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Tenacity, creativity, realism, and willingness to lobby the government for change: These are the top recommendations LBM executives give on how to fight the slowdown in banks' construction lending, responses to a Southern Building Material Association (SBMA) "Dealer Helping Dealer" sounding found.
"Dealers telling me that they didn't have this problem were almost non-existent," reported SBMA's Cindy Hartley, who compiled the responses over recent weeks and reported them today. "Loans for speculative jobs are nowhere to be found. But construction loans of one sort or another CAN be hunted down, although it takes some work.
"Many dealers mentioned that, if possible, the homeowner should try to get the loan," Hartley continued. "Others talked about going to bank after bank and finally finding one that was willing to work with them. Some are finding that savings and loans are becoming the easier choice. Still other dealers are opening accounts of their own for homeowners and running the purchases through the homeowner's account."
The comments reply to a rural dealer's request for help after his local bank declared it wouldn't do any residential construction lending, even when the homeowners involved appeared to be creditworthy. It's a common problem nationwide; a Builder magazine survey in December of contractors nationwide found thast 26% of the builders who tried to get construction and development (C&D) loans in 2010 were turned down, another 20% encountered trouble receiving the loan, 39% never even tried, and only 14% said their loan request was granted without trouble.
Banks still are burdened by defaults on construction loans. The Federal Deposit Insurance Corp.'s report on banking conditions as of Dec. 31 found that 16.01% of the C&D loans outstanding were more than 90% days past due and another 1.97% were 30-89 days overdue. Those numbers are one reason why the number of institutions on FDIC's problem list jumped from 50 in 2006 to 884 in 2010.
But not all banks are in the same straits, dealers responding to the SBMA query reported.
"Don't stop with one bank--talk to as many as it takes to get a YES," one dealer said. "I've seen situations where literally the 10th or 15th bank said yes. Is a construction to perm loan a possibility in the homeowner's name? This may be something that is more comfortable to the bank yet enables the house to be built."
Wrote another: "We have not had this problem on the construction loan side, where the homeowner had the ability to get the mortgage loan to pay off the construction loan, but we have had a lot of people with down payment money and good credit--700 or higher-- that could not get a loan. In our market, they just go to another bank until they find one that will make the construction loan. That 'no construction loan' policy is only from some banks."
Here is a sampling of other comments. SBMA didn't identify any of the respondents.
- "Local banks are the only alternative. [Bank of America] has for the most part done away with new construction lending. Small local banks have more leeway. I have several jobs that I put with a private financier for construction loan then owner refinanced with a bank. Another concern for lenders can be covered by two-party draws for larger subs and suppliers. We maintain relationships with all the loan officers in the area for this reason. It also helps avoid getting hung out by your contractors."
- "Many banks are under an order to reduce their land-based lending. Others are under an order not to pay dividends until they get their loan portfolio (mainly land-based) in order. Not paying dividends tends to make the stockholders unhappy and depresses the trading price of their stock making them venerable for a takeover. These are some of the reasons banks will not make land-based loans to good customers. The person in question should seek to find a bank that is not subject to the above which may be a bank which is the past did not peruse construction lending."
- "The proposed owner should make application for the loan in his name to build his house. This should be easier to accomplish than having the builder to apply. If this does not work, the owner should contact different banks. Each bank may be working with different circumstances, and it is understandable that some banks are not making residential construction loans. The bank's decision may be influenced by various factors, such as their current portfolio of loans and by regulators. Bankers are much like lumber dealers: They make money by doing business. And if they don't make loans, there is a good reason. Many times bank customers do not understand the reasons. With a credit worthy individual, local banks should be able to advise the customer as to what he will need to do to get a loan."
- "Unfortunately, this is a problem in both large and small areas. The banks have so many non-conforming loans (foreclosures) and they run away from construction lending. This problem will remain with us until the banks start to lend. There is a light at the end of the tunnel. Loans for cars and such are at a three-year high. This will spread out the risk and allow banks to step out with construction lending. Time will tell and we hope that this trend will continue and we can get some home loans this year. Our area has already started but the bank requires more than in the past. Not a kidney but a much larger amount from the builder. The days of 100% financing has come and gone."
