Maintenance Payment Delinquencies - Condo vs Coop

If there is a default on the underlying mortgage, the lender could foreclose on the co-op and your shares are worth nada.

Many co-ops defaulted on their underlying mortgages in the 70s. I believe other recessions have seen similar things happen. I would not be surprised to see the same thing happen over the next several years.

As to the other question I'll leave it to someone more knowledgeable than I.

When co-ops defaulted on their underlying mortgages in the 70's, what did the unit owners do?

There was much discussion of this on a recent thread. I believe that in a coop, before foreclosure, the corporation could essentially gain possession of the apartments and sell them to satisfy arrears. In a condo, the condo corporation cannot gain possession of the defaulting units--the bank would get the units and the condo would be a subordinate creditor making the situation more out of the condo's control and, IMO, more fraught with risk.

In other words, if I understand this correctly, the coop can take bold, aggressive action if need be. A condo is left suing a bunch of potentially absent and judgment proof individual owners.

What happens AFTER a default on the building mortgage? Don't know...anyone care to weigh in on what happens to shareholders in a coop and owners in a condo?

One thing to remember re defaults in the 70s: much has changed since then and what happened then may not be a useful guide to what would happen now. (Laws could have changed, etc.)

kyle, so, let me see, if a sponsor is not paying her maintenance, the co-op can evict her tenants, repossess the shares from the sponsor and sell them? Or does the co-op just repossess the shares and sell the shares as occupied units to a new sponsor? In condos, there is no underlying mortgage, so their is risk of defaulted operating expenses only, no risk of building foreclosure.

About quarter of the residences at our coop is currently delinquent (Most are clearly making an effort to pay whenever they can while others haven't paid at all in months). They tend to be larger units, too, which seriously affects our cash flow. Also, a couple of these delinquent residents haven't been seen by our doormen in months. We wonder whether they intend to ever come back.

johnnyjai, from what other board members tell me, huge assessments went in place to avoid foreclosure first. The next step would have been to sell the sponsor units quickly (i.e., below market) to come up w/ cash--which would have caused the property values at our bldg. to plunge. Luckily, our bldg. didn't have to resort to that.

I guess we are still waiting for someone truly knowledgeable in this area to explain what happens to the residents in worst case scenarios.

See this from the NYT from 1987: http://query.nytimes.com/gst/fullpage.html?res=9B0DE4DA133BF93BA15755C0A961948260

Recognize that in the intervening 21 years things may have changed. Consult a lawyer, etc.

"About quarter of the residences at our coop is currently delinquent (Most are clearly making an effort to pay whenever they can while others haven't paid at all in months). They tend to be larger units, too, which seriously affects our cash flow. Also, a couple of these delinquent residents haven't been seen by our doormen in months. We wonder whether they intend to ever come back"

Is this a Manhattan co-op?

Do tell...

nyc212: Sorry to hear about your building. Can you tell us if it is a newer development?

kyle, just because I ask you a couple of questions to clarify your point doesn't mean I don't understand basic housing finance. Co-ops can be lost to foreclosure of the underlying mortgage. Check this story:

http://query.nytimes.com/gst/fullpage.html?res=9B0DE4DA133BF93BA15755C0A961948260&scp=3&sq=cooperative%20foreclosure&st=cse

"Earlier this year, when the payments fell several months behind, the bank initiated steps to foreclose its $480,000 loan - making the Orlee one of the few co-ops to face auction in New York City since the Depression."

"If the co-op fails in its efforts to refinance the loan, the property would be sold to the highest bidder and co-op owners would become rental tenants. After the proceeds of the sale had been disbursed, the former apartment owners would still be personally liable for the remaining balance of their own loans."

no, I don't think co-ops are inherently less risky than condos.

PMG, you didn't read me right. Wasn't being at all critical. Just wanting a plain answer from someone to all issues raised here by you and others.

"About quarter of the residences at our coop is currently delinquent (Most are clearly making an effort to pay whenever they can while others haven't paid at all in months). They tend to be larger units, too, which seriously affects our cash flow."

Thats rough, and I have started several threads addressing that very issue. The broker types (and pro nazi-esq board types) refuse to admit its possible for their precious coop to face financial difficulties. I think what you just pointed out is proof positive that MANY coops/condos (mostly coops) will be up against challenges.

