Zombie Condos: The Mortgage Zone

Posted by jeff

Sun May 17th, 2009 08:28 PM

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I thought I would share some more information from the Zombie condo study we continue to work on here at Guild Partners. As we try to quantify sell-out velocities on the condominium projects that are in the unenviable position of trying to sell in this environment, we are picking up some data points that I think are relevant to our potential condo buyers here at Urban Digs. So here goes:

In most of the buildings we have looked at the pace of sales has slowed considerably in 2009. In fact, in one, there have been no sales in 2009 (where a sale is defined as the filing of a deed....and frankly we have no way of knowing what the normal elapsed time is from closing to deed filing, so these sales could have actually closed last year). Considering the hurdles thrown up against getting a mortgage in a building that is not 71% sold, I am sure you won't be surprised to know that in the buidlings we have researched at least a third of the units sold since the close of 2008 were bought for cash (or least no mortgage has been registered yet).

You might also be surprised to know, that considering the state of the market, it only looks as if 10% or so of the units sold were sold to bulk buyers/investors, and that is only if one assumes that every unit purchased by an LLC, Corporation or LP is an investor. I am sure there are reasons why someone, especially the very wealthy, might buy one of these units through a partnership, even if they planned to live in it.

Just to briefly review the current state of affairs as it pertains to mortgage financing of condominiums; Fannie Mae has declared New York City to be a declining market, and as a result, their policy is not to allow conforming mortgages to be made in buildings with fewer than 71% of the units contracted for (note this is contracted for, not closed). Now savvy Urban Digs readers know that Fannie doesn't do Jumbos and that many condo sales in New York City fall into the Jumbo bucket anyway (despite the boost to the Jumbo definition enacted under the Economic Stimulus Act of 2008). However, most big banks take their underwriting cues from Fannie Mae (titter titter), and so they have also adopted the 71% rule, at least from what I have been told. So, I was curious to know what mortgage lenders, if any, were lending in the condominium buildings we are looking at, and what kind of Loan-to Value ratios (LTVs) they were accepting.

So which lenders are extending mortgages to those buying in condo buildings in New York City. I have actually compiled a list of the lenders who have lent to buyers in the buildings we are researching, where the mortgage was filed since January 1.

Now recall, the only data I have is on actual sell outs of units indicated by a deed having been filed, I don't actually know how many contracts have been signed in a building (and frankly, contracts don't seem to be worth that much in this environment because people want out of them and exploiting lots of loopholes to get out). As a result, the list of lenders I am going to share with you is not necessarily a list of folks who will do loans in buildings that are not 71% contracted, but they are folks intrepid enough to do deals in new condos where from our research, more than 1/3 of the potential sales haven't closed. So here is the list.



As you will notice, there are a couple of lenders on this list who aren't exactly household names, and many are very local players. Interestingly, where these institutions have been making loans they are all taking a very similar approach. They are lending at low loan to value ratios, that is, the median loan being made is just 59% of the purchase price of the condominium. Now this makes a lot of sense (banks doing something sensible?....I know). The big worry for a bank lending to a new condo with lots of unsold inventory is that anyone who wants to sell will be creating like unit to like unit competition and could potentially drive the value of a particular condominium configuration in a building way down, in their search to find liquidity. By lending a smaller percentage of the purchase price, banks insure that if they have to foreclose on a unit and sell it they won't take too big bath. Interestingly, the highest LTV loan made by anyone except Wells Fargo, was a 77% LTV loan by Patriot National (a small well run Connecticut bank), and this loan is still a bit below the classic (or now back in fashion) 80% LTV loan. Further, Wells Fargo who is the only one doing 80% or higher LTVs, is letting customers get this leverage level by using 2 seperate loans. My guess, although I don't have a way of verifying this, is that the second loans are much higher interest rate second liens. I personally have an issue with this way of thinking about underwriting, which I will be writing a piece about, but suffice it to say that in many corners this would still be viewed as a more conservative method than giving a straight out 80% LTV loan.

So there you have it, even if you can't afford to be an all cash buyer of a condo these days, you may be able to find a low LTV mortgage. You might even be able to find a lender who will lend on a condo in a building where less than 71% of the units have been closed (or may even be in contract). There are bargains to be had out there. Condo developers have turned to bulk investors to move product indicating a willingness to flex on price to move units.