Shutdown leaves NYC real estate in deal-making limbo

"When our government pauses, our corporations pause too," NGKF exec says
By Katherine Clarke and Hiten Samtani | October 02, 2013 08:30AM

New York City real estate often seems to operate as if blissfully insulated from federal events, but the effects of the first government shutdown in nearly two decades — now dragging into its second day — will ripple through several fronts of the industry, brokers, developers and market observers told The Real Deal.

The shutdown, a showdown between Republicans and Democrats over the Affordable Care Act, is forcing nearly 800,000 federal workers to stay home, virtually shutting down many agencies that deal with housing and home mortgages.

While it’s business as usual for mortgage associations Fannie Mae and Freddie Mac — a spokesperson for Fannie told TRD that since the agencies are simply backed by the government, as opposed to being governmental bodies, they are unaffected — the U.S. Department of Housing and Urban Development has shut down almost entirely. The Federal Housing Administration — which insures mortgage loans under the purview of HUD and, in New York City, caters particularly to the lower end of the market — is running with a 96 percent reduction in staff, severely limiting its capabilities, according to a statement from HUD spokesperson Jereon Brown.

“There will be a limited number of exempted FHA staff available to underwrite and approve single-family home loans,” Brown said. “The underwriting and approval process will definitely be slower than normal.”

In the long term, HUD-subsidized development may also slow down. New York City developers relying on HUD-insured loans, whose projects typically have large affordable components, might face delays in construction, said Don Peebles, CEO of development company the Peebles Corporation. And if the shutdown continues, families relying on housing subsidies linked to HUD may have to rely on their landlords to work with the government to find a solution for rent payments.

“The sad reality of this is that the impact will be most heavily felt by working families in the city,” Peebles said.

The National Association of Mortgage Brokers is also warning of delays for condominium and co-op purchasers who still need IRS transcripts or Social Security verifications before getting mortgage approval for their lender or the FHA.

“Without access to tax transcripts and relevant information that must be verified by these agencies, it may not be possible to complete the loan verification process,” said Don Frommeyer, president of the association, in a statement. “Thus, the lenders working through the shutdown may come to a standstill while processing loans.”

Indeed, it’s the inability to access tax transcripts that’s crippling mortgage brokers, said Melissa Cohn, an executive vice president at mortgage provider Guaranteed Rate, adding that the company is now only able to get loans closed through Fannie and Freddie.

Rolan Shnayder, director of new development lending at HOME Mortgage Bankers, said the problem is not so much closing deals as it is perception and consumer confidence.

“We’ll figure out a way to push the deals through the system,” he said. “The real issue is that when there’s uncertainty out there, economic activity slows down. That’s the real problem.”

Condo developers are among those most inconvenienced by the government shut down thus far, since they rely on the FHA for project approvals. Without approvals, developers cannot commence closings, leaving both purchasers and lenders hamstrung.

“We already see the backlash [from sponsors] because all the developments we submitted for condo approval, which include some projects in Upper Manhattan and the boroughs, are dead in the water,” said Orest Tomaselli, CEO of National Condo Advisors, a company which obtains nationwide condo project approvals for developers and deals in nationwide FHA lending. “Hundreds of thousands of buyers looking to purchase properties with FHA mortgages have to wait.”

Tomaselli’s clients have been calling all day, asking when the applications might be reviewed. “I’m saying there’s nothing we can do,” he said.

Brokers on the ground say they’re worried that financing woes will slow deal flow, particularly at the lower end and middle of the residential market, where all-cash deals are rare.

“The wheels of the federal government are not working at full capacity,” said Jason Haber, CEO of residential brokerage Rubicon Property. “I received calls from clients this morning about whether they’d have a problem closing.”

The uncertainty stemming from the shutdown would add to the woes of real estate players already anxious about Mayor Michael Bloomberg’s departure in January, according to Mark Weiss, a vice chairman at Newmark Grubb Knight Frank.

“This is going to hurt us on a lot of different levels and we’re walking right into it,” Weiss said. “When our government pauses, our corporations pause too.”

Market intelligence will also be hurt, at least in the short-run, as associations compiling reports on key industry metrics, such as construction spending and employment, rely on the U.S. Census Bureau for their data.

“It is hard to get a sense of where the industry is heading when basic construction spending data isn’t available,” Ken Simonson, chief economist at the Associated General Contractors of America said in a statement. “Unfortunately, the lack of federal spending data likely foreshadows a decline in federal construction spending until the government reopens.”

But a dramatic event such as a shutdown — as long as it’s short-term — might have a silver lining for the industry. It would force people on both sides of the political aisle to play ball, said John Wood, chief operating office of Iron Hound Management, a real estate investment company founded by Robert “Large Loan” Verrone that brokers commercial debt and equity transactions and restructures commercial loans.

And it would prevent the Federal Reserve from scaling back on the bond-buying program which has kept interest rates at record lows, said J.D. Parker, an executive at investment sales brokerage Marcus & Millichap. “I don’t see it as a negative thing at all,” Parker said.

Any efforts to sustain the shutdown for longer than a few days would be politically risky for the Republicans, Peebles said. “More and more of those on the center of the aisle will start abandoning this approach because it’s really counterproductive.”

Still, those closely watching the market say delays are unlikely to affect the thirst for New York City real estate long-term.

“In my view, there are only three things that can impact the New York City market right now: consumer confidence, mortgage rates and the stock market” said Doug Perlson, founder and CEO of online brokerage RealDirect.com. “The good news in the short term is that [the government shutdown] is not going to have a tremendous impact [on any of those things.] One day into it, people are optimistic that it’s going to get resolved before tragedy happens.”