Co-op deep freeze begins to thaw.

The ice is started to break up around co-ops. While many co-op owners feel like they are in a bind, efforts by elected officials are starting to gel while bankers and regulators are proposing solutions that can add movement to the market.

For a long time, some owners have felt stuck in their units because bona fide purchasers were being given the run-around by lenders. The banks, meanwhile, have been passing the buck to federal regulators. Actually, the problem has been that they cannot pass the buck -- the co-op loan -- onto a Federal underwriter in the secondary market unless it meets stringent criteria, and therein lies one of the major dilemmas.

Charles Rappaport, president of the Federation of New York Housing Cooperatives said he knows of a co-op in Queens established in the 1920's and the people can't sell and get a loan because it is only an 18-unit co-op. "It's ridiculous," he said.

Barbara Corcoran, president of the Corcoran Group believes the sales atmosphere has dramatically changed in the last few months because of lower interest rates and prices. "It is fueled by people afraid of missing the bottom," she said.

But, she agreed, the stringent rules have affected the salability of the units in a negative way. "It's tremendously hurt the buildings most in need -- the ones with financial problems or high sponsor ownership," she said.

Lenders are also expressing some fear that a building's underlying mortgage will be foreclosed -- as a handful have been -- and they will lose their investment in the unit. Those buildings that have been foreclosed have been few and far between and merely a statistical aberration, but nevertheless, the banks see them as accidents waiting to happen.

A two-year old survey done by the Queens Borough President Claire Schulman found 80 percent of the co-ops to be in good financial health. Her co-op aide, Andrew Kellman, said even with recent workouts, they have not seen any reason to believe the numbers are different now.

Not too long ago, buyers were shocked to learn that banks required 50 percent of the apartments to be owner occupied. Today, because the secondary market has become more cautious, that number has risen under Fannie Mac repurchase-of-loan requirements to between 70 percent and 80 percent with some latitude down to 50 percent. That has been making life for sellers unbearable. Additionally, a co-op cannot have less than three years to run on its underlying mortgage. in effect. a sale that could raise the percentage of owner-occupied apartments cannot take place because not enough are sold already.

"It sounds on the face of it like a Catch-22," observed Thomas White, senior vice president for multi-family activity with Fannie Mae. He noted it is easy to "roll" the loan if the building is in good financial shape, but he has seen cases where a loan is made by the converting lender temporarily to keep it in financial balance, a loan is made on a unit, and by that time the underlying mortgage "is underwater."

Queens Borough President Claire Schulman has been meeting with lenders for the past eight months and held a public hearing. organized by Representative Charles Schumer, for Congressional banking committee members. regulators and lenders in March.

"She received an acknowledgement from regulators that it is an unmet community credit need that needs to be addressed," Kellman said.

White participated in the hearings and, as the day wore on. he noted. the situation became clearer. "koans seemed to be quite available for co-ops that have owner occupancy exceeding 70 percent, fairly decently available for those with 50 percent," he said. "Then it becomes an issue for under 50 percent."

Fannie Mae is now assessing the performance of co-op loans in the risk profile and trying to adopt different approval processes for both blanket and share loans as well as play a more supportive role in those loans that need workouts. "We're meeting with our lender base to get more advice to adapt our programs to be more helpful," White added.

While the conversion lender usually had a financing plan to help the property reach 90 percent sold, "something went awry," White explained, "so at some point there is a fundamental problem [with the building.] The difficulty for a secondary lender is that we set down categorical rules. We are not on the street and can't analyze every loan."

While Freddie Mac no longer purchases co-op loans, a representative told the Queens Borough President last week that they will be getting back into the market. But Kellman said it will be a slow process. "We're not sure how effective it's going to be," sighed Kellman.

The Borough President has also lobbied Albany with busloads of people to sway the legislators to enact seven measures that would in part, develop some protections for future conversions by increasing the sales requirement to 25 percent from the current 15 percent, and raise minimum sponsor net worth.

One bill would give co-ops a superior lien for maintenance. and another gives resident owners control of boards within two years instead of the current five. Other measures would give owners a private right of action against sponsors; require sponsors to post security guaranteeing financial obligations for three years; and correct all hazardous violations prior to closing.

