I recommend to my buyers to assemble their team and organize their finances completely before they set out to find an apartment.
This includes creating an updated balance sheet, getting as specific as possible on the ideal apartment with me and my team at Brown Harris Stevens, speaking to a
real estate attorney so he/she can be on standby, and having a solid lender.
While in many months I have glossed over the mortgage component of the process, given the low rates, this month it’s imperative to focus on lending.
Why the sudden need to focus on lending?
Three things:
1) Everyone wants to borrow money now given low rates, and for many it is the prime reason properties are affordable right now
2) lack of inventory and intense competition makes mortgage contingencies increasingly hard to be accepted by sellers
3) lender underwriting has become insanely challenging – we’ll call it March Madness to be fun, but in truth this has been building for months.
First, let’s cover the obvious.
Rates are incredibly low.
We won’t dwell on the later possibilities that cheap could may come back to bite the US- because I am an optimist.
But whether someone needs to borrow to make a purchase, or simply feels that it’s a prudent option, given where rates are, this will be looked back on as a golden time for borrowing.
Rates cannot stay here forever, and certainly they won’t.
Further, while prices of Manhattan and Brooklyn real estate have soared, even down to studio apartments at this point, prices still aren’t back to 2007-2008 highs for smaller apartments, nor even many smaller two bedrooms.
With rates 1/3 lower than in that time, is there any doubt why first-time buyers are packing into open houses each sunday?
Second, mortgage contingencies, which for many years were not something a buyer could expect to get in a contract, have been acceptable for most sellers since the end of 2008.
Before that time, perhaps mortgage contingencies were not acceptable, but lending standards were very lax as well.
Heartbeat?
Give them a loan.
It makes me think of a series of commercials when I was growing up in New Orleans.
A furniture store would give credit terms to just about anyone.
The pitch was “Go see the Special Man” – it’s more fun to watch the video:
(or
http://youtu.be/XI7jC57GuZM)
– worth a watch.
I hope you enjoy it.
Just like Frankie & Johnny’s in 1980’s New Orleans, credit was VERY, VERY easy here from 2003-2008.
Stated income, NINJA (no income, no job, no assets), no problem.
90% condo loans, HELOCs (home equity lines of credit) were commonplace, appraisals were a joke (though I still think they are now, but that’s for another time).
However, moving to the third issue, it’s really that we have moved back to a time when inventory has moved this to a seller’s market, where high demand has eliminated mortgage contingencies- but lending is no longer easy.
I’ll repeat that- lending is challenging for buyers of all income levels.
Simply put-it’s very difficult to get a conventional loan.
What are the reasons?
What’s changed?
1) Fannie Mae no longer is a player in the market, they are the entire ballfield, doing over 90% of conforming loans ($625,000 loans and under).
2) Fannie Mae’s underwriting standards have become standard at all lending levels, including over $625,000.
3) Changing and ever more challenging guidelines have made many buildings no longer viable for loans.
Fannie Mae used to have about 35% of the marketplace for loans, when rates were a bit higher.
Many investors were happy with 6% steady returns.
At 2-4% returns, investors have moved on to look for greener pastures.
And the Fed seems to have a vested interest in keeping homes selling.
Good for me, good for buyers, bad for investors who want to buy mortgages.
Fast forward to today, where Fannie Mae calls ALL of the shots.
A 1200-page book, I am told, exists with all of the underwriting standards Fannie Mae requires lenders to adhere to when underwriting loans- before selling them to Fannie Mae.
(H/t Jeff Appel at Citibank).
If an underwriter makes ONE mistake, Fannie Mae will kick the loan back to the lender, who would then need to keep on the books.
This has created a negative feedback loop- think the screechy sound at a music sound where everyone grabs their ears.
Where it has gone from here- and I’ll give you the main takeaways:
1) All NYC buildings must show a balanced budget (coop or condo) or Fannie won’t approve the building.
If a building shows a loss for two years in a row- the building goes on a “Declined” list.
The problem is that many, if not most, coops, operate at a loss every year, on paper, and then make assessments every so often.
How would buyers feel if the maintenance looked much higher in a building, just because they had to show a balance budget.
I would argue that it is a building wanting to appear competitive in the marketplace- but if every building has to conform to these rules, we will then likely see an across-the-board pickup in maintenance costs.
Luckily, in an election year for NYC’s Mayor, we are unlikely to see real estate taxes tick up very much.
2) One lender can’t have more than 25-30% of all loans in a particular building.
This is called “Saturation.”
3) There are an assortment of other picky rules, such as a reserve of 10% of the operating budget which a coop must maintain.
We will see cooperatives and condominiums taking big steps to clean up their balance sheets, otherwise shareholders or owners won’t be able to sell or refinance.
Let’s just say it will be a time of reckoning.
I would argue this is probably a smart thing ultimately, but while things are cleaning up, buyers, with so little to look at, are going to be incredibly frustrated they cannot buy an apartment they love, because a building hasn’t comformed to new rules yet.
Hence, my advice to sellers is to ensure that their building is completely up to the new regulations, to avoid any surprise issues when bringing a unit to market.
There is MUCH, MUCH more to write about here, but these are the highlights.
Happy Hunting! -Scott