“The Effect of the Credit Crunch on Small Business Access to Capital”
Scott Eckstein testified yesterday (April 30, 2008), on behalf of the National Association of Home Builders, before a U.S. House of Representatives committee looking at the current credit situation and its effect on the smaller home builders across the country.
Their recommendations to the committee have implications for all real estate investors. Here are some highlights:
Broader Sources of AD&C Credit (acquisition, development and construction)
The current financing quagmire for home builders vividly illustrates the importance of developing additional sources of AD&C credit. ... A viable secondary market for AD&C loans would directly benefit builders and lenders by: (1) transferring risk away from lenders; (2) increasing availability of funds so that projects can be
more reliably completed; and (3) mitigating the devastating impact of equity calls on builders, or transfers of partially completed projects to banks under capital and/or regulatory pressure.
Balanced Regulation
The approach of the regulators in overseeing institutions involved in AD&C lending will be an important factor determining the length and severity of the current housing and economic recession as well as the vigor of the subsequent recovery. It is crucial for the banking regulators to take a balanced approach when evaluating bank lending, especially in regard to AD&C loans. The regulators should continue to encourage institutions to pursue sound loans on viable projects. In addition, the regulators should provide additional guidance to lenders on dealing with outstanding
AD&C loans to ensure that losses are minimized through flexible and prudent loan accommodations. Such actions are just as critical in a nascent recovery as in the current downswing.
Federal Home Loan Bank Guarantees of Municipal Bonds
S. 1963, introduced in the Senate by Senators Rockefeller, Crapo, Stabenow and Carper, would address this impediment. The bill would amend Section 149(b) of the Internal Revenue Code by adding FHLBanks to the list of government agencies and government-sponsored enterprises (GSEs) authorized to provide credit enhancement for tax-exempt municipal bonds. Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) have been permitted since 1984 to provide such credit support. A similar provision was included in the Housing Assistance Tax Act of 2008 (H.R. 5720) that was recently approved by the House Ways and Means Committee. Enactment of this measure would help to significantly lower financing costs on public infrastructure and other projects that are the foundation for meeting community housing and economic development needs.
Home Buyer Tax Credit
Two causal factors in the current housing downturn and the related credit crunch are
declining house prices and excess inventory. These elements are equally central to the outlook for the broader economy and the financial markets. Policies that stimulate home purchases in the immediate future can pay huge dividends. The biggest bang for the buck most likely would be provided by a temporary homebuyer tax credit, such as the credits approved recently by the Senate in the Foreclosure Prevention Act of 2008 and by the House Ways and Means Committee in the Housing Assistance Tax Act of 2008. Indeed, the recent revival of interest among prospective buyers suggests that temporary credits could stimulate a wave of home buying that could quickly reduce excess supply in housing markets and halt the dangerous erosion of house prices and mortgage credit quality. NAHB applauds the Congress for its efforts to create a homebuyer tax credit, and stand ready to work with Congress in crafting the most effective credit to help solve the current economic crisis.
Expand the Net Operating Loss Deduction Carryback
Home builders, like many businesses, are now reporting financial losses when a few years ago they were generating jobs, providing local development and paying taxes. For home builders large and small the importance of the ability to claim and carry back net operating losses (NOL) deductions to years when significant taxes were paid cannot be overstated. The inability to do so will result in the need to either increase high-cost borrowing or further liquidate land and homes, which
will only compound the existing inventory problem.
Expand the Mortgage Revenue Bond Program
The existing Mortgage Revenue Bond (MRB) program also offers a method of increasing
housing demand. A special allocation of bonds to be used for either purchase or refinancing would be beneficial for housing.
Expand Small Business Expensing
Section 179 of the tax code allows small business to expense the cost of investment for business property. The Economic Stimulus Act of 2008 temporarily expanded the rules so that small businesses may expense up to $250,000 of qualified investment for tax year 2008 ($128,000 would have otherwise applied in 2008, with that amount indexed for inflation through 2011). The expensing benefit is phased-out for business incurring more than $800,000 in qualified investments in 2008 ($510,000 would have otherwise applied in 2008, with that amount indexed for inflation
through 2011).
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