especially smaller loft buildings
I have heard a couple of stories in the last few weeks from an agent and a mortgage lender about how some of the arcana about a Manhattan coop’s or condo’s
finances make it difficult or impossible
for a prospective buyer to get a mortgage. Then Sunday’s NY Times real estate article, For Home Buyers, More Bank Roadblocks
, probed the exact same issue. So, on the theory that two anecdotes make a trend
and newspaper coverage makes that trend a fact
, here’s a fact that might worry anyone thinking of selling a loft: if your coop or condo does not carry enough Fidelity Bond coverage to please Ms. Fannie Mae or Mr. Freddie Mac, you want to make sure the building gets the right coverage sooner than later. Otherwise, even a personally well-qualified buyer won’t get a loan to buy your loft (or apartment).
The entire article is a good — though somewhat hysterical — review. Here’s the money quote:
Banks of all sizes are now carefully reviewing the insurance policies that co-ops and condominiums hold, specifically to see whether a building has fidelity bonding, which is insurance against theft by property managers or by the building’s board of directors; whether its insurance has an A rating; and, if a building is in a flood zone, whether it has adequate protection.
Both the agent and the mortgage lender described real deals that did not close because the bank discovered — way late in the process — that the coop did not have sufficient Fidelity Bond coverage to satisfy standards set by Fannie or Freddie. The lender explained that the requirement for X coverage was not new, but that banks’ ability (willingness?) to grant waivers has been much reduced in the new lending environment.
not a fatal problem, unless …
The lender further explained that if the managing agent (and/or Board) is paying attention, the coop or condo can verify whether the coverage limits the building carries meet lender standards and — if not — can quickly (and inexpensively) add or increase coverage. The problem is not difficult to fix, in other words, but attention must be paid. (Cue Willy Loman.)
In the two cases described by the agent and the lender, the problems happened so late in the process that (for whatever reason) the coops were not able to address the issue before (for whatever reason) serious legal jeopardy ensued. (Maybe the closing got adjourned and a seller held the buyer in default; maybe the coop was so poorly managed that the building never adjusted coverage, so no mortgage could be issued; dunno….)
But this is a deal hiccup that no one would want to address under the gun.
I described the NY Times article as "hysterical" because this remark seems so out of proportion (my bolding):
“It’s gotten torturous,” said [a mortgage broker whom I will not name here] with offices in Manhattan and Brooklyn. “It’s still possible to get a mortgage, but the documentation required now is monumental because the questionnaires and insurance documents needed have to come not just from the purchaser but from the building, too.”
I have no doubt that much of the mortgage lending process has become more difficult than before (perhaps even "torturous"), but "questionnaires and insurance documents" have always been required of coops and condos in Manhattan. Every lender’s questionnaire I have ever seen (and they are part of every deal I have done) asks the Managing Agent for information and documents, including about insurance coverage and limits. Maybe that anonymous quoted mortgage broker does more lending in small Brooklyn buildings where this is not standard….
smaller = harder
These kinds of issues (including flood zone coverage or whether the insurer is rated A or A-) are usually easy to address up front, and harder to address under the gun. Any poorly run coop or condo can have these issues, but there are definitely problems that smaller buildings will continue to have that larger buildings are less likely to face.
One problem is (more or less) specific to small coops or condos. From the Times:
Because most banks will agree to do only one loan in such a small building, his loan officers have to get mortgage information from every other homeowner in the building and then find a lender that has no loans there but is willing to work with a small building.
(Larger buildings can have this kind of "concentration" issue, if, for example, one bank has 10 mortgages in a 40 unit building, but very small buildings are more likely to have this problem with multiple lenders being unwilling to write more mortgages there.) Again, the tone here implies the difficulty ("have to get mortgage information from every other homeowner") is more difficult than it is, as that loan officer should be able to get all the mortgage info needed on-line, in just a few clicks in nearly all cases.
Data aside, if different banks really are applying different credit standards from each other, anything that reduces the number of potential lenders in a building may make it harder for some buyers. (Imagine being deemed "qualified" by a bank that won’t lend any more in one building, but deemed not "qualified" by the only lender that will lend there; it is more likely to happen now than it was before.)
The take-away here is that there are some minefields out there that can make it harder for Manhattan coop shareholders or condo owners to sell to buyers who need mortgages, but the minefields can be safely and inexpensively swept if the managing agent and/or Board verifies that the building’s insurance meets the as-applied standards of Fannie and Freddie. To me, it is a no-brainer that every building should confirm that their shareholders and owners won’t face these problems.
You might want to make sure that your building management is on top of this. Especially if you are considering selling (or are already a seller). Especially if you are in a small building. Especially if you are in a building that has not had a sale since credit standards ‘evolved’ post-Lehman. Especially if you harbor some doubt about whether your managing agent or Board generally runs ahead of the curve.
© Sandy Mattingly 2009