Despite unprecedented attempts by the federal government to get banks lending again and to get the economy moving, buyers are finding it harder to get mortgages since the fallout on Wall Street.
In the last few weeks, banks have added stipulations that New York borrowers have even higher credit ratings than they had recently needed. Also, in some cases, lenders are going so far as to require borrowers to set up checking accounts at their banks if they increase the amount of financing on a mortgage.
While nontraditional lenders do exist, New York City buyers are finding that generally loan-to-value ratios are shifting against them, contributing to the cycle of decreasing activity and dropping prices in the downturn.
In the last few weeks, there’s been a 15 percent drop in clients among mortgage brokers in the city, and the number of loans actually issued has gone down as much as 40 percent, as deals are scuttled at the last minute by banks and buyers, according to mortgage brokers, real estate brokers, title insurers and developers.
“This fall has been a strange time — a triple witching hour of market volatility, a national election and drawn-out Jewish holidays that have disrupted the cycle,” says Melissa Cohn, president of the Manhattan Mortgage Company.
Last summer, banks were already in retreat, financing just 80 percent of purchases on average, said Michael McGivney, a senior vice president in the Midtown office of Stanley Capital. Now, after the financial cataclysms of the past month, they often just will cover 70 percent, McGivney said.
As a result, the size of down payments has increased for both co-ops and condos. Earlier this month, Steve Moran, a senior loan officer at Preferred Empire Mortgage Company, told The Real Deal that in the past putting down 10 percent for a condo and 20 percent for a co-op was typical in Manhattan. Those numbers have now jumped up to 20 percent and 30 percent respectively, he said.
Meanwhile, buyers can forget secondary financing, more commonly known as home equity loans. In 2006, those loans comprised 80 percent of all the mortgage activity McGivney handled, almost all of them in cases where the buyers sought to pay just 10 percent of a condo’s price and needed a home equity loan to cover what their primary mortgage could not. McGivney said today they make up just 5 percent of his transactions.
What changed? Banks realize those loans are the last kind to be paid back if a borrower defaults. “Lenders took a real bath on these,” says McGivney. They are “basically gone.”
Another added bank stipulation is that New York borrowers have credit scores of at least 700 — up from 650 just a few weeks ago, regardless of the price or type of a unit, according to James Gricar, an executive vice president at Brown Harris Stevens.
About 60 percent of his clients use mortgages to buy homes.
“Banks don’t have money to lend to buyers the way they did,” says Gricar.
Banks may also be willing to tailor their terms with unusual requirements: Some banks will demand that if they contribute a larger share of the loan, the borrower must invest that difference in the bank, McGivney said.
For example, if the borrower sought 80 percent financing, but the bank initially didn’t want to go above 70 percent, it might still come around if that extra 10 percent were placed in an in-house checking account, mortgage brokers say.
While some sources interviewed say that co-op buyers need to reach a little deeper into their wallets, others say that for financially healthy buyers, lenders don’t seem to be significantly changing their rules about co-ops. They seem satisfied with already-strict, existing co-op purchase rules, dictating a 25 percent down payment and two years of cash reserves, some brokers say.
However, all seem to agree that banks are changing their tunes about new condos, requiring now that at least half the units in a building are sold — a sign that the project will likely be seen through to its completion — before signing off on any loans for individual buyers. (See Ominous signs from new condos.)
As of late October, Chase, for example, is requiring that a condo in New York be 75 percent sold before extending any financing, Cohn said.
But while large banks may be tougher to crack, smaller regional institutions seem more flexible.
For example, Patriot National Bank, Astoria Federal Savings Bank, Ridgewood Bank, Hudson Valley Bank and Metropolitan National Bank — all of which have strong presences in the outer boroughs and suburbs — are lending 80 percent on loans of up to $3.5 million, McGivney said.
“It’s not true you can’t get a loan,” he said. “You just can’t always go to Countrywide or Chase.”
While there are indications the federal rescue plan has sparked some interbank lending, homebuyers will likely have to wait a year to see any considerable effects on mortgages. Even then, rates on a standard 30-year-fixed mortgage may just barely drop below 6 percent — low in historical terms, but higher than the rates that hovered between 5.25 and 5.5 percent during the recent boom, according to mortgage brokers. In the 1980s, by contrast, rates were in the 12 to 15 percent range.
One immediate benefit of the $700 billion government rescue plan, though, is that the conforming limit for loans backed by Fannie Mae and Freddie Mac is now $729,650, up from $417,000.
As a result, New York homebuyers suddenly have access to lower-cost loans that they didn’t qualify for before. The city’s homes have generally tended to be too expensive for the Fannie Mae/Freddie Mac programs, which generally cover mortgages issued by large publicly held banks like Chase, Wells Fargo and Citi.
“It probably won’t help the average condo buyer,” Cohn said, “but it will help people in the outer boroughs.”
Still, she adds, the higher conforming limit is only temporary, expiring at year’s end. While a higher limit will likely be extended, it will probably be lower than $729,650.
The point might be moot if the fundamentals of the real estate economy don’t improve. One particular worry is that sellers aren’t lowering their asking prices fast enough, says Douglas Panero, a real estate attorney and partner in Manhattan-based Rabin Panero and Herrick.
Until then, buyers won’t be shopping around for mortgages anyway.
In fact, the downturn of the early 1990s “pales in comparison to this,” said Panero, who’s been practicing for two decades.
“This seems to be a different variety,” he said, “with troubles in cities and troubles in business, and the stock market getting it all at once.”