[Congressional Record Volume 141, Number 123 (Thursday, July 27, 1995)]
[Extensions of Remarks]
[Pages E1524-E1525]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                      STABILIZING THE CO-OP MARKET

                                 ______


                       HON. ROBERT G. TORRICELLI

                             of new jersey

                    in the house of representatives

                        Wednesday, July 26, 1995
  Mr. TORRICELLI. Mr. Speaker, last fall, Jim Johnson, chairman of the 
Federal National Mortgage Association also known as Fannie Mae, came to 
New Jersey to join me in announcing an innovative co-op initiative that 
has helped countless Northern New Jersey families preserve the value of 
their co-op-apartment homes in a sagging co-op market. The initiative 
was modeled after a similar plan that was extremely successful in New 
York which my colleague Representative Charles Schumer and Queens 
Borough president Claire Schulman announced with Fannie Mae almost 2 
years ago.
  The reason the initiative works so well is that it allows co-op 
buyers to increase the portion of their mortgage payment which goes to 
pay for the underlying or blanket mortgage on the co-op building 
itself.
  The challenge that co-op buyers faced in my district is that from 
1989, when the housing market virtually collapsed, to 1993 the resale 
value of co-ops in Bergen and Hudson Counties, as in most of the State, 
declined by as much as 40 percent. That caused the pro-rata share--the 
share of the underlying co-op building mortgage--to exceed 30 percent 
of 

[[Page E 1525]]
the total mortgage payment. In the view of most mortgage lenders, a co-
op mortgage with a pro-rata share greater than 30 percent of the total 
mortgage amount was viewed as too risky. This, in turn, meant that it 
was difficult to get a mortgage on a co-op apartment unit. 
Consequently, resale values of co-ops fell even further because few 
people could get loans to buy them. Families, who had counted on rising 
property values, were beginning to discover they owed more on their co-
op apartments than they were actually worth.
  This is where Fannie Mae stepped in and made a difference. A 
congressionally chartered, private company, Fannie Mae purchases loans 
made by lending institutions and combines them with other such loans in 
pools that are sold to investors--and therefore influences the 
underwriting standards used by lenders. By altering the standards on 
these loans, Fannie Mae made it easier to buy co-op apartments in 
buildings carrying a relatively higher level of debt in relation to 
market value.
  Previously, end loans--mortgages for co-op unit owners--would be 
granted only when the unit's proportionate share of the underlying 
mortgage on the building was no more than 30 percent of the buyer's 
debt burden--the total of the underlying debt and the end loan itself.
  I am pleased to say that by working together with Fannie Mae, we have 
been able to bring more lenders into the marketplace and made it easier 
for shareholders to refinance their individual loans or further a sale.
  For many people, these co-ops represent a good portion of their 
savings. We need to help them preserve this investment, and while 
Fannie Mae's initiative is not a cure-all it has helped to stabilize 
the co-op market, increase the competition among co-op lenders and loan 
rates.
  I would like all of my colleagues to know how much I appreciate 
Fannie Mae's responsiveness and flexibility on this issue. Fannie Mae 
is a unique institution with a unique mission--to help low- and 
moderate-income families buy homes. From my own experience, Fannie Mae 
takes this mission seriously and does not hesitate to step up to bat 
when they are needed.
  Mr. Speaker I would like to submit the attached article by Rachelle 
Garbarine from the June, 23, New York Times.
     More Enter Field after Fannie Mae Relaxes Mortgage Guidelines

                        (By Rachelle Garbarine)

