The lock-up of financial markets that hit with a ven-geance last fall prompted a range of innovative policy responses by the Federal Reserve, the Treasury, Congress, and the White House. These efforts have shown some success, particularly in interbank and short-term securities markets, and huge quality spreads have narrowed modestly in some components of longer-term private securities markets.

But precious little success has been seen in the U.S. banking system, despite large capital injections by the Treasury under the Troubled Asset Relief Plan (TARP) as well as massive injections of reserves by the Federal Reserve into the banking system through both traditional and unconventional channels.

The banking system is treating outstanding loans rather harshly and is displaying dogged resistance to making new loans to businesses and households, despite the policy prodding. The clampdown on bank lending is dreadful news to the U.S. housing industry, since most builders rely exclusively on banks for loans to acquire and develop land and to construct homes (the AD&C credit markets).

A recent NAHB survey documents deepening problems encountered by builders in their dealings with banks, and a Federal Reserve survey for the same period of time documents the toughening stance of bank lending officers. The signals from the demand and supply sides of the AD&C markets are deeply troubling, and the implications for the strength of the eventual housing recovery are hardly reassuring.

NAHB Surveys

Since last May, the NAHB has been conducting large bimonthly surveys of builders about their experiences in the AD&C credit markets, and our most recent readings were taken in January. In a nutshell, we’ve seen a progressive tightening of lending terms and standards for both outstanding credits and prospective new loans.

In January, virtually no survey respondents said that the availability of new AD&C loans had improved in recent months, and a large majority said that availability had gotten worse for all types of AD&C loans. Those citing worsening availability most commonly cited lower allowable loan-to-value or loan-to-cost ratios, and as many as 75 percent said that lenders simply were not making any new loans.

As in previous surveys, a substantial proportion of respondents said that lenders had been tightening terms or conditions on outstanding AD&C loans prior to maturity. The most common form of tightening was requiring partial paydown based on reappraisal, followed by demands for additional assets as collateral.

We asked builders about reasons given by lenders for clamping down on outstanding or new AD&C loans. We heard most often about demands from lenders’ boards of directors, mandates from regulators, regulatory or accounting rules, and lenders’ concerns about loan performance.

Federal Reserve Surveys

The Fed’s most recent quarterly survey of senior bank loan officers, conducted in January, showed ongoing tightening of lending practices and policies for virtually all types of loans to households and businesses late last year.

The Fed’s surveys ask banks specifically about commercial real estate loans, a category that includes residential land development and construction loans. Nearly 80 percent of banks said they had tightened standards for approving applications for such loans during the final quarter of 2008, and no bank had eased standards. Tightening took the form of lower loan sizes, lower loan-to-value ratios, shorter maturities, stronger requirements for take-out financing, higher debt-service coverage ratios, and wider spreads of loan rates over banks’ cost of funds. A lot of banks also reported an increase in use of interest-rate floors in floating-rate arrangements.

Policy Issues

The NAHB is working with the FDIC to improve the treatment of performing AD&C loans on the books of banks the agency has taken over, and we are urging all federal regulators to avoid supervisory overkill regarding outstanding and new housing production loans.