Does New Home Shortage Loom?

Will Tough Refinancing Guidelines Create New Home Shortages?

August 20, 2009

Tough refinancing guidelines due to federal regulatory pressure on banks are causing difficulty for developers who need to renegotiate short-term loans for their projects.

Federal guidelines, issued in 2006, require banks to restrict commercial loans to less than 300% of total capacity. Although the guidelines were never formally adopted by any regulatory agency, they are currently viewed by both banks and regulators as an official requirement.

The regulations leave bankers only two options to control the volume of commercial loans: either raise equity from private sources to pay them off, or use earnings to write off the loans. Bankers are requiring commercial borrowers to pay off their loans rather than refinance, creating financial difficultiesfor developers who depend on refinancing in order to complete ongoing projects. As a result, some developers are now forced to default on their loans, leaving the future of their projects in question.

In Austin, Texas, the shrinking number of new lots under development signal a shortage of new homes in the near future, which means buyers will pay higher prices for new homes that are available. Given the current restrictions on commercial loans, other areas of the country may soon experience the similar shortages.