Additionally, the Mortgage Bankers Association New York President Mark Iannone has developed other legislation that would break some of the impasse.

Shulman has also met with the SONYMA chief executive officer, John Martinez, who is also executive director of the New York State Housing Finance Agency. They provide mortgage insurance for underlying mortgages where there is a minimum of 25 percent rehab involved. SONYMA also provides end loans with low down payments. The loans are pooled together and SONYMA sells bonds. Kellman said since SONYMA works with the insurance companies to establish criteria for the loans, they are looking at ways to make this financing more accessible.

Another sales stumbling block has been something called pro rata that takes into account the share of the underlying mortgage of the building, as well as a particular apartment's share allocation and value.

According to mortgage broker Sari Rosenberg, president of Circle Mortgage Brokers, the pro rata formula is derived by taking the underlying mortgage, dividing it by the total number of shares, multiplying by the shares for that particular unit and dividing by the value of the apartment.

"It could come out to 20 percent, which is good, or it could come out to 50 percent, which isn't," she said. "Chase, for instance, has a pro rata of 40 percent, whereas someone like Williamsburg won't look at something with a pro rata of more than 25 percent."

Pro rata kicks in, for instance, when you buy an apartment at $50,000, explained Home Savings of America's Nicholas M. Papajohn, and then request a loan for $40,000. There is another liability, however, and that is for the underlying mortgage.

If the unit's share of the underlying mortgage is $30,000, then the purchaser really owes $70,000. "What if the value of the apartment drops and someone forecloses on the building?," the senior conventional loan consultant asked.

Then he says, the unit might not be able to be sold for $70,000, which is really the amount of the bank's obligation. "We are going through a deterio-rating market," Papajohn observed. "Pro rata is never an issue when prices are rising."

If it is a portfolio loan that Papajohn would be keeping in-house "on a shelf," and not reselling to Fannie Mac, then he says the situation is looked at differently. There are occasions, he said, where Home Savings will make loans over its 35 percent pro rata figure. "It's not unusual to make a loan with a pro rata at 50 percent," he said. "We want to make loans but not bad loans."

"The banks don't have the ability to keep a lot of these loans in portfolio," agreed Kellman. "Without a secondary market it makes it difficult."

As a mortgage broker, Rosenberg said she is often able to overcome some of the financial stumbling blocks. "We know so many lenders that we are able to identify what the problem is and place the loan with a person who will not consider the problem," she explained. Most lenders, she believes, will take the whole picture in a general view.

She admitted a high pro rata is a difficult problem to overcome, but in many cases, such as with buildings with a block of sponsor units on the market, arrangements can be made. "When no one wants to finance them what we do is develop end-loan commitments," she explained.

Then Rosenberg will find a lender to put up several million dollars specifically for loans to purchasers of those units. Rosenberg is already working with Louise Sunshine for buildings that The Sunshine Group represents and said she can work with boards to pre-qualify a building.

Papajohn said Home Savings won't prequalify buildings. "We don't know what the purchase price will be," he noted.

Some managing agents have been overwhelmed with bank forms to fill out for prospective purchasers. Papajohn said they have established files on buildings they have "done well in," but some managing agents are charging $200 to fill out the forms and take four weeks to send them back, fouling the loan turnaround time.

Appraiser Dominic Zagaroli of the Greenpoint Savings Bank noted at a Westchester Cooperative and Condominium Advisory Council meeting that another obstacle has been that there are few sales to use for comparables or to make the market. "A 150-unit building with seven sales is appraisal heaven," he said. "There just haven't been that number of sales." Sellers are also complaining that bank appraisers are counting the estate sale and the forced relocation in computing their unit's true value. "That's the market," Zagaroli said.

At the same meeting, Marie Louise Handal, senior mortgage representative with Apple Bank in Scarsdale said the portfolio lenders are more flexible. She will balance a higher income person with the building "off the guidelines." she explained, and can contest the credit report with procedures to ask for exceptions prior to the loan.

"I want to make loans," insisted Papajohn, who was also a speaker at the Westchester meeting. "I want to make people's dreams come true but people are out there lending money and they want to get repaid. There are limits to the exceptions but we want to get the market going."