No landlord at all: Part 2, the present lender
[Continued from yesterday’s Part 1.]
When an owner skedaddles, leaving a trail of crumbling buildings and reams of uncured building code violations, whom can we vilify?
Building code violations! New York Times articles! Run away!
Certainly someone is culpable:
At
As we saw yesterday, the ownership group (called Ocelot Capital Group) has fled the scene:
Taking our remaining equity with us!
[Ocelot's] Web site is defunct. It used to have a suite in a Madison Avenue office tower, but it was evicted this year for nonpayment of rent.
Whose fault is this?
At 2254 Crotona Avenue, the occupants of one apartment abandoned it last year after parts of the ceiling collapsed, leaving many of their belongings behind. It remains vacant, a small-scale disaster zone of leaky pipes and caved-in walls and ceilings. Tenants in the building and other Ocelot properties use knives and screwdrivers to open doors without locks or doorknobs.
At
They could move … oh, but there’s that rent stabilization distorting the market already (and creating assets with negative equity).
If the owner’s not handy to pillory, leave it to the New York Times to find someone:
Elected officials and tenant advocates place much of the blame for the distress of multifamily apartment buildings not on landlords, but on the lenders who financed many of those now in default, saying the loans for the properties were based on shoddy lending practices and unrealistic projections of rising rents.
A ridiculous charge. Obviously the landlords are culpable, not the banks, but the banks are around to blame and the landlords aren’t.
Tenants and elected officials have raised concerns about Fannie Mae’s role in the Ocelot buildings –
Why Fannie Mae? What did they have to do with it? They didn’t originate the loans:
Fannie Mae, the government-controlled mortgage-finance company, bought the loans Deutsche Bank Berkshire Mortgage made to Ocelot for 18 of Ocelot’s 25 buildings, totaling $29 million from 2006 to 2007.
Fannie Mae bought loans, expecting them to perform. Obviously they have not:
Fannie Mae has now acknowledged that the loans did not meet their underwriting standards at the time of origination.
Meaning that Fannie Mae lost a lot of money on these loans.
And more will be going where these dollars went
I’ve previously taken Fannie Mae to the woodshed, at length (a total of seven parts), for shenanigans related to accounting and earnings tricks, but in this matter they deserve a stout defense. At least HPD recognizes that Fannie Mae’s blameless here:
Mr. Cestero said … the agency had become more aggressive in … working with lenders to find new, responsible owners, as he said the agency was doing with Fannie Mae on the Ocelot buildings.
That’s not enough for Senator Schumer:
“Fannie helped create this problem, and they have an obligation to solve it,” said Senator Charles E. Schumer, Democrat of New York.
Someone’s at fault, and Senator Schumer wants to know who
Just how is Fannie Mae responsible for this problem?
Fannie Mae does not own the building.
Fannie Mae has never owned the building.
Fannie Mae has started foreclosure proceedings [in March, 2009 – Ed.].
As such, Fannie Mae has no legal authority to operate or improve the property.
In fact, Fannie Mae did not originate the loan – it bought the loan from the original lender.
We’re clean!
What then is the basis for the Senator’s complaint?
Mr. Schumer and tenant advocates are outraged that Fannie Mae has allowed Ocelot’s defaulted mortgages to be sold on an eBay-style auction Web site called DebtX.
And this is bad – how?
They fear an Internet auction will attract buyers more interested in turning a profit than in improving conditions.
Whoa, whoa, whoa.
Let’s take these charges one at a time
In a regulated environment, one cannot legally make a profit from the property without improving it. Code violations are a lien on the property, and they must be cured for a legal buyer to collect legal rent.
The absolute best thing one could do for these properties is to replace the current no-landlord with a good-landlord, and the best landlord is one with new money, some to buy the debt, some to foreclose, and some to renovate.
“We are glad that Fannie Mae is working with H.P.D. on this serious issue,” said Dina Levy, director of organizing and policy for the Urban Homesteading Assistance Board, which has been assisting Ocelot tenants. “However, Fannie Mae’s plan to sell the distressed debt through a Web auction opens the door for more speculation, more overleveraging and more suffering for tenants.”
With all due respect, Ms. Levy, that’s utter nonsense. (By the way, selling through a Web site isn’t any worse than any other means of selling – in fact, it’s better because it will expose the property to a larger number of potential buyers, and increasing buyer competition is only to the good.)
I also believe, perhaps suspiciously, that Ms. Levy and her friends have another agenda:
– and they want Fannie Mae and the city to keep the buildings affordable to low-income families.
Does Fannie Mae owe additional affordability?
That’s the hidden agenda, I think. Not that the advocates want the properties renovated, but they want Fannie Mae (and similar lenders), who are already taking a bath on the loan losses, and paying for all the renovation costs, to go even further and write checks to create long-term affordability where before there was none.
I’m all for affordable housing, but that’s an overreach.
Kenneth J. Bacon, executive vice president of housing and community development at Fannie Mae, said the company was committed to putting the buildings in the hands of a responsible owner, and that it was moving forward with foreclosure proceedings while also pursuing the Internet sale to expedite finding a new owner.
In other words, they’re doing everything they can, and pursuing a two-track strategy.
Either of these tracks might work
If Fannie Mae really wanted out of these loans, they’d long since have sold them. Instead they’re acting responsibly, going well beyond their documentary requirements and quite possibly beyond their economic interest:
Fannie Mae has spent hundreds of thousands of dollars on safety-related repairs, and is prepared to spend hundreds of thousands more, the company said.
“When you inherit a situation where things are wrong, you go in and fix it,” Mr. Bacon said.
Only if you take seriously the responsibilities of being a landlord.
I’ve got some pipes that need fixing
Comments
Comment from Dan Gaulin
Date: July 23, 2009, 11:20 am
David,
I thought you were a little easy on Fannie Mae. If Berkshire originated the loans with the idea that Fannie was almost certain to buy them soon after origination, then Fannie is part of the problem and the debate then becomes over how big a part. When I was working for HPD back in the late ’80s; lenders who were selling loans to Freddie Mac were offering very generous refinance terms to borderline acceptable landlords of borderline acceptable buildings – the loan payments squeezed the operating budgets and the buildings and tenants suffered. To me, this practice is analogous to subprime lending to homeowners who had no business borrowing so much on such sketchy collateral. The difference is that the landlords are more sophisticated than the homeowners, but they may have been blinded by greed or took comfort in the attitude of “well the banker says the building can support this mortgage, then it must be OK.”
It is good to see that Fannie is more responsible than most lenders in minimizing the post-foreclosure damage; but given their (now-explicit, then-implicit) backing by the federal government, we should expect no less.
Dan Gaulin
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