Douglas Heller, a partner at the law firm Herrick Feinstein, is proposing a yet-to-be-tested idea that he argues could help lenders and sponsors at least break even.
While it may seem counterintuitive, in an article he co-authored with Assistant Attorney General Erica Buckley for GlobeSt.com last month, Heller proposed converting troubled condo projects into co-ops.
In today’s tough lending environment, Heller said, buyers could simply take a share of a co-op’s debt rather than securing outside financing for their purchases. Buyers would essentially be getting an apartment at a wholesale price, and the lender and other investors could break even instead of taking a loss.
"The most obvious reason that a cooperative structure might relieve pressure on lenders is that if they keep the mortgage in place, they can restructure it as a typical underlying co-op mortgage with a term of five to 15 years; the loan would become performing. This alone would increase the likelihood that the lenders would recoup their investments," Heller wrote in the article.
"The major portion of each purchaser’s price will be included in the underlying cooperative mortgage," he continued. "This essentially represents the transfer of what would have been individual condo buyers’ debt to the cooperative entity. The purchaser could pay an equivalent monthly amount but would not have to apply for financing."
Heller told The Real Deal that since the article was published, he’s had "significant discussions" with about 10 lenders or developers. "At this point, they are still evaluating it with respect to specific projects, and some suggested interesting variations," he said.
The article said the attorney general’s office would likely waive at least a portion of the filing fee when the offering plan is refiled as a co-op.
The condo to co-op conversion would not work for every struggling new project (buildings where the offering plan has been declared effective and some of the units have closed would clearly be hardest), but it could help save some new projects from big losses.
Co-ops certainly have their faults, least of which may be their notoriously finicky boards. But Heller contends that co-op board rules can be written leniently, more akin to the rules that govern condos.
Hurts: FHA explosion
Loans insured by the Federal Housing Administration exploded in popularity in New York after Congress boosted loan limits last year to as high as $729,750.
Under the program, buyers can get a mortgage with a credit score as low as 580, putting only 3.5 percent down — possibly even less when other credits are factored in.
In the wake of tightening lending practices that require at least 20 percent down and pristine credit, the new FHA loan limits were seen as a saving grace for struggling luxury condos.
Between January and March, the number of FHA-backed loans in the city leaped to 2,315, up from 995 in the same period of 2008.
"The more buildings that can get FHA approval, I think, the faster the absorption of the current inventory will be, which will help the whole market," said Stephen Kliegerman, executive director of development marketing at Halstead Property.
Union Square Mortgage, started by aptsandlofts.com President David Maundrell and banker Ross Weinstein, has worked to get dozens of new condos approved for the program.
But only a year after FHA effectively took over the subprime lending market for Fannie Mae and Freddie Mac, analysts are warning that it could become the next housing giant to require a federal bailout.
In testimony before a congressional committee last month, FHA Commissioner David Stevens acknowledged that 20 percent of FHA loans insured last year, and 24 percent of those issued in 2007, face problems including foreclosure, according to a report in the New York Times.
FHA now insures roughly 5.4 million mortgages with a combined value of $675 billion, and those loans have been bundled into mortgage-backed securities guaranteed through another government-owned corporation, Ginnie Mae. If large numbers of these mortgages default, taxpayers will be responsible for paying back investors.
Stevens has repeatedly said FHA won’t require a bailout. Meanwhile, in an effort to protect the program from the mass foreclosures that have helped take down the nation’s economy, Congress introduced a bill last month to increase the program’s required downpayment from 3.5 to 5 percent, seen as a protection against default because buyers are less likely to walk away from a loan they have a significant financial stake in. …CONTINUED