Wednesday, August 30, 2006

Developers Slobbering Over Biggest NYC Deal Ever

Metropolitan Life is putting Stuyvesant Town and Peter Cooper Village on the block for $5 billion bucks. This is a huge apartment complex development on Manhattan's East Side that has long been a haven for working families in the city. But it's not like there wasn't fair warning, the apartments have been going to market rent as quickly as possible in recent years.

Now even at the $5 billion price tag, the buyers are circling to grab this prize. Check it out in the New York Times.

Monday, August 28, 2006

Interest Only With A Bit Of Security

There's been much ado about interest only mortgages, payment option adjustable rate mortgages (ARM) and other mortgages considered risky by some. The fear is that once these mortgage payments adjust the homeowner will immediately go into foreclosure and their families will be living on the street. At least that's what I'm hearing.

The example Ms. Clinton used on the Senate floor to argue in favor of legislation to curb the "predetory" practices of mortgage brokers was a West Virginia waitress with a 6th grade education. This woman lost her husband and began a series of refinancings that ended in her losing her home because she couldn't make her house payment. It's a terrible thing. But is a person with a 6th grade education who repeatedly pulls the equity from her home to spend recklessly truly indicative of the American populace? Is she the typical consumer? Or is this one of a few isolated cases?

I don't have any problem with the legislation that was passed, or any that I've read is coming. The more the consumer knows the better. That's the reason I've joined the blogging fray. To give information on mortgages and the process of borrowing money against one's home. I'm just asking if this is another example of a alarmist call to pass laws too hurriedly to address the real issues?

There is a place in the market for all the mortgage products available. Some people here in New York live mostly on their end of the year bonus. That bonus is often more than 75% of their yearly income. That means that throughout the year, these high net worth individuals are getting a much smaller paycheck each month. Add that to the fact that they are savvy investors who know where they want to put their money. So sometimes these individuals will prefer a payment option ARM, perhaps even with a negative amortization feature that allows them to pay a smaller monthly payment throughout the year (especially in the last couple of months before bonus time) and then when their bonus comes, they will make a principal payment that erases all the negative amortization they have built up and creates an equity build up instead.

Is every mortgage for every consumer? No, absolutely not. That's why there is a vast array of mortgage options. Yes they can be complicated. People don't deal with mortgages everyday. That's why mortgage brokers and loan officers exist. We have to step up and learn the products and their implications in the lives of homebuyers. One question that a mortgage professional should always asked is "How long do you intend to stay in the property?"

Americans are on the move, upwardly mobile is our credo. We don't stay in a home for long (I think the average is somewhere between 4 and 7 years), that's the fact, so it may be more expensive for a homeowner to finance a home purchase with the standard 30 year fixed rate mortgage than a 7 year hybrid ARM (rate is fixed for 7 years then adjustable, frequently the initial fixed rate is a lower rate than longer fixed term mortgages like the 30 year fixed rate). But if when working with a client the mortgage professional is given the sense that for peace of mind, the homeowner needs a fixed rate mortgage, then that's what should be quoted. Ultimately it's the homeowner's choice, it's their home, their security, all we can do is advise, inform and allow the homeowner to make their decisions after learning the alternatives.

So what's the title of this blog all about? Given today's somewhat flat yield curve, the 30 year fixed rate mortgage is a very similar rate to the 5/1 hybrid ARM (same explanation as the 7/1 above just that the initial rate is fixed for 5 years then adjusts - and by the way, the interest rates on these mortgage can go down as happened in 2000-2004 when everyone with an adjustable rate mortgage was a "real estate genius" because they were paying mortgages with a 1% interest rate).

By adding an interest only feature to the 30 year fixed rate mortgage, homeowners may be able to get it all. A lower payment for the first 10 or 15 years of the mortgage because it's interest only and the security of a fixed rate mortgage. Another strong feature of this mortgage option is that the payment will recalculate (or recast) when a principal payment is made. That means that when the homeowner gets their tax refund check, they can pay down their loan balance and the very next month see a reduction in their monthly mortgage payment.

