Issue 23, April 2010: The Financing System Is Dysfunctional and I’m Mad

There’s a systemic issue that is pervasive in financing for co-ops and condos. This has long-term potential to upset the way buyers finance and purchase. Something must be done to change this, yet no one is speaking out and it is extremely frustrating.

At the last moment, deals are getting throttled by lenders with outrageous demands and banks implementing and enforcing guidelines that are simply not applicable to the New York City lending market; these are not vanilla loans. Lenders are requiring FHA standards on jumbo mortgages (those above $729,000) placing an increased burden on buyers. In some instances, lenders claim certain reserve funds are too low, in particular in small co-ops and condos.

Jonathan Miller is President of Miller Samuel Inc., one of the most conservative and respected appraisal firm. He speaks to the Federal Reserve and is one of the most knowledgeable and thoughtful people in the industry. I had a chance to speak with Jonathan at an event.

According to Jonathan, there is a breakdown in financing with all segments that play a role in issuing loans. Lenders are scared, he stated, and looking for reasons not to lend has become their back-up modus operandi. Jonathan declared at this time it seems the only market for non-conforming loans (those over $729,000) is the private market, which has been wiped out. Now, lenders have the ability to hold these loans in their own portfolio.

“In effect,” Jonathan stated, “there is an overcorrection,” with lenders now encouraging a lower-price market.

This has put pressure on the many small, appraisal firms whose business is now coming from lenders rather than mortgage brokers. This is a reversal from several years ago. Lenders want appraisers to come in low so the latter, not the underwriters, become the bad guys in turning down a mortgage or requiring stringent demands.

Miller stated the small appraisal firms (often one-man shops) are less conservative. “They played the game earlier in the decade when they over-appraised homes so lenders could provide larger mortgages,” he said. “Now, taking the lead of those purchasing their services, have a propensity to under-appraise in this market.”

Jonathan declared that the new appraisers do not know the market. “They come from out of the area and have no feel for it. Some of these appraisers come to New York City from upstate. In some instances, there are 10 appraisals done with in a 12-hour span. There is a disconnect between the appraiser, the bank, and the market.”

What can brokers and consumers do in this environment? Miller stated the best defense is to be proactive.

He discussed that brokers need full disclosure from the sellers so the appraiser has a clearer understanding of the issues. This involves accuracy in regard to what has sold, accuracy on the square footage of units, and knowledge of the price sensitivity of the market, as some buyers may not pay for capital improvements by the seller. As a result, the broker needs to be present at the inspection and walk the appraiser through the sale. The New York City market does not provide your typical vanilla loans, and as such, it is very important that the broker convey the story behind the transaction. The appraiser needs substantive information and must see the story in context and a solid broker can provide that.

At this time, there does not appear to be a remedy to this issue, however, one must be extremely proactive especially if the current activity of sales are not comparable to what one is transacting on.

“If we continue down this road that we are on,” Miller ended up by saying, “we’ll likely come to all cash transactions. Fewer will get financing.”

The frustration I feel is caused in part by the randomness of the current system. We can do everything right and still won’t be able to close the deal. Unfortunately, Jonathan and I do not see this changing overnight. It is unlikely to change soon unless the public, media and public officials start speaking out about the issues and underlying problems regarding landmines that are being placed on the road to a full recovery.