Needing a Mortgage for Repairs

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Q: I am the president of a five-unit co-op in Brooklyn. At present, our building does not have a mortgage, but we are going to need one to cover the cost of a new boiler, upgrades to our electrical system, and several other repairs. We’d like to complete all these projects before winter, but I’m getting desperate because none of the banks I’ve called are willing to give us a loan. Can you point me in the right direction?

A: It may be scant comfort to know that almost all small co-ops encounter the same problem. One reason comes from the lender’s perspective. It takes the same amount of work – and sometimes more – to do a small loan as it does to do a big one. However, the amount that a lender can charge for a loan tends to equal a relatively constant percentage of the total loan amount. Therefore, as loan size drops, so does the lender’s income, and at some point, it doesn’t make economic sense to do a deal. This is especially true for large lenders like the ones you’ve been calling.

Another reason comes from the market. Before 2009, there was a fairly active secondary market for small co-op loans. This gave lenders a ready buyer for their small loans at a decent profit. And because the secondary market pooled lots of small loans into a big package for sale to large institutional lenders, smaller co-ops received interest rates very close to those on loans to much bigger buildings. Unfortunately, that portion of the secondary market evaporated in the subsequent financial collapse. Consequently, the few lenders still active in the smaller end of the underlying mortgage market now originate loans only for their own portfolios.

So, today, in addition to all of the regular lender requirements, small co-ops – those with fewer than, say, ten units – face special challenges when searching for a new loan. In fact, if a building has fewer than five units, there may be only two or perhaps three lenders willing to do a loan. With such a small universe of lenders, co-ops like yours are in a very poor negotiating position.

Another challenge is cost. Because all underlying mortgages are commercial loans, lenders typically require the same documentation for small loans as they do for big ones. That means a full commercial appraisal (which is much more extensive than the one- or two-page report that individual apartment buyers may have seen and can cost $3,000 or more), an engineering report of the building’s physical condition (about $2,500), and an environmental risk assessment ($1,000 to $1,500).

Then there are legal fees for both the co-op’s attorney and the lender’s (at least $3,500 per side), title insurance (about $3 per $1,000 of loan amount), a survey update (about $500), searches of the public records for liens and violations (another $300 to $500), and miscellaneous items (say, $200 to $300). Some lenders charge origination fees (also called “points”) of 1 percent to 2 percent of the total loan amount, but some do not. If you hire a mortgage broker, that fee can be 1 percent of the total loan amount (and sometimes more). And, of course, if the co-op is increasing the total amount of debt on its building or, as in your case, taking out a brand-new loan, there is a mortgage recording tax (from 1 percent of the amount of “new” money in the counties outside the city to 2.05 percent in the five boroughs). That means that a new $200,000 loan like the one you are seeking could have total closing costs in the range of $15,000 to $25,000.

A third challenge is the interest rate. As I mentioned earlier, virtually all small co-op loans are originated by lenders for their own portfolios. These lenders, which themselves tend to be smaller in size, usually have a higher cost structure, and that is reflected in the interest rates they charge. That’s why smaller co-op loans like the one you want get interest rates that, depending on length (or term), are typically between 2 percent and 4 percent higher than those on bigger loans.

After painting such a discouraging picture, I’d like to leave you with a bit of good news. There are several lenders that will give you a new loan. If you have trouble finding them, I know at least one good mortgage broker who can lead you straight to them.