Since the first few years of a mortgage are mostly interest anyway, this will result in a principal reduction on par with a fully amortizing mortgage in the end anyway. And no, I'm saying that all homeowners need to throw their whole tax refund at their mortgage to make a principal reduction. They can still buy some of those consumer items they had their eye on all year, just not all of them at once.

Again no single mortgage solution is right for every homeowner or homebuyer. We are all in different situations with our lives that impact our financial, personal and professional lives. A home is a big investment, but once you check out your Truth-in-Lending disclosure, you'll see that a mortgage is a bigger investment. Make sure you know your options, put some thought into where you are in your life, what your plans are and make an informed decision.

Saturday, August 26, 2006

Rates went lower last week

The 30 year fixed rate dropped last week to a national average of 6.56%, down .06 basis points from the previous week. This is the lowest since late March when rate were beginning their march upward. 5/1 Hybrid ARMs also felt the down trend with an average of 6.30%.

Sales of both new and existing homes continue to decline, as the combination of prices and interest rates continue to dampen affordability at a time of slowing economic growth. The headlines for home sales predicted doom and gloom for all as a result of a housing correction. This may not be as bad as the papers want us to believe. 6 million homes sold per year is a peak that is very hard to sustain year after year. There may be some buying opportunities in the near term as the seller's market cools, and mortgage rates level at these historical lows.

If rates stay at the current levels, perhaps trending downward slightly, the hype about the pay option ARMs may not pan out as these homeowners may be able to refinance their Treasury indexed adjustable mortgages into fixed rate mortgages at similar rates to their fully adjusted ARMs. This will keep their payments at the same level, without increase as the markets fluctuate.

An economic soft landing is not a foregone conclusion, however. It will take an extended period of subpar growth to keep rates low, and housing is only one component of the economy (the financial industry head hunters that I know are having terrific years as Wall Street hires seem to be up). The economy numbers don't seem to be bringing any good news, though unemployment remained steady at about 330,000 claims last week. The Chicago Federal Reserve index of national economic activity pointed to below trend growth for July. The Fed's Richmond district also saw slowing.

It is summer with it's typical market slowdown and we are heading into a 3 day weekend, so the markets aren't expected to do much. September will bring more indications of where we are headed as everyone comes back to work from vacation and other summer distractions.

Friday, August 25, 2006

Appetite For Coops and Condos Growing

I just read an article in Broker Universe that nationally, people are choosing to live in urban environments so they are choosing condos and coops instead of good ole fashioned single family homes. New York is still the largest market for these property types, but interest in growing nationwide.

The article puts it this way:

In May, existing condominium and cooperative housing sales increased 1.9% to a seasonally adjusted annual rate of 852,000 units, up from a pace of 836,000 in April, according to the National Association of Realtors, Washington. However, sales were 6.6% below the 912,000-unit pace in May 2005. Meanwhile, total existing home sales including single-family, townhouses, condominiums and co-ops dropped by 1.2% to a seasonally adjusted annual rate of 6.67 million units in May, down from a pace of 6.75 million in April, and were 6.6% below the 7.14-million-unit level in May 2005. "There's now a clear pattern of slower home-sales activity in many higher-cost markets, which are more sensitive to rises in interest rates, and higher home sales in moderately priced areas which have experienced job growth," NAR's chief economist, David Lereah, said. "Although mortgage interest rates remain historically low, the uptrend in interest rates this year is affecting those buyers who are at the margins of affordability.

NAR reported the median existing condo price was $229,300 in May, up 1.9% from a year earlier, which is another indicator of growing demand and price appreciation. Granted there are regional differences with New York being probably the largest co-op market in the country.

