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My board is going to vote soon on a refi - I's appreciate some clarification or thoughts about a non FNMA over a FNMA and a descending penalty over a yield maintenance. Thx.
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Steven Rosenstein:
I am concerned about statements made regarding the advantages of a 10 year (assumed interest-only mortgage) versus a 30 year (assumed self-amortizing) mortgage. Mr. Winter states that a Co-op mortgage has a certain resemblance to a car lease and that Co-ops are essentially leasing money for a certain period of time. Mr Niland makes the assertion that a board cannot make a decision in 2011 that will be valid for the building in 20 or 30 years, and that the desire to go for a longer period is to save closing costs, but that the decision for a longer term mortgage will end up costing the Co-op more. The comparison between leasing an automobile and a Co-op's "leasing money" is arguably false. At the end of a car lease, the vehicle is returned to the lessor, and the lessee is free and clear of any further obligations. The same is not true of a Co-op building. At the end of a 10 year interest-only mortgage, the board cannot simply return the building to the mortgage holder in lieu of paying off the mortgage amount. Well, it could, but all the shareholders would be rather upset with the board. With an interest-only mortgage, a Co-op board is not just blithely "leasing money" but is instead kicking the mortgage day of reckoning 10 years down the road. As for a Co-op board's risk of making a decision in 2011 that would not be valid 20 or 20 years later, the exact opposite is true. The board has no way of knowing the interest rate in 10 years. A 4% rate today could quite easily double to 8% in 10 years. It could be even more during a period of high inflation. The Co-op with a 10 year mortgage will have a very small window in which to refinance the mortgage. With a self-amortizing mortgage, the rate is both fixed for the life of the mortgage *and* the underlying principle owed on the building is paid down. This is much more conclusive to long-term planning and budget stability than playing interest rate roulette every 10 years. An additional advantage with a 30 year mortgage is that if interest rates drop during the life of the mortgage, the mortgage can be refinanced on more favorable terms without the egregious pre-payment penalty described in the article. Finally, how, exactly, does opting for a one-time longer term mortgage end up costing more than paying new closing costs decade after decade after decade? The overriding concern I have is that both Mr Winter and Mr Niland, as principles in commercial mortgage and real estate loan companies, clearly have it in their company's best interests if Co-ops closes on a new mortgage every 10 years in perpetuity instead of a single 30 year commitment that never has to be renewed. The statements made by Niland and Winter need to be much more fully justified instead of simply accepted as true.
Matty - I guess it's true that our digital lives live forever. :-) I wrote that a few years ago, but I feel it is as true today as it was back then. Thanks for re-posting them here.
Hi,
I am a co-op Board president and a finance manager with a multi-billion dollar corporate pension fund. Co-ops and pension funds are similar in that long-term financial planning is absolutely necessary.
I cannot think of a single situation where I would recommend an interest only mortgage, ever. I would recommend either a 10 year mortgage with a 30 year amortization or a 30 year amortizing mortgage.
Assuming that a co-op is not a new building, the mortgage is probably funding capital repairs and improvements. Things wear out and will continue to do so. Having a break in the mortgage every 10 years or so gives the then Board the ability to fund necessary capital repairs if funds do not already exist (of course the preferred method is saving up ahead of time). The amortization recommendation allows the co-op to lower the debt to building value ratio. As we have seen, the assumption that building values will always go up is false; or rather the assumption that the value will always be higher when funds are needed is false. Lowering the principal on the mortgage shows the lender two things: the co-op is serious about sound fiscal management; and provides higher security (loan coverage) for the loan and thus the potential for a lower rate.
I would recommend a 30 year amortizing mortgage for a co-op with a continuing culture of strong fiscal management only where they would set-aside funds on a regular basis for capital repairs and improvements sufficient enough where tapping the mortgage would not be necessary.
Good fortune to you all!
Hi Steve - Thanks for the info and comparison between the 10/30 mortgage and the 30 year self-amortizing. We are (fortunately) in the latter category. We are 5 years into a 10 year interest only and I would dearly love to be able to re-finance with a 30 year self-amortizing loan at today's very low rate. I can't, though, because of defeasence. Right now this outrageous "prepayment" penalty would add another 20% to the principal amount. So we wait wile the mortgage expiration date gets closer and hope that the rates don't go up too badly when we finally are in a position to refinance.
A Coop Board should use, in all cases, in securing the best deal available a licensed banking or brokerage firm for these deals and NOT the management company that they hire to do all else The 10\1, I\O with a 40 year amoritazion is the best product for a host of reasons and never should one accept yield maintenace as the pre-pay penalty but rather a descending prepayment penatly, for example, a 5\4\3\2\1 where there is in the last year there is a 90 day window to refiinance again w\o a penalty !
Most of these transactions are, sadly, handled by the management agent for these coop's and never do they get the best deal, again, for a host of reasons. Also, the 'points' charged should never exceed .75% of the loan amount, both for the first and the LOC by bank\broker, in total
mortgage@richlandequity.com
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Hi Carol, Do you know if the "descending penalty over a yield maintenance" you mentioned is another way of describing defeasence? If it is, there is a Habitat article you will be interested in called "Defeating Defeasence" by Ronda Kaysen. It's in the Habitat archives, issue #287 (March, 2012).
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