By TOLUSE OLORUNNIPA - Miami Herald - 09/08/2010
South Florida has been home to more than $62 billion in loan defaults and 250,000 foreclosure filings since 2007, according to a report released Tuesday by Bal Harbour-based Condo Vultures.
The region -- including Palm Beach, Broward and Miami-Dade counties -- has experienced 43,980 foreclosure filings so far this year, and a total of $11.6 billion in loan defaults.
Between January 2007 and September 2010, Palm Beach County had $18.8 million in loan defaults associated with 74,399 foreclosure filings. Broward County had $26.5 million in loan defaults associated with 110,571. Miami-Dade County had $18.3 million.
The average amount for defaulting loans in South Florida is $ $253,529.20, according to the report, based on county records.
Showing posts with label foreclosure. Show all posts
Showing posts with label foreclosure. Show all posts
Wednesday, September 8, 2010
Thursday, October 8, 2009
‘Underwater’ homeowners lead Sept. foreclosures
By DUANE MARSTELLER - dmarsteller@ bradenton.com
MANATEE — Most Manatee County homeowners who fell into foreclosure last month were financially “under water,” property and court records show.
Two out of every three owed more on their property than what it is worth, according to a Bradenton Herald analysis of property tax records and September foreclosure filings. The average deficit was $72,098.
The Herald’s findings didn’t surprise foreclosure experts, who said Monday that most Florida homeowners have been financially swamped by free-falling home values.
“I would have estimated it as closer to 100 percent,” said Shari Olefson, a Fort Lauderdale foreclosure attorney and author of “Foreclosure Nation: Mortgaging the American Dream.”
The average underwater homeowner in Manatee who was hit with a foreclosure suit in September owed $282,268 on a home valued at $210,170, the Herald’s analysis showed.
In the most extreme case, a bank claims a Michigan couple owes nearly $2.05 million on a Lakewood Ranch Country Club home that’s valued at $1.45 million. And it’s not just single-family homes: The owner of a Bradenton apartment complex valued at nearly $12.1 million is nearly $18.6 million in arrears, according to the lender seeking to foreclose on the property.
Two federal foreclosure-prevention programs have done little to help Florida homeowners because of the eligibility criteria, Olefson said.
With the average underwater homeowner in Manatee owing 134 percent of their home’s value, many don’t qualify for a refinancing program because it’s limited to 125 percent. Federal officials initially estimated as many as 5 million U.S. homeowners could benefit, but only 20,000 loans have been refinanced thus far, according to the Treasury department.
“Most of our properties are more than 25 percent underwater, so refinancing is out of the question for them,” Olefson said.
Another program requires mortgage modifications to cost homeowners no more than 38 percent of their income for the mortgage, taxes and insurance. “That option’s not available for many because our taxes and insurance are so high in Florida,” Olefson said.
The Herald’s analysis was based on each foreclosure case’s “estimate sheet” — the lender or servicer’s calculation of how much the borrower owes — and the subject property’s 2008 market value as determined by the Manatee County Property Appraiser’s Office. The number of underwater homeowners likely is higher, as home prices have fallen further since the property appraiser’s office calculated those values.
Lenders and servicers filed 534 mortgage foreclosure suits in Manatee County Circuit Court in September, eight more than they did in August. They have filed 4,829 such suits through the first nine months of 2009, or 16.5 percent ahead of last year’s record-setting pace.
More than 75 percent of September filings were against homesteaded properties, the highest percentage since the foreclosure surge began in late 2006. Among neighborhoods, Bayshore Gardens had the most foreclosure filings with 11, followed by Greenbrook Village with nine and Greyhawk Landing with eight.
MANATEE — Most Manatee County homeowners who fell into foreclosure last month were financially “under water,” property and court records show.
Two out of every three owed more on their property than what it is worth, according to a Bradenton Herald analysis of property tax records and September foreclosure filings. The average deficit was $72,098.
The Herald’s findings didn’t surprise foreclosure experts, who said Monday that most Florida homeowners have been financially swamped by free-falling home values.
“I would have estimated it as closer to 100 percent,” said Shari Olefson, a Fort Lauderdale foreclosure attorney and author of “Foreclosure Nation: Mortgaging the American Dream.”
The average underwater homeowner in Manatee who was hit with a foreclosure suit in September owed $282,268 on a home valued at $210,170, the Herald’s analysis showed.
In the most extreme case, a bank claims a Michigan couple owes nearly $2.05 million on a Lakewood Ranch Country Club home that’s valued at $1.45 million. And it’s not just single-family homes: The owner of a Bradenton apartment complex valued at nearly $12.1 million is nearly $18.6 million in arrears, according to the lender seeking to foreclose on the property.
Two federal foreclosure-prevention programs have done little to help Florida homeowners because of the eligibility criteria, Olefson said.
With the average underwater homeowner in Manatee owing 134 percent of their home’s value, many don’t qualify for a refinancing program because it’s limited to 125 percent. Federal officials initially estimated as many as 5 million U.S. homeowners could benefit, but only 20,000 loans have been refinanced thus far, according to the Treasury department.
“Most of our properties are more than 25 percent underwater, so refinancing is out of the question for them,” Olefson said.
Another program requires mortgage modifications to cost homeowners no more than 38 percent of their income for the mortgage, taxes and insurance. “That option’s not available for many because our taxes and insurance are so high in Florida,” Olefson said.
The Herald’s analysis was based on each foreclosure case’s “estimate sheet” — the lender or servicer’s calculation of how much the borrower owes — and the subject property’s 2008 market value as determined by the Manatee County Property Appraiser’s Office. The number of underwater homeowners likely is higher, as home prices have fallen further since the property appraiser’s office calculated those values.
Lenders and servicers filed 534 mortgage foreclosure suits in Manatee County Circuit Court in September, eight more than they did in August. They have filed 4,829 such suits through the first nine months of 2009, or 16.5 percent ahead of last year’s record-setting pace.
More than 75 percent of September filings were against homesteaded properties, the highest percentage since the foreclosure surge began in late 2006. Among neighborhoods, Bayshore Gardens had the most foreclosure filings with 11, followed by Greenbrook Village with nine and Greyhawk Landing with eight.
Friday, August 21, 2009
Florida tops again in late mortgages
By DUANE MARSTELLER, Bradenton Herald, Friday, August 21st, 2009
Florida’s mortgage-delinquency rate remains the country’s highest, a national bankers group said in a report released Thursday.
More than one in five Florida mortgages either were at least one payment behind or in foreclosure as of June 30, almost twice the U.S. rate, the Mortgage Bankers Association said in a quarterly delinquency report.
“Florida continues to establish itself as the worst state in the union for mortgage performance,” said Jay Brinkmann, the trade group’s chief economist.
“Clearly we have not seen the bottom in Florida,” he said in a later interview.
The state led the nation with 12 percent of mortgages somewhere in the foreclosure process at the end of June. Another 10.8 percent were at least 30 days behind in payments, with nearly half of those more than 90 days overdue.
