New ‘Co-Op’ Loans to Ease Purchase of Leisure World Units

One of the biggest barriers that customers have faced in buying an apartment in the gated Leisure World community in Laguna Hills has been coming up with the cash--not for a down payment, but for the entire purchase price.

“The cash purchase was a tremendous drain on people coming in here,” said Curt Carson, manager of the Laguna Hills branch of First Interstate Bank. “It just destroyed their liquidity.”

Now the burden of buying into one of the 6,256 cooperative apartments in the affluent retirement village is being eased after a five-year effort to restructure property ownership so that buyers can take out loans on the specific apartment units they occupy.

This month, the local branches of First Interstate Bank and Eldorado Bank in Tustin started offering “co-op” loans to first-time buyers as well as to residents looking for extra cash to buy a car or anything else they might need.

The changes apply only to the Laguna Hills community and do not affect the Seal Beach Leisure World.

Leisure World residents could not obtain loans to purchase their co-ops because they did not own the property needed to secure the loans, nor could they borrow against their interest in the co-ops.

An owner of a co-op buys shares in an entire apartment building and is issued occupancy in one of the units. But the owner does not hold title to any property--at least, not any title that can be recorded in the Orange County recorder’s office.

Because the ownership interest cannot be recorded, any liens on the shares cannot be recorded either. That means that title insurers and lenders cannot find out if any previous debts already encumber the property. So title companies have not insured ownership rights in the past, and lenders have not made mortgage loans.

“There’s no reason you couldn’t make a loan, but if you had a default, it would be very difficult to cure,” Carson said. “You could have numerous liens before yours, and they wouldn’t be recorded anywhere.”

A buyer of a Leisure World co-op typically would finance the purchase with the proceeds from the sale of a previous home, from savings or from loans on other real estate.

In all, about 21,000 mostly retired people live in 12,736 units on 2,095 acres in Laguna Hills. Homes, from apartments to single-family dwellings, range in price from $40,000 to more than $400,000--and the price does not include the land. The land is owned by three Leisure World housing corporations.

The co-op structure was complicated from the start when Leisure World developer Ross Cortese gave first-trust deeds--the California equivalent of first mortgages--to lenders to finance construction of the apartment buildings, Brock and Carson said.

The buildings were part of the original map recordings, but the individual units were not listed. So original lenders acquired first-trust deeds on entire buildings.

But, after a five-year effort by the homeowners association, the co-op structure was changed. Each unit was identified and the project was recorded again to show each unit in each building, Brock said. Transamerica Title has agreed to provide title insurance, and First Interstate and Eldorado Bank are the first of the lenders to offer loans.

In New York City and Philadelphia, where co-ops abound, individual units already have long been delineated so that buyers could get loans, Brock said.

“Now, liens will be recorded,” Carson said. And he predicted that banks and other lenders will soon move in with many of the products offered elsewhere, including revolving home equity lines of credit. “But we have to get through one avenue at a time,” he said.

All loans, however, will be junior mortgages--second in line to the original construction lenders, he said.

Also, one of the original construction lenders, H.C. Mortgage in Detroit, refused to allow junior mortgages on its security, which affects about 600 co-op units, Brock said. FHA had required that original lenders give their approval to the new structure.

A few details--primarily approval from the Federal Housing Administration--must still be resolved, Brock said, but lenders should be able to close mortgages starting today as long as they keep the loans in their own portfolios.

FHA approval is important because, coupled with approval from the Federal National Mortgage Assn., it would allow all loans to be sold in the secondary market, Brock said. Banks and S&Ls; can make loans now, he said, but they have to keep the loans in their own portfolios.

The federal approvals would give residents a much greater choice of lenders. The approvals would encourage other lenders, such as mortgage bankers who sell all loans they make, to jump into the market.