Although New Jersey housing cooperatives may be rare compared to the numbers of co-ops in New York City, suburban co-ops face the same types of issues as their big-city neighbors. One of the primary concerns of nearly all co-ops is the building's underlying mortgage, which is paid for by shareholders as part of their monthly maintenance fee. Sometimes, special circumstances arise that require the board to take another look at the co-op's mortgage. For example, major expenses for essential repairs or improvements might necessitate refinancing or taking out a second mortgage. But one size doesn't fit all in such cases and different mortgage products and loan structures present various financial options for cooperatives.
Mortgages Then … and Now
Although mortgages of one kind or another have been in existence for hundreds of years, various products have come into existence only in the last couple of decades, and most of them have been tied to the overall economic climate.
"Mortgages have dramatically changed in the past 10 years, when treasury rates came down to historic lows," says Steven Geller, director of the Co-op Select department at Meridian Capital Group in Manhattan. "Before 1998, most banks loaned money on their portfolios, basically investing part of their depositors and investors funds. The interest rate was set based on treasuries, but not tied directly to them."
"When the 10-year T-bill dropped and dropped to the low three percent range, banks became wary of loaning long-term money at low rates," Geller continues. "Lenders started securitizing their mortgages - essentially making several loans, putting them together in a pool and selling the pool to an institutional investor. The banks would sell the loans; recover all of the money loaned, plus an additional fee for their effort. Then they would put that money back out into the market, pool and sell them again."
According to Geller, the interest rates on securitized loans were more competitive because of supply and demand for these pools and because there was less added risk that would drive up the rate on longer-term loans. "The market set the spreads, and these securitized lenders had to compete, driving the rates down further. That's where we are today," he says. Geller points out that the past few months have seen added scrutiny of loans that are sold in pools.