In order to fix the problem a few things need to happen. First, the INSANE requirements need to be immediately dropped for coop purchases, or even subleases. When 25% of the tenants of your building arent making their payments, offending potential new tenants (ie. people with MONEY) is a terrible idea and will only dig the building further into debt. Coop boards will need to stip away all but the most essential qualifications for all potential tenats (both buy and sublease). The board will need to get its head of of its rear and look at the following information ONLY:

1) Can the person afford the monthly payments (check bank account)
2) Does the person have good credit to ensure monthlies (check credit report)
3) Does the person have money to pay if they lose their job (again, bank account will tell you this)

THATS IT, NOTHING MORE IS NEEDED!

Back in the go-go days, coop boards got so full of themselves that they actually enjoyed turning people away. In this economy, asking people the make and model of their car, or requiring references from the college you went to, or asking the value of life insurance policy is an INSULT. Get with the times, or your building will go belley up!

A co-op has the ability to repossess the shares and sell them as a block. They cannot negate legal leases. The new owner may not necessarily be a sponsor but a holder of unsold shares. An astute co-op board will not wait until the sponsor nears default. If the unit(s) are unoccupied the board has the option of paying the maintenance until the units are sold. Defaulting on the mortgage depends on the how large the reserve fund and the rents due if any.

Hi. It is an established (?) "luxury" midtown condo-op w/ a large number of European and Korean residents. The Koreans (most of whom are either executives at the US headquarters of Korean corporations, which have been suffering greatly, or children of wealthy Korean families in Korea) were the first to really get desperate last year in our bldg., going delinquent on their maintenance payments. Apparently, the Korean currency is doing terrible against US$, on top of the already-weakened Korean economy which has caused huge job cuts.

We currently have a hefty assessment in place, so we have yet to touch the reserve funds.

Also--thanks, everyone, for not making fun of me for the typos (e.g., "about quarter of...") in my original post. I tend to type really fast w/o proofreading...

UESBandit wrote: "I think what you just pointed out is proof positive that MANY coops/condos (mostly coops) will be up against challenges."

I don't follow your logic UES. How does this one person's tale of woe serve as "proof positive" about what "MANY" others will face? It is a cautionary tale--particularly of reliance on foreign buyers of units that are not primary residences. I understand you may have a negative view of the ways in which boards act, but I don't see how what happened at a single building proves something about thousands of others...? Where's the link in your logic?

Because folks working in finance or dependent on their parents who might have large stock market investments is completely foreign to non-Koreans in Manhattan?

Because folks working in finance or dependent on their parents who might have large stock market investments is completely foreign to non-Koreans in Manhattan?

"I don't follow your logic UES. How does this one person's tale of woe serve as "proof positive" about what "MANY" others will face?"

Kyle,

The situation I am describing wont impact all coops, however it will impact a very large number of them. Those who currently have extremely reasonable boards wont likely see it happen at all, as they can simply backfill the apartments if someone leaves (market allowing of course).

The "we need an original copy of your 1st grade transcript" coops are the ones who are about to get totally NAILED, as nobody will care to go through their process in this economy. They will find themselves sitting on a moutain of debt and (when the building goes bankrupt) the apartments will be sold and turned into condos (what irony!).

I get you. I wonder if the more unreasonable boards (50%+ down; twice or more value of apt in assets/cash reserve; etc) will maintain their policies all the way to the coop's grave or will change their ways to preserve their asset if the policies really do begin to cause a build up in a building's inventory and delinquincies or litigations begin to mount and increase costs to coop. Will be interesting to see.

I think the majority of coops though are far more moderate. And while the downturn will impact everyone, those coops that did not sell to foreigners, to parents buying for children, those looking for pied a terres or non-primary residences, will have likely done themselves a favor insofar as at least the problems of those types of shareholders won't be visited upon them.

"I get you. I wonder if the more unreasonable boards (50%+ down; twice or more value of apt in assets/cash reserve; etc) will maintain their policies all the way to the coop's grave or will change their ways to preserve their asset if the policies really do begin to cause a build up in a building's inventory and delinquincies or litigations begin to mount and increase costs to coop. Will be interesting to see. "

They are going to NEED to! I suspect if faced with the options of bankrupcy or lowering their "standards", all but the most snooty coops will conceed defeat. The whole 'high end' coop market is like a house of cards, and each year they added another layer on top of it. Now that house of cards is very big (and tall, and unstable), and I sense a wind starting to blow......

nyc212, sorry to hear about your building. Do you know the financial requirements for these tenants when they applied - i.e. 2 years maintenance & mortgage liquid? And have these changed?

