October is "Co-Op Month." And this is one year when housing co-op supporters have much to celebrate, especially with respect to the financing of new and existing cooperatives.
Earlier this fall, one of the secondary market mortgage buyers, the Federal Home Loan Mortgage Corporation (Freddie Mac), bought its first "blanket mortgage" on a housing cooperative project.
In the last 12 months, the other secondary market mortgage buyer, the Federal National Mortgage Association (Fannie Mae), began buying "share loans" on individual cooperative units and has purchased $15 million in such mortgages so far.
In the most recent boost for cooperative housing finance, provisions included in this year's tax act will allow tax-exempt mortgage revenue bonds to finance cooperative blanket mortgages.
Taken together, these changes could make financing new and existing co-ops significantly easier. "It means the co-ops will have an incredible amount of flexibility in financing," said Matthew B. Slepin, director for housing development of the Cooperative League of the U.S.A. "You could use a combination of share and blanket financing, both of which could be tax exempt.
"The blanket mortgage on a property could be assumed in a conversion, which can't be done with condos. The whole effect is to structure deals more favorable to tenants, often with lower interest rates."
The challenge co-ops now face is to inform lenders and developers nationwide of the greater opportunities in cooperative housing, according to Stuart Wechsler, Freddie Mac's director of community and industry affairs. "The history of co-ops shows that good co-ops are a good investment," he said in Baltimore last week at the convention of the National Association of Housing Cooperatives.
"The problem is translating the enthusiasm about co-ops to a lender several hundred miles away. It's like 'Cool Hand Luke: What we have here is a failure to communicate.' "
Nationwide, the estimated 300,000 to 400,000 units of cooperative housing comprise less than one-half of 1 percent of a total of 86 million housing units. Approximately half of all housing co-ops are located in the New York City area. There are also concentrations of co-ops in Washington, D.C., Chicago, and Detroit and other Michigan cities.
For many years, cooperatives have had more difficulties than other forms of housing in obtaining financing. To build or convert a project, a group usually obtains a blanket mortgage, a single loan for the entire development. Original members make the down payment on the property by purchasing membership shares in the cooperative. Each month, members pay a proportionate share of the blanket loan and operating expenses. The shares give the member the right to occupy a unit and to vote for the co-op's board of directors and officers. Overall ownership of the project remains with the cooperative corporation.
Even though they do not hold fee simple title to their units, co-op residents can take the same tax deductions for mortgage interest and real estate taxes as owners of condominiums and single family houses. All but a few states consider co-op shares personal property rather than real estate.
As residents pay off the property's blanket mortgage and as their units appreciate in value, members who want to leave usually either have to find an all cash buyer for their shares or take back a loan on them. Because of the greater difficulty in arranging financing, co-op apartments generally sell for less than comparable condos.
Fannie Mae received authorization in 1980 to purchase co-op share loans. Since December of last year they have purchased nearly $15 million in packages of share loans from three New York banks: Chase Manhattan, Chemical Bank and Lincoln Savings Bank. So far, the loans have been from scattered sites; no more than 25 percent of the loans in each package were from a single co-op project. Fannie Mae is currently considering purchasing $50 million worth of loans from several projects in Pennsylvania and New Jersey.
Fannie Mae may soon begin buying packages of loans from single developments. Only 30-year, fixed rate, level payment loans and five-year balloon loans have been purchased initially, but Fannie Mae may begin accepting adjustable rate and growing equity mortgages.
The loan purchasers so far have been done on a case-by-case basis, as there is no national Fannie Mae policy on share loans. Once there is a standardized policy, many more thrift institutions should be willing to make share loans.
The Federal Home Loan Mortgage Corporation bought its first cooperatve blanket mortgage this fall on a 129-unit tenant conversion project in Forest Hills, N.Y.
Freddie Mac is currenty working on national standards for purchasing co-op blanket mortgages. Until those procedures are established, Freddie Mac will continue to buy such loans on a case-by-case basis under its rental project guidelines.
After purchasing the original loans made by an S&L or other lender, Freddie Mac and Fannie Mae assemble the mortgages into securities that they then sell to investors, primarily pension funds and insurance companies.
Establishing national standards for Fannie Mae and Freddie Mac purchasers of co-op loans is necessary before thrift institutions will begin providing more such financing and before investors will be willing to buy the securities offered by the secondary market, Freddie Mac's Wechsler explained. "You're going to do things that will satisfy the ultimate investor," he said. "Participation in the secondary market has become an absolute necessity for any type of mortgage instrument to be successful."
The Cooperatvie League of the U.S.A. is now pushing for legislation to clear up some of the tax questions that discourage lenders from originating co-op loans.
The Cooperative League will also be working to see that favorable Treasury Department regulations are written for tax-exempt mortgage revenue bonds to finance co-op blanket mortgages. The authority for state and local housing finance agencies to make such loans was included in this year's tax bill, the Tax Equity and Fiscal Responsibility Act of 1982.
Congress had passed legislation in 1980 restricting the use of tax-exempt bonds to finance home purchases. While still allowing such bonds to be used to finance co-op share loans, the Congress failed to make any provisions for co-op blanket mortgages.
Co-op supporters lobbied unsuccessfully this year to have housing cooperative blanket mortgages included under the more liberal regulations for multifamily rental properties. As a compromise, Congress added co-op blanket mortgages to the single-family bond program.
The cooperative league hopes to work closely with Treasury over the next several months to formulate regulations governing the new bond authority. It is a problem of "fitting the square peg into a round hole," explained Slepin. "How do you make co-ops work with a program that was designed for individual mortgage loans? That, in large part, will depend on Treasury's rule writing."
Tax-exempt bonds provide interest rates several points lower than conventional mortgages and will thus make many more co-ops economically feasible. "It's going to have a significant impact," said Slepin. "There are a number of projects around the country that couldn't be done before. They will go through now."
While benefiting middle and upper income individuals, all of these changes in co-op financing will offer only limited opportunities for low income housing if there are no government operating subsidies. "Tax-exempt bonds are an integral part of low income housing," said Slepin. "Given the financing flexibility, much low income housing will be done as cooperatives, but the question is where you get the subsidies.
"We're positioning co-op housing so that when subsidies are available, co-ops will be a competitive choice for housing."
While viewing these changes in housing finance as significant steps, co-op supporters will continue to push for further legislative and regulatory changes.
The recently formed Cooperative League of the U.S.A. Political Action Committee this fall made its first contributions to congressional candidates, including several who supported the changes on mortgage revenue bonds.
Housing co-op enthusiasts expect future successes from their strong lobbying efforts. "Co-ops haven't been in the political mainstream," said Slepin. "That is going to start happening.
"It the political action committee says to people on the Hill that we're a constituency you have to reckon with and says to developers that we're an option."