1. 1 National Association of Residential Construction Lenders (NARCL) The Current Impact Secondary Marketing of Residential Construction Loans “Discussion by NARCL Membership” Strategies for Success in Construction Lending December 3, 2008

2. 2 National Association of Residential Construction Lenders (NARCL) STRUCTURE & MISSION Structure NARCL is a nonprofit national Trade Association representing financial service providers in the residential construction industry. Mission To provide education, policy development, statistics & to develop standards for the benefit of borrowers, lenders, builders, investors & others.

3. 3 National Association of Residential Construction Lenders (NARCL) Review Effects of Recent Market Conditions Reduced Availability of Credit to New Home Construction, primarily from unknown valuation factors May cause additional write-downs on existing portfolios (already originated) with no pipeline protection Reduced value in Forward Commitments causing issues with Home Builders (Pre-Sales turn to Spec) Reduced number of Lenders providing New Home & Reno Construction Lending May increase the cost of borrowing to borrowers w/ additional appraisal & other costs May increase Foreclosures and Unfinished Inventories, especially in Soft Markets Enhances potential restrictions by FannieMae, FreddieMac & other Govt. Agencies

4. 4 National Association of Residential Construction Lenders (NARCL) Review Primary Lender Issues Time Frame: Collateral takes months to complete ( 6 to 24 months) Market Value: Appraisal today may be less when collateral is complete Borrower Capacity: Condition today may deteriorate when home is delivered Lender Delivery: Ability - sell or hold may change when collateral is complete

5. 5 National Association of Residential Construction Lenders (NARCL) Review Lack of Standards Has Impacted Delivery of Completed Loan Borrower + Completed Collateral = Completed Loan From What Perspective?

6. 6 National Association of Residential Construction Lenders (NARCL) Review Lack of Standards Two Elements of Risk in Construction Lending Credit RiskCompletion Risk - Collateral Borrower (Consumer or Builder) Construction Process - Catastrophic (Death, Divorce, Other) - Inspection Quality & Timing - Financial (Job Loss, BK, Business Decline, etc.) - Contractor (Experience, Financial Stability, etc.) - Loan Structure - Project (Type & Location vs. Plans, Contract, Budget) Equity & LTV (Interest Reserve, High LTV, etc.) - Funding (State Laws, Draws, Inactivity & Maturity) Construction (LOC, Standalone, C to P, other) Perm (Full Doc, Stated, Alt A, Sub-prime, etc.) - Perm Phase (Additional Cost, Recert, MI, Market, etc.)

7. 7 National Association of Residential Construction Lenders (NARCL) Short Review Industry Standards for Credit Risk? Agency Guidance FannieMae & FreddieMac – Emphasis for Sale Standard Appraisal Format 1004 Fannie 70 Freddie Standard Loan Documentation Application – 1003 Fannie 65 Freddie Loan Approval Standard Underwriting Requirements LTV, D/I, Liquidity, Others Leads to Consistency!

8. 8 National Association of Residential Construction Lenders (NARCL) Review Industry Standards for Completion Risk? Inspector:None Contractor:None Project:None (Plans, Specs, Contract & Budget) Funding:None (Draws, Fund Control, Inactive, Maturity & RTP) Minimal Consistency – Managed Individually by Lender!

9. 9 National Association of Residential Construction Lenders (NARCL) Review Size of Single Family Constrc. Lending Market* 2008 est.$ 120.2 billion 2007$ 245.7 billion 2006$ 324.5 billion 2005$ 372.0 billion 2004$ 320.3 billion 2003$ 263.7 billion From the 2005 Peak 2007 Single Family Construction Volume declined by 34 % 2008 is estimated to decline an additional 45 - 49% below 2007 * Data includes all Production & Non-Production Homebuilders and Consumer Direct Lending

10. 10 National Association of Residential Construction Lenders (NARCL) Review Current Market Direction Many of the Construction Lenders Have moved toward Conforming and Super Conforming Reduced emphasis on Non-Conforming Sale to FannieMae, FreddieMac & Others (FHA, etc.)

11. 11 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Initiatives Focus On Standards Pipeline Direction Future Business

12. 12 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Direction Coordination with NAHB to Work with FannieMae & FreddieMac

13. 13 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Initiatives w/ NAHB Focus on FannieMae & FreddieMac FreddieMac first Mis-understanding with Recent Change  FreddieMac Bulletin as of November, 24 2008

14. 14 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Initiatives w/ NAHB Issues w/ Lenders Master Agreement Retroactive Nov. 24 th or as of January 2 nd 2009 Across the Board Changes in Negotiated Terms and or Special Waivers

15. 15 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Initiatives w/ NAHB Pipeline Protection Most Important issue – Flexibility by Agency Retroactive Nov. 24 th or as of January 2 nd 2009

16. 16 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Initiatives w/ NAHB Appraisal Delivery Date – was 60, now 120 Need 12 Months as a Minimum! Recommendations 1. Change from 120 days to 360 days for delivery 2. Change from 120 days to 240 & allow for Risk Based Price Adjustment to 360 days 3. Change from 120 days to 240 & add adjustment for Soft Market Analysis 4. Change from 120 days to one above, however, allow for Tolerance based on Market Conditions

17. 17 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Initiatives w/ NAHB Understand the Value of Single Close Loans Lenders move more to Two Time Close vs. One Time (C to P) Accounting - Held for Investment (Construction) & Held for Sale (Perm) Lender may put Risk of Market Decline back to Borrower Higher Risk – Reduced Value of Forward Commitments (Pre-Sales turn to Spec)

18. 18 National Association of Residential Construction Lenders (NARCL) Direction NARCL & Lender Initiatives w/ NAHB What are Your Concerns & Ideas? Discussion

19. 19 Contact Information If you are interested in participation; Contact Information : National Association of Residential Construction Lenders (NARCL) (303) 488-3400 info@narcl.org Richard W. NirkTom HallockRichard Lloyd Executive DirectorDirectorAdvising Director (303) 726-5154(805) 358-0885(303) 520-0905 rwnirk@narcl.org