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Hi All -
Our co-op would like to keep shareholders' costs low while protecting the co-op. Our management company is asking as much as $1150 from shareholders seeking to take out a Home Equity Line of Credit. A five-page application asks shareholders seeking a HELOC for two years of tax returns and all their personal financial information, as well as letters of reference. It's not at all clear what judgment the management company would make based on this information. Additionally, apart from asking shareholders to black out their social security numbers on the paperwork, the management company has no way of keeping this confidential information secure. Shareholders understandably feel their personal information is no one else's business.
The bank has approved the HELOC. The management company is required only to provide a copy of the co-op's current insurance certificate. The management company says it must "protect" the co-op. Shareholders agree the co-op must be protected but don't see what protection is being offered by submitting their personal information, nor do they see why the fee should be so high.
The "application" would make sense for a purchaser in the co-op, but otherwise seems little more than a way for the management company to generate a fee.
What does your board do for a HELOC application? What's the legal issue here?
Thanks - Muddled in Manhattan
As a managing agent, I look at the whole picture and do require Shareholders to fill out a simplified financial statement form.
In most coops, I have moved the 80% LTV to 75% because of volatility and ensure this will be maintained if any LOC is maxed out.
We run credit, ask for current income verification and ensure stability.
We charge $50 for the credit, and 250 for the app, which is more industry standard and includes any bank questionnaires, etc that need to be filled out and submitted.
As opposed to purchasing, other questions such as "why?" come into play because it would concern me if they were financing their lifestyle that may be in a deficit..
But at the end of the day, if there's tons of equity and you maintain leverage, you can afford some leniency if needed.
In essence, you do need the whole picture.
~AR
PC#1, I think Muddled was asking about HELOCs for individual shareholders and not for the co-op corporation. That's the impression I had from reading the first part of your reply. I apologize if I read it incorrectly.
That being said, I agree that $1,150 is a very excessive fee to charge an existing shareholder for a HELOC review. I could see charging maybe half that amount for a new purchaser review because such reviews require a detailed analysis of the purchaser's assets and liabilities. But a HELOC? Very suspect.
Keep in mind that the shareholder already has a fiscal history with the co-op. Do they pay their monthly maintenance and any assessments on time? Have they ever asked for any special financial considerations? I'm assuming the shareholders haven't given the appearance of any financial distress, so the board knows they're reliable and good community members.
When we do a HELOC review, it's usually the treasurer who does it and not the MA. When I did the reviews, all I really needed was enough financial information to verify that the shareholder's mortgage+maintenance+HELOC monthly payments did not exceed around 35% of their annual pre-tax income. I may ask for a few documents like paystubs to verify income and employment, disclosure of any new, non-discretionary debts (large loans, divorce maintenance and child support, things like that) but not nearly the level of financial information the MA is requiring.
To me, the giveaway that the MA is price-gouging is the request for references. WTF? This is someone who's lived in the building, and the quality of their character should already be known to the board. You might ask the MA why they are requesting references and what their purpose is.
Two additional points. It's a pretty well-known tactic of some MA's to lowball their monthly fees with the expectation that they'll make some of it up in nuisance fees like excessive shareholder chargebacks. Before doing or saying anything, check your contract with the MA to make sure the fee wasn't specified in a rider to the contract.
Do not accept a bank's approval of a mortgage or HELOC as verification of the applicant's financial soundness. Remember what happened in 2008-2009 with no-verification and liar loans. There's been talk that this behavior is starting to appear with certain institutions. Due Your Diligence.
Good luck!
Thank you Steven424 for clarifying this for me.
Thank you Steven424 and People's Choice #1. Yes it's a personal HELOC, not a HELOC for the co-op. I'm not sure the managing agent is being dishonest. I think they are trying to get a fee for an unnecessary service, and have gone overboard in requesting documentation. That said, since a HELOC is a line of credit, not a loan, Steven424, there's no way to complete your calculation. And even so, why would a Board want to deny a HELOC to, say, an aging shareholder who's got millions of dollars in equity but only social security to pay his bills? Unlocking that credit avoids an apartment falling into arrears and avoids a premature sale of a property, both of which could lower values of other apartments. The 2008 crisis had nothing to do with this. That was about single-family homeowners who took cashout refis, or who bought using exploding ARMs and thought they could flip before the market crashed.
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Never heard of this for a coop or condo unless you want to improve your home. Our coop has a 30 year mortgage which some was used to get new elevators and boiler the rest was used as a cushion. HELOC is not tax deductible and it does not cost you money to fill out an application. I world have a lot of concerns and questions about the dealings of your managing agent. Your board needs to seriously change agents he/she sounds shady. I'd also have your accountant double check your books this managing agent sound like he/she needs money. What is the name of you managing agent? So we can rule them out. Let us know what the end result is. Best of Luck
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