“this past septeMBer, the
Continued from Page 19
According to a Sept. 30, 2007, survey by the
National Association of Residential Construction Lenders (NARCL), residential
construction lenders reported a decline in
volume and an increase in delinquency and
write-offs within their portfolios for the
first time in more than a decade. This past
September, The Denver Post also reported
that 37 lenders no longer have construction-lending programs out of the approximately
70 in place between 1991 and 2006. This
represents a loss of nearly $30 billion in financing, according to the article.
Many external factors have brought the
construction industry to its knees in the
past year. According to the aforementioned
NARCL lender survey, the top external
threats for construction lenders are:
n Perceived and actual risks to construc-
n Decline in home values and appraisals;
n Higher risk and default among build-
n Secondary-market reductions and
Many successful construction lenders
implement a pre- and post-loan-mitigation
process to cover each aspect of the construction project. This process includes reviews of the contractor and the project itself.
With these in place, most lenders mitigate
their risk by reviewing a contractor’s credibility and the borrower’s creditworthiness,
in addition to a project’s feasibility, before
the loan closes.
When first evaluating a construction
project, lenders consider a contractor’s qualifications extremely important. If the contractor is not qualified to manage the project, it
likely won’t matter how effectively the lender
manages the funding. The contractor also
has the largest influence over the success of
the project and the funds disbursed.
According to the NARCL survey, the top
reasons for a builder-related loan default are
a lack of working capital, inexperience, high
number of starts without a customer, a cutback credit line or a high cancellation rate.
Your construction lender will examine
these elements in your loan scenario. As a
broker, you should ensure they’re as solid as
they can be.
In addition, lenders often will order an
initial-cost review or budget analysis to
Although few construction lenders implement an entire contractor-review and
project-review process, choosing to bank on
their funds-disbursement system instead,
these steps will highlight the most important question to the lender — is it lending
enough to complete the asset?
denver post reported that
37 lenders no longer
Managing the projeCt
Once lenders know they have a qualified
contractor and an accurate budget in place
for funds disbursement, they draft appropriate guidelines to manage disbursement
through the life of the project. Some lenders
adhere to a “work in place” philosophy, in
which they ensure each phase of a project
is complete before releasing funds. In this
type of arrangement, funds are not fully
disbursed until each phase of the project
is complete. This is an important point for
your clients to keep in mind.
Operational issues also can trip up lenders at this point, especially if they are short-staffed or process loans using outdated
technology. The current market has seen
challenges related to training, maintaining
and acquiring construction-lending personnel. A number of lenders outsource tasks to
Technology also has been a stumbling
block for many lenders that cannot sustain
their workload with a reduced staff. Those
who have updated their processing technology often have additional comfort with credit
risks in their portfolio. They also often have
streamlined their systems and shortened
their turnaround times, which can allow
them to take on additional business.
prograMs out of the
approxiMately 70 in plaCe
BetWeen 1991 and 2006.”
What looms in the outside marketplace
is nothing compared to what has happened
internally with many lenders. Two of the
most-prevalent internal impacts have been
the downsizing of parent corporations and
long-standing risk-management issues, according to the NARCL survey. In addition
to product-tightening, the management
of defaulted loans and long-term funding capabilities also has weighed heavily
The combination of these external and
internal factors has affected most divisions
within these construction lenders. Many are
scrambling to get on board with risk-mitigation firms or underwriting departments.
But lenders that are seeing growth in
their programs and that have continued to
be profitable can attribute much of their
success to risk-mitigation components put
in place through outsourcing or conservative, strategic management. These are
the lenders that commercial brokers often
would be wise to check out when posed
with a construction-loan scenario.
Lenders have several options for mitigation
policies that can secure them and their brokers against a market crash or simply against
a project that has gone south.
ward against project default. Reviewing the
project’s scope and associated costs will help
lenders decide if they should take on a particular loan. Ensuring that all the elements
of a construction project are in place is important, as is a cost-per-square-foot analysis
to help lenders avoid underbid line items.
Other questions that construction lenders might ask include:
n Does the budget add up correctly? Is it
n Does the budget match the contract? and
n Does the disbursement schedule follow
the project’s progress?
Lenders also will review the contract
to avoid any unforeseen issues. Their
n Is the contract between the contractor
and the owner?
n Does the contract define the scope of
n Are provisions listed outside the
n Is the contract fully executed?
n Are there unusual payment terms?
As a broker, not reviewing these terms
can lead to turmoil once construction has
started and changes begin.
hoW lenders survive
With tightening credit policies and a decrease in marketing budgets, the industry
also has seen a reduction in sales channels.
Thus, the number of companies offering construction-loan programs also has dwindled.
Successful lenders that are still operating a
construction-loan program realize the need
to target growth opportunities as well as the
management to handle those opportunities.
Surviving construction lenders are
evaluating the market to manage their programs and growth. At the same time, they
are looking to reduce risk and mitigate those
risks that do come up. They also recognize
the need for construction-loan products,
even as the market contracts.
Clearly, these components will continue
to change with the mood of the industry.
But lenders that have integrated a comprehensive risk-mitigation system often will be
those that are around to witness the changes.
For brokers seeking funding for construction
scenarios that cross their desks, these could
be the ones to keep in mind.
Penny Roach is executive
vice president of business
development for The Granite
Companies — Granite Loan
Management, Granite Construction Inspections and Granite Commercial Management.
Roach has more than 15 years’
mortgage-banking experience with firms such as
Chase Manhattan Mortgage Corp. and First Republic
Bank. She has held positions from operations and
underwriting to sales and origination. GLM provides
construction-loan-management and construction-risk-mitigation services for financial institutions nationwide.
Reach Roach at (888) 456-4888 or penny.roach@ graniteloan.com. Visit www.graniteloan.com.