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Builders Struggling With Credit

Home builders testify before Congress

April 30, 2008

By MortgageDaily.com staff


Residential home builders, who have seen the pool of new homebuyers diminish with the contraction in available credit, are now finding it more difficult to obtain or extend financing for new developments. The sector is looking to banking regulators and government-sponsored enterprises for help.

The credit crunch is actually getting worse despite the concerted efforts of central banks worldwide, Illinois Home Builders Association President Scott Eckstein said today in testimony before the House Small Business Subcommittee on Finance and Tax, according to an announcement from the National Association of Home Builders.

He noted homebuyers are having a tougher time obtaining financing.

"The mortgage credit crunch will continue to be the most significant factor impacting the home building industry into the foreseeable future," Eckstein said. "There is deep concern that the dislocations in the financing markets will increase the depth and length of the housing downturn."

Terms on residential loans for land acquisition, land development and home construction are worsening, he explained. The availability of AD&C loans, which enable the development of a project's infrastructure and construction, is also deteriorating.

"Builders are reporting an adverse shift in terms and availability on loans for land acquisition, land development and home construction," Eckstein stated. "Defaults on AD&C loans are rising. In this environment, banks are actively reducing exposure levels to home credit."

He testified that builders with outstanding AD&C loans are facing increasing challenges because falling appraisal values are prompting lenders to seek additional equity for outstanding credit. In addition, lenders are "balking" at loan extensions.

Eckstein recommended that Fannie Mae boost its AD&C activity and called for Freddie Mac to create a similar program. He also suggested that housing production loans be accepted as collateral for secured advances to member institutions of the Federal Home Loan Banks.

Other recommendations by Eckstein included FHA insuring the construction portion of AD&C loans, Wall Street securitizing AD&C loans and banking regulators using more optimistic assumptions about future home sales.

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