In contrast, just 4.3 percent of U.S. mortgages were in foreclosure and another 8.9 percent were delinquent but not yet in foreclosure. Still, the combined U.S. foreclosure/delinquency rate is the highest since the association began tracking it in 1972.
Observers attributed Florida’s weak showing to rising unemployment, falling home values and a higher percentage of non-primary homeowners.
“It’s getting to the point where we’re deeper into the recession, and people have hung on as long as they could possibly hang on and no longer can afford to keep paying their mortgages,” said Bob Stobaugh, a senior lender at Sentinel Mortgage Co. and president of the Gulf Coast Mortgage Bankers Association.
Some can’t pay because they’ve lost their jobs: Florida’s unemployment rate was 10.6 percent in June, the latest month for which figures were available.
For others, it’s because a foreclosure-fueled drop in home values has left them “under water” on their mortgages, Stobaugh said. Nearly half of Florida homeowners owed more than their homes are worth as of June 30, tracking service First American CoreLogic said in a recent report. Florida also is seeing more delinquencies and foreclosures involving second homes and investor-owned properties because it has more of them and foreclosure-relief efforts are focusing on primary homeowners, Stobaugh said. About 27.4 percent of single-family homes in Manatee do not have homestead exemptions, according to the Manatee County Property Appraiser’s Office.
The report said the mortgage crisis, which began with subprime loans taken out by those with spotty credit, also continued to spread. One in three new foreclosures between April and June was from a prime, fixed-rate loan, up from one in five a year earlier. Last year, subprime adjustable-rate loans caused the largest share of foreclosures.
“The rise in prime delinquencies . . . is a clear indication that employment is the driver of mortgage performance, with the worst performance coming in those areas that are combining jobs losses with large drops in home values like California and Florida,” Brinkmann said. “We won’t see a turnaround in delinquencies until we see improvements in employment, most likely the middle of next year.”
Stobaugh agreed, but wasn’t sure when that would happen. “Sooner or later this downward spiral will stop,” he said. “When, no one knows.”
McClatchy and the Associated Press contributed to this report.
Florida’s mortgage-delinquency rate remains the country’s highest, a national bankers group said in a report released Thursday.
More than one in five Florida mortgages either were at least one payment behind or in foreclosure as of June 30, almost twice the U.S. rate, the Mortgage Bankers Association said in a quarterly delinquency report.
“Florida continues to establish itself as the worst state in the union for mortgage performance,” said Jay Brinkmann, the trade group’s chief economist.
“Clearly we have not seen the bottom in Florida,” he said in a later interview.
The state led the nation with 12 percent of mortgages somewhere in the foreclosure process at the end of June. Another 10.8 percent were at least 30 days behind in payments, with nearly half of those more than 90 days overdue.
In contrast, just 4.3 percent of U.S. mortgages were in foreclosure and another 8.9 percent were delinquent but not yet in foreclosure. Still, the combined U.S. foreclosure/delinquency rate is the highest since the association began tracking it in 1972.
Observers attributed Florida’s weak showing to rising unemployment, falling home values and a higher percentage of non-primary homeowners.
“It’s getting to the point where we’re deeper into the recession, and people have hung on as long as they could possibly hang on and no longer can afford to keep paying their mortgages,” said Bob Stobaugh, a senior lender at Sentinel Mortgage Co. and president of the Gulf Coast Mortgage Bankers Association.
Some can’t pay because they’ve lost their jobs: Florida’s unemployment rate was 10.6 percent in June, the latest month for which figures were available.
For others, it’s because a foreclosure-fueled drop in home values has left them “under water” on their mortgages, Stobaugh said. Nearly half of Florida homeowners owed more than their homes are worth as of June 30, tracking service First American CoreLogic said in a recent report. Florida also is seeing more delinquencies and foreclosures involving second homes and investor-owned properties because it has more of them and foreclosure-relief efforts are focusing on primary homeowners, Stobaugh said. About 27.4 percent of single-family homes in Manatee do not have homestead exemptions, according to the Manatee County Property Appraiser’s Office.
The report said the mortgage crisis, which began with subprime loans taken out by those with spotty credit, also continued to spread. One in three new foreclosures between April and June was from a prime, fixed-rate loan, up from one in five a year earlier. Last year, subprime adjustable-rate loans caused the largest share of foreclosures.
“The rise in prime delinquencies . . . is a clear indication that employment is the driver of mortgage performance, with the worst performance coming in those areas that are combining jobs losses with large drops in home values like California and Florida,” Brinkmann said. “We won’t see a turnaround in delinquencies until we see improvements in employment, most likely the middle of next year.”
Stobaugh agreed, but wasn’t sure when that would happen. “Sooner or later this downward spiral will stop,” he said. “When, no one knows.”
McClatchy and the Associated Press contributed to this report.
Thursday, August 20, 2009
House: Let foreclosed homeowners rent
By Kenneth R. Harney, Special to the St. Petersburg Times - Saturday, August 15, 2009
WASHINGTON — Here are two questions getting a lot of attention on Capitol Hill and from the Obama administration: When homeowners lose their houses to foreclosure, should they be able to stay in the property, leasing it back at fair market rent from the lender?
Should they also get an option to purchase the house from the bank at the end of the lease term, assuming they have the income to afford it?
Before leaving for their August break, Democrats and Republicans in the House took a rare, unanimous stand on both questions by passing the Neighborhood Preservation Act by voice vote. The bill was co-sponsored by Reps. Gary Miller, R-Calif., and Joe Donnelly, D-Ind.
The bill would remove legal impediments blocking federally regulated banks from entering into long-term leases — up to five years — with the former owners of foreclosed houses. It would also allow banks to negotiate option-to-purchase agreements permitting former owners to buy back their houses.
The idea, said Miller, is, "at no cost to the taxpayer," to "reduce the number of houses coming into the housing inventory and preserve the physical condition of foreclosed properties," which ultimately should help stabilize values in neighborhoods with large numbers of distressed sales and underwater real estate.
If the bill is approved by the Senate, participation by banks would be purely voluntary. But the legislation might encourage banks to calculate whether they would do better financially taking an immediate loss at foreclosure, or by collecting rents and then selling the property at a higher price in four or five years.
Though it was not opposed by banking lobbies, the bill quickly attracted critics. The Center for Economic and Policy Research, a Washington think tank, said a key flaw is to leave decisions about leasebacks solely to banks.
"If Congress does want to give homeowners the option to stay in their homes as renters," said the group, "it will be necessary to pass legislation that explicitly gives them this right."
Some private-industry proponents of short sales — where the bank negotiates a price that's typically less than the owners owe on their note — say turning banks into landlords won't work well, either for the banks or foreclosed owners who want to stay in their houses.
Al Hackman, a San Diego realty broker with extensive experience in commercial transactions, argues that leasebacks with options to buy are the way to go — but not if banks run the show.
Hackman and a partner, Troy Huerta, have recently begun putting together what they call "seamless short sales" as alternatives for banks and property owners. Their short sales and leasebacks are "seamless" because the financially distressed homeowners remain in their properties, before and after the settlement.
