing with loans associated with a completed residence. And the Federal Home Loan Banks
focus their activities almost entirely on single-family mortgages.
So far, the NAHB is having its best luck with the Department of Housing and Urban
Development, which, at the association"s behest, is researching whether the Federal Housing
Administration has the authority to insure single-family construction loans.
The FHA now backs construction loans that convert to permanent mortgages on multi-
family properties, so a "clear precedent" exists, the NAHB maintains. But the FHA"s C2P
insurance program for single-family houses is currently inactive.
NAHB also is accelerating efforts to develop securities structures and exploring possible
changes in tax regulations that would facilitate the development of ADC loans in securities
pools.