Bank of New York has begun using an updated version of Fannie Mae's underwriting software that automates co-op lending, which makes up 28% of the New York City mortgage market.

The agency began testing the software Nov. 16 in a pilot with 20 lenders in five regions, but Bank of New York is the only one using the co-op option. The technology is meant to streamline what can be a cumbersome process and reduce the cash down payment required to as little as 5%.

"Now if you're buying a co-op, you can get all the advantages of a single-family homebuyer," said Patrick McEnerney, president of Bank of New York Mortgage.

"Six months ago, the underwriting process was very paper-intensive," he said. "This has speeded up the process significantly. Co-ops are a very small volume in the national market, which shows how advanced the agencies have gotten with automated underwriting if they've gotten to the point where co-ops are part of their model."

Bank of New York's co-op volume has doubled to 24% of total conventional loan production to date in 1998, from 12% in 1997. The company's co-op loan volume is up 270% from volume to this point in 1997, and the overall mortgage business is up 55%. Mr. McEnerney said the average co-op loan is about $110,000; non-co-op loans average about $180,000.

Co-op ownership is a three-way partnership between a co-op corporation, a lender, and a borrower. The buyer owns a piece of the corporation that owns his of her apartment building and has a long-term, proprietary lease as a shareholder.

From a lender's perspective, this is riskier than a conventional, single-family home loan. Corporation dues take precedence over the lender's lien, and lenders can find themselves, in order to protect their interest in a property, paying maintenance dues on which the borrower has defaulted.

"A co-op is like a 51st state that has its own set of rules," Mr. McEnerney said. "Fannie has been very aggressive to modify their underwriting system."

Mr. McEnerney said that no other markets in the country are as standardized as New York and New Jersey for co-ops, and he predicted that other players in New York City would adopt the quicker underwriting process once the pilot test ends on Saturday.

Before this software option was introduced, prospective borrowers had to pass credit and employment verification and have the property appraised. Now the software determines what documentation is commensurate with the risk of an individual borrower.

"It's the co-op board that ultimately drives the closing of a loan; a buyer needs its approval, with a lender's commitment letter in hand," Mr. McEnerney said. "It takes around one to three days to get approval with the automated underwriting, where it could take up to 30 without the software. If you pass the credit hurdle by a great spread, you may not even need the income hurdle, where before you had to pass every threshold to get approval."

Jeff Noe, a spokesman for Freddie Mac, Fannie Mae's rival secondary mortgage agency, said it has no plan to add automated co-op underwriting to its software.

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