Here's how they work: First, the bank agrees to a short sale to a private investor, just as they often do now. In the seamless version, however, the investor is contractually bound to lease back the house on a "triple net" basis — the tenants pay taxes, insurance and utilities — for two to three years.
The former owners only qualify if they have sufficient income to afford a fair market rent and can handle the other expenses, including maintaining the property. The deal comes with a preset buyout price after the leaseback period. That price is higher than the short-sale price paid by the investor, but lower than the original price of the house paid by the foreclosed owners.
Hackman and Huerta already are doing seamless short-sale transactions. Here is one that Hackman says is "real life" and moving toward escrow: A family purchased a house for $725,000 with 20 percent down in 2005, then made substantial improvements with the help of an equity line of $72,500. The house now is valued around $500,000, but is saddled with $625,000 in mortgage debts.
Enter the seamless short sale: Hackman has brought in a private investor who is willing to buy the house at current value, all cash. As part of the deal, the investor has agreed to lease back the house at $25,000 a year, triple net. In three years, assuming they've been good tenants, the original owners have the option to buy back the property for $550,000.
Hackman says the internal rate of return to investors can be raised or lowered based on rents and the buyback price, but typically are in the 8 to 10 percent range.
"It's a win-win," he says. "The owners stay in their houses. Private investors get a moderate return on what should be a safe investment."
Plus the banks are out of the equation.
Thursday, April 16, 2009
Borrowers get the gift of time
By Todd Ruger - Sarasota Herald Tribune, 04/15/2009
Heide and Ronald Felicita showed up in Circuit Court last week thinking this would be the hearing where they finally lose their home.
Their suitcases were packed and they removed all the pictures from the walls of their Venice home, which has been in foreclosure for nearly two years.
But like hundreds of foreclosed-upon residents in Manatee and Sarasota counties, the Felicitas got a reprieve -- weeks, possibly months, to stay in their home and try to clear their debt and work out a deal with their lender.
Since January, the rate of residents in Sarasota and Manatee counties who lost their homes to foreclosure has fallen 66 percent, going from more than 400 cases per month to just over 100.
The decline has nothing to do with the state of the real estate market or a sudden benevolence on the part of lenders.
Instead, it reflects a policy set down by 12th Circuit Court Judge Lee Haworth that has effectively stopped the fast track of summary judgments allowing lenders to quickly gain control of properties from distressed borrowers.
Last fall, as foreclosure cases overwhelmed the court system, Haworth ordered lenders' law firms to meet with homeowners starting in January and discuss alternatives to foreclosures. The judge's hope was that discussions could lead to resolutions that would prevent residents from losing their homes.
But lenders widely ignored the judge's request. So Haworth hit the law firms in the pocketbook, with a new rule requiring them to show up in person -- not just over the telephone -- for all hearings starting in March. They must also complete a checklist about the facts of the case.
Again, many lenders have failed to comply, leading Haworth and two other judges in the 12th Circuit to cancel cases, so many that their dockets are virtually bare. Last Wednesday, for example, Judge Donna Berlin canceled 20 of the 27 foreclosure cases on her docket, including the case against the Felicitas, whose attorney failed to show.
The reprieve is only temporary. Distressed homeowners still must find resolution with their lenders. Yet the extended time comes with opportunity because lenders have been more open in recent months to negotiate, and the Obama Administration is offering more help for homeowners.
"It gives us more time and, hopefully, the company will come up with something better," said Ronald Felicita, who lost his job as a home inspector in the real estate downturn. "Now, they could work with us."
Heide Felicita has found a job, but it is not enough to pay off what they owe on the house they bought 10 years ago. They are not sure where they might go if forced out of the home, but they might have to move in with relatives in Minnesota, Ron Felicita said.
The rules instituted by Haworth make the 12th Judicial District one of the toughest places to get a summary judgment, which gives the lender the property without lengthy litigation, attorneys said. Other circuits are starting to follow suit with similar rules.
"It's a new procedure, so people are not used to dealing with it," said Robert Schermer, who often makes the local appearance in court for the lenders' out-of-town attorneys. "And they don't really realize how serious the judges are, or how strictly they are enforcing it.
"They want every box checked and every spot filled in."
Other outside factors have worked to slow the pace of final judgments, including moratoriums on foreclosures from some of the country's largest lenders and new rules for refinancing loans.
But attorneys and judges say the new rules are the biggest cause. Attorneys for lenders, who mostly work at large, out-of-town "foreclosure mills" that handle cases across the state, are too overwhelmed to go through the careful review of cases and rules for each circuit.
"There have been days when the entire docket has been canceled from non-compliance," Circuit Judge Charles Williams said.
One day recently, Williams had four foreclosure hearings set. None of the hearings happened, though, because attorneys did not follow the rules.
Bradenton attorney John Fleck, who represents both homeowners and lenders in foreclosure cases, said the judges are doing the right thing if an attorney does not make sure his work is right.
"The judges think, 'If he didn't take the time to fill out the box, how can I be certain the rest of this was done correctly?'" Fleck said. "Until all these massive foreclosures, we didn't see this slipshod work."
Heide and Ronald Felicita showed up in Circuit Court last week thinking this would be the hearing where they finally lose their home.
Their suitcases were packed and they removed all the pictures from the walls of their Venice home, which has been in foreclosure for nearly two years.
But like hundreds of foreclosed-upon residents in Manatee and Sarasota counties, the Felicitas got a reprieve -- weeks, possibly months, to stay in their home and try to clear their debt and work out a deal with their lender.
Since January, the rate of residents in Sarasota and Manatee counties who lost their homes to foreclosure has fallen 66 percent, going from more than 400 cases per month to just over 100.
The decline has nothing to do with the state of the real estate market or a sudden benevolence on the part of lenders.
Instead, it reflects a policy set down by 12th Circuit Court Judge Lee Haworth that has effectively stopped the fast track of summary judgments allowing lenders to quickly gain control of properties from distressed borrowers.
Last fall, as foreclosure cases overwhelmed the court system, Haworth ordered lenders' law firms to meet with homeowners starting in January and discuss alternatives to foreclosures. The judge's hope was that discussions could lead to resolutions that would prevent residents from losing their homes.
But lenders widely ignored the judge's request. So Haworth hit the law firms in the pocketbook, with a new rule requiring them to show up in person -- not just over the telephone -- for all hearings starting in March. They must also complete a checklist about the facts of the case.
Again, many lenders have failed to comply, leading Haworth and two other judges in the 12th Circuit to cancel cases, so many that their dockets are virtually bare. Last Wednesday, for example, Judge Donna Berlin canceled 20 of the 27 foreclosure cases on her docket, including the case against the Felicitas, whose attorney failed to show.
The reprieve is only temporary. Distressed homeowners still must find resolution with their lenders. Yet the extended time comes with opportunity because lenders have been more open in recent months to negotiate, and the Obama Administration is offering more help for homeowners.
"It gives us more time and, hopefully, the company will come up with something better," said Ronald Felicita, who lost his job as a home inspector in the real estate downturn. "Now, they could work with us."