If the market for coops and condos is increasing, then many more mortgage brokers and loan originators will attempt to get into the market to help bolster up their sagging loan production. One thing that is tricky about coops and condos is that the building must also be approved during the loan process, it must have adequate insurance coverage, sound financials and high owner occupancy. If the building is subpar, the buyer won't be able to obtain financing at preferred rates, or perhaps not at all. It won't sit well with the other players in the transaction to have a deal fall through because the building wasn't up to par. Fortunately many lenders are publishing their database of buildings online for mortgage brokers, so that we can check the maximum financing restrictions, what coop or condo documents need to be updated in order to close the purchase or refinance transaction. It would be great if all institutional lenders did this, but they don't.

In short, it's best with these property types to work with a mortgage broker who is experienced in handling coop and condo financing.

Wednesday, August 23, 2006

Chalk One Up for the Local Guy

As a local doing business locally, I sometimes get the question, "How is my service any better than one of the big internet lenders?". Well one way that my service is better just dropped into my lap in an email newsletter today...

Flaws Seen in Survey of Closing Expenses
Patriot-News (PA) (08/11/06) ; Miller, Dan

Some real estate professionals in Pennsylvania disagree with a survey that pegs average closing costs statewide at $3,175, insisting that the calculation includes "junk fees" that are not imposed by every lender. Homesale Mortgage Services President Jennifer Goldbach says it is difficult to calculate a meaningful average because of the numerous variables that must be considered, adding that it is possible to calculate five different closing costs for a single house. senior reporter Holden Lewis says only the fees charged by Internet lenders were included, but he acknowledges that local brokers produce more accurate first estimates than online lenders. According to Lewis, "Some online lender based in Orange County, Calif., probably doesn't have the title insurance formulas for every county in the country."

That's right, local brokers know the fees for their market, and can quote a much close estimate from the beginning of what the various closing costs are going to be so that there are no surprises at the closing table. Especially in New York City where there are exceptions and some specific circumstances based on property type, such as the NY city and state mortgage recording tax doesn't apply to coops, but Mansion Tax does.

