Mortgate Outlook: Refinancing

The Boom Is Over

By Patrick Niland

After almost 20 years of refinancing underlying mortgages for New York area cooperatives, I’ve become relatively proficient at “guesstimating” downturns in the market. I know that my guesses are correct whenever lenders start calling for my views. I’ve been getting a lot of those calls lately, which confirms that one of the longest runs of refinancing has finally come to an end.
Over the last five years, virtually every lender has reported record volumes of co-op underlying mortgage business. Now, most lenders are seeing little of such business beyond the maturing loans in their own portfolios. The reason for this change is not really caused by the recent increase in interest rates. True, 10-year treasury rates have risen from their 2002 low of about 3.35 percent to a high of about 4.70 percent before retreating to current levels of around 4.50 percent.

But that is a far cry from the 6.60 percent reached as recently as 2000 or the almost 8 percent seen in 1995! No, the dramatic change in the refinancing market is a supply issue. As one lender put it, “Everyone who could refinance, did.” So many co-ops refinanced their underlying debt over the last five years that very few deals remain to be done. Most lenders expect that this dearth of new co-op refinancing will persist until the next cycle rolls around in 2007 or 2008.

So, if your building happens to be one of the very few co-ops that hasn’t refinanced its underlying mortgage, what can you expect from the current market? For one thing, you’ll get a good interest rate. It won’t be the rock-bottom rate that one of your neighbors got when his building refinanced back in 2002, but it still will be very low by historical standards. Also, more lenders are entering the market and introducing attractive new products. This has increased competition for the few deals that do exist, and that has reduced spreads. So, while indices like the 10-year treasury have increased, the margins added to those indices have declined, restraining the overall rise in interest rates for new loans.

Second, because many lenders are hungry for new business, you’ll get a much warmer reception than you might have gotten during the deluge of recent years. That doesn’t mean that you can tell a loan officer what to do, or that you can be any less prepared. However, it does mean that you might be able to negotiate a few more concessions. Don’t get carried away by this prospect, though. Such basic underwriting criteria as owner-occupancy levels, loan-to-value comparisons, and financial conditions still guide most loan decisions.

What’s my forecast for interest rates? If I really knew the answer, I’d be sipping pina coladas on a beach somewhere. My best guess is that rates will trade in a fairly narrow range for quite a while, but the range itself will drift upward. Remember, though, that “rate” is not the most important aspect of your new loan. Structure is. So, if you need to refinance your building’s underlying mortgage, don’t dawdle. Call all of your professional advisors – your accountant, attorney, managing agent, and a good mortgage broker – to help you structure the right loan. Then, get to work!

Patrick Niland is president of First Funding, a mortgage brokerage firm.

Still Looking Good

By Edward Howe III

As interest rates trend up, some boards may feel that the window for favorably refinancing debt is closing. This is not the case, as robust origination volumes continue to attest. The surge in lending activity in the New York metropolitan area is unabated, as many cooperatives move to take advantage of still-desirable market rates.

In this environment, many boards are seeking refinancing that can lower the cost of servicing their cooperative’s debt and also provide funds to cover the expense of necessary, but expensive, capital improvements. Although rates may be inching up, property values continue to appreciate at a far faster rate. This scenario affords a board the opportunity to tap into equity through cash-out borrowing as a cost-effective way to cover capital improvement expenses, while maintaining low debt-to-equity ratios. When faced with big ticket projects like façade restoration, window replacements, or elevator, plumbing, and heating upgrades, boards are finding cash-out refinancing is a fiscally smart alternative to unpopular special assessments.
After deciding to pursue refinancing, a board should undertake a careful analysis of potential financial partners, with the goal of finding a lender who not only understands the current real estate market, but also clearly grasps the unique needs of a cooperative corporation. Locking in a favorable rate an important goal for any board, and arranging financing with dispatch can be a key factor in achieving this.

Interest rate forecasts for 2006 see more upticks ahead. And, some real estate projections indicate a softening of appreciation levels may be in the works. Given this shifting scenario, a board planning to refinance their building will find it a wise decision to move ahead sooner rather than later. Proactively managing all fiscal goals is the hallmark of a well-run board, effectively protecting the ongoing financial health of the property.

Edward Howe III is the managing director at the National Cooperative Bank.