Stephen G. Kliegerman
President of Development Marketing
By Saskia Scholtes in New York
Frank Cuneo and Alan Levy are frustrated. After weeks working with a prospective buyer for a one-bedroom apartment in the “Dafina”, a new luxury condominium development in Harlem, New York, the two-man real estate team at Halstead Properties lost the deal. The buyer could not get a mortgage.
“This was a good borrower with stellar credit and a 25 per cent downpayment, but she wasn’t the problem. The banks didn’t want to finance the building,” said Mr Levy.
The banks, which included JPMorgan Chase, Bank of America and Wells Fargo, declined the loan because only three of the Dafina’s 46 units had been sold.
“It’s a big problem,” said Mr Cuneo. “The banks have really tightened the rules for new condo construction.”
Under pressure to write only ironclad mortgages, banks have become increasingly unwilling to write mortgages for some new buildings, especially if only a small percentage of their units has been sold, said Mr Cuneo.
Banks have always had guidelines to ensure buildings they lend in are financially stable, completed on schedule and sell quickly. But in recent months, several lenders have tightened those rules.
Some lenders will no longer lend in buildings that are less than 70 per cent sold, or if they already have 25 per cent of the mortgages in the building. Fannie Mae, the government-run mortgage financier, has also placed restrictions on which mortgages it is willing to fund in developments.
The new requirements make it harder for developers to sell units, creating a chicken-and-egg problem that underscores how financing remains a big obstacle for some parts of the market, in spite of government efforts to encourage lending.
Pamela Liebman, chief executive of Corcoran, a New York real estate brokerage, said mortgage availability has been a problem in New York as a whole, with some sellers now granting financing contingencies in contracts to protect buyers if the banks back out. But she said the problem was most severe for new construction.
“We’re assisting all buyers with financing, but buyers in new developments probably need the most help. The banks want 70 per cent pre-sold before they will do closings in a building. This can force some buyers to wait for months to move in,” said Ms Liebman.
The restrictions come as a flood of new construction is scheduled to hit the market.
Reis, a New York-based real estate company, estimates that more than 12,000 units will be completed in New York and northern New Jersey by year-end. This is more than the total supply of new and existing apartments that were available for sale in New York at the end of the first quarter.
Meanwhile, forecasts for February’s Case-Shiller house price index for 20 big cities, expected on Tuesday, are for further declines in all cities.
New York has not yet seen formal blacklists of developments that lenders will not touch – a practice that has wrought havoc in areas such as South Florida. But as slower sales make it harder for developers to unload units quickly, more buildings are failing to meet banks’ pre-sale requirements.
This is particularly true in “fringe neighbourhoods” such as Harlem or Manhattan’s financial district where interested buyers have also become increasingly scarce, said Mr Cuneo.
In many developments, the months of waiting for sales to close have prompted buyers to walk away from their contracts and deposits. As apartment prices fall and mortgage availability decreases, buyers have become increasingly skittish.
The logjam has prompted some developers to abandon projects that have not yet broken ground, said Steve Kliegerman, executive director of development marketing at Halstead, while other developers have begun offering protections for nervous buyers.
The Dafina promises to match further price reductions for buyers who are already in contract, and to pay rent for buyers who need to move before closing.
Toll Brothers, a luxury homebuilder which has several developments in New York, is offering buyers the safety net of mortgage insurance. If a buyer loses their job, the developer is offering to make mortgage payments for up to a year.
Protections, perks and incentives have so far not been enough to stem the decline in sales for new developments. These have fallen by 67 per cent in the last year, more than the market for existing homes, according to Corcoran.
Copyright The Financial Times Limited 2009
Monday, April 27, 2009