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In the Credit Crunch Age, it's not only new condos that are being labled bad credit risks.
Right now--without you or your board realizing it--you may be unable to refinance your mortgage or sell your apartment to anyone but an all-cash buyer.
That's because banks continue to enforce federal mortgage guidelines with fundamentalist fervor, slapping the infidel label on even long-established co-ops and condos.
“We’re in the era of irrationality,” says Jerry Feeney, a Manhattan real estate lawyer who works primarily with buyers and sellers. “Everything needs to be perfect without any issue.”
Here are four circumstances that may have already turned your building—and by extension your apartment—into a lending untouchable:
1. Your neighbor was sued by his flooring installer
“I had a client lose an attractive rate lock on a refinance of a $1 million apartment because of an $80,000 mechanic’s lien on the co-op building,” says Feeney. “One of the neighbors had gotten into a dispute with the flooring installer, who slapped the lien on the whole building.”
In pre-credit-crunch days, the bank probably would have overlooked the lien. These days, says Feeney, boards need to force unit owners being sued by their contractors to make the lien “disappear” by paying a bonding company a portion of the lien to assume the risk.
2. Your building’s reserves are too low
Fannie Mae guidelines--myopically followed by banks these days--require that buildings maintain a segregated reserve fund of at least 10% of the annual budget.
Smaller and newer buildings especially may not have that much set aside.
“They may need to bite the bullet and say let’s make our units financeable, because if not our market values will go down,” says Feeney, who recommends buildings put 30 percent in reserve. “Maybe the answer is everybody has to write a check for $10,000.”
3. There are too many pied a terres
“Even in non-new construction projects, banks are very sensitive about having an occupancy threshold below 90 percent,” says Feeney.
4. That little thing called fidelity bond insurance
Fidelity bond insurance protects co-ops and condos from pilfering by a board member.
“For many years Fannie Mae would issue an exception if you didn’t have it,” says Feeney.
Lately though, it’s been a dealbreaker for banks. The good news is it only costs $200-300 a year, says Feeney, who recommends boards take out the insurance before it becomes an issue.
Otherwise, when a bank demands to see proof of insurance before greenlighting a deal, says Feeney, "you get these stupid situations where unrealistic managing agents or boards say, 'Who is Wells Fargo to tell me what to do?'" The apartment owner loses in the stalemate.