The New York Times

The $3.6 Million Mortgage

Christine Haughney, July 1, 2007

SETH WEINSTEIN is not a guy who likes to run a tab.

He has only two credit cards -- one for his personal use and one for business -- and he says he pays them in full each month. He even wrote a check the last time he bought a car, a white Volvo convertible.

But Mr. Weinstein, who for nearly the last 30 years has developed office buildings and condominiums in the New York area, and who seems to be allergic to the idea of accumulating debt, was approved for a $3.6 million mortgage last month for the $4 million condominium he is buying at the Century at 25 Central Park West.

The loan is a two-year floating-rate mortgage that will carry payments of roughly $24,000 a month at what he estimates will be an interest rate of 8 percent through the term of the loan. He plans to refinance in two years after making some renovations on the apartment.

Mr. Weinstein chose the condominium over a similar co-op apartment, where the limit on his mortgage would have been $2 million. He said he wanted to use as little of his own money as possible to buy the apartment, preferring to invest it in Connecticut real estate, where he expects the returns to be 25 percent.

"It's not the case that I'm cavalier about debt," Mr. Weinstein said. "I can make a much better return on that in my business."

More lenders are targeting overqualified borrowers like Mr. Weinstein as the next frontier for growth in the troubled mortgage industry. As the national housing market continues to suffer and lenders grow more cautious about approving mortgages for home buyers with anything less than sterling credit, they are opening their coffers to Manhattan's wealthiest buyers, who might not need any financial help.

High-end buyers, even those who are flush with money from Wall Street bonuses or the real estate boom, are flooding banks with requests for huge mortgages so that they can keep up with the escalating prices for multi-million-dollar apartments.

"I've seen more $10 million mortgages in the past 6 months than in the past 10 years," said Melissa Cohn, the president of Manhattan Mortgage Inc. "We have the new breed of buyers who are buying real estate for investments and consider leverage to be part of that ongoing investment."

Most of these new borrowers take the mammoth monthly payments in stride because mortgages are now one of the cheapest forms of debt.

Keith Kantrowitz, the president of Power Express Mortgage Bankers in Lake Success, N.Y., said that the average mortgage requested by his borrowers in Manhattan has nearly tripled in the last two years to about $4 million, up from $1.45 million. Mr. Kantrowitz is currently arranging interest-only mortgages for four borrowers in Manhattan, each for $30 million or more, for two apartments and two town houses they want to buy or refinance.

On the flip side, mortgage brokers say that more banks are increasing the amounts they will lend to Manhattan buyers because apartment prices and sales have remained strong. Jeffrey Appel, a senior vice president and the director of new development financing at the Preferred Empire Mortgage Company, a brokerage based in New York, said that he had seen a 20 percent increase in multi-million-mortgages in Manhattan in the past year.

Mr. Appel said lenders that are willing to write large mortgages include UBS, Thornburg Mortgage, Countrywide Mortgage and JPMorgan Chase. For some clients, Thornburg will finance up to $1.8 million on a $2.25 million apartment and up to $5.5 million on $9.2 million houses. Banks that once required buyers to put down half for an $11 million house now require only $3.5 million, Mr. Appel said.

Depending on a borrower's net worth and financial background, Mr. Appel said, lenders are often willing to finance 10 to 20 percent more than their guidelines dictate, provided that the mortgage is less than 80 percent of the house's value. This has resulted in a vast increase in the amount of allowable debt. "All of these banks are willing to evaluate exceptions on a case-by-case basis," he said.

Lenders are eagerly financing these multi-million-dollar mortgages because they are trying to make up for declines in nearly all other segments of the mortgage market, said Robert D. Manning, director of the center for consumer financial services at the Rochester Institute of Technology and the author of "Credit Card Nation" (Basic Books 2000). The broader mortgage market has been suffering because lenders have financed so many aggressive mortgages for subprime borrowers and have tightened their requirements for all borrowers who do not have blue-ribbon credit scores or big incomes.

Lenders have also had a harder time lately packaging and selling off most kinds of mortgages as bonds. As borrowers have defaulted and home sales across the nation in the middle and low price ranges have been slow, the bonds have lost some value.

But at the same time prices for luxury apartments have remained strong in Manhattan. So banks find that extra-large mortgages made by wealthy borrowers are more attractive to package and resell, Mr. Manning said.

"The banks are hurting because the middle-class market has been hurt so much that they're desperately looking for new markets," Mr. Manning said. "This is a much more profitable product for the bank."

At the same time, New Yorkers have also been buying more condominiums, which allow for smaller down payments (and larger mortgages) than co-ops do. For example, 49 percent of the sales in Manhattan in the first three months of 2007 were condominiums, compared with 38 percent during the corresponding period five years ago, according to data from the Miller Samuel appraisal company. Co-ops generally require buyers to put down at least 20 percent of the purchase price; condominiums require as little as 5 percent.

When it comes to condos, "there is no third party telling people what they can and can't finance," Mr. Appel said.

Mortgage brokers and psychologists agree that multi-million-dollar mortgages mark a major shift away from the historical stigma that carrying a lot of debt used to hold, especially among the very rich.

"Years ago, financing was looked down upon," said Mr. Kantrowitz, the mortgage banker. "A Rockefeller would write a check. Now it's accepted."