       The sign in one window of the Chemical New Jersey bank 
     branch in Fort Lee reads: ``We have co-op loans.''
       On the face of it that may seem surprising given the fact 
     that nearly one-third of the states's 27,000 co-op units are 
     in Bergen County, and most of them are in Fort Lee.
       But the reality is that until recently there were just two 
     lenders offering potential unit owners mortgages for co-ops 
     in Northern New Jersey. That along with restrictive bank 
     rules on co-op mortgages adopted largely because of the 
     excesses in the co-op market in the 80's and local banks lack 
     of knowledge of the market made it difficult for prospective 
     buyers to get such financing.
       Mortages for unit owners are know as ``end loans.'' They 
     are different form the co-op's underlying mortgage which is 
     the building-wide loan that is repaid from a portion of the 
     monthly maintenance fees shareholders pay to the corporation. 
     While financing for these loans is tight there are 
     considerably more lenders available.
       Now Chemical is one of nine lenders from banks to mortgage 
     companies offering end loans. And recently the National 
     Cooperative Bank with offices in New York and Washington has 
     also entered the scene to finance underlying mortgages.
       A key element in the banks return to offering end loans was 
     a program begun last October by the Federal National Mortgage 
     Association or Fannie Mae. Fannie Mae a Congressionally 
     chartered company purchases loans made by lending 
     institutions and combines them with other such loans in pools 
     that are sold to investors--and therefore strongly influences 
     the underwriting standards used by lenders. Altering the 
     standards on these loans, Fannie Mae made it easier to buy 
     apartments in buildings carrying a relatively higher level of 
     debt in relation to market value.
       Previously, end loans would be granted only when the unit's 
     proportionate share of the underlying mortgage on the 
     building was no more than 30 percent of the buyer's debt 
     burden--the total of the underlying debt and the end loan 
     itself. Thus, if the underlying dept was $15,000, the buyer 
     could get a loan to purchase a $35,000 unit ($15,000 being 30 
     percent of the combined $50,000 debt). Under the new 
     standard, even if the
      underlying debt has risen to $18,500 the buyer can still get 
     a $35,000 sale price ($18,900 is 35 percent of a total 
     $54,000 debt).
       The result is that the sales market has apartments in 
     buildings with a higher debt burden in relation to market 
     value should improve. That in turn should raise prices and 
     make it still easier to get loans.
       Last year Representative Robert G. Torricelli, Democrat of 
     Hackensack, taking a cue from New York City elected 
     officials, became a force in getting Fannie Mae to ease its 
     standards on purchasing the end loans. That in turn has 
     brought more lenders into the marketplace and made it easier 
     for shareholders to refinance their individual loans or 
     further a sale.
       The underwriting revisions were designed to meet the needs 
     of the 12,000 co-op unit shareholders in Mr. Torricelli's 
     district, which includes parts of Bergen and Hudson Counties, 
     and help investigate the sluggish co-op market. Fannie Mae 
     said it would apply the North Jersey standards to 
     shareholders across the state on a case-by-case basis and has 
     waived the $100 project review fee assessed to co-op 
     corporations.
       Before the change ``people were prisoners in their homes,'' 
     said Philip Goldberg, a spokesman for Representative 
     Torricelli.
       ``For many people these co-ops represent a good portion of 
     their savings,'' Mr. Torricelli said in a statement. ``We 
     needed to help them preserve this investment.''
       This was not the first time that Fannie May had eased its 
     policies in response to co-op problems in the New York areas. 
     In 1993 New York City officials, notably Queens Borough 
     President Claire Schulman and Representative Charles E. 
     Schumer, Democratic of Brooklyn, sought help in resolving 
     some issues, chiefly the proportion of units that must be 
     owner occupied. That October Fannie May liberalized its 
     guidelines for co-op lending in the city.
       Important changes include the reduction of the required 
     percentage of units sold to owner occupants to 51 percent 
     from 80 percent, counting sublets as owner-occupied units and 
     increasing the pro-rata share from 30 to as much as 40 
     percent.
       In New Jersey, which did not have the same level of sponsor 
     defaults as in New York City or the same difficulty in owner-
     occupancy levels, the problem was the pro-rata share issue.
       From 1989, when the housing market collapsed, to 1993 the 
     resale value of co-ops in Bergen and Hudson Counties, as in 
     most of the state, declined by as much as 40 percent. That 
     caused the pro-rata share to exceed the 30 percent limit. 
     Buyers couldn't buy and sellers couldn't sell, further 
     depressing the market and value of units, said Fred Heller, 
     president of the co-op board at the 235-unit Century Tower on 
     Parker Avenue.
       ``The bigger the bargain the more all cash buyers were 
     needed to buy the units,'' said Randy Ketive a partner at 
     Oppler-Ketive Realtors in Fort Lee, which specializes in co-
     ops. ``Most everyone else was locked out of the market 
     because they couldn't get loans.'' That led Mrs. Ketive, Mr. 
     Heller and Lou Verde, a Fort Lee real estate lawyer who 
     represents the 270-unit Northbridge Park Co-op, to let 
     Representative Torricelli know of their concerns.
       In October, Fannie Mae announced the New Jersey Co-op 
     Program.
       To participate in the program, eligible co-ops, among other 
     things, must have 80 percent of its units owner-occupied and 
     no more than 10 percent of its owners more than a month 
     behind on the monthly payment. But Fannie Mae says that 
     exceptions will be considered on a case-by-case basis.
       While all those involved in the co-op problem acknowledge 
     that the program is not a panacea, they say it is a good 
     start and will make it easier to buy and sell in the future. 
     As sales increase, prices will also adjust, said Mrs. Ketive.
       This has clearly not yet happened. In the first six months 
     of this year 99 co-ops were sold in Bergen County, compared 
     to 101 for the same period last year. According to he Bergen 
     County Multiple Listing Service.
       But Mr. Heller said that he pro-rata share problem at his 
     building had disappeared. And Mrs. Ketive, who called the 
     program ``a shot in the arm,'' said it had helped remove many 
     of the inexpensive units from the market. She added that 
     prices are not stabilized.
       Two-bedroom units in high-end co-ops, depending on size and 
     location, cost $100,000 to $450,000 in Bergen County and 
     $75,000 to $300,000 in Mudson County, Mrs. Ketive said. Those 
     priced from $80,000 to $150,000 are most in demand, but there 
     is an oversupply of studios and one-bedrooms, she added.
       The changes have also drawn more lenders into the market 
     and the competition has made mortgage rates more competitive.
       Chemical has been offering share loans in New Jersey since 
     late last year. ``If not for the changes we could not have 
     been able to sell the loans on the secondary market and that 
     would have increased the risk on our loan portfolio,'' said 
     Robert Brown, vice president of residential mortgages at 
     Chemical Bank New Jersey with offices in Princeton and Fort 
     Lee. ``We see Fort Lee as a rich market,'' he said, adding 
     that his bank had made 10 loans a month there.
       Even in recent years, Dale Mortgage Corporation had 
     continued offering co-op end loans. Marc Sovelove, vice 
     president at Dale in Fairfield said through May his company 
     did 50 end loans in New Jersey up from 31 from the same month 
     last year. ``There are still other deterrents, but we see 
     opportunities in the market,'' he said.
       The program is also important because an active market for 
     share loans returns liquidity to the markets and makes 
     lenders of underlying mortgages more secure.
       Since the start of the year the New York office of the 
     National Cooperative Bank has refinanced the underlying loans 
     on two co-op buildings in Fort Lee and is working on a third 
     in East Orange, said Paulette Bonanno, vice president at the 
     at the bank.
       ``The deals out there are now easier to make,'' said 
     Charles Oppier of Oppier-Ketive Realtors. But, he added, the 
     market, still hampered by buyer uncertainties over the 
     economy and job security, now has to catch up with the 
     program.
     

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