Cooperative refinancing: the trend is amortization.

The trend today in the refinancing of underlying mortgages for New York City cooperatives has radically changed as compared with the past decade.

In the heyday of the 1980s, when real estate values escalated "as you slept," the margin of equity continued to grow with standing interest-only mortgages. The attitude of the time was to purchase a co-op as a starter home, to hold on to it for a couple of years and then to sell it for a large capital gain. As part of that plan, buyers wanted to keep expenses at a minimum. Therefore, paying off the building mortgage was not even a consideration.

However, with the downturn in the real estate market in the later part of the 1980s and early 1990s, co-ops became harder to sell. The equity which built up during that tumultuous time no longer existed. And while the housing market has experienced a resurgence, co-op owners have been confronted with the hard fact that the value of the co-op today may still be less than what they paid for it. Even in cases where the individual unit has appreciated somewhat in value, the gain is not enough to justify a sale in order to "move-up" to something that is larger and more expensive.

As a result, many co-op dwellers are holding onto their residences longer than their original intent. And with long-term ownership, coops are now finding it to their benefit to fully amortize the underlying mortgage.

New Perspective Among Financing Sources

Favorable interest rates are further supporting the trend for amortization. In fact, very often the debt service with amortization on a refinanced mortgage is comparable to previous expenses with an interest-only mortgage.

At the same time, banks today also have a different perspective than they did in the 1980s. During that time, the banks felt there was less risk because real estate values continued to rise even though the mortgage principal was not being paid down. Today, however, although money is very much available, banks prefer to see at least some amortization when setting terms on new mortgages.

Several years ago, when money was tight, co-ops had a difficult time securing financing. Often, sponsors owned large numbers of apartments in their buildings, and if a properly was more than 35 percent sponsor-owned, few lending sources were available.

Today, however, banks are starting to become more liberal, and heavily-sponsored buildings are finding more financing available. One reason is that the sponsors often have positive cash flow from rising rental incomes versus their share of the maintenance obligation. This has resulted in banks becoming less nervous about the possibility of a sponsor default.

Of course, the old rules of location still apply. It is much easier to finance an underlying mortgage in a better location than in a secondary area. And given an adequate loan-to-value ratio, banks will loan more money in a better area, because there is less risk.

Individual Unit Financing is Still Tight

While the real estate market and the overall economy have improved, the high level of foreclosures and the problems of many sponsors earlier in this decade are still effecting individual unit sales efforts and refinancing. When appraisers analyze the comps of a building, any financial problems in the recent history of the building will impact their final appraisal. Distressed sponsors that sold off units at "fire sale" prices, or individual units that were bought back by co-ops in foreclosure situations, can still have adverse effects when an appraiser considers them as a valid comparable.

Additionally, even with the improvement in the real estate market, many apartments are still selling below the sales levels of the mid-80s. The lower valued unit prices also negatively impact individual refinancing efforts, and many share-owners are finding the balance of their mortgage to be higher than the current apartment value.

Within the last 18 months, however, the sales market has improved substantially. Overall values of cooperative buildings are increasing as are individual unit shares. Immediately, this has contributed to a positive financing environment. Ultimately, if the real estate market continues its upward path, we are projecting an even better financing atmosphere for cooperatives during 1997, and improved opportunities for refinancing on an individual unit basis.

(Robert Harwood is a principal shareholder of Century Operating Corporation. Founded in 1971, the company has been a leading New York cooperative and condominium property management firm for 25 years. The firm's portfolio includes more than 60 buildings throughout New York City and Long Island.)