Heide Felicita has found a job, but it is not enough to pay off what they owe on the house they bought 10 years ago. They are not sure where they might go if forced out of the home, but they might have to move in with relatives in Minnesota, Ron Felicita said.
The rules instituted by Haworth make the 12th Judicial District one of the toughest places to get a summary judgment, which gives the lender the property without lengthy litigation, attorneys said. Other circuits are starting to follow suit with similar rules.
"It's a new procedure, so people are not used to dealing with it," said Robert Schermer, who often makes the local appearance in court for the lenders' out-of-town attorneys. "And they don't really realize how serious the judges are, or how strictly they are enforcing it.
"They want every box checked and every spot filled in."
Other outside factors have worked to slow the pace of final judgments, including moratoriums on foreclosures from some of the country's largest lenders and new rules for refinancing loans.
But attorneys and judges say the new rules are the biggest cause. Attorneys for lenders, who mostly work at large, out-of-town "foreclosure mills" that handle cases across the state, are too overwhelmed to go through the careful review of cases and rules for each circuit.
"There have been days when the entire docket has been canceled from non-compliance," Circuit Judge Charles Williams said.
One day recently, Williams had four foreclosure hearings set. None of the hearings happened, though, because attorneys did not follow the rules.
Bradenton attorney John Fleck, who represents both homeowners and lenders in foreclosure cases, said the judges are doing the right thing if an attorney does not make sure his work is right.
"The judges think, 'If he didn't take the time to fill out the box, how can I be certain the rest of this was done correctly?'" Fleck said. "Until all these massive foreclosures, we didn't see this slipshod work."
Thursday, December 25, 2008
Once Trusted Mortgage Pioneers, Now Pariahs
By MICHAEL MOSS and GERALDINE FABRIKANT
Published: December 24, 2008 - New York Times
“We are team-oriented, highly ethical, extremely competitive, profit-oriented, risk-averse, consumer-focused, and we try as much as possible to squeeze out any ego. Hubris is the beginning of the end.” — Herbert Sandler, June 2005
SAN FRANCISCO — Herbert Sandler, the founder of the Center for Responsible Lending, is standing in his bayfront office watching a DVD that trains brokers to pitch mortgages by extolling the glories of the real estate boom.
The video reeks of hucksterism, and it infuriates Mr. Sandler.
“I would not have approved that!” he declares. “I don’t think we should be selling our loans based on home prices continuing to go up.”
But the DVD was produced in 2005 by a mortgage lender that Mr. Sandler and his wife, Marion, ran at the time: World Savings Bank. And the video was a small part of a broad and aggressive effort by their company to market risky loans at the height of the housing bubble.
The Sandlers long viewed themselves — and were viewed by many others — as the mortgage industry’s model citizens. Now they too have been swept into the maelstrom surrounding who is to blame for the housing bust and the growing number of home foreclosures.
Once invited by Congress to testify about good lending practices, the Sandlers were recently parodied on “Saturday Night Live” as greedy bankers who handily sold their bank — and pocketed $2.3 billion in shares and cash — in 2006 before many of their loans began to sour.
Last month, the United States attorney’s office in San Francisco announced dual inquiries into whether World Savings engaged in predatory lending practices or misled investors about its financial well-being. And the bank has been sued by numerous borrowers who claim they were misled into taking out mortgages they could not afford.
At the center of the controversy is an exotic but popular mortgage the Sandlers pioneered that helped generate billions of dollars of revenue at their bank.
Known as an option ARM — and named “Pick-A-Pay” by World Savings — it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.
Pick-A-Pay allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case.
Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.
The Wachovia Corporation, which bought the Sandlers’ bank two years ago, was so battered by the souring portfolio of World Savings that it began writing off losses now projected at tens of billions of dollars and eventually stopped offering option ARMs.
Through it all, the Sandlers have maintained they did nothing wrong beyond misjudging the real estate bubble.
“I didn’t mislead anybody, and to the best of my knowledge, our company didn’t, though there may have been an isolated case here and there,” Mr. Sandler said. “If home prices hadn’t declined by 50 percent, nobody would be raising these questions.”
Mr. Sandler also finds it incredible that borrowers feel victimized by Pick-A-Pay. “All of a sudden their home is worth half of what it was, and they say they didn’t know.”
Yet the Sandlers embraced practices like the use of independent brokers who used questionable methods to reel in borrowers. These and other practices, critics contend, undermined the conservative lending practices that the Sandlers built their reputations upon.
“This product is the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”
The Birth of Pick-A-Pay
Marion Sandler, now 78, was a Wall Street analyst in the early 1960s when she and her husband decided to buy a bank that took only savings deposits and made mortgage loans — a thrift, or savings and loan, in banking shorthand — and run it themselves.
Mr. Sandler, now 77, was a lawyer in Manhattan who grew up poor on the Lower East Side, the son of a compulsive gambler whose earnings were consumed by loan sharks.
The Sandlers searched for a thrift in the sizzling California market and paid $3.8 million in 1963 for an Oakland enterprise called Golden West Savings and Loan Association, which later became the parent company of World Savings. It had a main office and one branch.
When Reagan era deregulation arrived, the Sandlers and two other competitors were able to market option ARMs for the first time in 1981. Before that, lawmakers balked at the loan because of its potential peril to borrowers.
World Savings initially attracted borrowers whose incomes fluctuated, like professionals with big year-end bonuses. In the recent housing boom, when World Savings started calling the loan Pick-A-Pay, they began marketing it to a much broader audience, including people with financial troubles, like deeply indebted blue-collar workers.
As the entire thrift industry soared after deregulation, the Sandlers’ business also took off. They avoided financial problems by doing things like scrutinizing borrowers’ incomes to make sure loans were manageable and performing astute appraisals so the size of a mortgage was in line with the value of a home.
“Our protection was our total underwriting of the loan,” Mr. Sandler said. “From scratch.”
When many of the Sandlers’ competitors in the thrift industry later began collapsing under the weight of bad loans and investments, Congress and the media invited the couple to speak about the proper way to do business.
“The deregulatory situation attracted bums, charlatans, crooks, phonies, con men,” Mr. Sandler told an ABC News program in 1990.
The Sandlers also held onto World Savings’ loans rather than selling them off to Wall Street to be repackaged as securities. They say this made them more alert to risky borrowers than were lenders who sold off their loans.
When foreclosures occurred, World Savings executives would drive to the house to see if they had made mistakes appraising the property or underwriting the loan. “We called these the van tours,” Mr. Sandler said. “And we would say, ‘O.K., have we done anything wrong here?’ ”
More Philanthropic Work
As the Sandlers’ wealth increased, so did their philanthropy. Over the years, they financed scientific research and groups like Human Rights Watch and the American Civil Liberties Union. More recently they founded and financed ProPublica, a nonprofit investigative journalism enterprise that has collaborated with The New York Times on coverage and a news archive. Its 14-member advisory board includes two top New York Times Company editors.
The Sandlers’ giving intersected most directly with their business interests in 2002 when they helped create an advocacy group for low-income borrowers called the Center for Responsible Lending.
