Over the past 12 months, the shareholders of Lincoln Guild Housing, a cooperative at 303 West 66th Street, have been keeping assistant treasurer Jack Linder very busy. For nearly a year, he has been up to his ears in mortgage refinancing requests, submitted by shareholders anxious to take advantage of the historically low interest rates. Anywhere from 15 to 20 applications have been submitted in the 12-month period, each one going through an exhaustive review. The upshot? They were all approved.
With interest rates low and the value of co-ops high many co-op boards are reporting a similar spike in interest for refinancing approval. And when it comes to refinancing, what could be better than helping a shareholder to lower his or her monthly mortgage payments? If a shareholder is seeking board approval for a loan that will lower debt, approval should be a matter of course, right?
Perhaps. But what happens if the shareholder wants to refinance a bigger loan, and monthly payments are set to increase? How involved should a board get when a shareholder seeks refinancing approval? Be careful when swimming in the refinancing waters, there can be unforeseen shoals ahead.
"Right now, most co-ops do not get intimately involved in the refinance process," observes attorney Jim Glatthaar, a partner at Bleakley Platt & Schmidt. That can be a mistake. "People can get in way over their head, debt-wise." Property values have skyrocketed in the past five years in co-ops and the question is: if someone's income is different from when he or she purchased, what should the board do? "A person could greatly increase the amount of their monthly mortgage payment by refinancing for a much larger amount," says the attorney. "And that's an issue that co-ops may want to start looking into."
For most boards, the question of how involved they should get in the refinancing of individual apartments comes down to an issue of board personality type and philosophy: is it cautious and hands-on or is it more laissez-faire? The answer depends on who's talking.
At an 82-unit co-op on the Upper East Side, where the apartments hover in the $1 million and up price range, the board leans toward a self-described liberal policy: any shareholder who has been in the building for at least two years and has never been in default can refinance his or her apartment at 50 percent of the appraised market value. "We don't really feel the necessity of looking at a shareholder's finances after they are a shareholder in good standing," offers one director, explaining the board's mostly hands-off policy.
Over on the Upper West Side, another building tends toward the other extreme. There, the board members in the 24-unit co-op at West End Avenue and 75th Street, where prices range from $400,000 to $900,000, take a more cautious approach.
"We have a quite simple policy on refinancing and that is, the refinancing package that is submitted to the board for approval from the apartment owners is identical to the financial package that a new owner would submit," says treasurer Peter Dignazio. "You have to come in with your tax returns, your ability to pay, all the stuff that a new owner would do. We think it's a sound policy. We don't want any defaults."
Board approval of shareholder refinancing is a highly subjective art that varies throughout the city. And boards sometimes do and sometimes don't abide by the rules set down in their proprietary leases regarding mortgage financing.
Most proprietary leases provide for a paragraph, Article 17, which allows shareholders to pledge their lease as security for a mortgage. Some proprietary leases go further, and mandate that a board must sign a recognition agreement - a loan document holding the bank and co-op mutually responsible in alerting one another in case of shareholder default - if approached by a shareholder looking to refinance. Banks will not approve a refinancing without a signed recognition agreement.
So, what should a board ask to see if a shareholder comes forward with a request for refinancing approval? Set some ground rules, advises Lynn Whiting, director of management with the Argo Corporation. First check and see what the shareholder wants: to reduce debt or increase it?
"If a shareholder is refinancing their mortgage in the same amount, to simply take advantage of a low-interest rate and lower their debt service, this is a no-brainer, and there would be no reason for a board not to approve," notes Whiting.
However, if a shareholder is taking on a mortgage or increasing the amount of the loan, consider whether the shareholder is able to afford the increased payment. Review a current credit report, suggests Whiting. And make sure the refinancing package meets the building's guidelines, typically not exceeding 80 percent of the value of the appraised apartment.
It would be foolish for boards to summarily refuse refinancing requests, because that would hurt the resale value. "They want their apartments to be freely marketable," says attorney Robert Tierman, a partner in Litwin & Tierman, but also want the building to maintain its fiscal stability.
It's those two thoughts that have guided the actions of the co-op board at West End Avenue and 73rd Street, which oversees the management of the 615-unit building. The board has a two-track protocol for refinancing requests. If it is simply a question of a shareholder reducing debt, the property manager and the board give approval after an administrative review. But if a shareholder is taking on more debt, then a more careful scrutiny kicks into gear. The board looks at the shareholder's employment history, the length of time he or she has been in the building, whether they are in good standing in paying their maintenance, and why the loan is needed. And while the guidelines are strict, the board is not inflexible.
"We make exceptions to our rules when they are appropriate for the given circumstances," such as a need for a loan to pay medical bills, says treasurer Mitchel Levine. Overall, the driving issue is maintaining the fiscal stability of the building. It is the board's fiduciary responsibility, maintains Levine, "to make sure that occurs."