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BrooksAmerica announces 50-year, fully amortized loan program

National Mortgage Professional
Nov 05, 2006

Cooperative apartments need loans, too! Richard H. Lovell Esq.cooperative apartments, lending Disclaimer: The information contained within this article is for educational purposes only. Please check with your individual state and local regulations before pursuing cooperative apartment loans. When I first wrote about cooperative apartments in The Mortgage Press a few years ago, I received many requests for additional information from the mortgage industry. Since I continue to receive inquiries on this sometimes-puzzling subject, I decided that it was time to publish a revised version of my previous article. So here it is! Most mortgage professionals know the ins and outs of securing a mortgage loan on a one- to four-family house. Even a condominium loan does not faze them. However, the mere mention of attempting to obtain a loan on a cooperative apartment for a client can have the most experienced professionals running for the hills of misinformation and misunderstanding. The fact is this; some equate the difficulty and confusion of obtaining a cooperative apartment loan with obtaining a mortgage on Osama bin Laden's cave. Well, it is quite true that the financing of cooperative apartments is different than obtaining a mortgage for a house or condominium unit. It is different because the loan is not being secured by real property, as it is with other types of financing. There is no mortgage document to file with the local county clerk because a mortgage can only be filed against actual real property. But we are getting ahead of ourselves. It's time to get to the basics. For our purposes, let us assume that obtaining financing on one- to four-family houses and condominium apartments is the same. Yes, there are differences, but not enough to make a broad-based distinction. When we help a borrower obtain a mortgage on a house, we do the usual things; we run a credit check, obtain a verification of employment (VOE), appraisal and verification of deposit (VOD), etc. Then, after the loan is approved and we obtain a satisfactory title report, we go to closing. At the closing, the borrower signs, among other documents, a mortgage and, in New York, pays a mortgage tax and recording fees to have that mortgage recorded at the county clerk's office in the county where the property is located. Once the mortgage is properly recorded, the lender has a valid security interest in the property. What does this mean? The lender now has a lien against the borrower's house. If the borrower does not pay his mortgage payments in accordance with the terms agreed to, the lender may take legal steps to take the house away from the borrower. This legal action is called a foreclosure action. If the lender successfully completes the foreclosure action, the borrower loses the house and the lender can do with it as it wishes. The lender has the right to own the actual physical property - the land, the dirt and the bricks and mortar. How cooperative apartments are different Looking from the street, one cannot often differentiate between a building containing cooperative apartments, rental apartments or condominium apartments. The physical structure is not the defining feature, as the differences are legal and not structural. A cooperative apartment is located within a building owned by a cooperative apartment corporation. This cooperative apartment corporation owns the entire building (i.e., the land, the dirt and the bricks and mortar). Most likely, this corporation has obtained mortgage financing on the entire building. All of the apartments within the building may be owned individually by apartment owners. Some of the apartments may be owned by the corporation and rented to tenants, perhaps due to the rules of various local rent control laws. In any event, the units set aside for individual ownership are sold to those interested in buying them. What is it, exactly, that these purchasers are buying? We know that the purchaser of a house or a condominium receives a deed to the property, which indicates that he owns that piece of land upon which the house sits. This is not true with a cooperative apartment! What the cooperative apartment owner receives is not a deed, but a stock certificate. This stock certificate is his evidence that he owns a portion of the cooperative apartment corporation, which actually owns the building (remember, the land, the dirt and the brick and mortar). The unit owner gets a small piece of the cooperative corporation, and, hopefully, it will remain more valuable than the shares of stock held by the shareholders of Enron. So, how do these differences affect the lending process? The initial steps in the process are about the same (same credit reports VOEs, VODs, etc). Then, however, the road takes a different turn. Firstly, the monthly maintenance charges assessed by the cooperative corporation must be added to the projected principal and interest payments, to determine how much of a monthly obligation a borrower can afford. Secondly, the building in which the to-be-financed apartment is contained must be approved by the lender. This means that the lender will have had to review the financial statements of the cooperative apartment corporation and make an independent determination that the corporation is financially sound. If the lender has doubts about this financial soundness, then the lender will probably not make a cooperative apartment loan on an apartment in the building. (Of course, another lender might be willing to lend on apartments in the particular building, so sometimes, the mortgage broker has to shop around.) Don't forget the flip tax A flip tax is not really a tax, in that it is not imposed by some government entity. This is a charge imposed by many cooperative corporations on the seller, usually in proportion to the number of stock shares that the seller owns in the cooperative corporation. This amount, if it exists, can be minimal or substantial. However, if it is a charge paid by the seller, why should the borrower be concerned about it? Firstly, a buyer/borrower should be concerned because he will have to pay this charge when the apartment is sold. It also