Knowing what the loan officer wants is key to getting what you need.
Gardner Semet is one busy man. Every weekday morning he awakes in the pre-dawn darkness, fires up his Prius, and leaves his home in the northern New Jersey suburbs by 6:30. After dropping his wife Daphne off at her job at Mount Sinai Medical Center, Semet is at his desk in midtown Manhattan by 8 A.M.
Let the games begin.
Semet’s phone is usually warbling when he walks in the door. His e-mail “in” basket is overflowing. And then there’s the small mountain of loan applications, including a great many from co-ops hoping to renegotiate their underlying mortgages.
“I never stop working,” says Semet, who rarely has time to crane his neck and enjoy the partial view of the magisterial Seagram’s Building across Park Avenue. “Making mortgage loans is like being a saucier. You’re always addressing the one that’s bubbling.”
Gardner Semet has worked for M&T Bank for the past 18 years. He calls himself a “loan originator,” though to most laymen he’s a “loan officer.” No matter what you call him, Semet is often the first – and arguably the most important – person co-ops deal with if they decide to approach M&T for a loan.
At 47, Semet’s goatee has gone to salt and pepper and much of his hair is simply gone, but he’s still physically active, an avid skier and rower, the father of two teenagers who brings vast energy and passion to his work. He was born in Newark and educated at Columbia (where Barack Obama was a classmate), and after so many years in the business he knows things that could prove useful, even invaluable, to every co-op in the city. The reason, quite simply, is that refinancing the underlying mortgage is the most important decision your co-op board will ever make.
To rephrase an old real-estate adage, there are three things that tend to separate the successful loan applications from the doomed ones that land on Gardner Semet’s desk: preparation, preparation, preparation.
One for All
Which brings us to the First Commandment of Gardner Semet: “One authorized person should speak for the co-op. Then that person has to decide which horse the co-op wants to get on and ride.”
“I agree 100 percent,” says Sheldon Gartenstein, senior vice president at NCB, a nonprofit corporation that handles about one-third of the city’s co-op mortgages. “First, designate one person as the voice of the co-op. Then review your financial needs and know why you’re seeking new financing.”
This board representative should be a conduit of information as opposed to a unilateral decision-maker, in the eyes of Semet, Gartenstein, and other experts. Obviously, this conduit needs information, which requires homework. Before approaching banks, board members need to ask questions and get answers. Do shareholders want low maintenance payments, or are they willing to endure higher maintenance so they can pay off all or some of the loan’s principal? Do they want a short- or long-term mortgage? Which capital improvements get top priority? How big a loan should the co-op seek? Will the co-op shop for a lender by itself or use a mortgage broker?
Wisdom is divided on this last question. With the pool of potential lenders relatively small, some believe it’s a waste of money to pay a broker instead of using the co-op’s professionals. Patrick Niland, president of First Funding of New York, a mortgage brokerage, begs to disagree.
“Would you hire a plumber to do your appendectomy?” Niland asks rhetorically. “In volatile markets like this – with a global recession and disruptions in the flow of capital – it’s particularly useful having a professional who can help your co-op find the right lender. The way I’ve built my business is by saving co-ops money, not necessarily by getting the lowest interest rate, but by getting the best package of terms to meet the objectives of that particular building.”
In fact, the lender with the lowest interest rate is not automatically the right lender, in Niland’s view.
“A lot of co-ops suffer from what I call ‘interest-rate myopia,’” he observes. “But the interest rate is less important than the amortization schedule” – the rate at which the co-op pays off the principal on the loan. (Or it can decide not to pay it off and instead pay only the interest.)
Other important factors in any mortgage package, according to Niland, are prepayment terms, how to handle insurance proceeds, creating an escrow fund for taxes and insurance, and when to lock the interest rate. And, of course, the length of the mortgage.
“You have to have a pretty good reason for going beyond a 10- or 15-year loan,” he says, noting that inflation works to the advantage of borrowers, and major repairs, both planned and unforeseen, are virtually inevitable. “Going beyond 15 years is nuts.”
Once they’ve answered all these questions, the co-op is ready to go shopping for a lender. The good news is that, even with the credit crisis, the recession and the shakedown on Wall Street, there is money to be had out there – and interest rates are at rock bottom. Also, co-ops are traditionally a low-risk gamble for bankers, what one veteran loan officer calls “the most creditworthy audience in the world.”
“It’s not so bad right now for co-ops who look like they can pay their debts,” says Semet. “There’s plenty of money available for financing co-op mortgages. The problem is getting co-ops to decide what they want.”
If the co-op board has done its homework and the board’s “conduit” approaches Semet with a clear idea of its needs and wants, the loan process can move forward on greased wheels. It can take Semet as little as five minutes to lay out the loans he can offer.
“Basically, I can give them four products,” he says, noting that an M&T mortgage loan will either be held by the bank; sold to Fannie Mae or Freddie Mac, which are now under federal conservatorship; or insured by the Federal Housing Administration (FHA). “With each of those four products there are of course many options – a 10-year, 15-year, or 30-year loan,” Semet says. “Interest-only, partially amortizing or self-liquidating. It all depends on the nature of the co-op. They tell me what they want and I tell them what I can give them.”
