The One That Got Away
Unfortunately, for a different group of the Ocelot properties — six buildings serving 260 families, with mortgages held by Dime Savings Bank of Williamsburg — the same happy ending did not materialize. In May 2009, Dime transferred the properties to Hunter Property Management, a speculative real-estate company backed by a Japanese private equity fund. Despite the horrible conditions, neither Hunter nor Dime Savings planned a tangible renovation component as part of the transfer. Dime’s mortgages were conveyed on an “as-is” basis, meaning the debt remained at the same level it had been under Ocelot, despite the fact that the excessive debt level was what arguably drove the buildings into disrepair in the first place.
Not surprisingly, things only got worse following the transfer. Hunter began to sink under the weight of the inflated mortgage and further reduced spending on the physical upkeep of the properties. Living conditions became nearly intolerable and many families chose to move out. A fortunate few were able to find apartments elsewhere in the Bronx, but for many, doubling up with family members or taking up residency in the city’s homeless shelters was the preferable alternative.
In a desperate attempt to get repairs made, one of the tenant associations, assisted by Legal Aid and a pro-bono private law firm, brought a case against Hunter in local housing court. After Hunter ignored a court order to repair the most hazardous conditions for months, a judge issued an arrest warrant for the head officer of the Hunter group. Eventually, he was apprehended at his midtown office and served more than 20 days behind bars.
Today, these six buildings are close to one-third vacant. In July 2010, the properties went into foreclosure. In August, a private equity firm called the Bluestone Group, new to the New York City real-estate market, purchased the distressed mortgages from Dime Savings Bank for an undisclosed amount. Bluestone has made some verbal promises about repairing the portfolio, and they have started some work, primarily in the vacant apartments. However, as of this writing, there are still more than 1291 outstanding code violations on the portfolio, 367 of which accrued since Bluestone came on the scene.
Though the overleveraged multifamily crisis has played out most visibly in New York City, a number of public reports now indicate that the trend is starting to manifest in several cities across the country. In February 2010, a congressional oversight panel chaired by Elizabeth Warren issued a report about the future of commercial real estate. According to the report, “Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present underwater, that is, the borrower owes more than the underlying property is currently worth.” The scale and severity of the problem raise a number of difficult but vitally important public policy questions.
With investors and landlords fleeing, housing advocates are struggling to determine who is responsible for rescuing this housing stock. The capital costs required to bring livable conditions back to many of these portfolios will unquestionably exceed the resources of most local governments. For obvious reasons, advocates are looking for help from those who helped create the problem and now control the purse strings: the banks and their partners on Wall Street.
But negotiating with financial institutions about the need to preserve affordable housing is a little like trying to communicate in a foreign language that you haven’t quite mastered; people appreciate your attempt, but no one totally understands what you’re saying. The lending community remains somehow disconnected from a sense of its own culpability in creating the housing crisis. Its primary objective is to preserve the “value” of its loans and keep losses to a minimum. Unfortunately this end goal is in direct conflict with preservationists, who view the need to reduce debt obligations as the key to repairing and restabilizing the housing stock.
The conflict is compounded by the near deafening silence coming from Washington, D.C., which has yet to mandate a code of conduct as to how banks that lent irresponsibly during the boom years should help bring restitution to the millions of families struggling through these dark financial times. In the absence of such a directive, the affordable housing community, despite limited resources, will be forced to keep fighting it out at the grass-roots level, one portfolio at a time.
For some this will mean victory; for others, sadly, the struggle goes on.