1994 RGB MORTGAGE SURVEY


Section 26-510(b)(iii) of the Rent Stabilization Law calls upon the Rent Guidelines Board to consider the "costs and availability of financing (including effective rates of interest)" in its deliberations. To assist the Board in meeting this mandate, RGB staff conducts an annual survey of financial institutions which underwrite mortgages to multi-family properties in New York City. The findings of the 1994 mortgage survey are summarized in this report.

Summary

In 1991, a deepening recession, the "S&L crisis" and the collapse of New York's co-op market drastically curtailed the volume of multi-family lending in the city. This was demonstrated by declining loan applications from landlords and fewer approvals on the part of financial institutions. The 1992 Mortgage Survey showed increased cautiousness among bankers and landlords, as adverse market conditions forced many banks to tighten lending requirements or cease financing rent stabilized buildings, despite aggressive efforts by the Federal Reserve Board to reduce interest rates. The multi-family loan market began to improve in 1993 for some lenders and building owners, as loan volume started to stabilize and interest rates continued to fall.

Over the past year the credit market for rent stabilized housing has undergone considerable change. Average interest rates for both new and refinanced permanent mortgages declined for the fifth straight year, from 9.2% to 8.6%, while loan volume soared. Additionally, far fewer institutions tightened their underwriting standards, with only 14% of this year's respondents reporting stricter lending criteria, as opposed to 42% of last year's sample. Many landlords took advantage of historically low rates to refinance fixed rate mortgages in much greater numbers than last year. Such refinancing activity may have affected mortgage delinquencies in the rent stabilized stock, which declined from an average rate of 4% to 3%, while foreclosure activity remained fairly stable.

Changes in the Mortgage Survey Sample and Questionnaire

Besides updating mailing lists of local mortgage lenders, staff of the Rent Guidelines Board substantially modified last year's mortgage questionnaire to create the 1994 Mortgage Survey. New questions examined the importance of building size, location and age in determining loan approvals. Additional attention was focused on the outcome of foreclosure proceedings against rent stabilized properties. Questions on the relative importance of rent stabilized mortgages on the loan portfolios of individual banks were eliminated, since this information could be gained from other questions, and because portfolio size was found to have very little statistical effect on the survey's data quality.

Response to the Survey

The 1994 Mortgage Survey received the highest response rate ever, with about half of the fifty two institutions questioned providing useful data. Unlike last year, when more than one-third of respondents said they had stopped underwriting multi-family properties, only three of the lenders participating in this year's survey ceased multi-family lending over the past year. Two institutions reported that they did not loan to either rent stabilized properties or buildings with more than four dwelling units. The third lender recently withdrew completely from making commercial loans. Additionally, two respondents reported mergers with other institutions, but said they were still active in lending to rent stabilized buildings.

See 1994 Mortgage Survey Respondents The Federal Reserve's aggressive policies have lowered rates on mortgages for both single and multi-family housing in recent years. Rates continued to fall in 1994, although not at last year's pace, as demonstrated in the chart Average Interest Rates on New and Refinanced Permanent Mortgages for Rent Stabilized Buildings, 1989-1994. Respondents to the 1994 Mortgage Survey report average rates of 8.6% for both new and refinanced permanent mortgages on rent stabilized dwellings, a drop of roughly 60 basis points from last year's average of 9.2%. Service fees ("points") also decreased, from an average of 1.4% of loan value a year ago to 1.2% and 1.1% of value for new and refinanced loans.

Unlike last year, it seems that many borrowers are taking advantage of low interest rates by refinancing outstanding mortgages on rent stabilized buildings. Whereas less than a quarter of respondents to the 1993 Mortgage Survey reported significant levels of refinancing, nearly half (10) of the 22 respondents to this year's survey that refinance mortgages reported significant levels of refinancing activity. The chart Percentage of Fixed Rate Mortgages Refinanced to Lower Rates below shows that the proportion of fixed rate mortgages refinanced at lower rates has tripled over the past year, from an average of roughly 8% in 1993 to 23% in the most current survey.

Such levels of refinancing represent a sharp change from a year ago, when few rent stabilized landlords were able to refinance mortgages, primarily due to low property values. A possible explanation for the recent upturn in refinancing may lie in the fact that many lenders are seeking higher returns than are currently offered by government bonds, and are willing to refinance well maintained and managed rent stabilized buildings in strategic locations(1). Given respective yields on 3 month and 10 year Treasury Bonds of 3.1% and 6.1%, such behavior on the part of lenders is not surprising, particularly since default has slackened, underwriting standards are generally more conservative and the metropolitan economy seems to be recovering.

