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Luxury seal of approval

This government body was created to make home ownership available to low-income Americans. So why is it providing low-interest mortgages to Manhattan apartments?

Expensive apartments with panoramic views of the Brooklyn Bridge have become more attractive with government-assisted loans.
Expensive apartments with panoramic views of the Brooklyn Bridge have become more attractive with government-assisted loans.

Whitney Gollinger, the marketing chief for a Manhattan condo building with an outdoor movie theatre and panoramic city views, is highlighting a different amenity to spur sales: the financial backing of the federal government. The Federal Housing Administration (FHA) agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 per cent in a building where apartments are listed at US$820,000 (Dh3.35 million) to $3 million.

"It's a government seal of approval," said Mr Gollinger, a director at the Developments Group of New York-based brokerage Prudential Douglas Elliman Real Estate. "We need as many sales tools as we can have these days, and it's one more tool." The FHA, created in 1934 to make home ownership attainable for low-to-moderate income Americans, is now providing a lifeline to new Manhattan luxury condominiums after sales stalled.

Buildings featuring pet spas, concierges and rooftop lounges are applying for agency backing to unlock bank financing for purchasers. The FHA guarantees that if a homebuyer defaults on his mortgage, the agency will pay it. At least nine Manhattan condo developments south of 96th Street have sought approval for FHA backing since the agency loosened its financing rules in December, according to a database of applications maintained by the US Department of Housing and Urban Development.

The change allows the FHA to insure loans in new projects where only 30 per cent of units are under contract, down from at least 50 per cent. About 1,900 apartments in New York's most expensive neighbourhoods would be covered by the applications. The agency also offers insurance to half of all mortgages in a single building after previously setting a limit at 30 per cent, according to the new standards, which expire in December.

The entire property must be approved for a buyer to get backing. The FHA is filling a void left after mortgage-finance agency Fannie Mae tightened its condo lending standards last year. The Washington-based company won't back loans made in new buildings where fewer than 51 per cent of the units are in contract, sometimes setting a requirement as high as 70 per cent. That in turn makes mortgage lenders hesitant to make loans at developments under those thresholds, said Orest Tomaselli, chief executive officer of White Plains, New York-based National Condo Advisors LLC, which advises condominiums on how to adhere to Fannie Mae and FHA standards.

"It's not an accident that the FHA is offering this - not private lenders," said Christopher Mayer, senior vice dean at Columbia Business School's Paul Milstein Center for Real Estate in New York. "An unfilled condominium complex is not the kind of thing that a bank looking to rebuild its balance sheet on real estate is looking to do." In New York City, the priciest urban US housing market, the FHA insures loans of as much as $729,750, and permits buyers to borrow up to 96.5 per cent of the price.

No buildings in Manhattan applied for FHA recognition between 1998 and 2008 - though in those years the programme didn't require an entire property be approved and condo buyers could seek FHA-insured loans on their own, Mr Tomaselli said. New development in Manhattan represented 23 per cent of the sales market in the second quarter, compared with 35 per cent two years earlier, according to New York appraiser Miller Samuel Inc. About 8,700 new apartments in the borough were empty as of June, partly because of a lack of available financing for buyers, said Jonathan Miller, president of the firm.

"Something has to happen for this product to be marketable," Mr Miller said. "I just find the whole thing ironic that FHA is providing financing for luxury housing." The FHA loosened the condo rules because of "market conditions," according to Lemar Wooley, an agency spokesman. "We are certainly cognizant of falling sales prices, limited availability of liquidity, etc, so we wanted to be flexible," Mr Wooley wrote in an e-mail. "The risk was considered before issuance of the temporary guidance."

The new rules are a "game changer", said Ryan Serhant, vice president at Nest Seekers International, a brokerage with offices in New York and Florida. He's marketing 99 John Deco Lofts, a 442-unit conversion project in downtown Manhattan that features a "zen" flower garden and Brooklyn Bridge views. The development, where sales began more than two years ago, had 10 units go into contract with FHA backing since approval in March. The FHA suspended its support for the building on August 3, according to the agency website. The property is working to have it reinstated.

Angela Ferrara, who markets the Sheffield condos on West 57th Street, checks every day whether the 597-unit property, which applied to the FHA in May, has won approval. Mr Ferrara, vice president of sales for New York-based Marketing Directors Inc, said she is eager to start touting the FHA backing to potential buyers. That's a reversal from the past, when government loan programmes weren't necessary - or advertised.

"People would get the wrong idea, and think it was a different type of government-subsidised product," Mr Ferrara said. "It was almost regarded as a negative, particularly in the luxury properties." Now, she said "it's actually became a widely accepted marketing tool". The Sheffield's owner, New York-based Fortress Investment Group LLC, took over the condo conversion project in foreclosure last August after the original developer, Kent Swig, defaulted on a loan.

The FHA is "definitely a great solution right now", said Mr Tomaselli of National Condo Advisors, which prepared the FHA applications for Tempo and Sheffield. "The savvy developers did it first," Mr Tomaselli said. "But everybody else is catching up." * Reuters