Banks change New York mortgage lending standards after Covid

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This spring, Kevin Brunnock considered himself one of the lucky brokers in town.

He was working with a client who wanted to continue looking for housing despite the pandemic. If the right property came along, the client was ready to commit on sight.

In June, they found such a place: a two-bedroom condo on the Upper West Side owned by a model of Nigerian descent. Oluchi Onweagba. The 1,300 square foot apartment had a patio overlooking the Hudson River and an in-unit laundry room, the two main draws of the Covid era.

Brunnock’s client made an offer within two days and entered into a contract on June 25 with a mortgage contingency. But that’s where the momentum for the deal died.

The sale was only closed on September 30 to allow the mortgage lender to verify the buyer’s employment and review income and assets, as well as double and triple check statements, Brunnock explained. Funding took double the time the broker expected.

“We saw for the first time how banks scrutinize everything,” said Brunnock, who works at R New York. “Covid has made mortgage lending an intimidating process. “

Barriers to accessing finance for the few homebuyers looking to buy in New York are a blow to the city’s depressed housing market – which reveals institutional uncertainty and a lack of confidence in the future of the city. city, according to experts and industry insiders. The biggest concerns are falling property values, potential new taxes and rising unemployment.

It may sound counterintuitive. Interest rates have fallen to unprecedented lows. Demand from home buyers is propelling the US real estate market to new highs with prices rising and supply reaching historic lows. But this wave has yet to hit New York. Manhattan sales fell 46% last quarter a year earlier.

Lately, most buyers have relied on financing to get to the closing table. In 2019, the number of cash buyers fall substantially for the first time in five years. But this dynamic has been reversed again, especially at the top of the range. Part of the reason may be that funding is not as easy to obtain as it used to be.

“Low rates by themselves don’t necessarily mean you’re able to get a mortgage,” said Michael Berkin, a New York-based mortgage originator at Silver Fin Capital.

New control

It’s not just that banks are taking a more critical look at those with less traditional sources of income – think entrepreneurs or workers in the small business economy. For lawyers, doctors, and affluent financial services borrowers, new layers of due diligence are slowing the process.

There is a dearth of mortgage data tracking origins for the New York City residential market, but an analysis of property records by The real deal shows that the total volume of new mortgage loans recorded since the start of the year is down 20% compared to the same period in 2019. (TRDThe analysis includes both buying and refinancing loans.)

At the national level, available housing credit has fallen almost every month this year, indicating that homebuyers with lower credit are increasingly unable to obtain mortgage financing, according to the Mortgage Bankers Association.

Joseph Palermo, head of mortgages at TD Bank, said he now examines bank statements and calls businesses to verify a borrower’s income and employment, something he had never done before.

“We don’t just take the two-sentence letter from the accountant like we did before,” he said. “We double check.”

Berkin recalled a recent long process in which a couple, one of whom was a doctor and the other a lawyer, were trying to secure financing for their home.

“They should have no problem qualifying at the end of the day and it took them almost 90 days to close which is, in my opinion, ridiculous,” he said.

In response, Chris Totaro, a residential broker at Warburg Realty, began advising his buyers to begin the mortgage prequalification process before they begin their search – and be prepared to shell out more money than expected.

“The 10 percent mortgage on the condo is completely lost,” he said.

While a 20% down payment is the rule of thumb for New York City buyers, a 10% down payment for a condo was typical before the pandemic in the city, as were loan-to-value exceptions. But now lenders are stricter with down payments, and in the first three months of the pandemic, a 30-35% down payment has become the norm, according to Berkin.

The mortgage broker said this was changing “very slowly” and admitted that it “obviously dramatically affects how a person approaches a purchase and what they are willing to spend.”

It is difficult to determine whether it is difficult to determine whether it is difficult to determine whether it is difficult to determine whether funding for the problem landing is causing deals to fail in New York. So far, Totaro has said he hasn’t lost any deals due to delays in mortgage financing, although it may only be a matter of time. The broker said he was working with a buyer who refused to sign a contract for a two-bedroom apartment downtown until he received approval for a mortgage.

