Until a couple of years ago, most mortgage bankers in Southern California--and every place else in the country outside New York--wouldn't even consider making mortgage-type "share loans" to people buying into stock cooperatives.
The lenders didn't understand co-op apartments and didn't want to learn, so the buyers usually had to ask the sellers to carry the loans.
Now, however, Jacques Warshauer, a mortgage banker with Capital Services Group in Long Beach, is looking for co-ops in Southern California where buyers might qualify for share loans. So far he's found a surprising number--everything from parts of Leisure World to 17-unit buildings in central Los Angeles--and he's gradually signing them up.
Why are at least some lenders changing their minds about co-op share loans? The biggest reason is that Fannie Mae, the Federal National Mortgage Assn., is using its clout to open up co-op financing in much the same way it legitimized condominium financing in the '70s--through the creation of a secondary market for the loans and standardization of the loan instruments.
Stimulus to Co-ops
Fannie Mae claims that its actions have served as the biggest stimulus to co-op housing since the FHA's Section 213 program, aimed at developing middle-income co-ops, was enacted in 1950.
Warshauer and his firm are the local representatives for Share Loan Service Corp., a new lending entity set up by the National Cooperative Bank.
"The same types of questions put to condominiums (by reluctant lenders) in their early years are being asked of cooperative share loans today," says Beth Marcus, a senior product manager for Fannie Mae in Washington. "And the answer is the same: establish national appraisal, underwriting and legal standards."
Although both offer ownership, usually in a multifamily setting, co-ops are not the same as condominiums. Instead of individually owning their units, co-op tenants purchase shares in a corporation that owns the building. This ar gives co-op residents greater control over who lives in their building and, co-op advocates say, also gives the residents a strong sense of community.
Surprised by Number
Mortgage experts at the National Cooperative Bank and Fannie Mae say they've been surprised at the number of co-ops they've found in the United States. Marcus estimates about 600,000 units.
Tax laws also provide co-ops with a number of breaks that can make them more affordable than condos. Because an entire building is sold together, rather than split up into individual ownerships, developers can pay capital gains rather than income tax on the sale.
Co-ops pay lower transfer and property taxes because they are assessed as rental units. And when a rental building is converted to a cooperative, an old blanket mortgage can often be assumed by the co-op corporation.
Marcus says Fannie Mae decided to set up a secondary mortgage market for co-op share loans because it was one of the few significant segments of the housing market that the organization was not serving.
Lenders Not Involved
Although some mortgage bankers occasionally dabbled in the co-op market, she says, "by far, the majority were not offering any co-op financing. And the majority did not offer any variety or flexibility."
Warshauer says this was particularly true in Southern California. "As long as you can market all the conventional loans you want, why get involved?" he adds.
Although there are 55 share-loan lenders approved by Fannie Mae around the country, the only one working on a nationwide basis is Share Loan Service Corp., which is partly owned by the National Cooperative Bank.
It targeted a few markets around the country where experts believed many co-ops already existed: Manhattan, Chicago, Washington, Michigan (Ann Arbor), South Florida and California. Shekar Narasimham, a senior executive of Share Loan Service Corp. says the firm has identified about 55 co-ops in the Bay Area and about 25 in Southern California, including in Encino, Long Beach, Westminster, Anaheim and Oceanside.
"California has been the toughest," Narasimham says--partly because this state, unlike most others, regards co-op shares as real property that must be approved by the Department of Real Estate. But, he adds, "We think California has great potential."
The approval process is complicated. Each individual co-op must first sign an agreement with Fannie Mae before any individual buyer can obtain a share loan. But experts say that Fannie Mae is responsive, and that motivated co-ops can wend their way through this approval maze in as little as 60 days.
Marcus says that because Fannie Mae buys co-op share loans as part of its normal commitments with lenders, she cannot estimate how many the organization has bought so far. And she adds that the outcome of a Boston legal case--in which the Boston Five Cents Savings Bank is challenging HUD's conversion of a rental building to cooperatives--may go a long way toward determining the number of co-op conversions in the next few years.
But she says Fannie Mae is in the co-op game to stay. "We will do co-op business in every state," she predicts. "Now that cooperative legal and finance tools are in place, more and more lenders, developers and buyers are recognizing the benefits."