NCB's young star invests in co-op finance niche.

Edward J. Howe III, senior vice president National Cooperative Bank Company

Refinancing co-op apartment buildings may not inspire in lenders the same level of excitement as say a trophy Manhattan skyscraper, but those few who have established market share have quietly been enjoying a record breaking year. Perhaps none more so than National Cooperative Bank.

Providing roughly half of the money lent to co-ops in 2005, NCB has done about $700 million worth of deals, a figure far above the firm's previous best of $500 million and nearly double what in the past would be considered a banner year.

Because co-op loans are typically not large, that $700 million worth of business necessitated a whopping 450 transactions. In spite of the high volume, NCB's co-op lending operation is amazingly lean and efficient, spearheaded by only a three member team consisting of senior vice presidents Mindy Goldstein and Sheldon Gartenstein, and managing director Edward Howe.

Howe, who joined the firm in early 1990s and is the youngest member of the NCB team, has had a record-breaking year as well, tallying $250 million of the $700 million total himself. Helping his total were a number of unusually large refinancing transactions that he handled in succession this year, including a $29 million first mortgage he executed in June for Kings Village, a 777-unit coop located in Brooklyn. Perhaps his best month, June, saw Howe arrange more than $72 million in loans.

"It's great when you can have a few big transactions like that," Howe said. "We've had an unusually busy pace of large deals however. 2005 has been a huge year."

Many co-ops have been eager to refinance because of the historically low interest rates. But it isn't just the Fed Reserve's actions that have kept rates low for co-ops. Record high real estate values have helped too, Howe indicated.

Most co-ops were formed in the 1980s when buildings were purchased by their residents for a fraction of what they are worth today. Co-ops typically took on long-term mortgages, but as pricing in the real estate market has gone steadily up, the size of those loans have come to constitute a far smaller percentage of what the co-op buildings are worth, meaning also that the risk associated with making such loans has dropped. And lower risk makes for below market interest rates.

"The hot real estate market has been great for co-ops," Howe said. "They can refinance so easily and get a great rate because here you have a cooperative that's taking out a $2 million loan on a building that is easily worth many tens of millions."

Although there are 7,000 co-ops in the city, a relatively small number that grows only by 10-15 per year, Howe doesn't see his business slowing down anytime soon. Because most co-op's were formed in the 80s, the bulk of a typical mortgage on a co-op has usually been paid. All that normally remains are a few million dollars, an amount that many co-ops are now converting into interest only loans or loans with very little principal payment to reduce the debt service payments. Such payments are made by the individual members of the co-op in the form of monthly maintenance fees. Co-op members would rather keep those fees down with low principal payment loans and continue to refinance into the future than take on a standard amortizing loan whose principal payments would raise maintenance charges.

"Co-op owners don't want to pay a higher maintenance charge so they'll refinance again and again," Howe said. "If you pay down both principal and interest, you're going to raise maintenance and that hurts the value of your co-op apartment which is obviously something that co-op owners don't want to do."

Howe said that NCB's efforts at expanding its already dominant presence in the claustrophobic co-op debt market often lead it to "step on its own tail," but bundling co-op debt along with other types of loans has had the effect of sweetening the CMBS bonds the company offers and has helped it expand as a seller to the secondary debt markets. Because coop debt has an excellent loan to value ratio, it earns very high bond ratings that, when packaged with other loans, can help compensate for those with less credit.

"The secondary debt market loves co-op debt because it's so secure," Howe said. "We placed thousands of loans to co-ops and there are virtually no defaults."