can affect the cooperative apartment loan that the buyer expects to obtain. Let us estimate that the purchase price of the unit being purchased is $100,000 and the borrower is seeking financing in the amount of $80,000. This would make the loan-to-value (LTV) 80 percent, and private mortgage insurance (PMI) would not be required. However, suppose in the case above, a flip tax were imposed by the cooperative corporation upon the seller in the amount of $5,000. For the purposes of computing LTV only, many lenders would add this flip tax amount to the proposed loan amount to determine the real LTV. Accordingly, in our example, the LTV would be considered to be 85 percent and would thus very much change the financing scenario. Perhaps PMI would be required or other steps would have to be taken, to secure the financing. Approval of the board of directors Besides obtaining approval from the lender, the purchaser of a house does not need approval by any other entity. The purchaser of a condominium apartment does not need the approval of the building manager or anyone else in order to proceed with the purchase of the condominium unit. All that the condominium association can do to prevent the purchaser from buying is purchase the unit directly from the seller at the same price. (This is known as the right of first refusal.) In practice, it is virtually unheard of for this to happen. Again, however, things are very different with cooperative apartments. The cooperative apartment corporation is run by the board of directors, who makes many of the decisions affecting the operation of the entire building in which the apartment is contained. The apartment owners elect the members of the board of directors. One of the most important decisions made by the board is deciding who will be allowed to own shares in the cooperative corporation (and, accordingly, be allowed to purchase an apartment). Other things that they will determine might include how much the purchaser will be allowed to finance or how much an owner will be allowed to refinance, if that is the owner's desire. In order to make its determination, the borrower will usually have to meet with the board (which might only meet once per month), answer its questions, air his dirty laundry and provide the board with personal financial statements or tax returns. Approval of the purchase or refinance is at the sole discretion of the board of directors and is certainly not guaranteed. The board can approve or reject any borrower without explanation. It can also require additional information and may not act on that information until the following months board meeting. The board also usually sets certain guidelines that may require a certain minimum down payment (e.g., 25 percent is not uncommon). With these conditions in mind, it is the wise mortgage professional who does not lock in an interest rate on any cooperative apartment loan until the approval of the board of directors has been granted. The lien search As part of the financing of a house or condominium, a title search is performed and a report is presented to the lender (usually through its closing attorney). Among other things, a title report informs the parties who the actual owner of the property being purchased is and whether or not there are any liens, judgments, mortgages, etc. filed against the property or the parties. This is important, of course, because any of these items can be an obstacle to the new lenders property rights. At the closing, the borrower typically purchases a title insurance policy to protect himself and another to protect the mortgage lender. With cooperative apartments, the search that is performed is somewhat different. Recall that while one who purchases or owns a house receives a deed stating that he actually owns the land upon which the house sits, the owner of a cooperative apartment only receives shares of stock in the cooperative apartment corporation. Therefore, the search is different. Firstly, we are interested in knowing if the cooperative apartment corporation does actually own the land upon which the entire building is located (e.g., if the deed to the building is in the name of the cooperative corporation). It will also be revealed if there are any liens or mortgages on the building itself (it is normal and acceptable for a cooperative apartment building to be mortgaged), if there are building violations issued against the building and if the building has the proper certificate of occupancy. We might be concerned if the cooperative apartment corporation had large, unsatisfied judgments against it, hadn't paid its real estate taxes in a long period of time or its mortgage were in foreclosure. We'd want to know if the seller of the apartment had any judgments against him or if the current owner had used the stock certificate for the unit as collateral for a cooperative apartment loan (information equally important to the purchaser and new lender). These inquiries would also be applicable to the borrower if a refinance and not a sale of the apartment were contemplated. The lender's attorney must be overly cautious in reviewing the lien search, as the transaction does not usually include any sort of title insurance, as is the case with a house or condominium. Although an insurance policy on cooperative apartments is now available from title companies in New York, most purchasers dont elect to purchase one, and lenders don't require it. A final word about the lien search: Don't take it for granted that someone else has ordered it. On a refinance transaction, check to see if anyone has ordered the search. While the search is usually ordered by the buyer's attorney in a purchase transaction, this, too, can sometimes fall through the cracks, as the purchaser's attorney may believe that the lender is ordering it. The closing nears ... or so you might think! So we have obtained a loan commitment, we have the cooperative apartment search and the board of directors has approved the transaction. Now, you are ready to lock in the rate and set the closing date, right? Not so fast! First, a few more details need to be tended to. When you pay off a regular mortgage loan (either in a purchase or a refinance transaction), a payoff letter is obtained from the old lender and, at the closing, the title closer