From the Editor:
 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
President
First Funding of New York
©1998 by Patrick B. Niland |
"Shop
'Til You Drop"
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."
Commercial Banks
Commercial banks are among the oldest and most visible of all lending institutions.
There's one on almost every corner-with names we all know well. Commercial banks offer
checking and other deposit accounts and, historically, made loans only to businesses. But
over the last 10 to 15 years, commercial banks have become quite active in consumer loans
and home mortgages. Several of them also provide underlying mortgages, but their rates and
terms vary widely. And, unfortunately, few of those provide credit lines or second
mortgages.
Savings Banks
To a layperson, savings banks are almost indistinguishable from commercial banks because
they provide many of the same services. But there are some subtle differences.
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
("FNMA" or the Federal National Mortgage Authority) and Freddie Mac
("FHLMC" or the Federal Home Loan Mortgage Corporation) were federally-chartered
institutions that now are publicly-traded corporations. However, both still have a
quasi-governmental aura that probably facilitates their activities. Although they share
similar charters, congressional mandates, and regulatory structures, Fannie and Freddie
differ in the strategies they use to meet their operational goals.
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
These institutions often are referred to as "premium" lenders because they lend
only to co-ops with the best profiles (excellent location, high owner-occupancy, very low
loan-to-value). With rare exception, these groups limit their lending to larger loans ($2
to $5 million minimums).
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.
Conduits
Conduits are relatively new players in the co-op underlying mortgage game. Most conduits
were formed as subsidiaries of Wall Street investment firms to repackage and sell off
troubled property left over from the savings and loan crisis. Such deals were risky, so
conduit rates and terms were not very attractive.
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.
Private Lenders
Private lenders use their own money (or the money of other investors) to make mortgage
loans. Because these lenders are not subject to federal or state banking regulations, they
have much more flexibility. However, this flexibility usually comes with a higher price
tag. But co-ops with tough financial problems, sponsor defaults or arrears, low occupancy
rates, or serious maintenance problems might find that private lenders offer the perfect
solution.
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. |
