Addressing the Barriers to Housing Recovery

Here we sit one year into the economic recovery, yet the home building industry is struggling with painfully small incremental gains. What’s going on? One of the most significant barriers to a full-bore housing recovery is the lack of available credit. In fact, it’s a major problem that has significant impact on many of us. As it happens, Congress is considering a bill to address the problem and hopefully get financing flowing to developers and builders.

In early May, the Home Construction Lending Regulatory Improvement Act of 2011 (H.R. 1755), co-sponsored by Rep. Gary Miller (R-CA) and Rep. Brad Miller (D-NC), was introduced into Congress. The same day it was introduced, I went to Capitol Hill with friends from the industry for the SBC Legislative Conference to talk about the bill with our members of Congress. I met with my legislators, Representative Roscoe Bartlett (R-MD), and Senators Benjamin Cardin (D-MD) and Barbara Mikulski (D-MD), and urged them to consider cosponsoring this important measure.

In a nutshell, the bill establishes new guidelines for banks to provide acquisition, development and construction loans, known as AD&C loans, to builders and developers. This issue is particularly important to my company because many of the builders we work with have not been able to secure financing for large-scale, multi-family projects.

Ever since several large financial institutions collapsed in 2008, it appears many banks have tried to purge all AD&C loans from their books. In some cases, banks are calling these loans due, and builders are doing what they can to pay them off to avoid defaulting. To add insult to injury, they have also made it extremely difficult for developers to qualify for construction loans. Banks don’t want to lend to developers that are using raw land as collateral because they don’t believe the land values have stabilized.

This bill directs banking regulators to issue new guidance to banks regarding AD&C loans. First, it will direct bank regulators to no longer obstruct lenders from granting credit to builders. One key is to discontinue using the 100 percent capital lending limit as a permanent rule, but rather to use that limit as a guideline as it was originally intended. Second, the bill will provide additional guidance to regulators on how banks should evaluate lending applications. The measure will require lenders to weigh projects based on their value at the time they are completed, as opposed to discounting the project value based on predetermined liquidation rates.

Finally, the legislation will stop lenders from calling existing AD&C loans due when builders are adhering to the payment requirements of the loan. This change in guidance will hopefully slow the rate at which developers are forced to “liquidate” their assets, generally below cost, in order to pay for an AD&C loan the bank unexpectedly decides to collect on.

Getting a chance to meet the two lawmakers sponsoring this bill the night before we went on the Hill was a powerful experience. For the two of them, this was not new territory. When the Democrats controlled the House, Rep. Brad Miller sponsored a similar bill, which passed out of the House but never came up for consideration in the Senate. Now that the Republicans are in control, Rep. Gary Miller is trying to tackle the problem once again using the same approach. It was interesting to get their perspectives, as federal lawmakers, on the problems facing housing finance, and hear how they hope to address it through this legislation. The bill has a long way to go before it has a chance to become law, but it was pretty neat to be there at the beginning of the journey.

Read more about SBC Industry Policy on housing finance and other issues. Go to thomas.loc.gov/cgi-bin/bdquery/z?d112:h.r.1755: to view the bill.