Issue 35, February 2012: Banks Thwart Market

Some banks continue to be excessively difficult: Yes, caution is welcomed, but stupidity is damaging and counterproductive. The irony is that mortgage rates today are at historic lows. In fact, they can’t go much lower. Easing up of mortgage restrictions would significantly help the real estate market hold and become a much more positive force to revive this economy. Yet, banks still balk.

At times, obtaining financing can seem elusive as, the Greek king who was condemned to roll a bolder up a hill only to see it fall back as he reached the top. Stories abound about buyers who receive their pre-approval letter from the bank only to have their guarantee rescinded upon the banks review of the building, not just the buyer’s candidacy. In the worst cases, financial institutions have pulled back at the closing. These problems are all exacerbated by something I touched upon in last month’s Katzen Report – the fact that lower rates are attracting first-time buyers for studio and one-bedroom units — the weakest segment for NYC for the past few years.

I believe what we are seeing is a tragic over-reaction to the problems that led to the current economic turmoil. Earlier this century, banks dropped most lending requirements to beef up their mortgage business by offering subprime loans to people ill-equipped to make payments for an extended period of time. The effects of which we are seeing now. In reaction, banks have gone overboard- establishing lending barriers that are excluding many potential buyers who have solid credit scores and are capable of making the necessary payments.

New York City has avoided many of these sub-prime and foreclosure problems because co-op boards serve as an effective gatekeeper. Interestingly, we haven’t heard many complaints about boards being overly restrictive or too cautious recently as their diligence (which sometimes was excessive) has spared many buildings against a flood of foreclosures. Yet, we are suffering the credit crunch. These negative forces have been imposed for some time, but they continue. Banks are still implementing and enforcing guidelines not applicable in New York City, such as requiring FHA standards on jumbo mortgages (those above $729,000). In some instances even claiming the association’s reserve funds are too low.

Often, banks are lax in understanding the nuances and complexities involved in New York City Real Estate transactions many of which involve financing with trust money, investment and stock options. We do not seek a return to the days of minimal review, just to use some common sense.

Jonathan Miller, president of Miller Samuel Inc. the respected appraisal firm that prepares the Elliman Quarterly Markets reports, told me about the problem caused by banks using small-company appraisers from out of town. These firms (often one-man shops) do not understand our market and continue to do the bidding of the banks to get their business rather than providing higher appraisals as they did a decade ago to feed the market, they are low-balling the price so it is easier for banks to reject mortgages.

The result of these actions by banks is to stifle a free-flowing market and thwart a more vibrant real estate comeback. While savings banks have stepped forward with less stringent lending mandates, we still need the major banks to reverse their current attitudes.