Interest Rates Make This Refi Prime Time

Prior to the pandemic shutdown last March, Donald Einsidler, the president of Einsidler Management, was busy helping five different co-op boards navigate the process of refinancing their underlying mortgages at interest rates just above 3%. Then came the stay-at-home order, and suddenly pricing went haywire. “Rates spiked up to points where it wouldn’t have made sense to go through with the loans,” Einsidler says.

Fortunately, because he had secured lender commitments on four out of the five loans, Einsidler felt no urgency, and he advised his boards to “just hang out” and hope that over time the rates would come down. And that’s exactly what happened. Refinancing rates once again dipped to tantalizing lows, Einsidler says, and all of the loans eventually closed at rates low enough to allow the co-ops to maintain their same monthly payment even after taking out some cash.

With the nation’s economy in tatters from the pandemic, this is one sector that is enjoying robust health. But as with everything these days, there are complications that never existed before. The current economic uncertainty is causing lenders to take some extra precautions on refis – above and beyond traditional prepayment penalties. Boards should not assume that the pace of business means that loans are sailing through the underwriting process. To the contrary, brokers say, co-ops should be fully prepared to undergo closer financial scrutiny than was common before the pandemic hit.

“If you have any borderline issues,” says Patrick Niland, the president of First Funding of New York, a mortgage brokerage, “you’re going to get a lot more scrutiny.” For example, co-ops that own retail space and/or rely on a commercial tenant for a significant portion of their maintenance will find it harder to get approval. 

“It’s a huge kind of bag of issues that are popping up,” says Harley Seligman, a senior vice president at National Cooperative Bank. “It could be that the unit is vacant, it could be that we don’t have confidence that it won’t be vacant in six months, or the tenant has stopped paying their rent. Take a Soho co-op with a high-end designer’s store on the ground floor paying a huge rent. Will that even exist in a year?”

A board dealing with lost commercial income might try to improve its odds of qualifying for a loan by increasing everyone’s maintenance or imposing an assessment to cover the shortfall, says Marc Schneider, a managing partner at the law firm Schneider Buchel. A lender would want to see that the shareholders have been able to cover the shortfall for some period of time, he says, and that delinquencies aren’t rising. 

Niland reports that some lenders are also being more conservative about the percentage of arrearages on shareholders’ monthly maintenance they will allow, fearing what the future might hold if unemployment continues to rise. Whereas before the pandemic, “a few wandering ducks” didn’t really hurt a co-op’s chances of securing a loan, now all those ducks need to be in line. 

“I just did a loan on a building in Woodside, Queens, that has two units that have been in arrears for a long time,” Niland says. “They’ve taken the people to court and won a judgment and are now moving to collect, like, $50,000. The lender looked at that and said, ‘This has gone on for a long time.’ Now the lender is holding an escrow until those situations are resolved.”

Some lenders are requiring co-ops to put up what they call a “COVID-19 debt service reserve,” which is typically three to six months of mortgage payments. If the co-op makes its scheduled payments over a certain period, that money is released back to the co-op. But the co-op has to come up with the money – one more sign of banks’ unease about the current climate.