It is completely understandable that community banks would be reluctant to lend to home builders. After all, those loans sunk many banks after the housing bubble burst.

Still, bankers are slowly showing a renewed interest in making construction and development loans, as the housing market slowly starts to regain momentum.

"We've heard some banks have been making some new home builder loans," says Joe Brannen, president and chief executive of the Georgia Bankers Association. Activity is largely limited to "markets where the inventory of new construction is extremely low and where home builders are in strong financial shape."

Broadly, national economic indicators show that residential real estate appears to have turned the corner. Housing starts rose 3.6% in October from a year earlier, to an annual rate of 894,000 units, marking a four-year high, according to Bloomberg.

The National Association of Home Builders has projected that increased activity will continue next year.

The housing recovery is confined to specific areas, says David Crowe, chief economist at the home builder group. "It's a spotty recovery, so not every market is participating," he says. "But there has been a steady improvement. People are borrowing on the basis of building homes they want to sell next year."

Despite promising numbers, only a select group of small banks will be able to take advantage, says Christopher Marinac, an analyst at FIG Partners. Many banks are still weighted down by nonperforming residential development loans, and their regulators frown on them issuing new credit in that area.

"Many banks have said their examiners would yell at them for doing construction loans," Marinac says. "Most regulatory examiners have a disdain for construction lending."

Representatives from the Federal Reserve Board, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency could not be reached for comment.

Community banks with relatively clean balance sheets are making their move. The $11.5 billion-asset Umpqua Holdings (UMPQ) in Portland, Ore., last month added a home builder finance group to focus on the Pacific Northwest. .

At the $1.4 billion-asset Hamilton State Bancshares, construction and development loans increased by 48% in the second quarter from a year earlier, to $107 million. The Hoschton, Ga., company already had one of the largest concentrations of any community bank, with noncovered construction and development loans making up 39% of total loans at Sept. 30.

Bigger banking companies also want to tap into the potential for growth. Wells Fargo (WFC) formed a group in August to lend to residential developers along the East Coast, and in the Midwest and Texas.

Regulators will allow banks with a long track record in making development loans to expand, Marinac says. Those banks include the $3.8 billion-asset Bank of the Ozarks (OZRK) in Little Rock, Ark., and the $12.5 billion-asset Iberiabank (IBKC) in Lafayette, La. "They've got street cred," he says.

Many banks have thrived on the recent boom in refinancing, fueled by federal initiatives like the Home Affordable Refinance Program, though many industry observers expect refis to significantly tail off in 2013.

The Mortgage Bankers Association has projected a 23% decline in mortgage volume in 2013 from this year, with a 39% drop in refinancing offsetting a 17% increase in new home purchases.

A rise in development lending could partly offset a decline in refinancing, but not enough to completely compensate for it, says Matt Kelley, an analyst at Sterne Agee.

"If rates stay stable, you're going to burn through the pool of homeowners that have an incentive to refinance," leading to the drop in refi, he says. Meanwhile, many small banks are still avoiding development loans. "I'm not seeing any management teams say that they're seeing an inflection point in lending to their local builders," Kelley says.

Still, a number of bankers will likely have to wait before they can return to their roots and help developers turn pieces of dirt into subdivisions of sparkling new homes. "The summary is that banks are proceeding cautiously," Brannen says.

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