Like eager suitors at a debutante ball, cooperative housing developers and lenders celebrated what they termed the "coming of age" of co-op financing at a wide-ranging meeting here this week.
No longer relegated to the bottom of the brokers' lists as a zany form of home ownership, "co-ops have become respectable" now that Federal National Mortgage Association has opened up a secondary market for co-op share loans, proclaimed Washington attorney Robert B. Joselow, cochairman of the seminar and a specialist in co-op financing. Dozens of D.C. area cooperatives are negotiating with lenders or already are using share loans that will be sold to Fannie Mae, he said.
The seminar participants see the newfound availability of share loans as eliminating one of co-ops' major drawbacks, so co-ops may now be poised to take back some of the market lost to condominiums in the 1970s, seminar participants agreed.
For example, one significant advantage to co-ops from a development standpoint is the co-op corporation's ability to assume old low-interest mortgages of the previous owner in a conversion situation. In a condo conversion, by contrast, this debt would "be wiped out piece by piece as individual unit ownership is spun off," Joselow explained.
At the same time, easier availability of share loans for individual co-op members makes each unit more marketable and therefore more attractive to initial buyers and developers, several seminar speakers confirmed. Share loans are taken out by individual buyers on top of any preexisting blanket project loan, and are now a great boon for resales in which owners often were forced to take back unit loans themselves.
This "revolution" in co-op share financing hailed at the seminar also means that interest rates are coming down closer to those available on condos -- fixed rates of 13 1/8 or 13 1/4 percent over 15 years currently can be found for co-op loans in the District.
The proliferation of institutional lending was triggered by Fannie Mae's inauguration of a share loan program last spring. It allows lenders immediately to sell off the co-op loans they originate. The seminar, cosponsored by the Cooperative League of the USA and Institute for Professional and Executive Development, was heavily attended by developers and local government officials wanting to learn how they could use the Fannie Mae program.
One new lender on the Washington co-op loan scene is the Share Loan Service Corp., a subsidiary of the National Cooperative Bank. In this case, the new kid on the block intends to stay, since SLSC specializes in co-op loans and intends to remain in the market permanently with Fannie Mae purchasing most of its loans.
This permanence should bolster the image of co-ops as marketable real estate, SLSC officials said.
"It's important that share loans be available five years from now so people know they can resell with financing," stated Shekar Narasimhan, vice president at SLSC. Before the advent of Fannie Mae as a capital source, lenders in the Washington area had moved in and out of the co-op loan business, depending upon market conditions.
In the past, co-ops sold by particular real estate brokers often were nearly captives of one lender with whom the brokers dealt, but "it's important for consumers to know they can shop around now," commented Mark Hines, who works on the share loan program for Colonial Mortgage Service Co. of Rockville.
Colonial and Clark Financial Services Inc. of Lanham are the two loan processors through which SLSC is making loans in the D.C. area. Other established lenders in this area include Ronzetti Mortgage Co., First Maryland S&L, B. F. Saul, and National Savings and Trust.
SLSC has completed agreements with seven local co-ops, giving it authority to make loans, and is in the process of working with another 40 co-ops. Among the co-ops already signed up are: Greenbelt Homes, Greenbelt; Buckingham Village, Arlington; Promenade Towers, Bethesda; and The Stafford, Ontario Towers, and 1730 20th St., all in Washington.
A unique procedural hitch that any lender faces in co-op share lending is arriving at a "recognition agreement" with the co-op, recognizing the lender's right to a lien on co-op shares. This can take weeks or months as the volunteer co-op board ponders the lender requirements for foreclosure and other protections. With willing lenders at hand now, "it's a matter of the co-ops themselves realizing that the revolution in lending has occurred" and accepting the agreements, said Hines.
A whole new dimension in the Washington market for co-op loans has been added by the D.C. Housing Finance Authority's decision to set aside for co-ops $11.4 million of mortgage money from its latest single family bond issue. This makes available 10 3/4 percent fixed-rate, 30-year, assumable loans to moderate-income buyers if they have not owned a home in the past three years. The rate is frozen for the next several months, a particular advantage if interest rates continue to rise this year.
Some co-op boards reportedly are reluctant to jump into the tax-exempt program because it is erroneously seen as a way for less desirable members to gain entry into a co-op. "There's a need to educate co-op boards to explain that they still get to maintain their own membership criteria," Hines said, emphasizing that it is advantageous to any co-op to extend ownership potential to households in the $20,000 to $30,000 income range under the city program.
As for FHA's role in the share loan market, there is a program on the books, known as Section 203(n), but with rules so restrictive that it has gone unused throughout the past decade. As D.C. attorney Charles Edson quipped, "The 'n' stands for 'nothing.' " Now HUD has proposed more flexible rules that would make the program usable, but it will take months for these to take effect.
Financing advantages to a developer doing a co-op conversion means "co-ops frequently have a competitive edge over condos," Joselow said. Because of their ability to assume an existing mortgage that may carry an attractively low interest rate, carrying charges can be lower or sale prices can be higher. Further, changes in the tax code now under consideration would place co-ops in a still better competitive situation, stated C. Peter Behringer, National Cooperative Bank vice president. Among those changes are tighter depreciation allowances for rental housing and elimination of interest deductions for second homes.
Syndication sales of rental properties already have become much less attractive because of tax code changes enacted last year, which indirectly help out tenant groups interested in co-op conversion as an alternative. "With resyndication not such a profitable option any longer for rental project owners , co-op conversions can compete better again," Boston attorney John Achatz told the seminar.
Assumption of existing FHA mortgages in a co-op conversion will be a key to opening up many middle-aged, moderate-cost rental projects to the co-op market, Achatz added. Currently, HUD will allow FHA blanket loans to be assumed in a co-op conversion and without lender consent, but only if the co-op indemnifies HUD against any losses in case this procedure should prove illegal.
The question of legality is now pending in a case before the Federal Court of Appeals (first circuit). In that case, a Boston savings bank is challenging HUD's right to let a new co-op assume a 5 1/4 percent loan that it would rather call. HUD "With resyndication not such a profitable option any longer" for rental project owners, "co-op conversions can compete better again." -- attorney John Achatz claims that the original housing use of the loan is continuing and therefore the loan should continue. HUD won its case in the first round of the fight in federal district court.
Low-income co-ops with resale price controls (limited equity), such as those developed in Washington over the past few years, will not immediately be major beneficiaries of the new share loan program. Fannie Mae's standard program does not include them, because the lack of substantial appreciation protential is viewed as too risky.
However, SLSC is willing to negotiate on a case-by-case basis with such limited equity co-ops, SLSC's Narasimhan said. In some cases, he stated that resale prices may reach a high enough level for share financing to be workable (possibly in the $20,000 to $40,000 range). In fact, he views such loans as no more risky than others.
With below-market sales prices on limited equity co-op units, "there's a large available pool of buyers for this low price -- and that's security to a lender" as much as is appreciation potential, he concluded.