1 national association of residential construction lenders (narcl) the current impact secondary...

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National Association of Residential Construction Lenders (NARCL)

The Current Impact

Secondary Marketingof Residential Construction Loans

“Discussion by NARCL Membership”

Strategies for Success in Construction LendingDecember 3, 2008

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National Association of Residential Construction Lenders (NARCL) STRUCTURE & MISSION

StructureNARCL is a nonprofit national Trade Association representing financial

service providers in the residential construction industry.

MissionTo provide education, policy development, statistics & to develop standards

for the benefit of borrowers, lenders, builders, investors & others.

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National Association of Residential Construction Lenders (NARCL)Review

Effects of Recent Market Conditions

• Reduced Availability of Credit to New Home Construction, primarily from unknown valuation factors

• May cause additional write-downs on existing portfolios (already originated) with no pipeline protection

• Reduced value in Forward Commitments causing issues with Home Builders (Pre-Sales turn to Spec)

• Reduced number of Lenders providing New Home & Reno Construction Lending

• May increase the cost of borrowing to borrowers w/ additional appraisal & other costs

• May increase Foreclosures and Unfinished Inventories, especially in Soft Markets

• Enhances potential restrictions by FannieMae, FreddieMac & other Govt. Agencies

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Primary Lender Issues

• Time Frame: Collateral takes months to complete ( 6 to 24 months)

• Market Value: Appraisal today may be less when collateral is complete

• Borrower Capacity: Condition today may deteriorate when home is delivered

• Lender Delivery: Ability - sell or hold may change when collateral is complete

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Lack of Standards

Has Impacted Delivery of Completed Loan

Borrower + Completed Collateral = Completed Loan

From What Perspective?

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Lack of Standards

Two Elements of Risk in Construction Lending

Credit Risk Completion Risk - Collateral

Borrower (Consumer or Builder) Construction Process- Catastrophic (Death, Divorce, Other) - Inspection Quality & Timing- Financial (Job Loss, BK, Business Decline, etc.) - Contractor (Experience, Financial Stability, etc.)

- Loan Structure - Project (Type & Location vs. Plans, Contract, Budget)

Equity & LTV (Interest Reserve, High LTV, etc.) - Funding (State Laws, Draws, Inactivity & Maturity)

Construction (LOC, Standalone, C to P, other)

Perm (Full Doc, Stated, Alt A, Sub-prime, etc.)

- Perm Phase (Additional Cost, Recert, MI, Market, etc.)

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National Association of Residential Construction Lenders (NARCL)Short Review

Industry Standards for Credit Risk?

Agency GuidanceFannieMae & FreddieMac – Emphasis for Sale

Standard Appraisal Format1004 Fannie 70 Freddie

Standard Loan DocumentationApplication – 1003 Fannie 65 Freddie

Loan ApprovalStandard Underwriting Requirements

LTV, D/I, Liquidity, Others

Leads to Consistency!

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Industry Standards for Completion Risk?

Inspector: NoneContractor: NoneProject: None(Plans, Specs, Contract & Budget)

Funding: None(Draws, Fund Control, Inactive, Maturity & RTP)

Minimal Consistency – Managed Individually by Lender!

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Size of Single Family Constrc. Lending Market*2008 est. $ 120.2 billion2007 $ 245.7 billion2006 $ 324.5 billion2005 $ 372.0 billion2004 $ 320.3 billion2003 $ 263.7 billion

From the 2005 Peak2007 Single Family Construction Volume declined by 34 %2008 is estimated to decline an additional 45 - 49% below 2007

* Data includes all Production & Non-Production Homebuilders and Consumer Direct Lending

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Current Market Direction

Many of the Construction Lenders

• Have moved toward Conforming and Super Conforming• Reduced emphasis on Non-Conforming• Sale to FannieMae, FreddieMac & Others (FHA, etc.)

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National Association of Residential Construction Lenders (NARCL)Direction

NARCL & Lender Initiatives

Focus On

Standards

Pipeline Direction

Future Business

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NARCL & Lender Direction

Coordination with NAHB

to

Work with FannieMae & FreddieMac

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NARCL & Lender Initiatives w/ NAHB

• Focus on FannieMae & FreddieMac• FreddieMac first • Mis-understanding with Recent Change

FreddieMac Bulletin as of November, 24 2008

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Issues w/ Lenders Master Agreement

Retroactive Nov. 24th or as of January 2nd 2009

Across the Board Changes in

Negotiated Terms and or Special Waivers

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Pipeline Protection

Most Important issue – Flexibility by Agency

Retroactive Nov. 24th or as of January 2nd 2009

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Appraisal Delivery Date – was 60, now 120

Need 12 Months as a Minimum!

Recommendations1. Change from 120 days to 360 days for delivery

2. Change from 120 days to 240 & allow for Risk Based Price Adjustment to 360 days

3. Change from 120 days to 240 & add adjustment for Soft Market Analysis

4. Change from 120 days to one above, however, allow for Tolerance based on Market Conditions

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Understand the Value of Single Close Loans

• Lenders move more to Two Time Close vs. One Time (C to P)• Accounting - Held for Investment (Construction) & Held for Sale (Perm)

• Lender may put Risk of Market Decline back to Borrower• Higher Risk – Reduced Value of Forward Commitments (Pre-Sales turn to Spec)

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What are Your Concerns & Ideas?

Discussion

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Contact Information

If you are interested in participation;

Contact Information:National Association of Residential Construction Lenders (NARCL) (303) [email protected]

Richard W. Nirk Tom Hallock Richard LloydExecutive Director Director Advising Director(303) 726-5154 (805) 358-0885 (303) [email protected]

1 national association of residential construction lenders (narcl) the current impact secondary...

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