Bronx Housing Roundup: the mess of foreclosures

It’s been another active week in the world of housing news, in the Bronx and nationally. The one common theme shouldn’t be too surprising: foreclosures.

Let’s start locally with a couple of stories that exemplify larger trends in Bronx multifamily housing.

Private Equity investments gone bad

Following in the disastrous model of Ocelot, most of California-based private equity investor Milbank Properties’ buildings have gone into foreclosure, including 10 buildings in a securitized mortgage that is being serviced by Florida-based LNR Properties. (Read here for more background.) 

Word from Crain’s this week is that the supposed mystery buyer of these 10 Milbank buildings may be backing out. The purchase of control of the mortgage for $35 million from LNR was supposed to close this past Tuesday. Crain’s sources point out that the mystery buyer may be Jonathon Weiner and Chestnut Holdings, based on Riverdale Ave here in the Bronx.  It seems the focus of attention by advocates and organizers on the deal, in addition to the City Council funded report on the amount of work needed in the buildings, is making Chestnut think twice about getting involved. For now, the tenants remain in limbo, waiting to see how the lawsuit that ordered LNR to put $2.5 million into the buildings in the coming weeks plays out.

A meeting last night in one of the buildings with HPD will hopefully help the tenants' predicament, but it is difficult to see a positive resolution to the situation without the lender taking a major hit. The problem is that in securitized mortgages there is no traditional lender but instead a complex relationship between unknown investors, the servicers and the trustee, all governed by something known as a pooling and servicing agreement, with little room for write-downs on debt.

Mortgage Dumping

Only a few blocks away from a few of the Milbank buildings sits 2285 Sedgwick Ave. Just under a year ago, the building and its tenants were making headlines for hanging up sheets with messages like “No Gas, No Heat”, while conditions in the building went from bad to worse.  Even at the time, the building had entered foreclosure proceedings under mortgage lender Capital One Bank.  Representative of a much larger trend, Capital One sold the mortgage note at a loss once the building reached this default point.  As the foreclosure process in New York can often last up to 18 months in the courts, many lenders are anxious to get these problem buildings and loans off their books. In this case, Capital One sold the delinquent $2.5 million mortgage to Galster Funding and Sedgwick Participants LLCs (both with the same Manhattan address) for about $1.8 million.

The recent development here is that the auction date for the mortgage is coming up this month.  If no one bids more than the outstanding debt (estimated to be at more than $3.5 million now), Galster will take ownership of the buildings from Juan Romero and his 2285 Sedgwick Realty Corp. The new owners will also have to pay off about $175,000 in liens to the City for back taxes, water and sewer, and Emergency Repair Program charges. While a change in ownership should be welcome news, Galster does not have a good reputation for running buildings according to a number of review sites. It is also not clear how much money they will put into the building that has racked up more than 500 HPD code violations (about 150 of them since this May) and many DOB complaints regarding the elevator not working.

In both of these situations, tenants are paying the price for bad investments, both by small-time landlords and private equity investors. How the situation with control of the mortgages and the buildings plays out is quite different, but in neither example is a single bank working to ensure conditions don’t deteriorate.

National Foreclosure Headlines

Most of the national news about foreclosures has to do with small private houses. The biggest headlines focus on the improperly handled paperwork by large lenders on foreclosure papers, especially in states with judicial foreclosures including New York. This lack of proper procedure has been serious enough to cause mega-lenders like Chase, Bank of America and GMAC to put a halt to foreclosure while things are straightened out. While it may only represent a short moratorium, deeper issues may be discovered in the process. 

While there are many paperwork-based issues being raised in various courtrooms, the problem with the biggest potential to wreak utter havoc stems from an entity known as the Mortgage Electronic Registration System, or MERS, created by the banking industry and lending giants Fannie Mae and Freddie Mac to cut down on local recording fees and taxes. According to the Washington Post:

“The idea behind it was to build a centralized registry to track loans electronically as they were traded by big financial firms. Without this system, the business of creating massive securities made of thousands of mortgages would likely have never taken off. The company's role caused few objections until millions of homes began to fall into foreclosure.”

UNHP actually did object to MERS going back to 2006, as it interfered with our housing research and left homeowners and advocates in the dark about the real holder of mortgages in default. Yet, MERS won a number of lawsuits that year and in 2007 about their right to be listed as the plaintiff in a foreclosure case, even though MERS itself has no staff and owns no property. To say the least, it will be interesting to see how this all plays out.

In other foreclosure news, the Furman Center at NYU has released a new report on the impact of foreclosures on children, including estimating the number of students in New York City who have been affected by the crisis.

Finally, a new study in the American Sociological Review looks back on the beginnings of this most recent foreclosure crisis and its roots in subprime and predatory lenders targeting predominately black and Latino neighborhoods in the 1990s, long before it hit white middle class suburbia and actually got mainstream media attention. While this is not new information, the report is headed by well respected sociologist Daniel Massey who confirms that “even African-Americans with similar credit profiles and down-payment ratios to white borrowers were more likely to receive subprime loans.”

Hopefully there will be some better news to report next time.