If a tenant/proprietary lessee defaults on maintenance payments on a coop, it's just like a tenant who defaults in a rent payment. The coop can commence a non-payment proceeding in the Civil Court and obtain a possessory judgment and a monetary judgment for the arrears. Upon eviction of the tenant (assuming the tenant does not timely pay the judgment amount), the shares can be resold by the coop at its discretion. The tenant would have claim to the purchase price on the shares minus the coop's expenses and fees.

NYC212 - sorry to hear about your building.

UESbandit - I am not sure I follow your logic. The more selective coops are probably the ones who will handle the downturn the best sicne these are the people who have the most cash (in some cases more than you could ever imagine). Also, it is precisely the coops' selectivity that has allowed them to have buyers with stable work histories, strong financials, 20%+ down, non-exotic mortgages and often 1-2 years of maintenance in escrow. To suggest that coops need to be less selective to deal with a downturn that is, in part, fueled by bad financial decisions by condo owners just doesn't make any sense.

Finally, if someone in a coop defaults on their mortgage the apartment doesn't become a condo. The coops are at the head of the line in a bankruptcy, while the condos are well down the list.

Certainly any building that has not been run well could be in trouble, but I think it would be naive to not expect condos to be at a greater (perhaps much greater) risk. I just don't see how any evidence actually supports what you are suggesting.

There is an underlying mortgage on some co-ops. period. For some, this may be a material additional risk of default in a depression, if for example, the underlying mortgage is large and many shareholders are, or the sponsor is distressed. As was mentioned on prior threads, lenders to co-op owners in default on their maintenance payments may have the motivation to pay on behalf of borrowers to avoid risk of default and loss of the bank's collateral. However, relying on insolvent banks to fund your co-ops' budget is a risk in a depression. To deny this reality if you are a shareholder in such a co-op is to whistle past the graveyard.

PMG - your point is well-taken. It is also important to note that we are not in a depression and the likelihood of that occurring (at least right now) is not very good.

whether we will experience a recession or a depression is openly discussed in the financial pages I read. it is a risk.

"I am not sure I follow your logic. The more selective coops are probably the ones who will handle the downturn the best sicne these are the people who have the most cash (in some cases more than you could ever imagine)."

Waverly, here is the problem with your statement. The most selective coops are typically the ones that are the most expensive. Traditionally, about 95% of the people in NYC who have (lots of) money are/were involved in finance (or real estate). As you might have noticed, that whole industry has imploded leaving people who had millions (billions?) on paper looking for a new jobs. Hence, coops that required tenants have extensive stocks/options as 'insurance' against downturn are now feeling the heat more so than your average coop.

One additional scenario:
When a SH stops paying maintnc, it's likely that the SH also stopped paying their coop loan. So, sometimes, it's a race bet the coop corp & the bank (which holds SH's coop loan) as to who brings a default action first.

And yes, bottom line: if a coop corp defaults on it's underlying mortgage loan, the bank (which held the coop corp's mtg) can foreclose and the coop apts would become rentals & the SHs (former coop apt owners) lose their equity; they could even be evicted. I believe this scenario occurred in the early 1990s & the apts became rent stabilized, so the former coop owners lost their equity & became rent stab Ts.

nyc10022-sorry to hear about yr bld

Winging it here a bit: in a condo, Bd has right of 1st refusal which could enable the condo to buy a defaulted until for non-payment of common charges.

So, again, if a condo Owner isn't paying cc, they're probly not paying the mtg on their unit. So who starts foreclosure 1st? Condo Bd can sue for non pay of CC & bank can begin foreclosure of mtg on the condo unit.

But, in a condo, there's no underlying mtg on the entire building, so in that respect, unit owners are more secure that coop owners.

"Traditionally, about 95% of the people in NYC who have (lots of) money are/were involved in finance (or real estate)."

There is absolutely no evidence to prove this statement. Your argument just doesn;t hold-up because you are making facts up to support it.

"There is absolutely no evidence to prove this statement. Your argument just doesn;t hold-up because you are making facts up to support it."

