As property owners run into trouble paying their mortgages, neighborhoods around New York City have been witnessing a disturbing consequence: Small and large apartment buildings are being abandoned in a state of disrepair, leaving tenants in limbo without basic services or even landlords.
In the Bronx, anybody can walk into a four-story building on East 178th Street near the Cross-Bronx Expressway. Someone took the front door off the hinges and sold it for scrap metal. Drugs have been sold out of vacant apartments.
"A nightmare," said Cesar Guzman, 29, who lives in the building. "I can't describe it as anything else."
In Brooklyn, a woman at 76 Newport Street said the landlord disappeared this year and stopped collecting rent, so she stopped paying it. A 19-year-old man in Apartment 1F has become the unofficial superintendent, sealing holes in ceilings with cardboard and duct tape.
The two landlords of those buildings were in foreclosure in 2008 and 2009, and have earned a distinction of sorts: They own properties on the city housing agency's annual list of the most poorly maintained apartment buildings in New York City. Of the 200 properties on the 2008 list, at least 77 were in foreclosure from January 2005 to October 2008, according to data from PropertyShark.com.
Many of these landlords, particularly those who bought in recent years when the real estate market was at its peak, are struggling to make mortgage payments, let alone pump thousands of dollars into buildings for repairs. 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.
Rafael Cestero, the commissioner of the city housing agency, the Department of Housing Preservation and Development, told a City Council committee in April that a "small but significant proportion" of multifamily buildings bought in recent years may be overleveraged, meaning their debt is unsupportable by the income generated by the rents.
Many of these overleveraged buildings - the agency does not have precise numbers - are made up of low-income tenants in rent-regulated or subsidized apartments. International developers and private equity firms have borrowed hundreds of millions of dollars to buy buildings with rent-regulated units in the belief that they could profit by replacing existing residents with higher-paying ones, a trend tenant advocates call predatory equity.
The owner of the building on East 178th Street is a real estate investment company called Ocelot Capital Group. Ten of Ocelot's 25 properties in the Bronx were placed on the city's worst buildings list in 2007 and 2008, racking up 5,000 serious and immediately hazardous housing maintenance code violations.
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 has now acknowledged that the loans did not meet their underwriting standards at the time of origination.
Mr. Cestero said in an interview that the poor conditions created by overleveraged buildings were nothing like the widespread abandonment of the late 1970s and early '80s, which turned some neighborhoods into urban wastelands. But he said the conditions not only threatened tenants' health and safety, but risked destabilizing entire blocks. As a result, he said, the agency had become more aggressive in tracking the buildings, making emergency repairs and working with lenders to find new, responsible owners, as he said the agency was doing with Fannie Mae on the Ocelot buildings.
"We are very concerned and continue to be concerned about the overall problem that Ocelot represents in the city, where you have multifamily buildings in some state of financial distress," he said. "If that financial distress is not corrected quickly, you will ultimately end up with physical distress."
Tenants have grown frustrated waiting for repairs. Fannie Mae, which initiated foreclosure proceedings in March on the 18 Ocelot properties for which it had purchased loans, is able to make repairs only in those buildings for which a court has appointed a receiver. Residents at one run-down Ocelot building sued the landlord, persuading a judge to appoint an independent administrator to make repairs.
Ocelot, which described itself in a 2007 Deutsche Bank press release as building a portfolio of subsidized, "income-producing real estate," has become a kind of phantom. Its 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. "The owner is making no attempt to repair the buildings or fix the violations or make them decent places to live," said Mr. Cestero, whose agency has so far paid for roughly $850,000 in emergency repairs in the 25 buildings, money Ocelot now owes the city.
Rachel Arfa, Ocelot's president, did not return phone calls seeking comment.
For Ocelot tenants in the Bronx, life has been far from ordinary.
At 1744 Clay Avenue, residents have endured winter days without heat and hot water. The super has not been paid in about three months; tenants took up a collection to buy building supplies. 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.
"This is some MacGyver stuff," said Kim Payne, 43, who lives on East 178th Street. "People shouldn't have to live like this."
Tenants and elected officials have raised concerns about Fannie Mae's role in the Ocelot buildings, and they want Fannie Mae and the city to keep the buildings affordable to low-income families.
"Fannie helped create this problem, and they have an obligation to solve it," said Senator Charles E. Schumer, Democrat of New York.
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. They fear an Internet auction will attract buyers more interested in turning a profit than in improving conditions.
"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."
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. 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.
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