Sunday, July 13, 2008

Boards reject Wall Streeters

July 13, 2008
Rich, but Rejected
By CHRISTINE HAUGHNEY
http://www.nytimes.com/2008/07/13/realestate/13cover.html

ALMOST overnight, investment bankers and others on Wall Street have gone from being Manhattan’s most aggressive apartment buyers to real estate pariahs.

As financial services companies continue to cut jobs and bleed billions of dollars, their employees have far less cash to spend on high-priced apartments, and very little optimism about taking a risk right now anyway.

Those in the financial industry who still want to buy real estate are often unable to persuade lenders and co-op boards to work with them.

The biggest problem is that buyers who work on Wall Street no longer have the guarantee of huge bonuses to bolster their financial status. And even those who continue to get bonuses are finding that banks and co-ops will not let them count all that money as part of their income, because unlike a salary, it can fluctuate wildly.

Workers in financial services-related businesses make up roughly 25 to 30 percent of Manhattan buyers, according to estimates by Halstead Property. Although some lenders and building boards are accepting these buyers after tightening requirements, others are becoming far more interested in buyers outside the financial industry.

“They’re looking for people who have stable incomes that are not so market dependent,” said Melissa Cohn, the president of the Manhattan Mortgage Company, who has noticed the changing standards regarding bonuses in the last month.

Lenders, she said, fear that “bonus levels won’t be the same in 2009 as they were in 2008” and will no longer take any risks.

The problems facing buyers from Wall Street won’t necessarily cause Manhattan apartment prices to slide drastically, said Diane M. Ramirez, the president of Halstead Property, though they could result in slightly less competition for properties and prompt more sellers to negotiate.

Buyers who work in finance are having trouble with both co-ops and condominiums. Some co-op boards are rejecting bankers even when they appear to be financially qualified, or they are demanding as a condition of approval that many months of maintenance payments be provided upfront.

Tighter home mortgage standards are also affecting some condo sales.

In the past, Wall Street workers would count most or all of their year-end bonuses to qualify for mortgages, often borrowing amounts that covered 90 percent or even 100 percent of the purchase price of high-end condos. Now, some lenders allow buyers to count just a third of their bonus. A banker who qualified for a $3.75 million mortgage a year ago based on a $250,000 salary and a $1 million bonus now qualifies for only a $1.8 million mortgage with the same salary and bonus.

At the same time, some lenders are demanding 25 percent down, rather than just 10 percent. Thus, a banker who went to contract on a $4 million apartment a year ago with a $400,000 down payment now has to come up with $600,000 more to close the deal.

The bonus situation is expected to get worse before it gets better. Alan Johnson, the managing director of Johnson Associates, a company that tracks compensation data, said that Wall Street bonuses are projected to be 30 to 40 percent lower in 2008 than in 2007. “It’s going to be the toughest year in at least five years,” he said.

He predicts that bonuses will not pick up until 2010.

The buying habits of bankers also matter more during this slowdown because the financial services industry has become a larger percentage of the city’s economy than ever before.

Rick Wohlfarth, a Manhattan real estate broker for three decades, said that during the economic slowdown of the late 1980s, fewer people had Wall Street jobs and he could count on a more diverse pool of buyers.

Now, his firm’s 18 agents are advising 60 clients who work in finance and are struggling to buy or sell apartments when market conditions have turned against them.

“This downturn is more profound because it has hit the largest customer base we’ve had,” he said.

The slowdown in sales, however, has not yet hurt Manhattan apartment prices. Data released earlier this month show that while the number of transactions fell, the average apartment sales price of $1.6 million is a third higher than a year ago, according to Halstead. These numbers have risen mainly because of high prices for brand-new condos at 15 Central Park West and the converted Plaza Hotel.

While many bankers and other Wall Street workers interviewed for this article would not speak for the record because they feared being laid off or jeopardizing their severance packages, their lawyers, real estate brokers and mortgage brokers said they were struggling with shrinking bank balances and new buying standards that in some cases might mean they could lose apartments they had already signed contracts to buy.