The center was the successor to a smaller organization in North Carolina, whose director, Martin Eakes, had helped the elderly and minorities avoid predatory banking practices.
“I said, ‘Isn’t that incredible what he is doing?’ ” Mr. Sandler recalled. “I said to Martin, ‘What would it take to do what you do on a national scale?’ ”
Mr. Eakes, who became the center’s executive director, had also just helped secure a new mortgage lending law in North Carolina that prohibited, among other things, the use of prepayment penalties.
“I hated prepayment penalties,” Mr. Eakes recalled, noting that such charges make it hard for cash-poor borrowers to refinance a loan for one with more manageable terms.
While Mr. Sandler supported the center’s antipredatory goals, he disagreed with Mr. Eakes’s position on prepayment penalties and sought to change his mind. Mr. Eakes says the Sandlers convinced him to drop his opposition to prepayment penalties, “but they never dictated to us what to do.”
Mr. Sandler acknowledges that some lenders used the penalties to lock borrowers into “absolutely awful” loans. But he said his bank used the penalties to fend off unethical brokers who enticed borrowers with low-interest-rate loans that often had hidden fees.
“You have to understand how independent brokers work,” Mr. Sandler says. “They are the whores of the world.”
Despite that distaste, World Savings made extensive use of brokers. By 2006, they were generating some 60 percent of its loan business, he acknowledged. He said he was compelled to do so because of brokers were a dominant force in the mortgage industry.
As a check on the representations that brokers made to borrowers, World Savings sought to telephone applicants to ensure that they understood the terms of their loan. These calls reached only about half of the borrowers, however, according to a former World Savings executive. Mr. Sandler did not dispute that point.
Customer complaints that an unethical broker had misrepresented the terms of World Savings loans is at the heart of a lawsuit filed against the bank and others in Alameda County, Calif. The broker was sentenced to a year in prison for misleading at least 90 World Savings borrowers.
Mr. Sandler points out that the company was itself a victim of this broker, that it cooperated fully with authorities, and that it was not charged with any wrongdoing.
Others have also raised questions about how carefully World Savings disclosed lending terms to its borrowers.
In August, a federal judge in South Carolina ruled that World Savings had violated the federal Truth in Lending Act by telling borrowers that choosing to make minimum monthly payments on Pick-A-Pay mortgages might cause their principal to grow — when in fact it certainly would occur.
Wachovia, which is defending the case, has appealed the ruling. Mr. Sandler said he was not familiar with this lawsuit, but generally, he says, “Wachovia’s legal defense is deficient.”
A Speedy Merger
By 2005, World Savings lending had started to slow, after more than quadrupling since 1998. The next year, Wachovia bought the bank in a hastily arranged deal. The Sandlers say they sold their firm at the top of the market because they were growing older and wanted to devote themselves to philanthropy.
Some current and former Wachovia officials say that the merger was agreed to in days and that it was impossible to conduct a thorough vetting of World Savings’ loans. Others say the portfolio was adequately scrutinized.
“Herb and his wife had run a tight ship,” said Robert Brown, a Wachovia board member. “There was not a huge concern about it because they had not had any delinquencies and foreclosures.”
Others were less sanguine. The creditworthiness of World Savings borrowers edged down from 2004 to 2006, according to Wachovia’s data. Over all, Pick-A-Pay borrowers had credit scores well below the industry average for traditional loans.
“I don’t think anyone thought a Pick-A-Pay product was a customer friendly product,” says a former Wachovia executive who requested anonymity to preserve professional relationships. “It is easy to mislead them.”
World Savings lending volume dipped again in 2006 shortly after the sale to Wachovia was initiated, according to the company’s federal filings.
This prompted World Savings to attract more borrowers by taking a step that some regulators were starting to frown upon, and which the company had been resisting for years: it allowed borrowers to make monthly payments based on an annual interest rate of just 1 percent. While World Savings continued to scrutinize borrowers’ ability to manage increased payments, the move to rock-bottom rates lured customers whose financial reliability was harder to verify.
Russell W. Kettell, a former chief financial officer of World Savings, says the merger created “pressure” for “a pretty good-sized increase in loan volume.”
Asked if Wachovia ordered World Savings to drop its rate, Mr. Kettell said, “No, but they wanted volume and wanted growth.”
A swift increase in option ARM lending had prompted federal regulators to weigh tougher controls on lending standards in 2005. Of the $238 billion in option ARM loans made nationally in 2005, World Savings issued about $52 billion, or more than one-fifth of the total.
Susan Schmidt Bies, a governor of the Federal Reserve System until last year, said the surge in volume caught regulators by surprise, and that she regrets not acting more quickly to protect borrowers because she believes that they could not understand the risky nature of option ARMs.
“When you get into people whose mortgage payments are taking half of their cash flow, they are in over their heads, and these loans should not have been sold to this customer base,” she said. “This makes me sick when I see this happening.”
In March 2006, two months before the Wachovia deal, Mr. Sandler wrote regulators and objected to several aspects of the new rules, including the regulator’s conclusion that option ARMS “were untested in a stress environment.”
He argued in the letter that World Savings had few loan losses in the recession of the early 1990s. Then again, the current financial crisis is far more severe than what occurred then — far more severe than anything the country has faced since the Great Depression.
By the third quarter of this year, Wachovia was projecting $26.1 billion of losses on a World Savings loan portfolio worth a total of about $124 billion. About 6.2 percent of the Pick-A-Pay loans were more than 90 days late, it said, compared with an industry average of 8 percent on option ARMs and 1 percent on Wachovia’s traditional loans.
Wells Fargo, which is now buying Wachovia, is more pessimistic: it expects losses of $36 billion on the loans unless efforts to stem foreclosures help rescue part of the portfolio. The losses caused analysts and others to reassess the Sandlers’ legacy.
After the “Saturday Night Live” skit, Paul Steiger, the former executive editor of The Wall Street Journal and the editor in chief of ProPublica, was among those who wrote to the show’s producer, Lorne Michaels, saying the Sandlers had been unfairly vilified. Mr. Michaels apologized for the skit (which suggested that the Sandlers “should be shot”) and removed it from NBC’s Web site.
Mr. Sandler says Wachovia did not work hard enough to help struggling borrowers, and that his loans became scapegoats for other problems at Wachovia. He remains confident that losses on its loans will not reach Wells Fargo’s projections.
He says World Savings was hit especially hard because it had made so many loans in volatile markets like inland California, but he disputes homeowner assertions that his option ARMs are at fault.
“We have not been able to identify one delinquency, much less a foreclosure, that is due to the product,” Mr. Sandler said, adding that “if home prices had not dropped, you wouldn’t see” a single article.
Over all, analysts expect the option ARM fallout to be brutal. Fitch Ratings, a leading credit rating agency, recently reported that payments on nearly half of the $200 billion worth of option ARMs it tracks will jump 63 percent in the next two years — causing mortgage delinquencies to rise sharply.
Mr. Sandler says that his loans are not in the pool that will become distressed in the next few years; he says they reset at a later date. He adds that were he not sure that the market would recover he would have sold his Wachovia stock at the time of the takeover. His charity has sold off much of its Wachovia stock, but he said he and his wife retain a substantial portion of their personal holdings.
