The board officers and our Education Czar recently invited member lending institutions to the table to discuss the dramatically different landscape we find ourselves in currently, especially with regard to AD&C lending and individual mortgage loans.
Our objective was to better understand both the market and regulatory forces which are creating the changes that affect our industry so substantially. We also wanted to promote dialogue with our lenders and work to convey accurate information to you, our members, so that you know what to expect and understand what changes we need to make to remain successful in an otherwise volatile industry at an incredibly challenging time.
While builders and lenders may have valid grievances with another – we agreed at the outset not to play a blame game. We need to move on and understand the rules of the game so we can position ourselves successfully. We also want the lenders to understand how our members represent the height of this profession and they can use our professional standards to prevent these problems from recurring in the future.
Here are some of what I believe were the most important points from our dialogue:
• A position of equity: For a speculative home, the builder must have some equity in the deal – no more 80% of appraisal. For example, if you own the lot, that value would be taken into consideration.
• More scrutiny – looking at the builder “globally”: I heard lenders saying that when they are lending for spec or a custom, they will be looking at the builder’s history and full financial profile in a very comprehensive way – debt service, cash reserves, insurance, years of experience, completed projects, current projects (including those with other lending institutions, etc.) They want to see a financial statement with liquidity and a comprehensive, itemized budget for the project. Those who are not professional builders will certainly not meet many of these requirements.
• Loan expiration: The lenders said that there have always been clauses in contracts about actions the lender may take after a certain period of time, if the home does not sell. For many years, however, these were nearly moot because homes were selling here in fairly short order. We need to be aware of the “fine print”, so to speak, and well informed about our legal obligations as well as those of the lender.
• Regulatory Hot Button – Appraisals: Those responsible for oversight of the lending industry are focusing intensely on the appraisal process. Some of the fraudulent schemes we’ve seen in the headlines related to manipulating appraisals are driving changes in the process of ordering an appraisal. Some banks are going to a more random selection of an appraiser from an internal list while others are using an Appraisal Management Company – a third party outside the bank that orders the appraisal to keep the process at an arm’s length.
• The Secondary Mortgage Market: this is a driving force behind this appraisal and other changes by making them requirements for those mortgages they are willing to buy. One banker said those eligibility criteria change and expand on a daily basis. This, of course, is also affecting what is required of the purchaser to qualify for a loan.
• Mortgage loans: a buyer will certainly have to provide a well-documented financial position. In the past, there wasn’t a need for the homeowner to sell their existing home before starting a custom. That may not be the case now. While there are still some bridge loans out there, the perspective on this situation is different. Before, banks made an asset-based decision in this equation. Now, it is more an issue of cash flow and whether or not someone can handle two loan payments for a longer period of time if the house does not sell quickly.
I really appreciated our lender members who made the time to come to this meeting to educate us, to listen to us, and to help us move forward in a productive way.
Keeping the Faith