2008 TIC Lending Update
2008 has been a tumultuous year for the mortgage industry. What started out as a "subprime" crisis has now spread to all types of mortgages, including those intended for well-qualified borrowers. It's now harder to qualify for a loan and many loan programs and lenders have disappeared. The good news is that fractional TIC loans have escaped relatively unscathed. They are still available at rates and terms similar to what was in place before the crisis hit. In addition, larger FHA loans have been introduced making them, for the first time, a viable option for group financing for TIC's.
Currently, there are least six lenders consistently offering fractional TIC loans to the Bay Area market. These include a new lender, National Cooperative Bank, which began making TIC loans this year. Because it lends on co-ops in New York, fractional financing for TIC's was a natural extension of its business. (Like TIC financing, co-op loans are made against an interest in a multi-unit property.) Aside from the main TIC lenders, a few local banks have also provided fractional financing on a limited basis for select borrowers and properties.
Rates for fractional loans have remained stable this year or, in some cases, declined. Most lenders are still charging an origination fee of 1% (one point) for each loan and requiring a prepayment penalty during the first few years of the loan. Minimum down payments vary across lenders and range from 10% to 30%. (You'll probably pay a higher rate and face tighter qualification requirements if you have less than a 25% down payment.) Limits on building size begin at 8 units and go to 12 units, although some lenders have provided financing on larger projects.
Sales of TIC's in San Francisco have grown steadily over the last few years. In large part, the increase can be attributed to the wider acceptance and availability of fractional TIC loans. TIC sales for 2005-2007 are shown in the graph below.
What's interesting to note is that during 2007 not only did the overall number of sold units increase, but so did the percentage of units sold in 5+ unit buildings. Units sold in projects with five or more units made up over 40% of all TIC's sold . This is because lenders categorize buildings with over four units as commercial property. Decent group loans have never been available for commercial properties held as TIC's. This makes fractional loans the best option. The growth in sales of TIC units in buildings with 5 or more units has been propelled by the wider availability and acceptance of fractional loans.
Group financing for TIC's has traditionally come from jumbo mortgages. A jumbo mortgage is any loan larger than the following amounts: 1 unit property $417,000, 2 units $533,850, 3 units $645,000, 4 units $801,950. Unfortunately, the mortgage crisis has had a far greater effect on these loans than conforming loans (loan amounts below those shown above). Rates for jumbo loans are now much higher than they were last year and the spread between jumbo and conforming rates has widened considerably.
One notable casualty of the mortgage crisis has been Thornburg Mortgage. Although it's still in business, its rates are far out of the market. Thornburg had always been an excellent choice for TIC's because it allows very high loan amounts coupled with very high loan-to-value percentages against 2-4 unit properties. In addition, its loans are partially assumable, which means prospective buyers have the option to assume a departing owner's portion of a TIC group's loan.
To fill the void left by Thornburg and other jumbo lenders buyers for TIC's have begun to take advantage of FHA loans. Until now, FHA loans were rarely used in our market. The maximum loan amounts were too low. The economic stimulus package passed by Congress in January changed that by allowing for temporary increases to FHA loan limits. The new limits are: 1 unit $729,650, 2 units $934,200, 3 units $1,129,350, 4 units $1,403,400. These loan amounts are now high enough to use for financing for most TIC's.
FHA loans are partially assumable and allow for financing of up to 97%. The downside is they come with a 1.5% upfront origination fee as well as mandatory mortgage insurance for the first 3-5 years (regardless of the down payment made). Even so, they are an attractive alternative to currently available jumbo financing.
It's important to note that the economic stimulus package also raised limits for traditional conforming loans. However, the increase applies only to single unit properties and, for this reason, is not helpful for TIC buyers.
Current Situation and Looking Forward
In spite of the mortgage crisis, good group and fractional financing options are still available for TIC's. We're all hopeful that the credit markets will recover and jumbo loans will once again be available at competitive rates. Until then, the new FHA loans created by the economic stimulus package are helping to fill the void and fractional loan options continue to be an excellent choice for financing TIC's.
Gordon Friedman is a TIC Mortage Expert based in San Francisco and a regular contributor to "the Brain". To contact Gordon Friedman: