The economic boom of the last few years has been a remarkable period of prosperity for the real estate industry in general, and co-ops in particular. Shareholders no longer need to feel trapped; the time is now for co-op boards to tackle the share loan financing issue.
The Liquidity Factor
While the speculative boom of the late 1980s saw an uptick in the prices of moderately priced co-ops, these buildings were often more deeply affected by the recession than any other property type. The lack of liquidity–the inability of purchasers to obtain financing–may well have been the critical factor that made the recession more debilitating for co-ops–a factor which clearly exacerbated the normal effects of recession on many of them.
During the recession, two major factors accounted for the lack of liquidity. First, there was the heightening negative perception of co-ops by lenders. Second, there was a dearth of expertise within the lending community to carry out the highly specialized lending and servicing requirements from origination through default.
It has become very important for most co-ops converted during the 80’s to demonstrate that they have been able to bounce back with the improving economy. Now that the lack of liquidity has receded as an issue for many co-ops, there is a window of opportunity to address and to make information available on share loan financing alternatives. It is precisely during a stabilizing time period that co-ops are able to deal from a position of strength in focusing on the importance of viable share loan financing. For major co-op lenders such as CitiMortgage and their agency counterparts at FannieMae, this is a critical issue because of its implications for the long-term viability of co-ops.
Over this time period of stability and growth, co-ops have evolved to a point where they are quite sophisticated on many core issues including their underlying financing, their emphasis on owner-occupancy and their heightened scrutiny of prospective purchaser’s financial status. Concurrently, some managing agents and co-op boards have become enlightened on end loan financing issues and take a proactive role. Unfortunately, our experience has been that moderately priced co-ops tend to be less proactive on this issue, particularly those that are in low to moderate income areas.
Where there has not been a clear path to financing alternatives for co-ops (i.e. they do not meet FannieMae guidelines), co-op boards and managing agents should be even more vigilant in pursuing and disseminating information about their alternative financing options.
Many lenders have had good success in working with FannieMae to provide share loan financing in those situations where specific guidelines are not met provided that the co-op is solid on all other fronts. A sophisticated co-op lender will frequently seek exceptions from FannieMae based on the co-op’s financial stability, the marketability of individual units, clear indications of a turnaround by the co-op and a variety of other factors. And, where financing is available in these circumstances, it is imperative that this information be communicated to board members, sellers and buyers. The failure to communicate this information can result in the devaluation of co-op units, which over time limits their appeal.
Left without any guidance, purchasers may make a mortgage application with a lender that does not lend in such co-ops. The purchaser becomes completely frustrated by the lender’s unwillingness to entertain loans in a particular co-op building. Purchasers then are faced with either abandoning the transaction; becoming a cash purchaser in another building at a lower price; or toughing it out by searching for a new cooperative lender, losing precious time and accruing more expense.
The only way to mitigate this pattern is for co-op boards and managing agents to become proactive on the share loan financing issue. Through their managing agents, co-op boards interact with lenders on an ongoing basis. A natural outgrowth of this process should be the gathering of intelligence on the co-op share loan financing market.
Managing agents can readily advise their sellers, brokers, boards and potential purchasers about lenders that have approved and are willing to lend in their co-op through board meetings, sales packages or newsletters.
But this sharing of vital information often does not happen in the normal course of business. Co-op boards must hold managing agents accountable for taking control of the financing issue. With the recent consolidations amongst managing agents, the time is ripe for co-op boards to tackle the financing issue–a proactive stance by a few of the major managing agents would ensure that a large segment of moderately priced co-ops in the New York Metropolitan area have their share loan financing needs met effectively.
A proactive approach to the co-op share loan financing issue also works to streamline internal processes. For example, once CitiMortgage considers a co-op, the managing agent never again needs to send in any additional co-op data sheets. This is a huge time-saver for managing agents who are typically besieged by such requests from lenders, appraisers and attorneys.
Co-op boards and managing agents should seek out co-op lenders such as CitiMortgage who are willing to work with them no matter the type of co-op involved including limited equity and Mitchell-Lama co-ops. The co-op continues to represent a huge opportunity for first-time homebuyers looking to stay in the five boroughs of New York City, and its close environs. Therefore, it is important that share loan financing is made widely available and painless to insure sales in this sizeable market.
Mr. Austin is Vice President of CitiMortgage, Inc.