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Timing is everything.
AUTHORNicoletta Pagnotta, Meridian Capital
Refinancing a co-op’s underlying mortgage is all about timing. Here are some things to remember in the best of times – and in a time of crisis like the one we’re living through now.
Why the Re-Fi?
Borrowers refinance for one of three main reasons. Either they're looking to lower their current mortgage interest rate; they need capital for an upcoming capital project; or their current loan might be maturing, and it now is absolutely the time to do it. Knowing an individual building's motivations for the refinance allows us to go to the market and help them find the right fit.
We have about 25 different lenders in the co-op space. Within those 25 different types of lenders, there are five types: portfolio lenders; commercial mortgage-backed securities, or CMBS lenders; life insurance companies; swap lenders; and the agency lenders. Each of those lender types then has a bracket of other types of lenders within them. The products offered by those five different lender types vary tremendously. Everything from the length of the loan term available, the rate lock, the rates quoted, prepayment penalties, and if a line of credit might be available.
When Is the Rate Locked?
The rate lock is a critical component of the timing of the transaction, and the borrower needs to ask certain questions about that rate lock. When is the rate locked? Is it at application? Is it after third parties are completed? Is it after a commitment is issued? Or is it at the closing or, say, within two days of the closing? When they're choosing a lender, boards need to have this information available, especially in this unusual market. Why? Because what happens if a rate-lock is only for 60 days, but it's taking lenders 120 days? Depending on the lender type, the length of the rate lock and the length of the transaction will vary.
Of course, the main factor is the rate being quoted, since that is one of the things co-ops like to focus on. That rate can be either a fixed mortgage interest rate upfront, or it can be spread over an index, which gets secured and rate-locked at some other point in time.
How Much Time Do You Need?
We have a breakdown of what lenders can do in terms of extending a rate. It is often at the lender's discretion, but some rate locks are what's known as a “formal hedge,” where there is no extra time without either severe penalties or severe costs to the borrower. Or there may not be the option at all.
Today, with the coronavirus pandemic, unusual things have to happen in order to get a loan closed. There are no sit-down closings. Attorneys have to coordinate extra steps with their title companies and with board members who have to sign loan documents. Notaries are a big question mark. In normal circumstances, we say the timing can be anywhere from 60 to 120 days, depending on a building's individual motivations for refinancing. They may want more or less time. For example, were they hoping to start work in the summertime? Do they need the money in order to work when the weather is warm, or do they have an upcoming maturity date? As long as we know going in what we're dealing with, we can work with the lenders to meet that borrower's goals.
Right now our concern is that everybody's working remotely. Third-party inspectors are having a hard time getting into buildings at all. So are surveyors, appraisers, environmental and property-condition assessors. All of these things are creating delays. With lenders, attorneys and title companies all working remotely, this is affecting timing. So what we're seeing is that it may take longer than that normal 60 to 120 days, and this may create a further backlog that will affect borrowers who are thinking of refinancing.
This Is No Time for Delay
Let’s suppose your current loan is not coming due until 2021. You might think that's plenty of time to think about this and discuss it with the board. Our advice is try to get in front of it sooner rather than later. There are too many unknowns right now. We don't know how long before people can access properties for these site inspections. And we don't know what that's going to mean the longer it continues, how big the backlog may become.
What If We Can’t Pay Our Mortgage?
This is a hot topic of conversation for people in this crazy time, and I think it will tie in largely to how long this pandemic continues. That's one component. The second component is which lender the borrower selected. Every lender has its own set of loan documents, and presumably they’re addressing these things internally in their own way. And lastly, every building has an individual income makeup, meaning what goes into their overall collections. Is it a small, six-unit building where half the shareholders no longer have personal income? Is it a very large building where there's a large component of either commercial or professional or garage income coming in? What is the individual building's reserve situation and other cash that they might have available to them? But it's still a little too soon for us to say what will happen.