Residential Realities October 2011
October 31, 2011: Hope is not a Plan--Unless You're a Bank...
Dispatches from C.E.
I gave a Continuing Education due diligence presentation to a group of real estate brokers last week, and of course, issues with residential lending featured prominently. One of the topics I’ve been talking about somewhat incessantly these days, is the applicability of stringent Fannie Mae lending guidelines to “non conforming” loans—that is, loans that will be held in portfolio by the lender because the loan size will not allow sale to Fannie Mae or a guaranty by a governmental agency. That being the case, why would a bank insist on compliance with guidelines that don’t really apply to the type of loan being underwritten by the bank?
One Possibility
A loan officer from Chase who attended the presentation offered a possible explanation. Banks are applying strict underwriting standards to portfolio loans just in case a secondary market returns for such paper. The hope is that these loans, which have been carefully vetted by the banks in the underwriting process, will be attractive investments, once investors return…if they ever do. So borrowers are forced to run an underwriting obstacle course, just in case things improve someday. It’s an upside down logic that protects the bank, but really does not help the real estate economy to recover as we are all hoping it will…
The Pendulum Thing
In any conversation about lending guidelines, eventually the “swinging of the pendulum” gets rolled out as an explanation for why things have become so difficult in residential lending. Things were so bad, many say, that banks have just over-reacted and have lurched to other end of the bell curve in review of borrowers and their proposed real estate purchases. And to a great extent that’s true. Most large institutions and government bureaucracies are reactive bodies and not proactive bodies, often fixing problems that no longer exist. It’s usually too little, or too much, too late. Within this context, the New York residential real estate community is struggling to cope with bank lending paranoia about the financial wherewithal of co-ops and condos. In truth, it is an underwriting anxiety that has little to do with the reality of the day-to-day economic health of most buildings in New York City and much more to do with the collapse of real estate far from New York (think Vegas, Phoenix and good chunks of Florida). Compared to other parts of the country, the foreclosure mess has barely touched New York. Except for a painful slowdown in sales and depressed pricing, the co-op and condo housing stock has not fallen victim to the foreclosure vortex in any material way. So why apply guidelines that have little or no relevance?
Expect The Long Hard Slog to Continue…
Unfortunately, I don’t think there is any hope that lenders will view the New York market differently and modify lending guidelines. Each transaction, which is subject to a borrower’s ability to obtain financing, will be obligated to run the current underwriting gauntlet, requiring co-ops and condos to satisfy financial and other requirements that in many cases, can’t be satisfied or won’t be satisfied, resulting in loan disapprovals and periodic deal explosions. One could argue, that as a selling point, the physical and financial condition of a co-op or condo has never been more important. Look for “Fannie Mae approved” to start appearing in listings…
October 12, 2011: Clearing Misconceptions
The Reality of Residential Lending
As I have discussed lately, as a result of stricter lending guidelines, getting a loan for the purchase of a co-op or condo has turned into a cumbersome, complicated process with unexpected twists and turns for all concerned. Banks have become skittish about the financial wherewithal of the buildings in which the apartments are located. Maintenance reserves, insurance coverage, liability for litigation, owner occupancy and a variety of other matters are reviewed by the lender before they will approve the co-op or condo. I sat down with Jill Urban of NY 1 to discuss the co-op and condo conundrum as well as what buyers should expect when they apply for a loan.