Still, the Sandlers have their detractors.
“As the largest and most respected regulated institution providing option ARMs, I hold the Sandlers responsible because a large percentage of home borrowers — but not all — should have been advised that it was in their best interest to have a fixed-rate mortgage,” said Robert Gnaizda, general counsel for the Greenlining Institute, a homeowner advocacy group. “I believe that financial institutions have a quasi-fiduciary responsibility not to mislead the borrower.”
Mr. Sandler insists that World Savings prided itself on ethical conduct and that untoward behavior was never tolerated. “We were also a family, and you expected people to live their personal and business lives in a particular way,” he said.
Published: December 24, 2008 - New York Times
“We are team-oriented, highly ethical, extremely competitive, profit-oriented, risk-averse, consumer-focused, and we try as much as possible to squeeze out any ego. Hubris is the beginning of the end.” — Herbert Sandler, June 2005
SAN FRANCISCO — Herbert Sandler, the founder of the Center for Responsible Lending, is standing in his bayfront office watching a DVD that trains brokers to pitch mortgages by extolling the glories of the real estate boom.
The video reeks of hucksterism, and it infuriates Mr. Sandler.
“I would not have approved that!” he declares. “I don’t think we should be selling our loans based on home prices continuing to go up.”
But the DVD was produced in 2005 by a mortgage lender that Mr. Sandler and his wife, Marion, ran at the time: World Savings Bank. And the video was a small part of a broad and aggressive effort by their company to market risky loans at the height of the housing bubble.
The Sandlers long viewed themselves — and were viewed by many others — as the mortgage industry’s model citizens. Now they too have been swept into the maelstrom surrounding who is to blame for the housing bust and the growing number of home foreclosures.
Once invited by Congress to testify about good lending practices, the Sandlers were recently parodied on “Saturday Night Live” as greedy bankers who handily sold their bank — and pocketed $2.3 billion in shares and cash — in 2006 before many of their loans began to sour.
Last month, the United States attorney’s office in San Francisco announced dual inquiries into whether World Savings engaged in predatory lending practices or misled investors about its financial well-being. And the bank has been sued by numerous borrowers who claim they were misled into taking out mortgages they could not afford.
At the center of the controversy is an exotic but popular mortgage the Sandlers pioneered that helped generate billions of dollars of revenue at their bank.
Known as an option ARM — and named “Pick-A-Pay” by World Savings — it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.
Pick-A-Pay allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case.
Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.
The Wachovia Corporation, which bought the Sandlers’ bank two years ago, was so battered by the souring portfolio of World Savings that it began writing off losses now projected at tens of billions of dollars and eventually stopped offering option ARMs.
Through it all, the Sandlers have maintained they did nothing wrong beyond misjudging the real estate bubble.
“I didn’t mislead anybody, and to the best of my knowledge, our company didn’t, though there may have been an isolated case here and there,” Mr. Sandler said. “If home prices hadn’t declined by 50 percent, nobody would be raising these questions.”
Mr. Sandler also finds it incredible that borrowers feel victimized by Pick-A-Pay. “All of a sudden their home is worth half of what it was, and they say they didn’t know.”
Yet the Sandlers embraced practices like the use of independent brokers who used questionable methods to reel in borrowers. These and other practices, critics contend, undermined the conservative lending practices that the Sandlers built their reputations upon.
“This product is the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”
The Birth of Pick-A-Pay
Marion Sandler, now 78, was a Wall Street analyst in the early 1960s when she and her husband decided to buy a bank that took only savings deposits and made mortgage loans — a thrift, or savings and loan, in banking shorthand — and run it themselves.
Mr. Sandler, now 77, was a lawyer in Manhattan who grew up poor on the Lower East Side, the son of a compulsive gambler whose earnings were consumed by loan sharks.
The Sandlers searched for a thrift in the sizzling California market and paid $3.8 million in 1963 for an Oakland enterprise called Golden West Savings and Loan Association, which later became the parent company of World Savings. It had a main office and one branch.
When Reagan era deregulation arrived, the Sandlers and two other competitors were able to market option ARMs for the first time in 1981. Before that, lawmakers balked at the loan because of its potential peril to borrowers.
World Savings initially attracted borrowers whose incomes fluctuated, like professionals with big year-end bonuses. In the recent housing boom, when World Savings started calling the loan Pick-A-Pay, they began marketing it to a much broader audience, including people with financial troubles, like deeply indebted blue-collar workers.
As the entire thrift industry soared after deregulation, the Sandlers’ business also took off. They avoided financial problems by doing things like scrutinizing borrowers’ incomes to make sure loans were manageable and performing astute appraisals so the size of a mortgage was in line with the value of a home.
“Our protection was our total underwriting of the loan,” Mr. Sandler said. “From scratch.”
When many of the Sandlers’ competitors in the thrift industry later began collapsing under the weight of bad loans and investments, Congress and the media invited the couple to speak about the proper way to do business.
“The deregulatory situation attracted bums, charlatans, crooks, phonies, con men,” Mr. Sandler told an ABC News program in 1990.
The Sandlers also held onto World Savings’ loans rather than selling them off to Wall Street to be repackaged as securities. They say this made them more alert to risky borrowers than were lenders who sold off their loans.
When foreclosures occurred, World Savings executives would drive to the house to see if they had made mistakes appraising the property or underwriting the loan. “We called these the van tours,” Mr. Sandler said. “And we would say, ‘O.K., have we done anything wrong here?’ ”
More Philanthropic Work
As the Sandlers’ wealth increased, so did their philanthropy. Over the years, they financed scientific research and groups like Human Rights Watch and the American Civil Liberties Union. More recently they founded and financed ProPublica, a nonprofit investigative journalism enterprise that has collaborated with The New York Times on coverage and a news archive. Its 14-member advisory board includes two top New York Times Company editors.
The Sandlers’ giving intersected most directly with their business interests in 2002 when they helped create an advocacy group for low-income borrowers called the Center for Responsible Lending.
The center was the successor to a smaller organization in North Carolina, whose director, Martin Eakes, had helped the elderly and minorities avoid predatory banking practices.
“I said, ‘Isn’t that incredible what he is doing?’ ” Mr. Sandler recalled. “I said to Martin, ‘What would it take to do what you do on a national scale?’ ”
Mr. Eakes, who became the center’s executive director, had also just helped secure a new mortgage lending law in North Carolina that prohibited, among other things, the use of prepayment penalties.
“I hated prepayment penalties,” Mr. Eakes recalled, noting that such charges make it hard for cash-poor borrowers to refinance a loan for one with more manageable terms.
While Mr. Sandler supported the center’s antipredatory goals, he disagreed with Mr. Eakes’s position on prepayment penalties and sought to change his mind. Mr. Eakes says the Sandlers convinced him to drop his opposition to prepayment penalties, “but they never dictated to us what to do.”
Mr. Sandler acknowledges that some lenders used the penalties to lock borrowers into “absolutely awful” loans. But he said his bank used the penalties to fend off unethical brokers who enticed borrowers with low-interest-rate loans that often had hidden fees.
