Dive Brief:
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Construction lenders remain cautious, conservative and “chastened” after the losses they suffered during the building boom-and-bust of the last decade, but some are wading back into the acquisition, development and construction (ADC) market, according to a report in mortgage publication Origination News.
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Lenders have replaced their pre-recession “build it and they will come” philosophy with a more careful approach that includes requiring more equity from builders and developers; financing smaller projects; and negotiating terms designed to stop builders from defaulting on their loans.
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Increasing demand for buildings has led some lenders to return to the ADC market that they all but abandoned during the recession, and even to relax their new rules against funding speculative homebuilding.
Dive Insight:
Lenders are no longer willing to take the chances with construction loans that they took during the housing boom years between 2004 and 2006. By 2007, many builders were unable to sell homes or afford to develop the lots that would have reaped them the profits they needed to make good on their loans.
Some of those builders and developers simply walked away from their projects and their financing, while others delayed construction for years as they waited for the market to improve.
As banks slowly embrace construction lending in the improving economy, they are asking for larger down payments and, in some cases, are denying more loan applications than they approve, a practice that has sent contractors to alternative funders like private investors and non-bank lenders.