A Hidden Problem - The Credit Markets and New York City Coops

What I write here is just a hypothesis. I do not have access to coop data to support this hypothesis nor have I gotten around to doing the research. So it may be completely off base as it is just a hunch. Also for disclosure purposes I do not own shares of a coop. The purpose of the essay is to notify coop boards and share holders of the possible difficulties faced when a coop tries to refinance its mortgage, and the ramifications of those difficulties including the possibility that coop sales prices decline.

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New York City apartments are classified as rentals, condos or coops. Rentals are easy to understand and condominiums are fairly common across the country so I won't discuss them except to say that it is my understanding that condominium associations are not allowed to have debt. Cooperatives on the other hand are corporations that can issue debt. Often when a building converts from a rental to a coop, the coop will take on mortgage debt to buy the physical assets such as the building and the land. When someone buys a cooperative apartment the individual is buying shares of a corporation. The coop corporation then leases the apartment to the share holder. However the individual who becomes a share holder assumes a liability for his portion of the coop mortgage debt. This mortgage debt is part of the coop monthly maintenance payment that the share holder makes to the coop corporation.

Usually the coop sets up mortgage payments that only pay off the interest and not the principal, so the mortgage never gets paid down but rather is rolled over into a new mortgage. It is possible that many coop share holders are unaware of this mortgage since it is a part of the maintenance payment nor are they aware that the principal does not get paid down. This is not supposed to be problematic though as the coop corporation usually will just refinance the mortgage when it comes due. However in recent weeks when the debt markets have given fits to borrowers such as the Port Authority and the state of Michigan, cooperative associations may be facing larger hurdles to refinance their mortgage debt. I am curious to see if the past relationship in which coop corporations borrowed money fairly easily still holds. Maybe coop corporations will not have any trouble refinancing their mortgage debt. Maybe they will face modestly higher interest rates. Perhaps they will be facing much higher interest rates. Could coops be paying the 20% interest rates that the Port Authority recently paid in the debt markets? In this debt environment anything is possible. I was stunned to see that the Port Authority had to pay 20% to borrow money.

So the question remains, how easy will it be for New York City Coops to refinance their mortgages in the debt markets when they have to roll over their old mortgage from a maturing one into a new one? If a new mortgage can't be issued, will shareholders be forced to immediately come up with the money to pay off the old mortgage? Usually these mortgages are in the millions of dollars so if coop share owners were immediately responsible for their portion of the mortgage, could this add thousands of dollars in bills to each share holder? If each share holder were then burdened with a large one time payment could this cause a flood of coop owners to sell their apartments before hit with this charge? Could this adversely affect New York City coop prices? Since there are thousands of coop buildings in New York City, how many residents could this adversely effect? I heard a stat that excluding rentals 70% of individual apartments in Manhattan are coops. I am not sure coop share owners are aware of the current problems that are occurring in the debt markets and the problems that coop corporations may face when refinancing their mortgages. It is possible that the New York City real estate and particularly New York City cooperatives may not be so insulated from the credit crunch or the housing decline after all.