NYC was/is the economic capital of the US, if not the world. When the financial markets (here in NYC) took a hit it started the global recession. The overwhelming majority of people in NYC who have/had lots of money were involved (directly or indirectly) with finance and Wall Street. Anyone (including you) who attempts to argue otherwise is delusional.

And to clarify, a person struggling to pay off their 600 square foot apartment doent qualify as having "lots of money" (at least from a NYC perspective), even if they paid $1m for the place. I am referring to the people who have $10m (plus) apartments on Park Avenue/5th Avenue/CPW/etc. 95% of THOSE people who hold/held the majority of assets in this city (on paper or otherwise) WERE involved in the financial industry.

Keep in mind that the standard of living here is much higher than it is elsewhere. The person I just described above (paying off $1m mortgage) who currenly lives in a shoebox could live like a KING in many other places. Wealth is relative, depending on who you ask and where they live. In either case however, the REAL wealth of NYC is/was undenialbly centered around Wall Street.

UES, what you're saying is true, but stating that 95% of the population is in the financial industry is a huge exageration.

Yes, a huge chunk of us work in financial svcs, but NYC is also a media capital, advertising, fashion. Not to mention all of those folks who work in local hospitals & universities, some of the best in the world.

"UES, what you're saying is true, but stating that 95% of the population is in the financial industry is a huge exageration."

I never said 95% of the people who live here work in finance. I said that 95% of the WEALTH comes from that industry. This means the people who have/had all the money in this city more than likely had some involvement with Wall Street. The people who do great work in hospital and universities arent buying 5th Avenue Penthouses, and thats my point.

"I am referring to the people who have $10m (plus) apartments on Park Avenue/5th Avenue/CPW/etc. 95% of THOSE people who hold/held the majority of assets in this city (on paper or otherwise) WERE involved in the financial industry."

And your source is.....made up. I would feel quite comfortable estimating that the people in NYC who own $10 million+ apartments are going to get through this downturn without missing their maintenance payments. Is it possible that a few of these people could be hurt and motivated to sell? Of course. Is it far, far more likely that people who bought new construction condo apartments in the $1-3 million range will have financial difficulties? Absolutely. Based on sheer numbers, riskier mortgages, loss of jobs, lack of additional capital, overpriced apartments that have very little equity in them and rising condo charges.

Other than facts you are making up, can you provide any evidence to support your argument? I am not so sure you can.

"Other than facts you are making up, can you provide any evidence to support your argument? I am not so sure you can."

Its undeniable that the vast majority of people living in this city had their wealth tied into Wall Street, I dont need to provide any evidence other than common sense. Look at people like people like Bernie Madoff, he was extremely wealthy but it all was a lie. What about the people who invested millions of their own dollars with him? They are now broke, and in fact two of them have already comitted suicide. While I dont disagree that the top 5% of the super wealthy will weather this storm better than your "average" wealthy person, that doesnt mean peoples assets cant become wortless.

MYC10022
>Because folks working in finance or dependent on their parents
>who might have large stock market investments is completely foreign
>to non-Koreans in Manhattan?

Hi. If you read my post carefully, I attribute the problem to the dramatically weakening Korean currency (whereby, for example, what used to cost Koreans $1M now essentially costs them $2M--on top of the SEVERELY weakening job market in Korea). These are real issues facing Koreans in the U.S., and virtually none of the non-Koreans here are directly affected by this. You've called me a "racist idiot" for something similar previously, and I just wanted to clear the air a bit. Thanks.

"And your source is.....made up. I would feel quite comfortable estimating that the people in NYC who own $10 million+ apartments are going to get through this downturn without missing their maintenance payments."

30% of NYC income last year directly from Wall Street. Source: NYC Budget office. Then add in the indirect. And you think the rest were putting all their money in CDs.

If you really want to pretend the rich aren't incredibly intertwined with the street, then there isn't much else to say.

As noted on another thread, Goldman PARTNERS are getting margin calls these days.

Ive just discovered that someone in my building is nearly a year delinquent on maintenance. How can the coop take the shares if theyre pledged to the bank as collateral for the mortgage?