This relatively optimistic outlook is also reflected in changes in loan volume, loan approvals and underwriting standards. Nearly half (43%) of respondents to the 1994 Mortgage Survey reported significant increases in the volume of permanent mortgages made to rent stabilized properties. This differs dramatically from the past two years, when only 20% and 11% of responding lenders claimed increased volume. Likewise, the proportion of institutions reporting either stagnant or decreased loan volume has also decreased from 80% of total respondents in 1992 and 89% last year to 57% of responding institutions in 1994, as show in the chart Change in Loan Volume, 1992-1994.

Increased loan volume cannot be firmly linked to changes in either loan approvals or underwriting criteria. Three lenders (13%) in this year's survey reported significant change in their approval rates for mortgages to rent stabilized buildings, while four respondents (17%) changed their underwriting standards over the past year. All lenders in the latter group increased loan monitoring and used more stringent approval standards. Three institutions decreased the Loan to Value ratios for mortgages written to rent stabilized properties. In two cases, change in approvals coincided with alterations made to underwriting standards. Two-thirds of respondents traced the stimulus for stricter underwriting criteria to increased delinquencies and defaults in recent years, along with greater demand for securitized rent stabilized mortgages and the general improvement of the metropolitan economy.

Further evidence of improvement in the rent stabilized lending market is provided by responses to questions concerning non-performing loans and foreclosure proceedings. Over the past year, the average percentage of non-performing (delinquent) loans fell from 4% to a current average of 3%. Among six institutions participating in both the 1993 and 1994 Mortgage Surveys, one third claimed decreased non-performance while half witnessed no change over the year. Likewise, one quarter of all respondents in both the 1992 and 1993 Mortgage Surveys experienced growth in non-performing loans, while only 6% of the lenders in this year's survey witnessed greater levels of non-performance.

Although non-performance among rent stabilized mortgagees appears to be declining, foreclosures have remained stable over the past year. Twenty two institutions responded to questions about foreclosure activity in this year's survey, and only one reported a decrease in the number of foreclosure actions. In contrast, two (out of 19) institutions reported substantial increases in their number of foreclosures in last year's survey. Respondents mainly attributed change in foreclosure rates to shifts in net rental income, operating costs and debt among owners of rent stabilized buildings, although two lenders mentioned the general improvement of the city's economy.

A new section in the 1994 Mortgage Survey explored how lenders ultimately resolved foreclosure proceedings against owners of rent stabilized buildings. Thirteen institutions reported that, on average, nearly half (45%) of all foreclosure actions against rent stabilized buildings ultimately resulted in seizure. Less than one-third of these respondents claimed seizure rates exceeding 80%. The most widely cited alternatives to seizure were debt restructuring and resumption of regular debt service payments, while securing alternative debt service arrangements was less widely reported. Lack of historical data prevents further analysis of this data.

Characteristics of Mortgage-Financed Properties

The development of increasingly cautious lending patterns and stricter underwriting criteria over the past few years has affected the accessibility of mortgage financing to owners of rent stabilized apartment buildings. High demand for new or refinanced mortgages, spurred by historically low interest rates, has allowed lenders to carefully chose where they make loans.

This year, nineteen institutions reported maximum loan-to-value (LTV) standards for new mortgages that averaged 69% of building value. However lenders often do not lend up to this maximum. The most common loan ratio of new mortgages made to rent stabilized properties over the past year is 65%, while the average is 66% of building value. Nine lenders also required the net income of newly mortgaged buildings to be at least 125% of annual debt service payments, orienting their lending towards rent stabilized properties with stable incomes, low maintenance costs as well as few vacancy and collection losses. Despite such standards, more than half of the respondents claimed that vacancy and collection losses for the "typical" rent stabilized property stood at or exceeded 5% of gross income.

See Loan to Value Ratio of Mortgages for Rent Stabilized Buildings, 1994

See Vacancy and Collection Losses Reported by Lenders, Rent Stabilized Properties, 1994

Building size and maintenance also appeared to be important considerations with lenders. Nearly one third of the respondents reported minimum thresholds for building size averaging between 6 and 10 units per building. Lenders tend to underwrite new or refinanced mortgages to rent stabilized buildings averaging between 50-99 units in size.

See Size of Rent Stabilized Buildings Receiving Mortgage Financing

Building location and the potential for conversion to cooperative ownership seemed to be relatively less important to underwriters of rent stabilized buildings. Four respondents reported that they loaned only within the confines of a specific borough, usually the one in which they were based. Significantly, only two institutions reported consideration of the potential for co-op conversion in their guidelines for lending to rent stabilized buildings: one lender claimed such potential was sometimes considered, while the other always considered the possibility.


Notes

  1. Albert Berger, "Multi-Family Mortgage Financing Opens Up'" Real Estate Weekly, November 3, 1993; and Albert Berger, "Mortgage Outlook for Multi-Family Property Improves'" Real Estate Weekly, November 10, 1993.