Credit squeeze bringing new challenges to builders.

The mortgage credit crunch has spilled over into land acquisition, land development and home construction (AD&C) lending, increasing the challenges faced by builders in the current housing downturn.

"With private securities markets in disarray and banks retrenching, a bona fide credit crunch is underway," Bob Mitchell, a home builder from Rockville, Md. and former president of the National Association of Home Builders (NAHB), told the Senate Small Business Committee during a hearing on "Impacts of the Credit Crunch on Small Firms."

Residential AD&C loans are used to purchase land; develop lots; build a project's infrastructure such as streets, curbs, sidewalks, lighting, and sewer and utility connections; and construct homes.

Presently, funding for viable residential development and construction projects has been severely limited or blocked entirely at federally insured depository institutions, which are the sole source of housing production credit for the small businesses that comprise most of the home building industry, Mitchell told lawmakers.

He noted that a viable secondary market for AD&C loans would directly benefit builders and lenders by transferring risk away from lenders; increasing availability of funds so that projects could be more reliably completed; and mitigating the devastating impact of equity calls on builders, or transfers of partially completed projects to banks under capital and/or regulatory pressure.

Meanwhile, stimulating demand for homes and stabilizing housing prices would do the most to relieve the financing and other business difficulties faced by home builders. The housing stimulus contains key provisions that would help ailing home owners, restore consumer confidence, jump-start housing, stabilize financial markets and save jobs, he said.

Expanding the carryback of net operating losses beyond the current two years would help all businesses that have been hit hard in the current economic climate to weather the economic storm, make their payrolls and emerge from this downturn in a position to grow. It would also provide flexibility for home builders with large land holdings to reduce their inventories in an orderly fashion to stabilize home and land prices.

Finally, approving a temporary $10 billion expansion of the mortgage revenue bond program, which is included in both the Senate and House bills, would also help strapped borrowers seeking to refinance their own homes, he said. Expanding the reach of the program would allow it to have the largest effect particularly in communities experiencing the possibility of a wave of foreclosures or an extreme excess of inventory.