Perhaps some clairity on why Coops and LLC are not a mortgable entity
From: Rob Sandelin (floriferousmsn.com)
Date: Sun, 7 May 2006 13:56:36 -0700 (PDT)
After reading my previous post on this topic I realized I was assuming a lot
of prior knowledge.  So, to the basic points of the lending process. 

When you build a cohousing devleopment all at once, you get a construction
loan to cover the costs of the construction, minus the upfront planning
costs that you have already paid. Once you have completed building your
community, you need to convert your construction loan to mortgages. The vast
majority of lending for mortgages is done between a lender and a home buyer,
it is an individual contract that you sign which you agree to pay a certain
amount over a period of time. During the mortgage time period, the bank
technically owns your home, and after 15-30 years you pay off the loan, then
the title transfers back to you. If the individual owner can not pay their
mortgage the bank forecloses on the home, and resells it, thus getting their
money back. Condominiums are the most common format for cohousing private
home ownership which banks fund. 

 In a coop or LLC ownership, the bank signs a contract with a legal entity
for the mortgages of ALL the units. The entity is responsible to make the
payment each month for ALL of the units. If an individual owner goes
bankrupt and can not pay their mortgage, the group must make up the
difference to cover the unpaid mortgage share or EVERYBODY loses their home
as the bank would foreclose on the entire project, not just the individual
unit.  Obviously banks do not want to foreclose, and especially on an entire
30 unit development so they write in all kinds of clauses and such into the
group mortgage, the most common being exorbitant interest on unpayed
balances. An LLC as a mortgage owner also complicates things because,
depending on state definition, LLC's can have many of the protections of a
Corporation, which would complicate banks abilities to foreclose. 

With any given lender there are loan specialists who scrutinize loans for
several factors which favor the banks. A clear foreclosure/resale path is a
key element loan executives consider when examining loan applications. Is
the property worth what it is being loaned, can that money be recovered
easily and quickly should the loan default? Selling an invidivially owned
unit in a development is pretty straight forward. Selling an entire
development, is much less attractive.

In order to have money to lend, banks bundle up and resell their loans to
other financial groups which is often called the secondary loan market. This
frees up captial for them to be able to make more loans. FannyMae is a
federal/private banking partnership that creates loan markets and makes the
federal rules for the reselling of loans.  Loans which are unique or held by
individual banks and not resold are called portfolio loans. The federal
government, in response to the savings and loans disasters of the 1980's
placed severe restrictions on the percentage of portfolio loans that banks
insured under FDIC can hold. Last I heard, 1.5% of the banks holdings is all
that can be held as portfolio loans. Portfolio loans are often very
diversified in order to spread risk and return. One of the largest local
banks in Washington State, Washington Mutual, limits their portfolio loans
to $500,000 each, and it takes the personal approval of the Exec Vice
President of the company. 

So the bottom line of all this: banks are usually unable to take on coop
loans, and even coop loan speciality banks have upper limit amount
restrictions. Last I heard, the National Coop Bank only will lend up to $3.5
million dollars. Since most cohousing projects are much more costly than
that, it requires finding other funding sources. LLC's are used as ownership
entities for construction loans and the contract for the construction loan
requires the loan to resolve into individual mortgages. 

What you philosophically want to do as a coop is support a cooperative
ownership model that is inline with your cooperative  ideals as a community.
Unfortunately, in the State of Washington, and many western states, local
lenders are not willing to loan coops the kind of capital a 30 or more unit
housing project needs. There are many smaller coops, the largest I know of
personally here is 12 units, which came in under $2 million dollars. 


Rob Sandelin
Naturalist, Writer
The Environmental Science School
http://www.nonprofitpages.com/nica/SVE.htm
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