Its funny how people posting on here think they understand the first thing about the finances or lives of owners of $10MM apartments. Aside from the enormous net worth these individuals generally have, in coops they often have multiples of the cost of the apartment in cash reserves and liquid assets. The rich are indeed different and for those who aren't to attempt to predict the behavior of the super wealthy is folly.

marco_m, it's covered in the recognition agreement and also in the share loan. The co-op's let it go for long enough. Co-op gets first dibs on the proceeds, then the lender, and anything left over goes to the shareholder.

so the coop sells the apartment...recoups the maintenance, then the balnace goes to the leneder and the former owner?

Yes. It takes awhile, though, so best get moving.

Flmaozzzzzz Marco. R u kidding me, you green shoots, shooting squirrels Bren the eye kinda re bull. Hey to keep up appearances why don't you pay that douche's arrears. You do know a foreclosure sales bring down neighbors home 'values' by 33%* well sleep tight in your new $200k 1bdrm.

* I know it's less but, 33% is easier to make marco's coop $200k.

Bren = btwn

MM -- There is no *need* for the coop to foreclose for maintenance arrears IF there is a mortgage. The standard 3-party Aztech Recognition Agreement (cites to sections of version with link below) provides that (if arrears are 3 or more months) A) Coop advises mortgage holder of default, B) lender has option to pay maintenance arrears [Para. 2.c.1], but C) if arrears not cleared Coop can foreclose, and D) has higher priority than lender [Para. 2.e].

In practical terms, this *usually* means that for individual shareholder defaults (as opposed to sponsor bulk defaults) the Coop can be kept whole from a cash flow perspective while a shareholder defaults. Someone with direct experience here may have a different perspective, but my understanding has been that banks prefer to call the shots about whether/when to foreclose, so they will keep the Coop happy by paying maintenance to avoid the Coop instituting foreclosure to recover what is usually a trivial amount compared to the loan balance.

So if your coop has a 12+ month arrears, the coop has either not exercised a remedy it has, or has no rights (because there is no mortgage). If there is no bank ready or able to cure the maintenance default there is a dicey neighbor-to-neighbor issue (foreclose on neighbor in distress, or not?? some shareholders would prefer not to, even if they have to carry a defaulting shareholder), but the rights are clear.

This is one of the subtle differences between coops and condos, one that I would term an advantage for other coop shareholders. If a condo owner defaults on CCs, (I believe) the condo has to wait for the bank to foreclose *and* is lower in priority to the lender, so probably doesn't get repaid. A typical coop shareholder maintenance default *should* be covered by the bank and, if foreclosed on, the coop gets paid before the bank.

Here is a standard Aztech: http://www.americanlandservices.com/legal/Miscellaneous/Aztech%20Recognition%20Agreement.doc

Oh, and don't forget to consult a lawyer ;-)

the coop is in good shape so Im thinkin we should just buy the place and split up the shares amongst the shareholders. will have to discuss with the prez.

Hhahahahaaaaaaa. So a friendly coop board unwilling to foreclose is a better re structure than a clean foreclosure action. And seriously, at my WYC. Rule #1. We r part of the club Bc we can all pay the monthlies.
Rule#2. C rule 1.

FLMAOzzzzz. Did I just read Marco correctly? Ya wanna buy more nyc re? Can't imagine if you were the coop prez, I'd have to sell my coop immediately. Flmaozzzzzzzz. Why not pay over ask on all the other units that a bound to go up in value? Don't limit yourself just to your building. Just suck that receive rigt up!!!!! Go Marco go.

Damn phone. Reserve right up.

"the coop is in good shape so Im thinkin we should just buy the place and split up the shares amongst the shareholders. will have to discuss with the prez."

And then what? Time-share the apartment?

Hey nycmatt. Got my eye on yOu

These dead beats probably bought the place as a pied a terre - obviously never felt the appropriate sense of communal spirit and brotherhood.

Or these "dead beats" could have lost their jobs in the latter part of 2008 and are still among the 15 million unemployed.

i think he might mean something else, nycmatt

w67, it doesn't have to be him. see how easy it is to make it look like i'm him? there's a real red troll scare here. everyone's a god damn commie troll until proven otherwise.

My quess is banks are now diligent in paying arreared coop maintenance. Sometime in the 1990's
Citibank sued a Coop which had sold its collateral without notifying the bank or letting the bank
cure under its Aztech Recognition Agreement, and lost. Price was $12,000 for Manhattan coop.