The Real Deal

• Email this article
• print
• Comments(1)

Construction lenders providing own end loans

July 01, 2010 07:00AM By Candace Taylor

When the credit crisis hurt buyers' ability to get loans in new condos, many in the industry hoped lenders would help by providing consumer mortgages in the projects where they'd also done the construction loans. But for a time, their hopes went unanswered as lenders -- concerned about a shaky market -- largely stayed out of it.

That, however, is finally changing, industry experts say.

"It feels like these [construction] lenders have gotten to the comfort level where they feel like the market is stabilized, and they're not lending on units that are going to decline in value," said Richard Martin, a senior vice president at DE Capital Mortgage, a partnership between Wells Fargo and Prudential Douglas Elliman. "They're saying, 'We have these projects that are built; let's help ourselves out.'"

Before the real estate slump of the early 1990s, lenders often did both construction financing and home loans (also known as end loans) in the same buildings. But when the market crashed, those banks were especially vulnerable to projects' failures. So even as home sales recovered, many banks avoided lending on both ends of the same development.

During the easy-credit days of the 2000s, that remained the norm, explained Mati Weiderpass, the developer of 505 West 47th Street, where the construction lender, HSBC, has done a number of the buyers' home loans.

"The construction lender was one side of the bank and consumer lending was another side," Weiderpass said.

When the recent credit crunch made it nearly impossible for buyers to get mortgages in a new condo with low presales, some looked to construction lenders to save the day for the buildings they'd helped finance.

"It does make sense," said Alan Rosenbaum, the CEO of Guardhill Financial. "If Fannie and Freddie won't do it, and the construction lender is putting out a $100 million loan, why wouldn't they want to make end loans on the units?"

But at the beginning of the slump, prices were declining and construction lenders worried about recouping their initial investment, let alone taking on more exposure in those same buildings.

"Six to eight months ago, [lenders] were thinking the market would come down," Martin said. "They looked at these projects last year and said, 'Oh my god, maybe these are not viable anymore.'"

Now that prices seem to have stabilized, lenders are more willing to help out -- in completed buildings, at least.

"As long as they've already approved the building as part of their commercial portfolio, they feel it's not a big step up for them to give residential loans," said Michael Namer, the developer of new condo Village Green at 311 East 11th Street.

When the market crashed in 2008, Namer had just begun constructing Village Green. When sales began in the spring of 2009, he approached his construction lender, M & T Bank, and asked if they would provide mortgages for early buyers.

M & T agreed, Namer said, because they recognized that it was to their advantage to see the project succeed. "They already have the exposure," he said. "If I fail, then they fail."

It helped that M & T, a regional bank, tends to keep loans on its books rather than selling them on the secondary market, so it wasn't bound by Fannie Mae's presale requirements.

The building is now nearly sold out, Namer said.

"Anyone who came in [to the building], we said, 'Go see our lender,'" he said, noting that once Village Green was 50 percent sold, other banks were much more open to issuing mortgages.

It's not just developers who benefit when their construction lenders offer consumer mortgages. Each time a unit is sold, the lender gets a small part of its loan repaid. "In a sense, they're paying themselves off," Martin explained.

Banks also see opportunities for their retail divisions in buildings where they are privy to the intimate details of the building's finances.

Weiderpass said he was surprised when he was approached by representatives from the retail banking arm of HSBC, his construction lender. The construction lending and retail divisions of the bank "were trying to work together to find buildings that HSBC was comfortable with," he said.

HSBC ended up doing a number of 505 buyers' jumbo mortgages, which are often harder for consumers to get because they exceed Fannie Mae and Freddie Mac's lending limits. HSBC was willing to hold the loans on their books, he said.

"HSBC already knew the building and the finances of the building," Weiderpass said. "There wasn't a question of, 'Is this building going to go under?' They knew exactly what was happening with closings and contracts."

At the time, there had been very few closings in the building; now, some 50 percent of the units have closed, he said.

Securing mortgages through construction lenders isn't an option at all projects, especially since some lenders don't have retail banks. But buildings where end loans are available through the construction lender seem to have a leg up.

"Every time I meet with a new client, I tell them, 'If you're doing a project, try to make the lender part of the process,'" said the Marketing Directors' Andy Gerringer, "because it will give you a marketing edge."

• Email this article
• print
• Comments(1)

Leave a Comment

Name: (optional)

Email: (optional)

Comment: