Fannie Mae lightens the co-op load

Real Estate Weekly, Nov 3, 1993 by Lois Weiss

After considerable persuasion by Queens Borough President Claire Shulman and Rep. Charles Schumer, the Federal agency that is America's largest source of home mortgage funds has begun a pilot project relaxing criteria for city buildings and is committing $500 million to new loans.

Co-ops experts around the city hailed the decision but were disappointed it does not affect Westchester and Long Island, places just as hard hit as the five boroughs.

Under guidelines announced last week by Fannie Mae president Larry Small, both co-op share loans as well as underlying blanket mortgages will have previous restrictions relaxed. Requirements for investor units, pro rata share and negative cash flow rules were eased, among other items.

Fannie Mae is a congressionally chartered corporation that is supposed to provide liquidity in the mortgage market by buying loans from originating mortgage lenders.

Since it acts as the secondary market, most city and suburban bankers justify their own requirements for loans based on the Fannie Mae criteria. According to co-op experts, the new rules will ease the credit crunch and make more units and buildings attractive to new ownership while, reducing the anxiety factor for current unit owners.

Charlie Rappaport, president of the Federation of New York Housing Cooperatives said, "The lenders and Fannie Mae are finally coming around to start to atone for the lending sins of the past and were prodded into this by Schumer and Shulman."

Mary Ann Rothman, executive director of the Council of New York Coops, noted the guidelines resulted from more than a year's work. "Fannie Mae made a tremendous effort to understand the nature of the problem," she said. "They made an exhaustive review and this is an on-target relaxing of the requirements."

Fannie Mae's policies have long been blamed for holding back the tri-state area's cooperative marketplace. In the past, Rappaport recalled, the lenders allowed co-ops to be over-burdened with debt service by granting huge underlying loans to sponsors, often with balloon payments. Once the market fell, the cooperators left holding the mortgage were unable to refinance.

Over the past year, political efforts started to jell and a public hearing was held in Queens last spring to discuss the problem. Queens alone has 80,000 cooperative units, many of which were converted as the market peaked, leaving unit owners floundering as the value of their co-ops dropped well below what they had paid.

Fannie Mae representatives attended the hearing and were startled by the magnitude as well as the absurdity of some of the problems. They went back to Washington and reviewed the agency's policies, resulting in last week's pilot program announcement.

Larry Small, president of Fannie Mae, explained the policy developed once they saw they were missing opportunities to make money. In response to questions regarding marginal cases, he said the lender should discuss them with the agency. If the co-op does not own the underlying land, Small said they would take a look on a case by case basis.

Mark A. Iannone, head of the commercial mortgage department of the Greater New York Savings Bank and a past president of the Mortgage Bankers Association of New York, said Fannie Mae certainly responded to the call. "It remains to be seen whether it is truly executed in a timely manner," he cautioned.

While Iannone called the new rules a positive statement for the whole industry, he noted the agency deals on a nationwide basis. "They don't understand the idiosyncrasies of New York," he explained.

The Mortgage Bankers are pushing for New York State agencies such as SONYMA, which issues insurance for mortgages, to make further changes. "We want SONYMA to provide guarantees on mortgage backed securities," he said. "Fannie Mae can do a lot of things in conjunction with SONYMA."

In the meantime, the Fannie Mae guidelines will have far reaching effects, since the vast majority of lenders try to match their loans to what the secondary market will buy. "It will give a shot in the arm to sales because more of the conventional lenders will be able to resell these loans," Rothman explained.

Richard Gelman, president of the National Bank of New York City which issues many underlying loans, agreed if the unit owners are in a position to finance where they weren't before, the rules would help with the marketability of the units and the value of co-ops overall.

This pilot program was inspired by the community reinvestment program, and is an active commitment to back loans for the purchase of units, Rothman explained.

"Would I like to see it lower than 51 percent? You betcha," said Rothman of the new pre-sale level for share loans. "Would I like everyone to be able to walk into a bank and get a loan? Of course."

All borrowers may now finance up to 90 percent of the value of the property, while under the Community Home Buyer's Program, credit-worthy borrowers with incomes below the area median of $47,700 will have more flexible qualifying standards. Between 38 and 40 percent of gross monthly income will be allowed to go toward housing expenses. The agency will also waive the requirement that borrowers have two months of mortgage payments on hand at closing.