Friday, August 18, 2006

History of Coops in New York City

It’s important to understand the difference between coops and condos before addressing which property type is best for you to purchase. This is a short history of the two property types in order to help you understand the differences.
The population in New York City is denser than other parts of the US, thus it makes economical sense to develop large multiple family properties to house this population. Coupled with the fact that land is more expensive than in most other parts of the country it makes sense to build vertically, creating a housing market that is unlike most of the country.
Historically, the majority of vertical empires took the form of rental buildings that were developed and owned by the landlord for the purpose of renting the apartments to people for a profit. The majority of today's coops and condos are a product of the demand for home ownership in New York City combined with forces of rent regulation laws.
Over time, there grew an appetite for home ownership. At the same time rent stabilization did not keep up with inflation, and it did not take long before the cost of each apartment became more than the regulated rents could cover. Many landlords were in a money losing situation, forced to burden a negative monthly cash flow. So how would a landlord get out of such a situation? The answer was to coop or to condo. During the 1980's, many landlords with negative cash flows, became sponsors and converted their buildings from rental buildings to coops or condos and sold their interest to individuals one apartment at a time.
The conversion was a fairly simple process. The landlord, or sponsor, gave each tenant a choice of buying their apartment through a non-eviction offering at an insider’s price generally less than what was offered to outsiders who were not protected by the non-eviction offering plan, or each insider would be guaranteed the right to continue renting under the terms already established under the laws of rent control and stabilization. The terms of each conversion or offering are detailed in a large book called an offering plan or prospectus.
The big question then becomes: Why did most sponsors choose to convert to coop and very few to condo? There are five basic reasons. A major reason was that condominium ownership was not allowed until 1964 in the State of New York. Another important reason for more coops was the familiarity with the cooperative conversion process. Other factors include a better economical position for the sponsor, marketability, and the importance of "exclusivity" was a premium only offered by the cooperative form of ownership.
Financial gain was an undeniable motivation for a sponsor to coop their buildings. Until very recently, only a cooperative could have an underlying mortgage, and many sponsors had existing mortgages secured by their rental buildings that needed to be dealt with at the time of the conversion. So, under the terms of many conversions, the sponsor’s existing mortgage became an underlying mortgage to be paid by the newly formed not for profit cooperative corporation as part of each shareholder’s (or apartment owner) monthly maintenance charges.
To further the financial position of some sponsors, upon converting, they were able to obtain an entirely new mortgage for a larger amount, or a wrap around mortgage. These mortgages were secured by the sponsor’s newly created value of being able to sell the apartments, and pass the mortgage payments onto the shareholders. This allowed some sponsors to tap their newly created value or equity without having to wait for each apartment to be sold.
Because the sponsor was able to get money from the underlying mortgage, freeing up capital immediately, the sponsor could then offer the cooperative units at a lower price to sell them quicker. For example, let's say a sponsor could sell each of their 100 units as condos for $100,000 each; the result would be gross revenue of $10,000,000 when all the condos are sold. Or, the sponsor could choose to sell each as a coop for $85,000 and hold an underlying mortgage of $3,000,000, which was realized immediately and to be paid by the cooperative corporation over time. The net result would be $11,500,000 in gross sales with almost a third put immediately into the sellers' pockets.
The more conservative sponsors were prudent about the size of mortgage passed onto cooperatives, others mortgaged without regard to the health of the cooperative corporation and apartment owners down the road. The market timing of some sponsors was better than others too. With the real estate market decline after 1987, some sponsors were left holding a majority of units that they could no longer afford to keep. As a result some coops were not as financially fit as others. An attempt to better inform prospective buyers of the activities of sponsors before buying into a cooperative, the State of New York enacted laws designed to protect the homebuyer. The law, the Martin Act, is better known as the AG Disclosure (the Attorney General Disclosure of the Sponsor). The Martin Act made it mandatory for sponsors owning ten percent or more of apartments in any coop or condo project to make a timely amendment to the offering plan that is filed with the New York Attorney General’s office.
This disclosure makes the Sponsor’s financial information relating the coop available as public information. Useful information contained in each filing is disclosure of the sponsor's unsold shares, the rent received from tenants in those apartments and the amount of maintenance the coop receives from the sponsor for these apartments, if the sponsor is using the unsold shares as collateral for a loan, a list of other coops or condos the sponsor has an interest, and if the sponsor is current on obligations to the coop or condo as well as to other parties.
Another main reason for converting to coops rather than condo was an issue of exclusivity and control. Owners and buyers were concerned about who might become their neighbor, and this type of control was valuable in the market. Condominiums did not and currently do not offer this homebuyer approval process. In today's market, people find value with in ownership with fewer restrictions, while others find value in exclusivity.

Thursday, August 17, 2006

Some Difference between Coops & Condos

Ownership - The main difference between condos and coops is the form of ownership each takes. A condominium is real property and ownership is evidenced by a deed allowing the entire bundle of rights that come with real property ownership. Coop ownership is evidenced by shares of stock in a non-profit corporation that owns the building in combination with a Proprietary Lease allowing each shareholder the right to occupy an apartment under specific guidelines. Condominiums have a condominium association and coops have a Board of Directors (similar to all corporations), each serves a similar purpose of making decisions on behalf of the owners and shareholders, respectively.

Occupancy Restrictions - Another major difference between coops and condos is the restrictions placed upon the owners of a coop of the occupancy of the unit. The Proprietary Lease may restrict the amount of financing on each apartment, it may restrict a shareholder from renting their apartment to others (splitting), or from having a maximum number of occupants, or from having certain pets, or whatever else the majority of shareholders deem to be best for their building and quality of life. The Proprietary Lease also gives the board of directors the right to refuse any prospective buyers or subfields. Most coops have a very formal application and interview process before the board reaches a decision on who may own an apartment. Condominiums on the other hand have virtually one restriction which is their "right of first refusal." The right of first refusal gives the condominium association first opportunity to buy an apartment from a selling owner at the same terms under contract with a prospective buyer. Condo associations rarely exercise this option.

