Socialized Mortgage Finance is a phrase that is becoming more prolific in the secret underbelly of the mortgage industry where a thousand private conversations dictate the direction of the masses.
In the wake ofCovid-19, as we slowly come out of isolation and into a volatile economy, lenders are already hyper-sensitive to risk. One of our sources described a network of professionals at different mortgage lenders, all tasked with creating credit policy, playing a game of telephone, reaching out to one another to find out each other’s appetite for risk. There’s nothing devious about these conversations, even if I made it seem that way with a slightly over-dramatic intro. Bottom line — Banks and policymakers have already formulated new stricter mortgage guidelines.
What Does This Mean For You?
When applying for a mortgage, two separate risk assessment analyses take place. An underwriter considers the risk associated with the applicant – What’s their credit history? How stable is their job? Are they putting any “skin in the game” by way of a down payment? Separate from that exercise, an underwriter (maybe the same underwriter, maybe not) is also considering the risk associated with the property that is being purchased. In New York City, 95% of the time, it’s about analyzing a condo or co-op building the applicant wants to buy in – What percentage of the units in a building are already sold or in contract to sell? How many residents in the building own their unit? How many unit owners are late on their HOA fees? How much revenue does the building allocate toward a reserve fund?
It’s the risk associated with each individual building that has lenders most concerned and where we’re seeing the most scrutiny. Buildings that were considered “compliant” with lending guidelines prior to the pandemic might not fit into that category anymore. And even a perfectly qualified buyer might see their mortgage application declined if the building they intend to live no longer passes muster with their bank.
Advice to our audience: In most instances, with proper guidance and cooperation from the building’s management, its board, and/or its developer, reasonable measures can be taken to get back to compliance – a happy place in which lenders are willing to lend. Still, before entering into contract to buy an apartment in the city, a buyer and the team working for them should complete their own due diligence. The attorney and real estate agent should gather specific materials to complete their own review – the building’s financials and bylaws in particular. A buyer’s loan officer should be able to quickly gather data about the building from a database and a newly completed condo or co-op questionnaire so they can identify potential red flags.
Advice to our audience: In most instances, when a mortgage lender approves a loan application and issues a commitment letter, there are almost always conditions associated with that commitment. Since it’s fairly common for an underwriter to review the individual applicant’s profile before the building is reviewed, a loan commitment that is still subject to “project approval” is more common than not.
In most instances, buyers have a mortgage contingency written into their contract protecting them against the possibility that their mortgage application is declined. Once a bank issued commitment letter is produced and is given to representatives for the seller, those protections are minimized, putting any earnest money deposit at risk. Insist that the lender review and approve the building so they can issue a new mortgage commitment that does NOT condition for project approval.
Safety in Numbers
Behind the scenes, fear of the unknown is being countered by a “safety in numbers approach.”
Throughout history, when faced with a threat, humankind has taken comfort by gathering in mass. Our instincts tell us that we are less likely to be the victim of a bad event when we’re part of a group. There should be no surprise, lenders take the same approach into our new landscape. Not only are the heads of banks having these conversations with each other, they will come to rely upon one another to mitigate risk in a way that will allow all of them to get comfortable enough to conduct business.
In many instances, they will look to older policies that may have been implemented or enforced during more troubling economic times. Perhaps the best example is a “lender concentration” overlay that many banks wrote into their guidelines to prevent overexposure in any single building. They kept track of the number of mortgages they’d issue and might decline to offer financing once they passed a certain threshold.
Overlays like this are very likely to be the norm in the near term. Early indicators suggest that banks might be comfortable lending on no more than 20% of the total units in a building. Sponsors who in the past liked to work with one or two “preferred lenders” will have to reconsider their strategy. Identifying four or five preferred lenders will not only help to ensure a complete sell- out, sharing that formula with each lender in the most transparent way will provide further comfort and be the impetus for opening lending channels at your site.
Shades of ‘08
All of these changes remind me so much of 2008/2009.
The lender concentration example I used above played out in real life in my days as a mortgage loan officer.
I got an email from an underwriter about an application I submitted for an extremely well-qualified client. Apparently, the loan application was being declined.
I stopped what I was doing, and I called the underwriter because her message didn’t make any sense to me. Over the phone, she explained something I’d never heard before. The company I worked for had already issued mortgages to borrowers on 20% of the units in that building. Other than that, the application was perfect.
Unfortunately, we were barely removed from an economic collapse and rules that never mattered before were being enforced with vigor. My client had to apply for a mortgage with a different lender.