Low Interest Rates Come With New Snags for Refi Shoppers

Seductively low interest rates have sent many co-op boards into the mortgage refinance market. Once they start shopping, many boards are surprised to learn that lenders, leery of the looming economic fallout of the coronavirus pandemic, are making unheard-of demands before approving loans.

Patrick Niland, the president of the mortgage brokerage First Funding of New York, reports that many lenders are worried about lost rental income from struggling commercial tenants in co-op buildings. Some lenders, he adds, 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 a row.

“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 an escrow fund they call a “COVID-19 debt service reserve,” which is typically three to six months of mortgage payments, according to Nicoletta Pagnotta, a senior vice president at Meridian Capital Group. “They just want to keep an eye on what’s going on,” she says. “If nothing happens over a certain period, that money would be released back to the co-op.” But the co-op has to come up with money that banks had never demanded pre-pandemic.

Toward the end of summer, Pagnotta also began to see signs that Manhattan’s troubled real estate market was affecting co-op appraisals. This was in buildings in which the appraiser based unit values on comparable rentals. With rental vacancies soaring due to the pandemic and rents on their way down, the valuations for some co-ops are coming in a little bit lower. “Now, these loans are usually very low loan-to-value,” she says, “so the slightly lower appraisal doesn’t necessarily hurt, but it’s something we’re making our clients aware of.”

When it comes to condominium associations, interest rates are also attractive on Common Interest Realty Association, or CIRA, loans. A mechanism that enables condos to pay for major capital needs over time, CIRA loans are secured not by real estate but by a security interest in the condo association’s common charges. However, lenders who do these niche loans are raising the minimum number of units they require in an association, says Barry Korn, the managing director of Barrett Capital. The minimum now tends to be around 20 to 25. With a building any smaller than that, it gets tougher, he says, given the uncertain job market and the risk that some unit-owners will stop paying their monthly common charges. “I even had a bank ask for a list of what each of the unit-owners do for work in a 14-unit association,” Korn says.

With economic forecasts ranging from uncertain to gloomy, boards considering a refi or CIRA loan would be well advised to act sooner rather than later, says Marc Schneider, a managing partner at the law firm Schneider Buchel. “I don’t know that we’ve seen the economic fallout yet,” he says. “People have had unemployment and stimulus money to fall back on. Once some of that stuff runs out and more people wind up unemployed, they may stop paying their maintenance or common charges in a timely way. Then it’s going to become harder to get a loan.”