Community Board 1 (CB1) is calling upon elected officials to intercede on behalf of condominiums and cooperatives, where the economic downtown triggered by the pandemic coronavirus has resulted in distressed finances.
In a resolution enacted at the Board’s March 23 meeting, CB1 notes that single-family homeowners are amply protected by last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act, federal legislation that requires “forbearance” for up to 180 days (and renewable for an additional 180 days) from making payments on mortgages overseen by the two primary federal home lending clearinghouses–the Federal National Mortgage Association (“Fannie-Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie-Mac”).
But the same law contains few protections for condominiums or cooperatives, which are the primary forms of home ownership in Lower Manhattan, and in many urban areas around the United States.
In particular, there are financial challenges faced by buildings comprised of owner-occupied apartments that have no precise analogue to either single-family homes or rental apartment buildings. Fannie-Mae and Freddie-Mac impose unique “Qualified Lending Requirements” on such dwellings, with rules governing how many apartments within a building may be owned by a single entity, such as the sponsor. The federal mortgage overseers also scrutinize the balance sheets of such buildings, demanding that they meet thresholds for cash on hand, to fund both capital and operating budgets. These are known as “warrantability” thresholds.
In ordinary times, these issues rarely become obstacles to buying or selling homes within residential towers. But during the pandemic-induced recession, more buildings have run afoul of these regulations, which makes apartments within them out-of-bounds for federally guaranteed mortgages. That, in turn, means that many banks will not offer loans on such dwellings. (It is still possible to obtain a mortgage without a federal guarantee, but it is more difficult, expensive and time consuming, and usually comes with less attractive terms than one sanctioned by Fannie-Mae and Freddie-Mac.)
This dilemma is particularly acute for cooperatives, where it is common for the building’s budget to be funded, at least in part, by “flip taxes”—a levy imposed by the building whenever a unit is sold, consisting of a fixed percentage of the apartment’s price.
As the pace of sales have slowed, and the prices for those transactions that are consummated have trended dramatically lower, the revenue generated for cooperatives by flip taxes has plummeted. At the same time, both cooperatives and condominiums have seen an uptick in delinquencies on common charges, further constricting their cash flow.
The CB1 resolution notes that, “if left unchecked, the precipitous drop in revenues supporting co-op and condo buildings’ operating budgets could lead to a ‘death spiral,’ in which the lack of mortgage availability further dampens demand, which leads to a larger sales-related income deficit for coops or condos, pushing them further out of compliance with Fannie Mae and Freddie Mac requirements, which places additional constraints on mortgages.”
The same measure calls for elected officials to enact a three-point plan to alleviate these challenges. First, CB1 wants, “our elected officials to work at the federal, state, and local levels to provide regulatory relief where appropriate by relaxing prohibitions or requirements… that govern co-ops or condos in terms of budget flexibility.”
Second, the Board wants, “our congressional delegation [to] pass legislation to address financial shortfalls not currently provided for in the Cares Act, so that there is parity between single family homeowners and those who collectively contribute to the success of… a cooperative or condominium.”
And finally, the resolution calls upon elected officials, “to prevail upon Fannie Mae and Freddie Mac, for the duration of the pandemic, to modify Warrantability requirements, so as not to penalize residential units for sale in buildings that fail Warrantability requirements for reasons that are specifically attributable to the temporary economic effects of the pandemic.”
Matthew Fenton
