The secondary market for home mortgages is successful. Why not a similar program for land acquisition, development, and construction? By Kent Conine
There's no question that the presence of a strong secondary mortgage market has revolutionized home financing. And as anyone who was active in the housing market prior to the emergence and growth of the secondary mortgage market can tell you, today's housing finance system is far superior to its predecessor.
When the majority of home loans were made by local banks and savings and loan associations and kept in the lenders' portfolios rather than being sold on the secondary market, periodic regional shortages of funding were common, because lenders could make and hold just a certain number of loans in their portfolios. What's more, the system was much less efficient and competitive than today, resulting in higher costs to consumers.
Because a strong secondary market for mortgages is a proven tool for lowering costs, making the mortgage market more efficient and making funding more readily available, one of the NAHB's top priorities in 2003 will be to work toward the creation of a similar secondary market for residential land acquisition, development, and construction (AD&C) loans.
Just as it has done for home mortgages, a secondary market for ADamp;C loans would help ensure a steady, reliable flow of funds for new-home construction and would lower the cost of housing production financing.
Ultimately, such a secondary market could help builders control land acquisition, development, and construction costs. Controlling costs would help promote housing affordability and thus potentially increase homeownership. Equally important, an ADamp;C secondary market could help builders better withstand the credit crunches that periodically constrict the supply of housing production funds.
Photo: Noah Woods
For these reasons, the NAHB is pursuing a number of alternatives in hopes of stimulating the development of a secondary market for ADamp;C loans. One of our most important initiatives is documenting the risks involved in ADamp;C loans.
We have already gathered some limited data. That data along with anecdotal information and industry experience, tells us that the risk on residential construction loans is almost as low as the risk on residential mortgages. Armed with definitive proof that residential ADamp;C loan risk is quite low, we can build much more persuasive arguments in favor of establishing a secondary market for this sector of the market.
Another of the NAHB's initiatives will be a broad-based advocacy effort where we will work with the financial regulators, the administration, Congress, HUD, the Treasury Department, and government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System, to build support and momentum for a secondary market for ADamp;C loans.
The secondary mortgage market brought revolutionary changes to home financing for consumers. It's time to take the revolution forward and give the nation's home builders and developers broader access to housing production financing.