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.
See Few Respondents Reported Changes in Underwriting
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
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.
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.
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.