This spring, Kevin Brunnock considered himself one of the city’s lucky brokers.
He was working with a client who wanted to keep searching for a home despite the pandemic. If the right property came along, the client was ready to commit sight unseen.
In June, they found such a place: a two-bedroom condo on the Upper West Side owned by Nigerian-born supermodel Oluchi Onweagba. The 1,300-square-foot apartment had a terrace overlooking the Hudson River and in-unit laundry, both major draws in the Covid era.
Brunnock’s client made an offer within two days and went into contract on June 25 with a mortgage contingency. But that’s where the deal’s momentum died.
The sale didn’t close until Sept. 30 to allow for the mortgage lender to verify the buyer’s employment and pore over income and assets, double and triple checking statements, Brunnock explained. The financing took double the time the broker had expected.
“We saw for the first time how much the banks were scrutinizing everything,” said Brunnock, who works at R New York. “Covid has turned mortgage lending into a daunting process.”
The hurdles to accessing financing for the few homebuyers seeking to purchase in New York City is a gut punch to the city’s depressed housing market — that reveals institutional uncertainty and a lack of confidence in the city’s future, according to experts and industry insiders. The biggest concerns center on declining property values, potential new taxes and rising unemployment.
It may feel counterintuitive. Interest rates have sunk to unprecedented lows. Homebuyer demand is propelling the U.S. housing market to new heights with prices soaring and supply hitting historically low levels. But that wave has yet to hit New York. Sales in Manhattan fell 46 percent last quarter from a year earlier.
Most buyers of late have counted on financing to get to the closing table. In 2019, the number of cash buyers dropped substantially for the first time in five years. But that dynamic has flipped yet again, particularly at the high-end. Part of the reason may be that financing is not as easy to secure as it used to be.
“Low rates in and of themselves doesn’t necessarily mean that you’re able to get a mortgage,” said Michael Berkin, a New York-based mortgage loan originator at Silver Fin Capital.
It’s not just that banks are taking a more critical look at those with less traditional income streams — think entrepreneurs or gig economy workers. For attorneys, doctors and well-heeled borrowers in financial services, new layers of due diligence are slowing down the process.
There is a dearth of mortgage data monitoring originations for New York City’s residential market, but an analysis of property records by The Real Deal shows that the total volume of new home loans recorded year-to-date is down 20 percent, compared to the same period in 2019. (TRD’s analysis includes both purchase and refinance loans.)
Nationally, available housing credit has fallen nearly every month this year, indicating that homebuyers with lower credit are increasingly unable to secure home financing, according to the Mortgage Bankers Association.
Joseph Palermo, a mortgage loan officer at TD Bank, said he’s now reviewing bank statements and calling businesses to verify a borrower’s income and employment, something he never did or cared too much about before.
“We’re not just taking the two-sentence letter from the accountant like we used to,” he said. “We are double checking.”
Berkin recalled a recent lengthy process where a couple, one of whom was a doctor while the other was a lawyer, were trying to secure financing for their home.
“They should have no issue qualifying at the end of the day and it took nearly 90 days for them to close which is, in my opinion ridiculous,” he said.
In response, Chris Totaro, a residential broker at Warburg Realty, started advising his buyers to begin the prequalification process for a mortgage before beginning their search — and be prepared to shell out more cash than expected.
“The 10 percent condo mortgage is completely out the window,” he said.
While a 20 percent down payment is the rule of thumb for New York City buyers, 10 percent down for a condo was typical pre-pandemic in the city, as were loan-to-value exceptions. But now lenders are being stricter with down payments and, during the first three months of the pandemic, a 30 to 35 percent down payment became the norm, according to Berkin.
The mortgage broker said that’s “very slowly” changing and admitted it “obviously dramatically affects how someone approaches a purchase and what they’re willing to spend.”
Whether trouble landing financing is actually scuttling deals in New York City is hard to determine. So far, Totaro said he hasn’t lost out on any deals due to delays in mortgage financing, though it may only be a matter of time. The broker said he’s working with a buyer who refused to sign a contract on a two-bedroom apartment Downtown until they received approval for a mortgage.