makes arrangements to send the old lender the payoff check. Several weeks later, the title company will receive a satisfaction of mortgage, which will then be recorded with the appropriate county clerk. However, satisfying a cooperative apartment loan that is presently encumbering the shares of stock of a cooperative apartment is a little more complicated and time consuming. At the closing of the to-be-satisfied loan, the lender took and retained the original stock certificate and proprietary lease for the unit being financed. This lender is supposed to keep these documents, to further secure its interest in the apartment. After all, the lender cannot record a mortgage on the apartment, because the apartment's ownership is only evidenced by shares of stock. It is not real property, as is the case of a house (or the cooperative building itself). Now that the old lender is being paid off, not only do we have to obtain a payoff letter from the old lender showing how much is due to satisfy the current owners obligation, we must also make arrangements to have the old lender deliver the stock certificate and the proprietary lease back to the managing agent for the cooperative corporation. This part of the process, unfortunately, can take some time, depending upon the prior lender. This lender must locate these documents, and this can sometimes take a few weeks. (Usually, the seller's attorney is responsible for securing these items. If it is a refinance, the mortgage broker or banker should probably remind the borrower that this process must be started.) On a purchase, the agent for the old lender must come to the closing to exchange the stock certificate and proprietary lease (along with a UCC-3 Financing Statement Termination form) for a payoff check. On a refinance, the old lender must come to the closing attorney's office on disbursement day (e.g., after the three-day right to cancel has expired) with the original stock certificate and proprietary lease and a UCC-3 Financing Statement Termination form. This UCC-3 form is to be recorded with the appropriate county clerk, which effectively terminates the prior lender's security interest in the stock certificate. Ready to close now? Wait! Remember that the loan on a cooperative apartment is not called a mortgage loan, because a mortgage can only be given on real property (e.g., land). So, how does a lender protect its interest in the cooperative apartment if it cannot record a mortgage? How does the lender ensure that if the borrower defaults on the payment of the loan to the lender, the lender will be able to gain ownership of the stock shares? Besides keeping actual custody of the stock certificate and proprietary lease, the lender, usually via its closing attorney, must file a UCC-1 Financing Statement (along with a cooperative apartment addendum) with the appropriate county clerk prior to the closing. While these documents are not signed by the borrower, the borrower must sign an authentication letter, authorizing the lender to actually file the UCC-1 form. The actual filing, depending upon the county in which the cooperative apartment is located, can take from one to several days. The reason that the UCC-1 must be filed prior to the closing is that, for example, if a borrower were to file bankruptcy between the time the loan were closed and the time that the UCC-1 were filed, the lender would simply become an unsecured creditor and might have to wait in line with everyone else to get any money. There is one more document that must be signed before a closing can happenthe recognition agreement. This lender-required form, simply put, requires that the managing agent for the cooperative apartment not issue a replacement stock certificate nor a proprietary lease for the apartment owned by the borrower unless the managing agent is notified that the lender's interest in the apartment has been satisfied (e.g., that the borrower's loan has been paid off). This form is signed by the lender (usually by its attorney) and the borrower and then sent to the managing agent for the cooperative corporation. It must be signed by an officer of the cooperative corporation and presented to the closing attorney at the closing (or before). The end ... almost As this article threatens to get as long as the cooperative apartment closing process itself, a few more items remain. While most lenders whose loans are being paid off at a closing will accept an attorney's escrow check for the payoff amount, most banks whose cooperative apartment loans are being satisfied will require either certified or official bank checks for the payoff amount. This usually requires some advance notice to the closing attorney by the seller's attorney. It should also be noted that there are more schedules to coordinate to actually set the time and date of a cooperative apartment closing. In addition to the usual parties, the managing agent and the attorney for the payoff bank need to be thrown into the mix. While most lenders do not require the buyer to obtain homeowner's insurance (unlike the purchase of a house), the lender will require a copy of the cooperative corporations master insurance policy on the building. A purchaser would be well advised, however, to obtain his own cooperative apartment insurance policy to protect valuables and provide for coverage in the event someone is injured in the apartment. Some cooperative corporations require the apartment owner to obtain this coverage. To people (and lenders) outside of the downstate New York area, cooperative apartment ownership and financing is puzzling at best. Those of us who live here know that cooperative apartment ownership in the New York metropolitan area is as common as beachfront property in Malibu, Calif. A properly managed, fiscally responsible cooperative apartment building can be a worthwhile investment and afford a unique and often more affordable path to homeownership. It sometimes requires just a little more patience. Richard H. Lovell Esq. is the founder of Ozone Park, N.Y.-based law firm Richard H. Lovell PC. He was a member of the New York Association of Mortgage Brokers board of directors for more than 14 years. He may be reached at (718) 835-9300 or e-mail [email protected]
Published
Nov 05, 2006
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