The outlook for improving the financing for cooperatives has brightened somewhat recently due to the following developments:
The Federal Home Loan Bank Board is expected to issue regulations later this spring that would permit federally chartered savings and loan associations for the first time to make loans on individual residential co-op units. The way was paved by the 1978 Safe Banking Act which finally included co-ops in the category of residential real property. It is anticipated the board will favor loans up to 80 percent of the unit's value, and up to 95 percent of value when the loan is insured.
The Department of Housing and Urban Development is putting the final touches on a handbook with instructions for lenders on how to make FHA-insured loans on co-ops.
The District government raised the ceiling on co-op loans this month to 12 percent. The previous limit had been 11.5 percent for short-term loans under $25,000 that were reimbursed in equal payments. But because most residential real estate loans for co-ops did not fit these conditions, the law required that the ceiling be fixed at 8 percent, the same as for personal loans.
American Security Bank is readying a pilot project to finance the purchase of individual co-op units at Habour Square. Though bank officials declined to discuss the project, it is believed these loans will be tantamount to conventional mortgage loans; i.e., market interest rates and 25-year maturity.
Cooperative housing is distinct from individual ownership of a detached house or a condo-minium apartment. In place of a deed on the property, the purchaser receives a lease in perpetuity and stock in the cooperative, which owns the property. There are an estimated 75 co-op buildings in the District with more than 5,000 units. (Because transactions are considered stock sales rather than property sales, they are not subject to egistration.) They range from $8,000 one-bedroom apartments to luxurious six-figure Watergate penthouses.
Proponents of co-ops point out that sales prices in the District are still cheaper, on the whole, than comparable single-family houses or condominiums.This is because many of the coops are unrenovated pre-war buildings. Monthly maintenance charges are also lower. In the past five years or so, however, the rate of increase in co-op sales prices has paralleled that of other housing in the area. Those that have been renovated are comparable in price to condo conversions, although the co-op developer can save a few thousand dollars per unit by not having each unit surveyed and a legal description written.
David Gogol is president of the Cooperative Housing Association, which has been lobbying the District government to get equal treatment from lenders. Gogol says he personally does not understand their reluctance when they know they can get a better return.But he doubts there will be a rush to finance co-ops because old phobias disappear slowly.
The traditional way of financing individual co-op units has been through cash sales or through sellers taking back notes. Until now, savings and loans have been prohibited from making loans on co-ops because the law required them to get a first lien on a property as a condition for making a loan. The Safe Banking Act requires only that the security be "adequate." It is not yet known whether the Federal Home Loan Bank Board will spell out what it considers "adequate" - the co-op stock and / or the lease hold - or whether it will leave it up to the lender.
The comptroller of the currency never has prohibited banks from making loans against stock or lease holds. If a loan is secured by a proprietary lease, it can be considered a real estate loan. Such loans are subject to a number of limitations. Moreover, in order to protect their interest, lenders are obliged to negotiate with the co-op as well as the borrower so that the bank takes over the property from the borrower in the case of default.
Added to the traditional reluctance of commercial banks to make individual residential loans is the memory of co-op loan edperience during the Depression when numbers of co-ops went bankrupt and banks were left with worthless paper. Yet in New York City today, banks do a big business in financing co-op appartments. Since July 1976, banks have been able to charge 1.5 percent more interest on co-op loans than on other loans for other single-family home loans. The loans, which are secured by co-op stock and proprietary leases, have the maturity as other residential loans.
Last year, a study by John Hoskinson, financed by the Washington Board of Realtors and the D.C. Bankers Association, said that New York bank found it profitable and safe to make up to 80 percent loans. There was no record of defaults. The Cooperative Housing Association again is drafting a bill for the City Council which would define how co-op loan.It does not address the question of the loan's length.
Most of the co-op financing done in the District has been in the form of group loans to tenants seeking to buy their own buildings. Perpetual Federal Savings and Loan and D.C. National Bank have been in the forefront.
Jeffrey Spragens, president of FCH Services, a firm specializing in co-op construction and conversions nationwide, was asked if these changes would result in a surge of co-op financing. He replied there would be little change until passage of additional legislation enabling S&Ls to sell their co-op loans in the secondary market. A bill is now being drafted to allow the Federal Home Loan Mortgage Corp. to purchase co-op loans.