- "The government will have to pressure the banks--the construction industry affects so much more than builders and subs/suppliers. Furniture, appliances, electronics, furnishings, landscapers, utilities [all are affected], and not to mention all your normal items like HVAC, plumbing, asphalt, and us. Someone has to make all this stuff, transport it, supply fuel to trucks, clean & maintain manufacturing facilities, feed people at break time--you get my point. Unfortunately, the government does not."
- "The banks are only half the problem dealing with all their bad loans on the books currently. The other major problem for the banks is the regulators/feds who are dictating what kinds of loans they think the banks should make. If the bank chooses otherwise, then feds just threaten to regulate them even more. Not an option!"
- "The problem [exists] in Texas and my understanding [is] that it is nation-wide. The problem is not banks wanting to lend, but the fear of the bank regulators and their strict guidelines. Banks have money and they want and need good loans. The best answer is to support our local associations and to support the National Lumber & Building Material Dealers Association, which through our local association we are members of. Then we need to call, write and e-mail our congressmen and make them aware of our problems."
SBMA's summary included comments from a banker who was asked how he would respond. "As your member indicated, home building construction has been hit hard during the economic downturn," the banker replied. "As a result, many financial institutions had to re-evaluate their credit guidelines and exposure within the industry due to the losses that occurred as a result of the impact. During this time, we have seen an increase in homeowners taking the lead in obtaining the construction loan. Historically, the builder obtained the financing because it was readily available in the marketplace.
"It is more common for homeowners to apply for a construction loan," the banker continued. "The loan would be specific to the project and provide for inspections/draws as the house is being completed. Most mortgage companies provide these types of products. I would encourage the builders to work with potential mortgage lenders in their marketplace to identify the available financing options and more information on the terms. Then, as they work with their customers, they can provide them with a referral and information on how the partnership would work."
The SBMA report concluded with one dealer from the greater Cincinnati area, where he said even smaller savings and loans are reluctant to give C&D loans.
Why? A lot of downside for the bank and a small, short-term upside," the dealer wrote. "There is a similar amount of paperwork to secure a 6-12 month construction loan as there is to a 30-year mortgage. But the actual dollar profit for the construction loan is small. An up-front fee, and the 6-12 months interest only--ig deal. Why "big deal?" Look at the bank’s downside risk: A 15-30 year mortgage is made on a COMPLETED house that has a professional appraisal done on it. Then, 70%-80% of the value is loaned. If there is a default, the banks gets the house in foreclosure and has a chance to break even. Construction loan? You loan 70%-80% of the EXPECTED value when completed. Yes, you only make payments after you have inspected the progress and are satisfied that the proper percentage of completion is met. BU, what happens if the builder overruns his budget and runs out of funds and cannot complete the house? A mess. The best a bank can do is take back an uncompleted house, possibly poorly built, below code, and try to get some amount out of a quick sale. If you don’t sell it quick it degrades from being open, unoccupied, unheated etc.
"A possible solution: network with bankers and find one that has funds to lend for end mortgages and make a deal that you will send new home mortgage prospects to his bank as long as they will make a construction loan first as part of a "package" 15- or 30-year mortgage. This could be a time saver for a bank to have prospects sent to them (especially high valued homes or well qualified buyers) and the bank will be willing to work with you in a win-win partnership. Obviously use this as a value added service you can help facilitate for your builder customers. This can become a valuable relationship for all three entities: the builder, the banker, and the lumber guy.
"FYI, in addition to being sales manager for a lumber yard, I am on the board of a savings and loan," the dealer continued. "We specialize in working with builders in the scenario I described above. If a builder I supply lumber to has a homeowner apply for a loan, I simply recuse myself from voting on approval of the loan. The savings and loan gets many new quality end loans with much less prospecting effort than normal. Just begin talking to bankers large and small) and I bet you can find one willing to work with you and your builders."
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