“If someone else steps up, that property is gone,” he said.
A question of value
So what’s changed for the city’s biggest home lenders? The simple answer is risk.
Most home loans in New York City are too large to be securitized and sold to federally-backed home mortgage companies, Fannie Mae and Freddie Mac. This means lenders have to keep the loans on their balance sheet and bear the risks associated with them.
Banks held the largest market share of home mortgages originations in New York City, or at least they did before the pandemic. When contacted for this story, no institution agreed to an interview. Bank of America, Citibank and Wells Fargo declined to comment. First Republic and JPMorgan Chase, which tightened home lending standards across the board weeks into the pandemic, did not respond.
Initially, the concern for institutions was how borrowers would weather the city’s three-month lockdown and the staggering waves of layoffs and furloughs that accompanied it, according to Palermo. But now, he said the biggest issue is whether appraisals accurately reflect the true values of the property.
Comparative sales for deals closed during the pandemic are beginning to roll in and, so far, they indicate property values have fallen since March, Palermo said. This means the leverage for loans issued based on pre-pandemic appraisals are now looking “a little squirrely,” he said.
“Banks are a little afraid that if the values keep coming down, then the leverage grows,” he said. “If you have 80 percent leverage on something and the value comes down… now we’re at 90 or 95 [percent].”
That’s translating into banks wanting to get bad loans off their books, according to Mark Anderson, a partner at Anderson, Bowman & Zalewski who focuses on foreclosure defense.
Starting in July, he began to see getting calls from bank attorneys offering to settle the long-running cases — some that dated as far back as the Great Recession.
He would not elaborate on specific offers due to confidentiality agreements but said the number of offers is more than normal and the values on the table “much lower than was originally discussed pre-Covid.”
“A bank’s offer is dependent on their valuation of a property,” he explained in an email. “So it seems, despite what public figures may indicate, the banks are seeing darker times ahead.”
Not all lenders share those concerns.
“Quite frankly we’re not having issues at this time because there’s so few sales in New York City,” said Alan Rosenbaum, CEO of New York-based mortgage company, GuardHill Financial. “Valuations only go down when sales go down… If they don’t sell it, it’s not a comparable.”
Market data is on Rosenbaum’s side so far. Last quarter, median sale prices slid marginally in Queens and were flat in Brooklyn. In Manhattan, prices actually increased, though that was due to distortion from higher-end deals that went into contract just before, or amid the city’s lockdown, according to appraiser Jonathan Miller of Miller Samuel. The number of transactions in all three boroughs was down at least 40 percent year over year.
Miller said the sales data is particularly “thin” on deals above $2 million, which can make appraising a high-end home more difficult. He also noted that different lenders’ standards for conducting appraisals also continues to be a factor that can delay financing.
For the appraiser, though, he said the tighter lending standards are “actually really encouraging” to him “because during the financial crisis there was no risk management.”
There’s more to banks’ cautious lending than uncertainty over valuation, however. Part of the calculus is a lack of confidence in New York City, according to economist Dr. Sam Chandan, dean of the NYU SPS Schack Institute of Real Estate.
“There are concerns around what is the trajectory of New York’s competitiveness in attracting new jobs and residents will be, given our challenging fiscal outlook,” said Chandan. He pointed to discussions on introducing new taxes on city residents and commercial real estate as specific sources of concern.
When it comes to TD, Palermo stressed that, despite additional due diligence, deals are still getting funded.
“As long as we know the person is working and has the ability to repay, we’re lending,” said Palermo. “It’s not a harder loan for us. We’re just taking extra steps to verify it.”
Palermo said that he’s able to close a purchase loan in under 30 days “with my eyes closed,” though he admitted a refinancing can run up to 90, even 100 days. (He and Berkin confirmed that most lenders are prioritizing purchase loans over refinance business.)
But as more and more borrowers are pushed to their limits, many have second thoughts.
“Money is almost free but trying to get it is another thing,” said Vickey Barron, a broker at Compass, who nearly gave up on refinancing her own property earlier this year. “You question, is it worth it?”