Feeling of Neighborhood Due to the lack of controls for ownership, condominiums may become more transient in feeling. Cooperative apartment corporations on the other hand tend to be morehomogeneouss and more stable in terms of neighborhood.

Purchase Prices - Coops tend to have lower purchase prices than condos.

Common Elements and Services - Condos generally may be slightly less expensive to maintain over time. Owners of condominiums pay for the common elements (management staff, doormen, plumbing, roofing, common walls, etc.) in the form of common charges, and they pay their taxes separately. Most condo owners are generally responsible for paying their own utility usage. Coops on the other hand pay for the common elements in the form of maintenance charges which generally include everything to upkeep the building, including taxes and frequently utilities. Another component of the maintenance fee that generally does not exist with a condominium is the cost of the underlying mortgage. Some coops and condos offer recreation, parking, storage and other facilities as a part of the common charges or maintenance. It is important to itemize what costs are included in the common charges or maintenance, and what services are offered in return.

Mortgage Vs. Assessments - Coops have no restrictions other than that imposed by the lender in terms of size of underlying mortgage. Underlying mortgages on condos have restrictions. In the event the building needs money, coops may be in a more flexible position not to assess each owner for additional monthly charges.

Settlement Costs - The closing costs to obtain a mortgage for a condominium are more expensive than settlement costs to finance coops. The major differences in New York City are: a mortgage recording tax, title insurance premiums and charges and taxacrosss when obtaining a mortgage for a condo. These items are not required to close on a cooperative apartment loan.

Availability - In Manhattan, even with the recent building of condos and condo conversions of existing buildings there are relatively very few condos. Most buildings, particularly older buildings are coops.

It is up to the homebuyer to become an informed consumer, to identify their personal preferences, look at the spaces, and analyze the cost and benefits of each.

Monday, August 14, 2006

Mortgage Broker (kinda) Defined

The mortgage lending business has being evolving so rapidly the last few years that it’s hard to keep track of all of the changes and trends. I’ve frequently read that approximately 70% of all mortgages are originated by Mortgage Brokers nationwide. That’s a vast majority of mortgage loans. I think the reason for this is Mortgage Brokers tend to be smaller entities and more able to sense a change in the marketplace and act on it.
In my opinion, large lenders such as Citi Group, Wells Fargo, and Chase are divided into two separate mortgage lending entities. One is their retail operations located in their branches or mortgage lending storefronts and the other is their wholesale lending operations. Mortgage Brokers work with the wholesale lending operation. The Mortgage Broker is the retail presence of the lending products.
They seem to compete against one another as well. Sometimes the retail operations will have a better deal than the wholesale division on a specific product like a Home Equity Line of Credit, or a 30 year fixed rate conforming mortgage, while the wholesale division may do better with jumbo mortgages or interest only solutions. These products are merely examples for this description, not intended to state any specifics of the marketplace at this time.
Thus, a Mortgage Broker generally isn’t more expensive to the consumer, and may possibly be a better deal. I recently originated a fixed rate mortgage on a new construction condo here in New York City in which my rates, terms and closing costs were less than a major bank’s employee benefit program, which was a surprise to me.
The frequent perception that Mortgage Brokers are better able to provide more lending solutions to an individual consumer is true. We are able to scan through many lenders finding each one’s best programs (which I think are largely driven by the secondary mortgage market) and offer the best to our clients. This is the one major advantage that we have.
Another advantage, in my opinion, is the transparency of the process when working with a Mortgage Broker. Mortgage Brokers must disclose all fees and their commission whether payable by the lender or the client. All of my clients are aware of my firm’s commission on every deal. Everything is upfront and above board. That’s not true with lenders who do not have the same disclosure requirements.Also I’m able to maintain my relationship with a client for longer, I believe. Perhaps a client and I first work together on a primary residence purchase. Then later, this same client may decide to purchase a second home, or a coop for their child, or an investment property. I can provide solutions for all of these purchases. I don’t have to say to a client with whom I’ve built trust and commitment that I cannot do this deal and they will have to call someone else and establish a whole new working relationship. That puts them back to square one again, back to the uneasiness and uncertainty of working with someone for the first time.

