Sometimes we think about "getting a loan" as the process of obtaining money from a bank when, in fact, loans can come from any number of sources. A basic understanding of these varied sources helps smart shoppers find the best deal every time.
In "Shop 'Til You Drop," I take a look at the major lending sources for co-op underlying mortgages. Each lender type tends to focus on a specific market niche, and each individual institution applies its own criteria when evaluating loan requests. Therefore, it's worth doing a little research before signing up with that bank on the corner.
On another note, I suspect that you're not ready to give up weekends at the beach or golf course, nor do you want to think about the snowy weather that will return in about four months. But now is the perfect time for board members to spend a few hours evaluating their building's readiness for the ravages of winter. Think back to last winter (brrrr!). Remember the complaints and suggestions of your shareholders and professional advisors. Discuss the financial position of the co-op. Then schedule any required repairs immediately. Getting job estimates now will assure that repairs and preventive maintenance are completed before the snow falls.
As always, whether it's obtaining a new underlying mortgage or handling major repairs, planning ahead-with input from all of the co-op's professional advisors-is the key to getting the job done right.
Thank you for reading Co-op Financing Quarterly.
Enjoy the rest of your summer!
Patrick B. Niland
©1998 by Patrick B. Niland
To get a great underlying mortgage you need to know who's got what.
Need a mortgage? Call a bank, right?
Not so fast. When it comes to underlying mortgages, there are almost as many choices as there are pigeons in Central Park.
At any given time, various lending institutions offer a wide array of options for co-ops that need to refinance an underlying mortgage.
But who are these lenders and what are the advantages and disadvantages of each? And how can a board be sure it has researched the market thoroughly and uncovered all the possibilities? That's the tough part.
When shopping for a new mortgage, it helps to have a feel for the financial markets, understand some of the jargon, and know a few of the "players."
Originally, most savings institutions were created as small, local "thrift" associations whose dual purpose was to provide a safe place for people's savings and affordable loans to help their depositors buy homes. Over the past 20 years, savings banks acquired new financial powers and now offer checking accounts, money market funds, life insurance, business loans, home equity loans, student loans, and other consumer credit.
In the 1980s, the savings and loan crisis bankrupted hundreds of savings banks and forced many others to merge. This debacle resulted in a smaller universe of savings institutions and more conservative loan officers. Today, some of the caution is abating and savings banks are again a good source for certain types of underlying mortgages. Most offer renewable 5- and 10-year loans, but only a few offer credit lines or second mortgages.
Fannie Mae and Freddie Mac-Both Fannie Mae
Both organizations purchase loans from a network of lenders across the country, which creates a "secondary market." They then package them into "pools" which are used as collateral for bonds known as mortgage-backed securities (MBS). These bonds are issued as investments to institutional investors such as insurance companies and pension funds.
Because government regulations limit the lending activity of banks to multiples of the deposits they hold, mortgage loans could become scarce if banks were forced to keep every loan "in portfolio." Fannie and Freddie help solve this problem by buying loans from lenders and then paying them fees to "service" each loan (i.e., collect payments and handle any problems). This process strengthens lenders by freeing up their capital and also provides them with steady servicing income.
Although Fannie and Freddie were originally created to support the single-family residential mortgage market, they both now purchase large multi-family loans, including underlying mortgage loans for co-ops.
The rapid growth of the secondary market can be attributed largely to the use of uniform underwriting standards and investment rating agency supervision. Since virtually all of Fannie's and Freddie's volume is "sold" to the secondary market, neither will purchase loans not underwritten to those uniform standards.
For this reason, a lender who plans to sell your loan to Fannie or Freddie will be less flexible than a lender who plans to keep it in portfolio. Before choosing a lender, consider the importance of such flexibility.
Insurance Companies and Pension Funds
If your co-op satisfies these criteria, these institutions can be excellent sources for very competitive underlying mortgages. Unfortunately, most of these institutions do not lend directly to co-ops; instead they channel their funds through "correspondents" who process, close, and service loans on their behalf.
However, familiarity with the market and growing competition has forced most conduits to cut spreads, loosen terms, and streamline processing. Nonetheless, they still are most effective on larger transactions with unusual or difficult components. Most co-ops will find better deals from more traditional sources.
The most important thing to remember about private sources is they often are the "lender of last resort" and can be quite expensive. So make sure all other options have been exhausted and all of the co-op's professional advisors concur with the decision. Professional guidance is important for any refinancing, but it's crucial with private lenders.
As you can see, a co-op's options for obtaining a new underlying mortgage are varied and sometimes tricky. It's impossible to categorize the above loan options as "right" or "wrong." Any one of them could be the proper choice, depending on a co-op's unique situation. That's why the involvement of the co-op's full team of professional advisors is so important.
So, when it's time to refinance your underlying mortgage, take time to prepare well and then fully research the market. That's the only way to find the "best" loan from the "right" lender.
|Building Name or
A two-story building with 22 units that
was converted in 1985.
|New Rochelle||$850,000||30 years||7.93%|
|30 EAST 21st STREET
A nine-story building with 16 units that was converted in 1982.
|740 EAST BROADWAY
A six-story building with 98 units that was converted in 1990.
|Long Beach||$2,250,000||10 years||8.16%|
|36 BAY STREET LANDING
A two-story brick and concrete loft building with 17 residential units
that was converted in 1984.
|Staten Island||$900,000||15 years||8.75%|
Q. What do lenders really look at to determine if a co-op is "loan-worthy?" What can a board do to improve its standing with banks?
A. Lenders consider a host of factors when "underwriting" a new underlying mortgage. These include property location, new loan amount per unit, recent apartment resales, overall co-op financial performance, and general building condition.
The best way to improve your co-op's standing among lenders is to be prepared for the refinancing process. This includes having all relevant facts about your co-op at your fingertips, knowing how much you want to borrow and why, being familiar with the mortgage market, responding promptly to lender questions, and assembling a team of competent professional advisors (managing agent, attorney, accountant, engineer, and mortgage broker) to guide the refinancing effort.
If you have a question for "Refi Whys and Wherefores," please e-mail it to firstname.lastname@example.org, fax it to the publisher at (716) 473-6305, or snail-mail it to our office.
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