After that initial contact, an interested co-op must start delivering documentation to the bank, including financial statements for the past two years and current year, a maintenance roll, a list of arrears, next year’s budget, recent sales, and the number of unsold apartments. Semet also asks for a list of rent payments and maintenance charges on the sponsor’s unsold shares.
“This is the first red flag – a sponsor with rent-stabilized apartments who’s paying high maintenance,” Semet says. “You want to make sure there’s no danger of sponsor default.”
In fact, bankers want to make sure there are no surprises of any kind, such as unresolved lawsuits, liens on the property, or looming capital improvements. Two things you need to remember about bankers: they dislike surprises and they like to get paid what they’re owed.
Semet is not one of those bankers who’s chained to his desk. He frequently visits co-ops to see for himself what kind of shape they’re in. “Basically, I’m looking for evidence of water damage, graffiti, trash, poor maintenance,” he says of his on-site inspections. “I want to make sure there aren’t any issues that are going to show up on the environmental or engineering report. Once I’m satisfied that the co-op is healthy, I issue an application, known as a letter of intent.” This document, usually five to ten pages long, spells out the conditions under which the bank will offer the loan, including the interest rate, the duration of the loan, and the amortization rate, if any.
If satisfied with the bank’s letter of intent, the co-op pays a “good faith” deposit, equal to one percent of the amount of the loan. This money is used to finance the next step, which is critical to the loan process: the physical evaluation of the building. The bank arranges for a real estate appraisal and for environmental and engineering reports. The total cost is usually about $15,000, and any money left over from the deposit goes toward closing costs.
“There’s been an increased attention paid to the reporting, especially leaks and the environmental aspects,” says Semet. “It has become a bigger issue recently because co-ops have borrowed money and then realized they had to borrow more after they’d made a deal because they found out things. Banks want to put loans to bed once and for all. The worst thing a banker can get is a phone call saying the borrower needs another loan or can’t pay the existing loan.”
Once he has all the reports in hand, Semet makes a presentation to the bank’s approval authority. This authority varies from one lending institution to the next. Depending on the size and nature of the loan, the approval at M&T can come from an individual, from a committee, from Freddie Mac, or from Fannie Mae if the loan is going to be sold to them and is larger than $30 million. Once the loan is approved, Semet issues a “commitment” to make the loan. Though this is a legally binding document, some hurdles remain.
The co-op’s lawyer should read the commitment closely, and may advise the board to try to negotiate some of the terms, such as how to handle insurance proceeds. Once these details are hammered out, the board must decide when it wants to lock in its interest rate – and how soon after that it wants to close the deal.
Depending, once again, on the board’s level of preparation, the closing can take an hour or it can drag on all day. The board must produce title insurance, it must notify the previous lender and meet the terms of prepaying the previous mortgage. A board representative must be on hand to sign documents.
“If there’s an imminent threat to the viability of the building, fix it before the closing,” Semet advises.
Once the closing is complete, the co-op has a new lease on life – until the next time it decides to renegotiate its mortgage. And there will almost certainly be a next time because debt-free living is a fantasy that few New York City co-ops ever experience. It’s a fantasy they shouldn’t even want to experience because while debt may be a four-letter word to some individuals, it’s not even a remotely dirty word for co-ops. In inflationary times like these, debt is, in fact, good.
“Why amortize?” asks Gartenstein of NCB. “Some co-ops want a self-liquidating mortgage because they dream of living debt-free. What they’re missing is that buildings need constant maintenance and repair. The thought that you can retire your debt in, say, 15 years and live forever debt-free is an illusion.”
More Money, No Sweat
The 35-unit Park & Tilford co-op on the Upper West Side of Manhattan recently followed Semet’s tenets to a T – and walked away from M&T Bank with a $1.1 million mortgage without breaking a sweat.
“First the board had to set parameters,” says Robert Cohen, the sponsor representative on the seven-member board who also serves as the building’s managing agent. “We knew we could get a low interest rate, but the main thing the board wanted was not to increase expenses servicing our debt.”
A committee was formed and three board members were sent shopping at three different banks. Cohen was sent to M&T, which was then the co-op’s lender. After discussions with Semet, Cohen reported back to the committee, which relayed his findings to the full board. M&T offered an attractive package, which it would sell to Fannie Mae.
Last summer, shortly before the credit crunch hit, Park & Tilford signed on for a 15-year “partially amortizing” $1.1 million loan with a 25-year amortization schedule. The loan met all the board’s objectives: it refinanced the prior mortgage, gave the co-op some money for capital improvements and kept maintenance payments steady.
“It’s usually easier if you refinance with your existing lender,” Cohen says, “because they have your files and they know the building. And while interest rates are important, we looked at the whole picture.” Though the refinancing was hugely important to the co-op, it proved to be almost laughably easy, thanks to the co-op’s solid financial history and the small size of the loan relative to the value of the building. “It was a vanilla box loan,” says Cohen. “Nothing fancy, very basic, a slam dunk.”