By Iver Peterson For more than 20 years, the Cardinal Federal
Savings and Loan bank in Owensboro, Ky., financed the land
acquisition and construction costs of Tommy Thompson's
house-building business, and Thompson hardly expected that
relationship to change when he recently took an option on another
piece of developable land.
But despite Thompson's two decades of credit worthiness,
Cardinal turned him down, citing new federal rules governing the
country's problem-plagued thrift industry.
The rules, enacted last August as the Financial Institutions
Reform, Recovery and Enforcement Act - FIRREA, as it has come to be
known - are intended to avoid another savings and loan crisis by
curtailing the share of its assets that a savings association may
lend to a single borrower.
Under the regulations, real estate development loans, the source
of most of the problems that troubled thrifts have gotten into
around the country, have been assigned the highest risk factor,
compared to other loans like home mortgages and Treasury notes.
That means these lenders must now have more capital in reserve
for such real estate acquisition, development and construction loans
- ADC loans, for short - than the safer forms of debt.
Many developers believe that, as a result, many of the thrifts
will simply refuse to make the loans for them to acquire land and
``It seems to me that unless you have a long-term relationship
with a bank, they're really not interested in any new business,''
said Josh Weiner, the head of Weiner Homes Corp. of Neptune, N.J., a
medium-sized developer. ``The banks have become more and more
conservative and more and more frightened about what the regulators
are going to do.''
Barbara Alexander, managing director of the Construction and
Building Products Group for Salomon Brothers, the investment
bankers, said that the country could lose 100,000 new housing starts
a year for the next five years because of the credit crunch the new
regulations are creating for residential builders.
She echoed the view of housing industry officials that Federal
limits on the amounts that may be lent to a single builder will
drive housing prices up, either by raising the builders' costs or
reducing the supply of new housing.
The value of all acquisition, development and construction loans
from the major housing construction lenders ``likely will slide by
10 to 15 percent in 1990, and then fal considerably more in 1991,''
Alexander told the National Association of Home Builders in January.
``In addition, with few incentives - and a plethora of
disincentives - for such lending, the likelihood of a quick revival
by such lenders is remote.''
The thrift institutions also lament the crimp the new federal
rules put on their ability to lend to developers. But secretly,
some analysts say, they may be pleased to have a valid reason for
turning down their old customers in a sluggish and - in many regions
- an overbuilt market.
Home buyers feel the pinch, too, when builders whose credit has
been stopped by a lender are unable to complete all the planned
phases and amenities in a housing development.
In some New Jersey projects where early buyers have invested
their money and moved in, roads have been left unpaved, sewage
hookups have not been made and half-built houses have been left
Thompson, the Kentucky builder, has not just thrown in the
towel. He has begun talking with a commercial bank, which will lend
him less and charge him more than he used to pay at Cardinal
Federal. A result, the builder said, will be a smaller project with
``Not only was it frustrating to have to find another source of
acquisition and development loans,'' Thompson said, ``but we
couldn't hire the people we were planning to employ, and in the
meantime, another developer came in and started a project that will
compete with ours. …