Mortgage fallout takes no prisoners

Sep.September 15, 2007 01:20 PM

The seismic effects of the subprime mortgage crisis and tightening credit are shaking up a wide swath of New York’s real estate market. In the housing market, loan applicants — even those with solid credit — are having a tougher time taking out a mortgage. Lenders have instituted more rigorous income checks, raised interest rates on prime mortgages, and tightened their standards. High-end purchasers of $10 million homes and young buyers looking for starter apartments are equally likely to feel the pain.

Meanwhile, major commercial property owners are finding it increasingly difficult to secure financing. And sales of commercial buildings have stalled after the volume of deals set a record pace in the first half of the year.

Here’s a look at some recent highlights and notable quotes from the experts about what’s going on.

“The high-end market is one of confidence.”

Higher mortgage rates, combined with potentially lower Wall Street bonuses this year, could take a toll on the upper end of the Manhattan housing market, according to experts.

More would-be buyers are now approaching homes priced at more than $10 million with caution.

“The high-end market is one of confidence — it’s pure, pure confidence, and the minute the confidence isn’t there, that’s when the attitude changes,” said Prudential Douglas Elliman vice chairman Dolly Lenz. The New York Sun, Aug. 13, 2007

“We thought the dust was going to settle, but instead, it just blew up.”

Loan applicants are not just finding themselves under a microscope in the tighter credit market; they need to have more funds to appease lenders. In addition to more careful scrutiny of credit history and home appraisals, some lenders are demanding reserves equal to six months of a home’s mortgage principal, interest, tax and insurance payments, instead of two.

“We thought the dust was going to settle, but instead, it just blew up,” says Mitchell Reiner, president of Mortgage Associates, a Los Angeles-based lender that does business in 48 states. “Everyone is being affected.” The Wall Street Journal, Aug. 14, 2007

“The end of an era.”

Many Manhattan buyers are feeling the strain of the tightening mortgage market.

Some banks have increased rates on jumbo mortgages, which are for more than $417,000, and are issuing them under stricter guidelines.

Lenders want borrowers to put down more money to discourage them from sticking the bank with the mortgage if the market drops.

“It’s the end of an era of highly leveraged lending on residential apartments in Manhattan,” said Keith Kantrowitz, president of Power Express Mortgage Bankers.

Still, many deals in the upper 10 percent of the market aren’t affected because buyers pay cash. Others have turned to renting. The New York Times, Aug. 17, 2007

“Banks used to like these [young] people.”

Young borrowers with high income but low savings could be pinched by the tightening credit market, which could affect new developments aimed at younger buyers in neighborhoods like the Lower East Side and Williamsburg.

“Banks used to like these people,” said Richard Bouchner, co-owner of Commodore Mortgage, based in Jersey City. In the last few weeks, “there has been a real contagion effect,” he said. “One lender after another is turning off the flow.”

But the city’s overall market should hold up because buyers with more solid finances are driving growth, not first-time buyers. Manhattan’s market is also insulated by the tough standards of co-ops.

Other boroughs, with more subprime borrowers, could be more affected by the credit crunch. “There are more subprime borrowers out there,” said Aaron Shmulewitz, a real estate lawyer for Belkin, Burden, Wenig & Goldman. The New York Sun, Aug. 16, 2007

“Frantic searches for last-minute financing”

Many homebuyers are experiencing something worse than simply not finding a loan. Some borrowers have found themselves turned down by lenders days or even hours prior to closing on a property.

In all likelihood, it started in July when the subprime market essentially imploded. The subprime market “is not really there anymore,” said Keith Kantrowitz, president of Power Express Mortgage Bankers. “It got bombed. It doesn’t exist.”

The effects of the credit crunch and unstable interest rates may linger for the foreseeable future.

“I’ve heard very few people say that it’s all going to blow over,” said Jonas Lee, managing partner for private-equity firm Redbrick Partners. “A fundamental shift has happened. And it’s not good.” The New York Post, Aug. 16, 2007

“Sales of office properties have stalled”

Even Manhattan’s prime commercial real estate is vulnerable to this summer’s shaky capital markets.

“With regard to the capital markets, we are clearly in a period of volatility,” said Mark Gordon, executive vice president at Cushman & Wakefield Sonnenblick Goldman. “Many are quick to forget that for the past three years, we kept saying that things could not get any better, and each year they did.”

With a record $31.4 billion of properties sold or under contract by June’s end, transactions have slowed as even big players have trouble getting financing.

As office buildings sell for up to $1,000 and $1,500 per square foot, owners need to lease them for at least $100 per square foot to show a profit, which many experts do not see happening.

“Office rents in prime buildings which are quoted at over $100 per foot seem to be more talk than reality,” a partner in the mortgage fund Rossrock LLC, Alan Leavitt, said. The New York Sun, Aug. 16, 2007

“I don’t see any immediate impact on [office] rental rates.”

Big brokers are downplaying the effects of the credit crunch on commercial leasing, particularly in new office towers under construction, with no talk of any leases being sidelined.

“Any change in liquidity or credit markets is going to impact commercial real estate,” said Grubb & Ellis president David Arena. However, he added, “We don’t see any immediate impact on rental rates in the city. In uncertain markets, we advise our clients to be cautious but opportunistic.”

CB Richard Ellis Regional CEO Mary Ann Tighe said that even if Manhattan is “impacted negatively, we’ve never been in better shape to absorb it.” She believes demand might diminish, but supply is still limited because so little has been built in recent years.

Tighe represents SJP Properties’ 11 Times Square and Harry Macklowe’s 510 Madison Avenue, two big buildings in the works which have yet to sign tenants. The New York Post, Aug. 21, 2007

Compiled by Linden Lim

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