1995 Mortgage Survey

Section 26-510(b)(iii) of the Rent Stabilization Law requires 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 obligation, RGB staff conduct an annual survey of financial institutions which underwrite mortgages to multi-family properties in New York City. The findings of the 1995 Mortgage Survey follow.

Summary

During the Savings and Loan Crisis of the early 1990s, financial institutions tightened their lending criteria for multi-family mortgages or ceased financing rent stabilized buildings. The multi-family loan market began to loosen in 1992 and continued to improve throughout 1993. Loan volumes soared and financial institutions increased their levels of loan approvals. Additionally, landlords took advantage of the lowest interest rates in over a decade by refinancing their mortgages.

This Mortgage Survey revealed additional changes in the multi-family lending market during 1994. Most notably, interest rates rebounded by 1.5% over the previous year, to reach a three-year high of 10.1%. This marks the first time in six years that interest rates increased from year to year, which partially explains why refinancing activity dropped sharply in 1994.

See Interest Rates Rise for the First Time in Six Years

Although interest rates increased, the mortgage financing market improved in other respects. For example, lenders slightly increased the volume of loans they underwrote during 1994. Further, lenders did not tighten their underwriting standards as they have in previous years, perhaps in response to the steady decline in delinquent and defaulted loans since 1993.

Survey Respondents

Thirty of the fifty-one financial institutions surveyed responded to the 1995 Mortgage Survey. However, ten lenders were not able to complete the survey for one of several reasons. Four lenders merged with other institutions, four left the multi-family lending market or are currently not lending to rent stabilized buildings, and two did not have information available to respond to the survey. Thus, 39% of those surveyed returned completed questionnaires. Twelve of this year's respondents also completed last year's Mortgage Survey, allowing us to make valuable comparisons for these institutions from last year to this year.

See Few Respondents Reported Changes in Underwriting

Financing Availability and Terms

For the first time since 1989, interest rates increased for multi-family mortgages. This is partly due to the Federal Reserve Board's strong anti-inflationary policy throughout 1994. The Federal Reserve raised interest rates six times beginning in February, by a total of 2.5 percentage points, in its effort to slow the rapidly expanding economy.[1] The average interest rates reported in the 1995 Mortgage Survey are 10.1% for both new and refinanced permanent mortgages. This represents an increase of 150 basis points from last year's average of 8.6%, which was the lowest interest rate since the early 1980s.

Points, terms, and types of mortgages are roughly the same for new and refinanced mortgages and remain relatively unchanged since a year ago. Points range from 1 to 3 and average roughly 1.25 for both new and refinanced mortgages. The terms range from 2 to 30 years, with the most common being 5 years. Slightly more than half of respondents offer fixed mortgages, with the remainder offering adjustable or ballon mortgages.

Lenders reported very little refinancing activity during 1994, probably due to the 1.5% increase in interest rates. Although most respondents did not know how many properties they refinanced last year, only 11% of respondents (two of eighteen) refinanced a portion of their fixed- or adjustable-rate mortgage portfolios. This level of refinancing represents a sharp change from a year ago when 42% of respondents (ten of twenty-four) indicated a significant portion of their fixed- or adjustable-rate mortgages were refinanced to lower rates.

The volume of loans underwritten by financial institutions increased during the previous year, despite the large increase in interest rates. About half of the institutions responding to the loan volume questions experienced no change in loan volume. However, the average percent increase in loan volume (among those reporting a change) was slightly higher than the percent decrease; thus, the results represent an overall improvement in the mortgage lending market for borrowers. The institutions with significant changes in loan volume reported that they were responding to a shift in the number of applications, not to the increase in interest rates.

See Refinancing Activity

Underwriting Criteria

Since 1993 the number of lenders tightening their underwriting standards has steadily declined. Past Mortgage Surveys revealed that most lenders had developed increasingly cautious lending criteria in response to higher delinquencies and default rates by landlords and to general economic conditions. In 1992, 50% of respondents had implemented tighter lending practices. The proportion was also about half in 1993 but dropped remarkably to 15% and 10%, respectively, for 1994 and 1995. This could be the result of fewer delinquencies and defaults in recent years stemming from tightened standards that lenders implemented previously.

Through 1994, lenders had reduced loan-to-value ratios for three straight years. This year, lenders reported their average loan-to-value (LTV) standard increased from 69% to 70% of building value. This modest increase in LTV is another favorable indication that the standards for mortgage financing may be loosening.

Non-Performing Loans and Foreclosures

Rent Guidelines Board Mortgage Surveys show that the large number of delinquent or defaulted loans that occurred during the recession are declining. In 1992 and 1993, 25% of respondents indicated an increase in non-performing loans. Only 4 percent of lenders reported an increase in 1994. In 1995, for the first time, some lenders reported a decline in delinquencies, while the remainder reported no change. Three lenders cited a decrease in non-performing loans that averaged 60%. This improvement may be due, in part, to the large amount of refinancing activity in 1993.

Six of the institutions provided responses to 1994 and 1995 survey questions regarding non-performance. All six institutions reported similar or lower non-performance rates.

While nearly all financial institutions reported no change in the number of foreclosure proceedings in 1993 and 1994, this year's survey results are more encouraging. A third of the respondents reported a decrease in foreclosure activity. Of these, two indicated that this category decreased 100%, and another indicated on both the 1994 and 1995 surveys that its foreclosure proceedings decreased a significant amount.

Similar to last year, the most common reasons cited for non-performing loans were changes in debt obligations, operating costs, and rent collections. There were not enough responses to the comparable question on foreclosure proceedings to analyze the results.

Respondents were also asked how they resolved the foreclosure actions they initiated against rent stabilized buildings with delinquent loans. Several lenders indicated that their course of action depended upon the particular circumstances. In most cases, lenders seized the property. Widely cited alternatives were resumption of regular debt service, restructuring the debt, arranging financing with another financial institution, or assigning the non-performing buildings to a third party. These results are similar to responses provided by lenders last year.

Characteristics of Rent Stabilized Buildings

The maximum loan-to-value (LTV) standards for new mortgages increased moderately to an average of 70% of building value. This is the first increase in LTV in several years. However, lenders often do not lend up to this maximum. The most common and the average LTV for new mortgages over the past year were 65% of the building's value. Slightly more than half of the lenders also required the net income of newly mortgaged buildings to be at least 125% of annual debt service payments - the same as last year.

Typical vacancy losses remained relatively high, averaging 4.6%. Three-quarters of respondents reported that their vacancy rates are 5% or higher. This may be another indication that lenders are loosening their underwriting standards.

See Typical Vacancy Losses Remain 5% or Higher

This is the second year the Mortgage Survey included questions regarding the importance of other factors such as building size, location, and age in determining loan approvals. Similar to last year, the 1995 Mortgage Survey revealed that most lenders consider building maintenance when assessing loan applications. Eighty-five percent of respondents consider maintenance, while 30% consider building size, which is typically 50-99 units. Ten percent of respondents consider building age, location, and the potential of co-operative or condominium conversion. Only 5% consider whether the borrower lives in the building.

Notes

  1. Robert D. Hershey Jr., " Greenspan Gives Strong Impression Rates Will Climb." New York Times, January 26, 1995.