Peter Graubard, a real estate lawyer, said that about 5 percent of his firm’s clients were struggling to get financing on apartments that they decided to buy a year ago, when the buildings were still under construction.

One couple, who both work in finance, put down a $250,000 payment for a $2.5 million condo at the Element at 555 West 59th Street. Then they lost their jobs. Even though the husband found a new job, the lenders won’t give the couple a mortgage because their salary total has dropped and they depend on bonus income.

By the July 7 deadline, the couple had not found a lender willing to give them a mortgage. So they sent a letter to the developer that day asking for more time, the ability to assign the contract to another buyer before closing or the option to buy a less expensive apartment in the building.

Other buyers are simply backing out of deals. Josh Guberman, the chief executive of the Core Development Group, found that bankers had been his most active buyers on his five condo projects in the last decade. But in the last three months, four bankers have backed out while negotiating contracts at his buildings at 157 East 84th Street and 433 East 74th Street because they were worried about the financial markets or couldn’t get mortgages they wanted.

Mr. Guberman said the most striking case involved a buyer who had signed a contract and paid about $20,000 in architecture and engineering fees before backing out of a $5.7 million apartment at the building on 84th Street. His deposit was returned.

“Our base of clients for years was always the finance guys,” Mr. Guberman said. “They were the guys who stepped up.”

Mr. Guberman has now started educating buyers about changing lending standards well before going to contract. He tells them not to expect to include their bonus income when qualifying for mortgages. He also advises them that lenders will require them to make 25 percent down payments, supply 12 months of financial and bank statements and four to five years of tax returns. (He previously told clients they needed three months of documents and two years of tax returns.)

Other bankers are trying to stay away from deals that require co-op board approval. Chris Poore, a broker for the Corcoran Group, recently worked with a banker who bid on an $800,000 co-op and had the offer accepted. But the banker withdrew the offer when he heard that co-ops were tightening requirements and not factoring bonus income into deals, and instead bought a sponsor unit co-op that didn’t require board approval.

In some cases, co-ops are rejecting bankers outright.

Felix Nihamin, a real estate lawyer, recently advised a couple who work in finance and who tried to buy a $740,000 co-op on East 77th Street. While the husband and wife felt their jobs were safe, they took steps to ensure board approval. They put down 20 percent of the purchase price, offered a parent with a multimillion-dollar net worth as a guarantor and offered to pay extra maintenance costs upfront. Under these terms, a lender approved them for a $560,000 mortgage. But the co-op board rejected them before even meeting with them.

“Everything else was perfect,” Mr. Nihamin said. “The board did not like that they received the chunk of their income from bonuses.”

Michele Kleier, the president of Gumley Haft Kleier, recently represented a woman buying a three-bedroom co-op on the Upper East Side. At the time, the financial company that employed the woman had suffered so badly from the subprime mortgage crisis that she did not receive a bonus for 2007.

The co-op board asked her for seven years of tax returns and detailed references showing how much she was valued at her firm. After the review, the board accepted her. She moved in late in the spring, and soon after, obtained a higher-paying job at another company.

“They took a risk on her and said that they thought she was very bright,” Ms. Kleier said. “She wasn’t somebody they thought was just lucky.”

Amy Herman, a Halstead broker, recently prepared one client who works for a top bank for his board interview for a one-bedroom prewar co-op in the East 70s.

In addition to providing salary and bonus information, her client gathered numbers about how many people had been laid off from his bank, how the firm’s layoff numbers compared with other major banks’ numbers and how his division had performed. He also assured the board that he wouldn’t go to business school and take on student loan debt or try to sublet the apartment.

Ms. Herman said one thing in his favor was that his career in finance was short enough and his salary low enough that his bank still paid him in cash and not company stock. So the board accepted him and he moved in last month.

Ms. Herman fears that some bankers may not be willing to work so hard to impress boards.

“It’s a really fine line,” she said. “If they do start hunkering down and go to an extreme toward people in the financial world, you’re going to absolutely see a decline in prices. That’s one out of every three buyers that you’re going to be eliminating or giving a hard time.”

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