Michael Morris, the head of a social intelligence program at Columbia's business school and a professor in Columbia's psychology department, said that historically, Americans often associated living debt free with economic success and even wholeness.

"In a traditional mind-set, there was a moralistic status to having paid off your home," Professor Morris said. "It was part of the American dream to have paid off your house."

But David Strause, a mortgage banker in the Manhattan branch of Countrywide Home Loans, a division of the mortgage company, said that the wealthy buyers he had seen in the last four months had no qualms about taking out large mortgages. He said that such borrowers were typically male, aged 30 to 45, working in finance or real estate and making around $1 million a year. He has found that buyers in their early 30s borrow most aggressively.

His clients include an investment banker who bought a $1.94 million apartment on the West Side with a $1.75 million mortgage, an entrepreneur who bought a $4 million apartment near Madison Square Park with a $3.4 million mortgage, and a 32-year-old hedge-fund executive who bought a $1.5 million apartment in the same neighborhood with a $1.35 million mortgage.

Mr. Strause said these buyers were generally not concerned that there is a ceiling of $1.1 million on the amount of mortgage interest that is deductible on federal income taxes each year.

He said these borrowers plan to plow the money they might put into a house or apartment into the stock market, where they hope to earn 20 percent returns.

"They buy the biggest property they can afford, they leverage to the max, and they assume that their careers are on track," he said. "A lot of these people tend to think that they are smarter than the banks and they have a better use for the money than put it into real estate."

But giving the superrich increased access to borrowed money has raised eyebrows across the rest of the lending market. Mr. Manning of the Rochester Institute of Technology points out that it has become far easier in the wake of the subprime crisis for a wealthy Wall Street executive to get a loan than for anyone else in the home-buying market.

"There's no problem with rich people getting loans as long as other people aren't disadvantaged in the process," he said. "Are we entering a new Gilded Age where there's just a new set of rules for the rich?"

Larry Goldstone, the president of Thornburg Mortgage, a real estate investment trust and jumbo mortgage specialist in Santa Fe, N.M., said that the average mortgage his company made in Manhattan in the first three months of 2007 was $1.19 million, compared with $1 million in 2005. The borrowers are often baby boomers, he said. In fact, Thornburg's average borrower is 47 years old.

"The baby-boomer generation is a generation that is increasingly comfortable with having a mortgage and borrowing money against their real estate," he said. "I would much rather have my money in other investments as opposed to paying off my mortgage."

That's just the way Mr. Weinstein, the developer, sees it. He watched his parents, who grew up during the Depression, approach buying homes far more conservatively, putting down as much cash as possible.

"My parents were concerned about debt,"he said. "I could afford to put down more money, and I could afford to pay off the mortgage at any time I choose. My cash has more value to me to invest in my company than to let sit fallow in a home."

Mr. Weinstein has found that his own development projects have been fueled by borrowers who share his views: first-time buyers and baby boomers. He said that buyers at the four condominium projects he and several partners have developed in Connecticut have requested mortgages ranging from 75 to 90 percent.

He said that leverage gives first-time buyers the ability to "improve their lifestyle" by breaking into home ownership with small down payments, and empty nesters have the "psychological security" of holding on to their cash.

Taking out a large mortgage enabled Dominique Guenot to buy and decorate an apartment in Williamsburg, Brooklyn, before he was ready to sell two properties he owns in France. Mr. Guenot, a 54-year-old business developer for Oracle, moved to New York City three years ago from France, where most of his assets were locked up in a house in a Paris suburb and a small factory in another suburb, Marne-la-Vallée.

In March, he moved into a $1.25 million two-bedroom apartment at 55 Bury Street in Williamsburg after taking out a $1 million mortgage and a $125,000 home-equity loan. His monthly mortgage payments are $5,500 and his original monthly home-equity loan payment was $800.

In France, "I would have never been able to get this amount of money at the rate I have," he said. "Here, I have found that they have been much more flexible."

Now he is figuring out what to do with his cash. First, he paid off about $90,000 of the home-equity loan and hopes to pay off the remainder by September. Then he took about $40,000 from savings to decorate his apartment and to install an irrigation system on his rooftop terrace, where he grows tomatoes and herbs. He intends to buy a new sofa and shades for his living room, which has a wall of windows.

He plans to sell his real estate in France eventually, but he is taking his time. "There is no rush for me to sell my property in France," he said, and the loans he took out in New York "gave me the flexibility to sell at the price I can find at the right time."

Mr. Guenot's approach mirrors what many buyers are doing in Williamsburg. Roughly three-quarters of the buyers in Mr. Guenot's 45-unit building took out 90 percent mortgages, according to Christine Blackburn, a Prudential Douglas Elliman broker who handled the building's sales.

She said that many new buyers in Williamsburg work in the financial industry and pay off chunks of their large mortgages when they receive bonuses. She said that most buyers prefer to hold on to their cash and use it for enjoying life after logging long hours at work.

"It's going into lifestyle," she said. "They can enjoy themselves. They can get a summer share in the Hamptons. The thought that you should have everything go into your down payment is very disturbing to New Yorkers."


This story ran on The New York Times on July 1, 2007.