NEW YORK -- A new wave of foreclosures stands to hurt people who may have never taken out a mortgage: renters. In cities such as New York, Chicago and Los Angeles, where many investors are carrying upside-down mortgages on large rental buildings, some tenants are watching their homes fall apart along with the financing.
Janeia Sandiford, a 24-year-old GED student in New York, has two young children and a deteriorating apartment. When a leak over Sandiford's bathroom and kitchen caused the ceiling to flake off and then cave in, nobody came to fix it for a year, she said. She lacked heat most of last winter, and she has duct-taped her loose-fitting windows in place to cut down on drafts.
"I'm really worried about the kids," she said.
The real estate investment company Ocelot Capital Group bought the building where Sandiford lives and about two dozen others in the Bronx in 2006 and 2007. As the new owners struggled to keep up with payments, 10 of the buildings appeared on the city's list of most dilapidated rental properties in 2007 and 2008. Last winter, as Ocelot defaulted on its loans amid the deepening financial crisis, the buildings plummeted further into decline. Together, they racked up thousands of Code C violations --the most serious kind -- from housing inspectors.
Fannie Mae, which had bought much of the debt from the original lender, entered foreclosure proceedings for Sandiford's building early this spring. A state court appointed receivers.
In the meantime, the building on Manida Street has been beset by problems, according to tenants and their advocates, whose accounts were confirmed by the crumbling walls and damaged plumbing apparent on a tour of the property and its neighbor, also owned by Ocelot. Vandals stole the lock on the front door, giving squatters access to vacant apartments to sell drugs. Plumbing in the building was disrupted after the squatters broke through the walls and stole pipes to sell as scrap metal.
Nationwide pattern
Similar conditions could crop up across the country this winter as foreclosures climb for large rental-unit buildings. In the first three quarters of 2009, 475 foreclosure proceedings were begun against multifamily rental or cooperative homes in the District, according to NeighborhoodInfo DC, a partnership between the Urban Institute and the D.C. Local Initiatives Support Corp. That figure already eclipses the 458 foreclosures for all of 2008.
In Chicago's Cook County, 328 multifamily rental buildings were in foreclosure by the second quarter of this year, compared with 185 last year, according to a yet-unreleased study by the Institute for Housing Studies at DePaul University.
In Los Angeles, foreclosures for buildings with five or more units totaled 78 -- encompassing 1,344 units -- in the first three quarters of 2009, compared with 49 buildings and 432 units over the same period last year, and 13 buildings and 239 units in the same period of 2007, according to the city's housing department.
In New York, housing analysts estimate that the number of apartment units in buildings at risk of default because of upside-down loans -- in which the property is worth less than is owed on the loan -- could range from 50,000 to 100,000.
And through the first nine months of this year, across the country, Fannie Mae had 74 foreclosed multifamily properties on the books, compared with 25 through the first nine months of last year.
The pattern is also showing up in smaller cities. Apartment buildings and complexes are entering foreclosure in Lexington, N.C., and Des Moines, Iowa. In East Palo Alto, Calif., an investor bought about 1,800 units, or about half the rental properties in town, failed to pay the loan, and one weekend "tore up all their computers, shut down their offices and left," said Mayor Ruben Abrica.
A recent study by Richard Parkus, the head of research in commercial mortgage-backed securities at Deutsche Bank, found that loan performance on multifamily buildings is deteriorating at a dramatic pace. Some 65 to 75 percent of multifamily buildings could face problems refinancing at their current rates, he said in an interview. These problems could "sit and fester" for a while, he said, or result in a burst of loan failures.
"We're at the front end of that wave," said Raphael Bostic, assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development. "Are we concerned? Absolutely."
A 'sugarplum notion'
Analysts say international speculators and private-equity firms took on mortgage payments larger than their income from rents in such buildings. Some may have hoped they could eject rent-regulated tenants in favor of higher-paying ones.
"It was a sugarplum notion," said David Jones, president and chief executive of the Community Service Society, an advocacy group for low-income New Yorkers, who calls this "predatory equity."
Other buyers may have simply been over-exuberant in a market that seemed as though it could boom forever.
"There was this pervasive view: 'We're all going to the moon, it's going to be a big party from here on out, somehow this could last,' " Parkus said. "Nobody should have lent on these strategies. They're ridiculous."
Other factors have intervened as well. A decline in property values has made it difficult for owners to refinance. High unemployment has pushed up vacancies, cutting into landlords' income.
Yet analysts agree that the potential crisis is different from the one that devastated single-family homeowners.
"It wasn't as outright reckless or abusive or fraudulent as single-family lending," said Jack Markowski, president of the Community Investment Corp. in Chicago and the city's former housing commissioner.
The impact on tenants is uneven. New York City officials say the owners of the vast majority of buildings in foreclosure there are likely to maintain decent standards of living. Yet, of the 200 properties on the city housing agency's 2008 list of buildings with the worst maintenance problems, at least 77 had been in foreclosure, according to data from PropertyShark.com.
In buildings where a landlord is struggling to make loan payments, maintenance is often the first thing to go. Garbage can pile up, lists of overdue repairs get longer, and vermin multiply.
"I went on vacation to California for a week and a half and put out 20 mousetraps and caught 20 mice," said Gloria Robinson, 51, the head of the tenants association at a Bronx building where tenants say maintenance has declined as the landlord manages an upside-down mortgage.
Dire case in the Bronx
Sandiford's building in the Bronx is one of the most dire cases.
"This is a dump," said Sandiford's neighbor Alfredo Martinez, 35, a truck driver. He has stretched a garden hose from his kitchen to bring water to flush the toilet; plastered his disintegrating walls, adding metal screens to stop mice from chewing through; repaired the ceiling twice after a leak caused it to cave in; and installed a steel grate over a window after a burglar stole money, jewelry and video games.
One of the court-appointed receivers for Ocelot properties last month asked a state court to order Fannie Mae to pay him $20,000, saying the company had promised funds to fix life-threatening problems but failed to deliver.
"My responsibilities are clear: collect rents, maintain the property and when it's dangerous, address it," said Marc A. Landis, the receiver, a real estate lawyer experienced in foreclosures. "When I don't have enough money to do that, the lender is supposed to step up to the plate."
Brian Faith, a spokesman for Fannie Mae, wrote in an e-mail that the company is "concerned about welfare of the tenants," noting that it has spent $1.7 million to make repairs and provide oil, utilities and insurance, among other items.
Other lenders maintain that tenants need not suffer, even if their buildings face foreclosure.
"This is a business," said Jamie Woodwell, vice president of commercial real estate research for the Mortgage Bankers Association, a trade group. "The lender has every incentive to make sure . . . the property continues to operate, so that its value continues to be maintained."
Staff researcher Meg Smith in Washington contributed to this report.
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