“You have to understand how independent brokers work,” Mr. Sandler says. “They are the whores of the world.”
Despite that distaste, World Savings made extensive use of brokers. By 2006, they were generating some 60 percent of its loan business, he acknowledged. He said he was compelled to do so because of brokers were a dominant force in the mortgage industry.
As a check on the representations that brokers made to borrowers, World Savings sought to telephone applicants to ensure that they understood the terms of their loan. These calls reached only about half of the borrowers, however, according to a former World Savings executive. Mr. Sandler did not dispute that point.
Customer complaints that an unethical broker had misrepresented the terms of World Savings loans is at the heart of a lawsuit filed against the bank and others in Alameda County, Calif. The broker was sentenced to a year in prison for misleading at least 90 World Savings borrowers.
Mr. Sandler points out that the company was itself a victim of this broker, that it cooperated fully with authorities, and that it was not charged with any wrongdoing.
Others have also raised questions about how carefully World Savings disclosed lending terms to its borrowers.
In August, a federal judge in South Carolina ruled that World Savings had violated the federal Truth in Lending Act by telling borrowers that choosing to make minimum monthly payments on Pick-A-Pay mortgages might cause their principal to grow — when in fact it certainly would occur.
Wachovia, which is defending the case, has appealed the ruling. Mr. Sandler said he was not familiar with this lawsuit, but generally, he says, “Wachovia’s legal defense is deficient.”
A Speedy Merger
By 2005, World Savings lending had started to slow, after more than quadrupling since 1998. The next year, Wachovia bought the bank in a hastily arranged deal. The Sandlers say they sold their firm at the top of the market because they were growing older and wanted to devote themselves to philanthropy.
Some current and former Wachovia officials say that the merger was agreed to in days and that it was impossible to conduct a thorough vetting of World Savings’ loans. Others say the portfolio was adequately scrutinized.
“Herb and his wife had run a tight ship,” said Robert Brown, a Wachovia board member. “There was not a huge concern about it because they had not had any delinquencies and foreclosures.”
Others were less sanguine. The creditworthiness of World Savings borrowers edged down from 2004 to 2006, according to Wachovia’s data. Over all, Pick-A-Pay borrowers had credit scores well below the industry average for traditional loans.
“I don’t think anyone thought a Pick-A-Pay product was a customer friendly product,” says a former Wachovia executive who requested anonymity to preserve professional relationships. “It is easy to mislead them.”
World Savings lending volume dipped again in 2006 shortly after the sale to Wachovia was initiated, according to the company’s federal filings.
This prompted World Savings to attract more borrowers by taking a step that some regulators were starting to frown upon, and which the company had been resisting for years: it allowed borrowers to make monthly payments based on an annual interest rate of just 1 percent. While World Savings continued to scrutinize borrowers’ ability to manage increased payments, the move to rock-bottom rates lured customers whose financial reliability was harder to verify.
Russell W. Kettell, a former chief financial officer of World Savings, says the merger created “pressure” for “a pretty good-sized increase in loan volume.”
Asked if Wachovia ordered World Savings to drop its rate, Mr. Kettell said, “No, but they wanted volume and wanted growth.”
A swift increase in option ARM lending had prompted federal regulators to weigh tougher controls on lending standards in 2005. Of the $238 billion in option ARM loans made nationally in 2005, World Savings issued about $52 billion, or more than one-fifth of the total.
Susan Schmidt Bies, a governor of the Federal Reserve System until last year, said the surge in volume caught regulators by surprise, and that she regrets not acting more quickly to protect borrowers because she believes that they could not understand the risky nature of option ARMs.
“When you get into people whose mortgage payments are taking half of their cash flow, they are in over their heads, and these loans should not have been sold to this customer base,” she said. “This makes me sick when I see this happening.”
In March 2006, two months before the Wachovia deal, Mr. Sandler wrote regulators and objected to several aspects of the new rules, including the regulator’s conclusion that option ARMS “were untested in a stress environment.”
He argued in the letter that World Savings had few loan losses in the recession of the early 1990s. Then again, the current financial crisis is far more severe than what occurred then — far more severe than anything the country has faced since the Great Depression.
By the third quarter of this year, Wachovia was projecting $26.1 billion of losses on a World Savings loan portfolio worth a total of about $124 billion. About 6.2 percent of the Pick-A-Pay loans were more than 90 days late, it said, compared with an industry average of 8 percent on option ARMs and 1 percent on Wachovia’s traditional loans.
Wells Fargo, which is now buying Wachovia, is more pessimistic: it expects losses of $36 billion on the loans unless efforts to stem foreclosures help rescue part of the portfolio. The losses caused analysts and others to reassess the Sandlers’ legacy.
After the “Saturday Night Live” skit, Paul Steiger, the former executive editor of The Wall Street Journal and the editor in chief of ProPublica, was among those who wrote to the show’s producer, Lorne Michaels, saying the Sandlers had been unfairly vilified. Mr. Michaels apologized for the skit (which suggested that the Sandlers “should be shot”) and removed it from NBC’s Web site.
Mr. Sandler says Wachovia did not work hard enough to help struggling borrowers, and that his loans became scapegoats for other problems at Wachovia. He remains confident that losses on its loans will not reach Wells Fargo’s projections.
He says World Savings was hit especially hard because it had made so many loans in volatile markets like inland California, but he disputes homeowner assertions that his option ARMs are at fault.
“We have not been able to identify one delinquency, much less a foreclosure, that is due to the product,” Mr. Sandler said, adding that “if home prices had not dropped, you wouldn’t see” a single article.
Over all, analysts expect the option ARM fallout to be brutal. Fitch Ratings, a leading credit rating agency, recently reported that payments on nearly half of the $200 billion worth of option ARMs it tracks will jump 63 percent in the next two years — causing mortgage delinquencies to rise sharply.
Mr. Sandler says that his loans are not in the pool that will become distressed in the next few years; he says they reset at a later date. He adds that were he not sure that the market would recover he would have sold his Wachovia stock at the time of the takeover. His charity has sold off much of its Wachovia stock, but he said he and his wife retain a substantial portion of their personal holdings.
Still, the Sandlers have their detractors.
“As the largest and most respected regulated institution providing option ARMs, I hold the Sandlers responsible because a large percentage of home borrowers — but not all — should have been advised that it was in their best interest to have a fixed-rate mortgage,” said Robert Gnaizda, general counsel for the Greenlining Institute, a homeowner advocacy group. “I believe that financial institutions have a quasi-fiduciary responsibility not to mislead the borrower.”
Mr. Sandler insists that World Savings prided itself on ethical conduct and that untoward behavior was never tolerated. “We were also a family, and you expected people to live their personal and business lives in a particular way,” he said.
Monday, December 1, 2008
A case study in housing collapse
By Michael Van Sickler, Times staff writer In print: Sunday, November 30, 2008
TAMPA — Thousands of miles from the trading floors of global stock markets, an abandoned house in one of Tampa's poorest neighborhoods is an improbable place to learn about why the world's financial system is collapsing.
