| VERTICAL
UPDATE
High-Rise News & Updates
for Las Vegas
| High Finance: Lending
in the World of Residential High-Rise |
by: Brenda Calvin,
The Calvin Group, LLC
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 Financing
of a residential high-rise unit is a very different animal
than single-family homes, and in light of the recent mortgage
debacle, how do we go forward? This month I had a chance to
speak with one of Las Vegas’ most respected high-rise
lenders, Matt Hennessy, branch manager of Citigroup’s
National Builder Division. We discussed this and other high-rise-related
topics.
New Construction
When do you close on a high-rise unit? As we know from the
old cliché, timing is everything. The short answer
is that it depends on how the purchase contract is written.
In most cases, it is based on obtaining the Certificate of
Occupancy from the authorized governmental entity (usually
the City or County). This is only after the general contractor
has met all of the criteria of the various property inspections
to determine the habitability of the property. This includes
inspections by the building department, fire department, health
department, etc. This process sometimes takes much longer
than anticipated. In Las Vegas the inspectors are extremely
busy with all of the new construction. In the last building
where I sold on-site, the inspectors were so busy that in
order to accelerate the process, the inspections actually
took place after normal work hours. And yes, the general contractor
was required to pay overtime for the inspectors!
This affects the high-rise
buyer because they may have already sold their home in order
to be ready to close on the property and move in. In some
cases, I have had buyers living in hotels simply waiting on
the infamous certificate.
From a lending perspective,
it is common practice to lock into an interest rate within
30 to 90 days prior to closing. “While a client may
opt for an extended lock of up to two years in advance, it
may be a costly risk that can be avoided through proper education
of market conditions,” says Matt.
 Most
lenders require an upfront refundable locking fee be paid
when a client wishes to lock into an interest rate for longer
than a year. A great feature to this option is that if the
interest rates drop during the construction phase, a client
can float down to that lower interest rate one time at no
cost. This feature is especially important in a rising interest
rate market. If the client closes with that same lender, they
will receive that upfront fee back at the closing table. In
the event the lock expires due to the closing date being extended
or if the client wishes to change lenders at the last minute,
they risk losing their locking fee and interest rate. It is
always suggested to have an in-depth consultation with a trusted
mortgage professional prior to making any lock decisions.
 Any
way you look at it, new construction is tricky as far as timing.
“I begin to educate the clients from day one about every
aspect of the lending process,” says Matt. “I
caution that many times the projects are delayed. When we
are within approximately 90 days out from the projected completion,
I am in constant communication with the developer, contractor
and sales team for a more detailed timeframe. I update the
clients with this information so that together, a good decision
can be made as to when to lock in the interest rate. Of course,
this is also based on my anticipation of the direction interest
rates are headed.” Matt has handled the mortgage financing
at many of the existing projects, and he has been the preferred
lender for new construction buildings such as Metropolis and
Panorama Towers.
I asked Matt how financing
a high-rise unit differs from financing a single-family home.
“Getting it warranted through the FNMA (Fannie Mae)
process [is one difference],” he says. “In fact,
there are no more FNMA approvals as of August 31, 2007. This
change is the first step in Fannie Mae's plan to fully delegate
the project review and acceptance process for a condominium,
cooperative, and planned unit development (PUD) to lenders.
Each lender involved in a high-rise project must warrant the
property themselves through an internal project-approval process.”
 This
is no easy feat; this process is very time-consuming. The
accuracy of the paperwork is critical because this is the
means for which the loans can be sold as mortgage-backed securities
in the secondary market—as bonds. This project-approval
process was simply a necessary step to warrant that the project
is available to safely sell its mortgages into the secondary
market.
Some lenders hold the loans in-house or
“portfolio” the loans; meaning that they do not
sell them on the secondary market. These are usually large
institutions and private banks. As Citigroup is the largest
financial institution in the world, I asked Matt how this
works.
“Under normal circumstances when a loan officer closes
a loan for a client, that loan is then packaged alongside,
say, 1,000 other similar loans,” he says. “That
mortgage company/bank then sells these packaged loans to investors
on Wall Street in the form of mortgage-backed securities,
or bonds. When a mortgage company has a loan product that
no investors on Wall Street wish to purchase—i.e., too
risky for investors—that bank may have to hold that
loan on their own books. Large banks have the funds available
to portfolio certain products. Thus, they have the ability
to make a creative loan program available where they aren’t
under the restrictions of Wall Street investors. In the end,
it is important to note that it is more profitable for the
bank to sell their loans off in the secondary market as this
eliminates the need to tie up their own funds.”
Resales
“Lending on resales in the high-rise community is pretty
straightforward, yet the loan officer still has to pay close
attention to the project approval issue,” says Matt.
Prior to August 31, 2007, lenders simply looked up the Fannie
Mae project-approval status on the particular high-rise to
make sure they could lend on it. Now, with the changes at
Fannie Mae, it appears as if each lender has to submit an
internal project approval within their company prior to closing.
The lender can also try closing the loan as a non-warrantable
condominium. Unfortunately, this usually results in a slightly
higher interest rate and perhaps tighter loan guidelines.
Time will tell as to how the changes from Fannie Mae will
impact the lending community as a whole.
 The
New Era of Full-Disclosure Loans
Ironically, one thing in this life that we can all count on
is change. The more that we can expect it and embrace it,
the better we deal with the changes that come our way. With
the recent changes in the capital markets, the lending process
has changed somewhat. I asked Matt to describe how it has
changed his business.
“Over the next 90
days, there will be a newly defined set of rules for lending.
This upheaval that we’re experiencing today is simply
a knee-jerk reaction to the problem. [Banks] are scared, as
they perceive certain mortgage loans as risky. They have determined
that certain loan programs have made it very difficult for
borrowers to maintain their payments, resulting in nationwide
defaults and foreclosures. This means that the larger financial
institutions are now more hesitant to loan money to smaller
mortgage bankers/brokers. As a result, the short-term financing
needed for these companies to fund loans is quickly disappearing.
“In the long run,
these changes get us back to reality. For the time being,
lenders will have to return to the frame of mind that borrowers
will need to provide proper documentation to qualify for the
loan they are applying for. I look forward to a more level
playing field where each lender responsibly places their clients
into loans that best fit their short- and long-term financial
goals. The government is going to step in to better regulate
the mortgage industry. This regulation will make sure that
mortgage lenders who make loans to clients verify that they
can make their mortgage payments today and in the future.”
Until next month,
here’s wishing you “elevated sales”!
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Brenda
Calvin is the Broker of The Calvin Group, LLC, and has
a 20-year successful track record of selling high-rise
and mid-rise condominiums in multiple states. The Calvin
Group is a boutique brokerage specializing the innovative
sales, marketing and developer consulting of residential
high-rise properties. To contact Brenda, you may phone
(702) 939-5638 or e-mail Brenda@TheCalvinGroup.com.
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