As builders struggle to get financing for land development and construction, a North Carolina congressman has called on the federal government to step in and guarantee loans for viable building projects, particularly in markets where lending has dried up the most.
“We’ve gone from indiscriminate lending to indiscriminate refusal to lend, and it’s killing jobs,” says Brad Miller (D-N.C), who with two other Democrats—Joe Baca of California and Steny Hoyer of Maryland—introduced HR 5409, known as the Residential Construction Loan Guarantee Program. “We can’t tell 16% of the [Gross Domestic Product] to just hang around and wait for a while,” says Miller, referring to the housing industry and its economic output.
This bill calls for $15 billion to be appropriated to the Treasury Department over three years to guarantee loans for land and building, or acquisition, development, and construction (AD&C) loans. HR 5409 is an amendment to another bill moving through Congress that, if passed, would extend $30 billion to small banks for small business loans.
In an telephone interview with BUILDER on Tuesday afternoon, Miller, speaking from the U.S. Capitol in Washington, D.C., quoted NAHB estimates which suggest that restrictive lending practices have been partly responsible for new-home inventory sinking to their lowest level in 42 years. (The Wall Street Journal reported on Monday that NAHB had sent letters to members of the House of Representatives urging them to support ”the Miller/Baca amendment,” which was added to the larger bill by a vote of 418 to 3.)
Miller also cited the jobs lost in the construction field because builders and developers can’t secure financing to get their projects off the ground. “These are Americans with real skills that aren’t transferable outside of construction.” He sounded particularly concerned about the plight of North Carolina contractors and subs who are out of work with few prospects in sight.
HR 5409 aims to reduce lenders’ risk by providing them with federal guarantees on loans made to eligible home builders for projects deemed “viable” by those lenders and the Treasury Department. Borrowers must have a minimum net worth equal to the loan amount being guaranteed, and the loan itself can be used only for the acquisition, development, and construction of approved residential projects.
The loans cannot exceed 75% of the land’s loan-to-value, 100% of the construction and development costs, or 80% of the market value of the building project. The loan guarantee would cover 80% of the loan amount, and a single borrower is permitted to have multiple loans as long as they aggregately don’t exceed that borrower's net worth.
One-third of the guarantees would be made in areas where the lack of financing is most pronounced, as determined by the Treasury Secretary. Miller couldn’t comment on where those markets might be, but he did say “determining where demand is isn’t all that unusual; it’s routine business.”
The loan guarantee program would expire three years after it is enacted. This proposal drew some flak from the Journal’s housing reporter Michael Corkery, who questioned in his blog why the federal government should be guaranteeing residential construction loans at a time when the excess supply of unsold homes keeps mounting, as measured by the number of foreclosed homes on the market. Some builders in other parts of the country have told BUILDER in recent weeks that banks are finally starting to loosen their grip on lending.
Miller challenged Corkery’s criticism of the bill “because it assumes every market is overbuilt, and I don’t think that’s correct. And we’re not talking about building homes in overbuilt markets.” Miller readily admits that he continues to be a big advocate for homeownership, although he also concedes that the conventional wisdom about the value of owning a home “is now in dispute.”
He didn’t want to comment on the odds that the larger bill to which his amendment is attached would pass. But he thinks proposing it was the right thing to do, regardless. “At least we’re putting the agenda on the table that making credit available again for reasonable projects is important.”
Miller also believes that, over the long haul, the housing and finance industries need to be “reinvented. We’ve got to bring more private equity back into the market, and securitization, too.” He also believes that investors need more transparency so they can do their own due diligence about the viability of loans without having to rely on credit ratings services.
He believes small banks will support this legislation “if they don’t already.” He’s less sure about larger banks and their trade group, the Mortgage Bankers Association, which he said fought “tooth and nail” against a proposal he made three years ago to allow bankruptcy court judges to modify underwater mortgages. “And now they’re worried about strategic defaults? That just gets me mad.”
John Caulfield is senior editor for BUILDER magazine.
Learn more about markets featured in this article: Washington, DC.