Fannie Mae is moving ever closer to making a market in construction lending, saying its routine involvement could help bring housing to within the reach of more people.
Home builders have been asking Fannie Mae for the last several years to become more active in attracting funds to finance the acquisition and development of raw ground and then construct houses. But the commercial banks and thrift institutions which currently dominate the $350 billion a year ADC sector haven't been too keen on the idea.
Although they are flush with cash right now, builders would like to see the same standardization and stability brought to construction lending that Fannie Mae helped create in the primary lending sector, where it buys home mortgage from local lenders, packages them into securities and sells them to investors world wide.
Fearful that Fannie Mae would quickly dominate construction lending, opponents of the idea say the market is functioning just fine, that here is no need for the government-sponsored enterprise's involvement.
But Fannie Mae Chairman Daniel Mudd told home builders meeting in Orlando last week at their annual convention that his company wants to be a player, not a gorilla.
"We're not going to put a big hairy King Kong footprint on the market. We'll still be a small player," Mudd told the National Association of Home Builders executive committee. The 120-member panel is the governing body of the 120,000-member NAHB.
Builders, he said, should have the same range of financing options available to them as their buyers.
Although HUD has given the program a green light, the regulator and Fannie Mae are still going back and forth on specific guidelines.
According to sources, Fannie Mae is hoping to convince government officials to allow the company to purchase and securitize ADC loans on all properties as a way to break into high-cost markets. But HUD so far has been adamant in insisting the mortgages on the houses that are eventually built be at or under the conforming loan limit.
The current ceiling is $417,000, but it tends to rise every year in lockstep with home prices.
Mudd told the builders that Fannie Mae is currently in the process of developing back-office support to work with construction lenders on underwriting and servicing acquisition, development and construction loans. And it is working with the NAHB to develop standards for loan documentation, underwriting and approval requirements, and servicing processes.
The Fannie Mae chairman noted that home builders will require some $4 trillion in ADC funding just to build the single-family houses they'll need to erect over the next decade to keep up with demand, and said his company can help meet their needs.
"While America has the most sophisticated secondary mortgage market in the world," he told the NAHB's leadership, "we have no secondary market for construction financing."
Not only would Fannie Mae remain active in the ADC market during the bad times, he said, its presence would drive down costs.
NAHB has estimated that a secondary market for ADC funding would reduce the cost of a $200,000 house by $3,000, an amount that, if passed along to consumers, would make that home more affordable to three-quarters of a million people.
Fannie Mae's original experimental ADC program was capped at $50 million, but HUD subsequently raised the limit to $100 million and then lifted it altogether and approved the company's request to make it permanent.
Last year, the government-sponsored enterprise financed more than 42,000 units under the program as part of its pledge to do $10 billion in construction financing as part of its American Dream Commitment over the next 10 years.
