A Mortgage Primer The Basics of Refinancing an Underlying Mortgage

To paraphrase Sy Syms, "an educated board member is a lender’s best borrower!" That concept underlies all of the articles I have written about co-op financing. Since my last article for The Cooperator ("Dial ‘M’ for Mortgage," December/January 1997), however, much has changed in the mortgage market. Refinancing an underlying mortgage is the most important decision that a board will make. This one decision will not only affect the monthly maintenance of every shareholder, but also the market value of every apartment in the building. It is a decision that warrants thorough planning, careful analysis, and diligent execution by every member of the board’s professional team. No board should attempt a refinancing on its own. It is absolutely essential that the board involve every one of its professional advisors in this critical decision from the very beginning.

First, Some Terminology

What most people refer to as a "mortgage" is more correctly called a "mortgage loan," i.e., a loan which uses some form of real estate as collateral. The borrower promises to repay this loan according to the lender’s terms in a document called a "note" (sometimes called a "promissory" note). The lender secures its right to take possession of the collateral should the borrower default (not pay) in a document called a "mortgage." The lender and borrower sign both the note and the mortgage at the "closing," a meeting during which all relevant documents are executed and money changes hands.

An underlying mortgage is a loan to a cooperative apartment corporation which uses its property as collateral. This type of loan is called an "underlying" mortgage because it lies under (i.e., comes ahead of) any personal (or "end") loans which individual co-op shareholders might have taken out to "purchase" their apartments. To be technically correct, I should mention that no co-op shareholder actually owns their apartment. All of a building’s apartments (as well as the grounds, garage, pool, and any other improvement which might exist on the property) are owned by the co-op apartment corporation which, in turn, leases the apartments to its shareholders. Individuals can pay "all cash" for their shares, or make a down payment in cash and get a personal loan for the balance of their new apartment’s share price. Such personal loans are called "end" or "share" loans and are secured by a lien against the shares of stock which have been allocated to the borrower’s apartment.

While some co-ops do not have an underlying mortgage, the vast majority do. There are several reasons for this. The early co-ops were built with borrowed money, and that debt was passed on to the apartment corporation once the project was ready for occupancy. During the conversion wave of the 70’s and 80’s, many property owners became "sponsors," wrote "offering plans," formed "cooperative apartment corporations," and sold shares to their tenants ("insiders") and others ("outsiders"). In these "conversions," the sponsors sold shares in the new apartment corporation for cash, but they also sold their building by transferring their existing debt to the apartment corporation. Some sponsors were able to squeeze even more profit from their building by "wrapping" their existing loan before transferring it to the apartment corporation.


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  • I am considering buying a coop. The price per unit is $150K and $35K is the underlying morgtgage (which can not be prepaid). Is that too much? And, more importantly, if the coop defaults on the loan, can lender re-posses my unit even if I am up to date with all my coop feels payments? In other words, do lenders typically have a right to reposses the units in case of default, even if the individual unit owner wants to pay its share of debt?
  • My building is in the proces of refinancing it's underlying mortgage. In order to reduce the amount of loan, we were wondering if we can give shareholders the option to pay their portion of the mortgage (like a $15K payment) to reduce the amount of the loan we have to take? Thank you.
  • can the board president refinance a mortgage without a vote from shareholders?