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Mentioned in this Article:
Stephen G. Kliegerman

Stephen G. Kliegerman
President of Development Marketing

Mindy Diane Feldman

Mindy Diane Feldman
Eastside Office

The Real Deal

Ground Shifts For Borrowers

Banks' new refrain: "we're not doing this anymore"


By Jen Benepe

Shifts in the New York real estate market aren't as drastic as in the rest of the country, but credit questions are getting tougher to answer. The Real Deal looked at the moving target of credit offerings and its effect on the residential market as part of an in-depth series of stories this month examining the shifting climate.

Property buyers and real estate brokers in Manhattan, Brooklyn and Queens watched with increasing disbelief as mortgage lenders and bankers walked away from previous rate commitments, further tightened borrowing restrictions or suddenly eliminated previous mortgage programs.

"Every day is changing," said Barbara Ladesou, a mortgage broker for Manhattan Mortgage Company. "Every day we get a message from the banks, and the catch phrase is, 'We are not doing this anymore.'"

New York buyers increasingly find themselves searching for a new banker or broker at the eleventh hour, and sometimes must pay higher net prices for property. Or they simply walk away from transactions, leaving their deposits on the table.

In many instances, other mortgage brokers have stepped in to secure similar deals for their clients, only to find that one door after another was being shut as banks sent e-mails canceling terms, programs and commitments on specific lending options.


Mortgage market not directly tied to Fed rates

As insulated as Manhattan is from the mortgage storm, it has responded poorly to the interest rate correction ordered by the Fed in mid-September, said mortgage brokers.

They said the Federal Reserve's Sept. 18 cut of 50 basis points -- one half of 1 percent -- to 4.75 percent hasn't yet loosened mortgage credit. A more important indicator of rate levels is really tied to the one- and 10-year Treasury bill rates, which hovered around 4.54 percent, said Ladesou.

The day after the Fed made the announcement, the 10-year Treasury was actually up by about 7 basis points, "higher than it was before the announcement," said Michael Moskowitz, president of Equity Now, a mortgage lender that specializes in refinancing.

In fact, after the Fed's announcement, all of the key mortgage rates had risen: the 30-year fixed, the 15-year ARM and the 5/1 ARM rate, according to Freddie Mac mortgage data. Any drop in rates will lag the Fed's move by several months.

"The banks are very quick to raise their rates and very slow to bring them down," said Ladesou.


Buyers lose deals, brokers scramble

Although real estate brokers aren't calling this a crisis, there's certainly some evidence of nerves. Stories abound of lenders who changed terms abruptly, canceled previous commitments or made final-day calls on loans that they had offered only two weeks previous.

"It's an absolute moving target, and you need to pay really close attention to every detail of the programs they are offering," said Mindy Feldman, a senior vice president at Halstead Property.

In one case, a bank changed its loan-to-value ratio (LTV), or the loan amount to capital down, on a commitment for an apartment seeker from 75 percent to 60 percent in just two weeks, said Feldman.

Two weeks ago, Feldman got a quote for a 30-year fixed loan for 8 percent, to close in 60 days. "Then yesterday, they announced they are discontinuing the program tomorrow," she said late last month. "Clients and customers need to
be working with mortgage brokers who come highly recommended."

Klara Madlin, president of Klara Madlin Real Estate and the incoming 2008 president of the Manhattan Association of Realtors, said she had a client who made an offer on a property worth more than $1 million when they could get mortgage rates in the mid-6 percent range. But when they went back with a counter bid, the rate had gone above 7 percent. "They left it on the table," said Madlin.

But Madlin says the tightened credit market does not seem to be affecting sales prices in Manhattan, a view echoed by many real estate brokers who said prices are stronger than ever, with bidding wars still a frequent occurrence.

But lenders are taking a harder look at credit scores for prospective buyers. Acceptable FICO (Fair Isaac Credit Organization) qualifying scores for a plain vanilla 30-year fixed loan have risen from a qualifying 680 to 700 or 710 in some cases, brokers said.

Acceptable credit scores were increased for almost every single product being offered, and when buyers didn't make the cut, lenders and brokers said the loans got more expensive.

Steve Kliegerman, executive director of development marketing at Halstead, said he still has clients getting 90 percent financing if they have FICO scores of 670 or better, however, and he hasn't yet seen any deals falling apart because of poor financing.

The ratio of debt to income is also expected to be much smaller. A seven-year adjustable-rate, 30-year loan -- which adjusts after seven years to a higher rate -- for a well-qualified applicant is coming in at about 3 percent over the 10-year Treasury, or about 7.5 to 8 percent.

Banks are expecting 20 percent down, and customers "are being penalized 1.5 basis points to go above 80 percent [financing]," said Ladesou.

One client who came to Moskowitz for a loan on a $535,000 house had a low 600 FICO score and put $15,000 down. The bank offered the buyer an 11 percent rate, making the payments too expensive. "He could lose his deposit," said Moskowitz.


Some programs eliminated altogether

In many instances, banks and mortgage lenders discontinued programs that many critics of the lending frenzy say exemplified the loans they considered risky.

"Globally, no one will give a loan to any no-income-check borrower who is borrowing over $417,000 if they have been over 30 days late in paying their mortgage over the past 12 months," said Moskowitz.

No-doc buyers do not want their income checked in order to qualify for a loan -- these are often called "liar loans" -- and the buyer will pay more for the lack of scrutiny. Banks have either tightened standards or abruptly halted these loans, said brokers and lenders.