“If someone else comes forward, that property is gone,” he said.

A question of value

So what has changed for the city’s biggest mortgage lenders? The simple answer is risk.

Most New York home loans are too large to be securitized and sold to federally funded mortgage lenders, Fannie Mae and Freddie Mac. This means that lenders must keep the loans on their balance sheets and bear the risks associated with them.

The banks held the larger market share mortgage arrangements in New York, or at least before the pandemic. When contacted for this story, no institution accepted an interview. Bank of America, Citibank and Wells Fargo declined to comment. First Republic and JPMorgan Chase, who tightened Home loan standards through the weeks of the pandemic, have not responded.

Initially, institutions concern was how borrowers would overcome the city’s three-month lockdown and the staggering waves of layoffs and leaves that came with it, according to Palermo. But now, he said, the bigger issue is whether the appraisals accurately reflect the real values ​​of the property.

Comparative sales for deals made during the pandemic are starting to pour in and, so far, indicate property values ​​have fallen since March, Palermo said. This means that the leverage effect for loans issued on the basis of pre-pandemic valuations now looks “a little strange,” he said.

“The banks are a little afraid that if values ​​continue to fall then the leverage will increase,” he said. “If you have 80% leverage on something and it goes down in value… we’re now at 90% or 95%. [percent]. “

This results in banks wanting to take their bad loans off their books, according to Mark Anderson, a partner at Anderson, Bowman & Zalewski who focuses on defense against foreclosures.

From July, he began receiving calls from bank attorneys offering to settle long-standing cases – some dating back to the Great Recession.

He did not give details of specific offers due to confidentiality agreements, but said the number of offers was higher than normal and the values ​​on the table were “much lower than what had been originally discussed before Covid “.

“A bank’s offer depends on its valuation of a property,” he explained in an email. “So it seems, despite what the public figures may indicate, that the banks see darker times ahead.”

Not all lenders share these concerns.

“Frankly, we don’t have a problem right now because there are so few sales in New York City,” said Alan Rosenbaum, CEO of New York-based mortgage company GuardHill Financial. “Valuations only go down when sales go down… If they don’t sell it, it’s not comparable. “

Market data is on Rosenbaum’s side so far. In the last quarter, median selling prices fell slightly in Queens and were Brooklyn apartment. In Manhattan, the prices in fact increase, although this was due to the distortion of the high-end deals that were made just before, or in the midst of the city lockdown, according to Miller Samuel reviewer Jonathan Miller. The number of transactions in the three boroughs has fallen by at least 40 percent year over year.

Miller said sales data is particularly “thin” for transactions over $ 2 million, which can make valuing a high-end home more difficult. He also noted that the standards of different lenders in terms of conduct evaluations also continues to be a factor that can delay funding.

For the assessor, however, he said the stricter lending standards were “actually really encouraging” for him “because during the financial crisis there was no risk management.”

However, prudent bank lending is not limited to valuation uncertainty. Part of the math is a lack of confidence in New York City, according to economist Dr. Sam Chandan, dean of the NYU SPS Schack Institute of Real Estate.

“There are concerns about the trajectory of New York’s competitiveness in attracting new jobs and new residents, given our difficult financial outlook,” Chandan said. He highlighted discussions on the introduction of new taxes on city residents and commercial real estate as specific sources of concern.

Regarding TD, Palermo pointed out that despite additional due diligence, deals are still funded.

“As long as we know the person is working and has the ability to repay, we lend,” Palermo said. “It’s not a more difficult loan for us. We’re just taking extra steps to verify it.

Palermo said he was able to close a purchase loan in less than 30 days “with his eyes closed”, although he admitted refinancing could be up to 90 or even 100 days. (He and Berkin confirmed that most lenders prioritize purchase loans over refinancing activities.)

But as more borrowers are pushed to their limits, many have doubts.

“The money is almost free, but trying to get it is another thing,” said Vickey Barron, a broker at Compass, who almost gave up on refinancing her own property earlier this year. “You ask yourself, is it worth it? “

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