Friday, August 11, 2006

It's Official...New York has the highest closing costs

What we always knew to be true was just confirmed by Bank Rate. New York has the most expensive closing costs in the land. On the average, it costs $3887 to close a mortgage in our great state, while Missouri, the lowest the nation, costs an average of $2713. Texas and Hawaii are number 2 and 3.

Of course this numbers seems low to those of us in New York City, with it's 1.8% mortgage recording tax and high purchase prices, $3887 is a drop in the bucket. And of course, the state just increased (yep read it again...increased) the mortgage recording tax. The refi boom of the past couple of years only seems to have whetted the state's appetite for homeowner's money.

Tuesday, August 08, 2006

Pre-Qualification v. Pre-Approval

There is a difference between these two tools used by everyone in the home buying process, from Real Estate Brokers, Attorney, Coop Boards to Mortgage Brokers. The Pre-Qualification Letter is a letter that a Loan Officer will write based on what the buyer has described as their situation and the Loan Officer's understanding of the mortgage programs out there. It's not a rigorous process and I don't recommend them at all.

The way to go for everyone involved is a Pre-Approval Letter. This process is a process by which the Mortgage Broker (or Loan Officer) takes the entire application, getting all the information from the borrower, from present address and employment history to income and assets along with account numbers. A credit report is pulled on the borrowers, tradelines are matched up and verified with the borrower. Then the application is run through Fannie Mae or Freddie Mac's underwriting engine and it comes back "Approved".

After a Pre-Qualification Letter is given to the borrowr from the Loan Officer, all that needs to be done is for the borrower to provide the documentation reflecting the information on the application. The mortgage is essentially approved and pre-sold to the secondary market once it funds.

Yes, this process costs the Mortgage Broker or Loan Officer money, they must pay for the credit report and the Desktop Underwriting of the file at a minimum, but borrowers and Real Estate Brokers should insist on nothing less. A Pre-Qualification Letter means that the borrower and the Loan Officer had a conversation, nothing more really. A Pre-Qualification Letter means that subject to verification, the mortgage is approved and the purchase will happen.

My understanding is that the only valuable information a Mortgage Broker has for a Real Estate Broker is the closing date. A Pre-Qualification Letter can give the Real Estate Broker the information they need.

Thursday, August 03, 2006

Rational Negotiations

An article published by Harvard Business School entitled When Not to Trust Your Gut just caught my eye this morning. There is an intuition test that is astonishing. 2 tables are placed in a graphic that are identical, but they don't appear that way at all. This graphic is used to illustrate the point that our intuition is not always trustworthy.
When applying for a mortgage, it's best to make a list of what the goals of the financing are. When purchasing this may, on the face of it, seem very easy - "I want to buy the property". It does take some more thought than that. How long do you intend to stay in the home? What are your plans after that? Do you want to keep it as a rental, a second home, is another member of your family, perhaps a child, going to live there? Also things to keep in mind are whether your income will increase, or decrease in the future, will your spouse start working or stop working during the term of the mortgage? And if so, when? What are your other investment plans? Do you plan on investing in another fashion that may allow you pay down the mortgage or pay it off entirely. When will this happen?
When refinancing, this is equally important. You really need to have some specific goals when refinancing your home. Are you paying off higher interest credit cards, is your current mortgage going to adjust to a higher rate soon? How long are you going to stay in the property? What the principal balance of your current mortgage? Sometimes the costs don't justify a refinancing even if your payment is going to be lower. Are you going to improve the property or make some large purchase? When refinancing for this purpose, try to envision other large ticket items that you may purchase in the future and get the funds to act on those as well, as the closing costs can add up if you refinance year after year.
The Harvard Business School article makes for a very interesting read, it is aimed more at business negotiations than at mortgage financing, but many of the concepts apply.