The surge of foreclosures resulting from subprime home loans around the country has largely missed Manhattan, though the island has felt its effects in tightening loan standards.
It remains to be seen whether a wave of adjustable-rate mortgages, or ARMs, about to reset this year (some of them subprime and others not), may place Manhattan in a more vulnerable position, though most experts are betting it won’t. Subprime mortgages are loans made to borrowers with poorer credit at higher interest rates. ARMs are loans that enable a consumer to determine monthly repayments based on fluctuating interest rates.
In general, the most popular types of loans being taken out are the five-year, seven-year and 10-year ARMs, said Melissa Cohn, the president of Manhattan Mortgage Company, a residential mortgage brokerage licensed in 15 states. New Yorkers, more so than people living in the suburbs, have traditionally taken out ARMs.
“In New York City, which is the highest price point, people tend to steer more towards the adjustable, and in the suburbs and outlying areas, where loan amounts tend to be lower, we’re seeing a lot more interest in the fixed-rate product,” she said.
However, Manhattan has been largely insulated from the surge of subprime loans, and those include subprime ARMs, for two reasons, said Tom Barnhart, the president of Mortgage Commitments, a New Jersey-based mortgage brokerage that operates in the metropolitan region. First of all, subprime mortgages were largely unavailable for co-op apartments, which comprise 75 to 80 percent of the Manhattan housing stock.
Second, most subprime lenders didn’t lend for new construction condominiums; they had to be 90 percent complete, Barnhart said. “That gets rid of another 15 percent of the Manhattan market.”
So even if proportionately more loans in Manhattan are ARMs, they’re not subprime, but prime, which will not see a huge adjustment, Barnhart said.
“The subprime adjustments are huge, huge adjustments, and the prime adjustables aren’t going to be as large,” he said.
Given the current values of LIBOR (the London Interbank Offered Rate) and the one-year Treasury bill, the indexes typically used to derive home mortgage interest rates, the adjustment “might even be lower in terms of rate than what they currently have,” Barnhart said.
Barry Hersh, the associate director of the Steven L. Newman Real Estate Institute at Baruch College/City University of New York, agreed that Manhattan is well-insulated from any crisis surrounding ARMs.
“Seventy-five percent of the market in Manhattan is co-ops, and the co-op boards always required very strong financial statements from buyers,” Hersh said. “So therefore, it is much less likely there will be foreclosures in Manhattan.”
Barnhart said that he believes what may be more important for New Yorkers is whether they took out interest-only ARMs.
“The increase in the payment is not necessarily going to come from their interest rate as much as it is from if they’re interest-only,” he said.
Interest-only ARMs provide the borrower with the ability to pay for a fixed period only the monthly interest due, and none of the principal, resulting in lower payments during that term. A related type of loan called a pay-option ARM offers even lower monthly payments for a fixed term by allowing the consumer to pay only a fraction of the interest due each month, and none of the principal, resulting in a larger loan balance each month.
“The people who bought expensive properties with option ARMs, and who never had an ability to carry anything other than the negative amortization minimum payment, if they run out of the ability to avail themselves of that payment, the payment triples or quadruples upon the reset,” said Paul Levine, the chief operating officer of Refinance.com, a company that provides home loans to borrowers.
For people who took out super-jumbo loans, or those for more than $650,000, who may be the predominant borrowers of pay-option ARMs in Manhattan, they may be in a good position to cover those monthly payment increases, he said.
“This is pure speculation, but it would seem that in the super-jumbo market, in loans over $1 million, there’s going to be more ability to sustain on-time payments, even with the large adjustments, because you have a bigger bucket of income to begin with,” Levine said.
Barnhart agreed and said, “I think most of the people in Manhattan would be prepared to absorb the increase.”
But people who took out the pay-option ARMs in the jumbo loan category, or one for more than $417,000 and less than $650,000, may find themselves struggling, as they will have less residual income from which to make their adjusted payments, Levine said. He said there were pay-option ARMs taken in New York City, but not to the extent they were in other parts of the country.
“In California, virtually two out of three loans were option ARMs,” he said. “I don’t think there was any sort of statistic like that that one could realistically apply to New York, but it was certainly a popular product, and unfortunately, it was not only taken by people in the super-jumbo loan market. It was taken by people in the middle-class market.”
Barnhart pointed out that most borrowers who took pay-option ARMs have caps of 7.5 percent on the annual increase in the negative-amortization (or minimum) payment. However, in New York, when borrowers’ loan balance has grown to 110 percent of the original principal, the lenders then demand repayment of principal, which sends monthly payments spiraling, Levine said.
In most of the rest of the country, it’s 115 percent, meaning that New York will begin to see pay-option ARMs recasting about a year before everywhere else, he said. In the rest of the country, analysts have predicted that people will start seeing loans reset in 2009.
Cohn said that she doesn’t believe the pay-option ARMs will play a big role in Manhattan. “The option ARMs are really a minimal percent of what we do,” she said.
And all analysts said that because home prices have remained strong in Manhattan, most borrowers should be able to obtain some type of refinancing.
“I don’t see a huge spike in foreclosures due to resetting rates,” Cohn said. “If you take into consideration the fact that the average price of an apartment in New York is in excess of $1.3 million, our buyers tend to be better, more qualified buyers, and can qualify for refinancing.”
The loan packages available for refinancing are much more conservative products than originally presented to borrowers, Levine said.
“Refinancing is available, but you have to be able to afford a realistic, real-world payment, so if you’ve been making the minimum payment on an option ARM, you’re certainly not used to budgeting for it.
“Still, in the Manhattan market, where prices still seem to be slowly but steadily increasing, certainly there’s more motivation for the upper-middle-class and wealthy borrowers to fight and struggle to keep their homes, because there’s still an upside,” he said.
Part of the problem with predicting the effects these home loans might have on the New York City marketplace is a lack of widely available data. The Mortgage Bankers Association of America keeps statistics on the types of loans taken by borrowers nationwide, and breaks them down only by state.
“We haven’t really had a need for our members to have anything that detailed on a local level,” said Jonathan Pinard, the president of the Empire State Mortgage Bankers Association. “It might not be a bad idea going forward.”