Residential Realities March 2013
March 31, 2013--Not a New York State of Mind: Avoid lenders who are not from around here…
Taking a Snap Shot of Residential Lending
If you are in the process of buying an apartment and if you are obtaining financing in connection with that purchase, you are now well aware of how difficult completing the underwriting of your loan can be, even if you have outstanding credit and significant income and assets. Factoring in ever changing Fannie Mae, federal and state banking laws and regulations, increased scrutiny of the co-op or condo’s finances, and chaos in the residential lending space generally, getting a loan to the closing table, under the best of circumstances, is a challenge.
An Ingredient to Keep out of the Soup
With increased market activity and with many purchasers coming to New York from another state or from outside the country, lenders who hail from other places are finding their way into the New York market. As Jimmy Durante was fond of saying, "everybody likes to get into the act". Purchasers who insist on using out-of-state lenders who claim to be familiar with the New York co-op and condo environment do so at their peril. Borrowers who are told they have “preferred status” because of the size of the account balances they maintain, will be in for quite a shock when the guys in underwriting show up in the hazmat suits. To say that there is a vast schism between the sales and account people and the back office underwriting departments cannot be overstated. No matter what assurances a customer is given by his account representative or the sales person at the bank, all bets are off on whether the loan will fund until the loan application documents have been put through the spin cycle several times.
Use the Pre-Approval Letter for Kindling
Despite everything that has transpired in residential lending over the past five years, borrowers still wish to believe that obtaining a “pre-approval” letter from a lender actually means something. It does not. As I have pointed out many, many times, even the issuance of a loan commitment letter, chock full of conditions, has a long way to go before a cleared to close letter is issued and the happy talk at the closing table commences.
Residential Reality: Borrowers Beware
The overheated market that we find ourselves in has a unique feature. Unlike the last go round when the lending spigot was left open and unattended, funding for residential loans is extremely difficult at the moment. The market appears to be driven by low inventory and pent up demand, but the financing component continues to foul up transactions and leave borrowers in difficult situations, particularly if they are lulled into signing all cash contracts. Sellers have become quite demanding in the past 90 days and that trend will continue for the foreseeable future. That being said, make sure your lender is active in our market and has a recent lending history with the co-op or condo in question. Chasing a low rate with a lender who doesn’t understand the how the isle of Manhattan operates, is a huge mistake.
March 10, 2013--Department of Sanitation: What To Do When the Minutes Have Been Scrubbed...
Due Diligence Dilemma
It’s axiomatic that before a co-op or condo contract is signed, the attorney will review the Board minutes to ascertain the operating history and material facts about the building. But what if the minutes reveal very little, or worse, what if there aren’t any minutes to review?
Going Forward Via the Rear View Mirror
When the deal sheet goes out, the attorney dutifully makes the appointment with the managing agent to review the minutes. Upon arrival, the attorney often finds that the minutes present a limited window into the co-op or condo’s day-to- day activities. Particularly with upscale buildings, the co-op or condo’s counsel makes sure that disclosure of material information is omitted from the minutes for liability and market value reasons. In short, the really bad stuff about a building is rarely in the minutes. That’s the good news. In other cases, the minutes can be disorganized, missing or non-existent. The smaller the building, the more inefficient the minute taking can be. It’s no secret that Email dominates our lives. Many small boards meet and make decisions through Email exchanges and rarely have recorded minutes to review. An attorney is frequently handed a minute book as thick as a slice of white bread. How does an attorney compensate for a limited written history of the co-op or condo’s activities?
Gatekeeper Q and A
Even when the minutes are up to date, the building’s property manager must be consulted to obtain current operating history. Not an easy task. Many managing agents require questions to be in writing, and to add insult to injury, charge a fee for answering due diligence questions. Often the written responses are monosyllabic and reveal little insight and nuance into the substance of the question. As deal pressure increases, buyers are forced to go forward without all of the requisite questions answered because they might “lose the deal”. With well-established buildings, unless there is a particular problem with the apartment in question, the limited responses from the managing agent usually will suffice. In other cases, the inability to obtain answers to basic due diligence questions will come back to bite down the road.
Residential Reality: Get As Much Information As You Can
Here’s good rule of thumb: it’s much easier to get into a deal than to get out of one. Without question, the landscape has changed and buyers are being pressured to act quickly, sometimes with limited information about the building under consideration. Keep that rule in mind when it's time to pick up the pen...
For more on what to ask the managing agent see "Hey Nineteen".