"A lot of banks are [also] doing away altogether with their foreign national programs," said Ladesou, describing lending programs for international buyers who do not live in the U.S. In many cases, foreign nationals are plunking down 40 percent capital and entertaining interest rates from 9 to 11 percent, said mortgage brokers (see More lending oversight for overseas shoppers).

Several mortgage lenders who spoke off the record said that major institutions including Credit Suisse, Citibank and Chase had simply stepped back from mortgage credit. Credit Suisse reportedly stopped buying home equity lines; Citibank stopped offering no-income verification loans for salaried people; and Chase eliminated its no-income verification loans for salaried borrowers as well as its stated-income products.


Even churches feel the heat

Even churches and nonprofits are seeing a pushback from lenders.

As recently as last month, Moskowitz said the Federal Housing Administration, or FHA, which administers federal grants tied to nonprofits seeking to purchase property, announced that it would ask lenders whether they should discontinue allowing churches and other nonprofits to qualify for loans with 5 percent money down -- unless the money came from them directly and was not donated by another entity.


Lenders pull out of risky hotel-condo commitments

But if loans are getting more expensive for individuals, higher borrowing costs are also taking a toll on developers. The problem is most acute in new developments and with new condo properties that haven't been built yet.

Ladesou said the hotel-condo type of property has become very hard to finance in the tightening environment because its format has not yet been proven in the marketplace.

In the past five years, developers have been able to require down payments and obtain preapprovals on buyers' loans so they can sell their projects prior to completion. But in many cases, those promises from lenders have dried up, even on previous commitments.

For that reason, Ladesou said lenders were changing terms or asking for new commitments from developers, such as mortgage contingencies, that protect the down payments of buyers if their lending terms change.

Ladesou said she could not find any banks to do the financing on a hotel-condo project whose primary lender suddenly backed out with 327 out of 368 units sold. "These are loans the banks think people will walk away from," she said.

On another hotel-condo project, Ladesou said many of the buyers who put money down 18 months ago don't qualify under guidelines set by lenders today, and some are walking away from their deposits -- as much as $50,000 to $100,000, representing the 5 to 10 percent down required for the average $1 million units. "I haven't seen a lot of those, but we're in new territory again," she noted.

Brokers report that the usual way of doing business, where banks will make loans on a future development based on the strength of the market, may soon be a thing of the past.

In Long Island City, the developer of the Solarium at 5-39 48th Avenue, 539 Realty , was recently asked to personally guarantee the $22 million loan for its development, said Rick Rosa, a Prudential Douglas Elliman broker who is marketing the project.

"It's a big sign of the times: This is only because we are going condo, because if we were going rental, there would be no guarantee required," said Rosa.

He said two other boutique condominium developments by the same builder, one worth $2 million and the other worth $1.4 million, did not require the same guarantee. Despite the recent tightening by banks, Long Island City is holding up as well as Manhattan, with strong price performance averaging about $750 to $770 per square foot. (Manhattan's average now starts at about $1,000 to $1,200 per square foot).

"The market here is still really strong," said Rosa. Still, there is plenty of competition in LIC. Major builders including Rockrose Development, Avalon Bay Communities and Toll Brothers all have large projects under way.


Manhattan market in for a price correction?

With rates rising, the tipping point could well have to do with the price-debt ratio: The Manhattan market will not slow down until rates reach 9 percent, a figure born of long experience, said Madlin.

Many experts agreed problems with borrowing may lead to price depreciations over the next two years.

"The real estate boom was because of cheap money," said Chris Shiamili, president of Ardor NY Real Estate, a real estate brokerage with more than 100 agents that handles deals in all five boroughs. "But you remove the cheap money, and the market has to correct."

Most brokers don't think the Manhattan market will correct soon, but the jury is out on when and how much it might be affected. "Historically, New York City experiences recessions later and gets out later," said Shiamili.

Brokers also cited repeatedly that Manhattan, at least, is insulated from the subprime mess roaring outside its doors in the rest of the nation.

Who would not agree? Listing inventory in the second quarter was 31 percent lower than in the same period a year ago, according to the appraisal firm Miller Samuel. Prices seem fairly stable, with a 3.3 percent average price increase from the first quarter, and only a 1.3 percent drop from the same quarter in 2006. When measuring the median sales price, prices in the second quarter were up by 7.2 percent from the first quarter and 1.7 percent from the previous year.

Brokers and experts agreed that the unusual vacancy issues in Manhattan, plus the fact that co-ops, which constitute the bulk of apartments changing hands, have tougher financial restrictions and thus are less likely to have owners going into default, play a part in insulating the market from severe fallout. But no one is saying it is immune.

"We think the real estate prices will drop 10 to 20 percent," said Moskowitz. "There is no reason it won't be a replay of 1989," he said referring to the last major drop in real estate prices in the city.

Downward pressure on prices is already plain in the boroughs, according to Miller Samuel. Queens and Long Island did not do as well in the second quarter, with quarter-to-quarter price and inventory comparisons showing continued weakness associated with subprime defaults on homes. The numbers reflect a greater percentage of risky loans in these markets.

But these areas also provide pockets of opportunity for buyers who manage to find properties that fall under the Fannie Mae and Freddie Mac guarantee.

Those institutions will guarantee 75 percent of the price of a one-family home for $417,000 or less, a two-family for $533,850, a three-family for $635,300 or a four-family for $801,950, said Moskowitz.

"That's substantial liquidity," he said, "and there is a ton of two, three and four families in Queens and Brooklyn."

Monday, October 01, 2007