But if you want to understand how we got into this mess, the stucco house at 4809 N 17th St. isn't a bad place to start.
Beer bottles and shards of glass litter the yard. A blue tarp covers much of the rotting roof. Boards shutter the windows.
This husk sold for $300,000 in 2006 with the help of a no-money-down mortgage from a subsidiary of Washington Mutual Bank. The owner defaulted; WaMu owns it now. Listed for $52,000, the house could be yours for $35,000 cash.
"What we had here was an obvious case of mortgage fraud," said Josh Parker, a Coldwell Banker Realtor.
The 17th Street house is one of a constellation of 90 homes stretching across Tampa, all bought and sold in the past four years by a 34-year-old tattoo parlor owner.
Most of the homes Sang-Min Kim sold are empty now. Many have code violations, and are clustered in impoverished neighborhoods such as Belmont Heights and Sulphur Springs.
The trail of foreclosures and blight is lined with the bad mortgages approved or assigned by Wachovia, Washington Mutual, Bank of America, National City Bank, Lehman Bros., Fannie Mae, Freddie Mac and Wells Fargo.
The loans — many made by banks now getting billions in a taxpayer bailout — dwarfed the true value of the properties. Some borrowers had no prospects to suggest they could pay off the loans. Multiple loans from the same bank branch sometimes went to a questionable borrower within weeks of each other.
"It's obvious the banks weren't paying attention, or worse," said Richard Hagar, a property fraud expert.
• • •
Kim, who has no criminal record in Florida, made millions selling houses. More than a third of the homes he sold are in default, with more expected. Some of the buyers have criminal records as drug dealers.
Real estate is popular among drug dealers, experts say. It's a cash investment that allows them to launder money, and the returns are terrific. Flipping a single house, a dealer can score more than he can grinding it out on a street corner for a year.
A common scam works like this: Someone with cash buys a crummy house cheap. A mortgage broker signs on and finds an appraiser to inflate the value. The broker shops the loan application, with false data about the borrower and the house. Bank loan officers approve it.
In recent years, this scam went unchecked as bank oversight mostly vanished. Banks had traditionally held onto mortgages for 30 years and had a self-interest in seeing that borrowers could repay the loans. But as lending rules were relaxed, banks sold the riskiest loans to investment firms, which dumped them into pools of thousands of other mortgages that investors would buy.
This pass-the-buck system did such a poor job policing itself, Hagar said, that "government now considers (mortgage fraud) a national security threat that's undermining our banking system.''
All it takes to prevent, Hagar said, is someone at the bank to ask a couple of questions. "This kind of fraud should be easy to spot."
• • •
"Sonny'' Kim, who was born in South Korea, owns Body Design Tattoos, an Asian-themed tattoo and body piercing parlor on N Florida Avenue. He's also listed as an owner of a flea market.
He started flipping property four years ago. In late 2005, he formed a real estate investment firm. Buyers paid Kim $10.7-million for homes he bought for $6.5-million, according to Hillsborough County property records.
What's his secret? Kim won't say. He politely declined any comment for this story.
His homestead tax exemption is on a house in Pasco's Meadow Pointe subdivision appraised at $215,000.
Kim lived there until recently, said Greg Ingram, who lives next door but never got to know his neighbor. Judging from a steady rotation of flashy cars in the driveway — a Hummer, a Mercedes, a Lexus, a Cadillac — Ingram assumed Kim worked at a car dealership.
In 2006, Kim bought an empty lot in a gated Lutz subdivision for $220,000 where he built a two-story, five-bedroom, five-bath house. Although it is not registered as his homestead, Kim lives there. Valued at $1.1-million, it's a world away from the homes Kim sells for profit.
Take the 54-year-old stucco house slumped at 7016 N Oregon Ave. in central Tampa. The back facade is crumbling. In October, a large maple branch lay in the front yard, tangled in an electrical wire it snapped on the way down.
Neighbors said they had not seen anyone in the house for six months. A June 18 legal notice tacked to the door cited the owner for weeds, debris and junk.
The deed from 2006 lists Kim's investment company as the seller and a Tampa woman as the buyer. Haydee Llanes got a $200,000 mortgage — more than double the property appraiser's current market value — and defaulted this year.
Her phone is disconnected. Her address is listed at a house that's abandoned. She defaulted on two other loans issued that same year. One was for a house she bought from one of Kim's business associates.
His name is Francisco Acevedo. Law enforcement knows him well.
• • •
In 1999, Acevedo made the mistake of paying a midnight visit to a home in Land O' Lakes that Pasco County sheriff's deputies were watching. They stopped him after he left the home and found $24,000 cash in the trunk of his car.
Prosecutors said Acevedo was the main source in a drug ring that sold $70,000 of cocaine a week in Hernando, Hillsborough and Pasco counties.
He shows up time and again in Sonny Kim real estate deals. He and his wife acquired seven homes from Kim. In more than a dozen other deals where Acevedo bought or sold homes, Kim prepared the paperwork.
After Acevedo's arrest for cocaine trafficking, Kim wrote the judge, describing Acevedo as a "hard-working citizen" deserving of a second chance.
Acevedo pleaded guilty to trafficking and got two years in prison. After his release on probation, he and Kim managed a property maintenance company together.
Now 31, Acevedo has his own real estate investment company called the Acevedo Investment Group. "Take control of your future," says the company Web site. "In America, the most common way to accumulate wealth is through home ownership."
Since February, he has been sued four times for foreclosure. His wife has defaulted on three mortgages. His father defaulted on a $164,000 mortgage for a home he bought from Sonny Kim.
Acevedo did not respond to messages seeking comment.
• • •
It takes 29 pages for the Florida Department of Law Enforcement to list the 45 times Thermozi Thomas has been arrested since 1980. Marijuana and cocaine possession and distribution. Arson. Insurance fraud.
He pleaded guilty for the 1999 false imprisonment of a woman he drove home from a bar. The arrest report said he wouldn't let her go until she had sex with him. While he smoked crack, the woman called 911.
Last year, a judge ruled he was "incompetent to proceed'' on a cocaine charge and let him go.
Through the years, most of the charges against the 46-year-old Thomas have been dropped, often because he was deemed incompetent to stand trial. His former lawyer says Thomas is schizophrenic.
Since 2000, Thomas has bought and sold about 35 homes, most with quit-claim deeds that don't show the true sales price. Kim acquired at least six homes from Thomas.
Thomas — repeatedly ruled incompetent for trial — prepared documents in at least two deals with Kim. After his latest arrest, Thomas was placed in a state hospital, said his former attorney, Ronald Young.
"I can't imagine this guy as a real estate magnate," Young said. "Unless he's the greatest actor in the world, I have a funny feeling that someone took advantage of him. There's no way he was in any shape to flip homes."
Then there is Andre Scott, arrested in 2003 after delivering cocaine to an undercover officer in a Kash n' Karry parking lot.
While on probation, Scott started flipping subpar houses. He said in a 2006 interview with a promotional magazine that "house hustling'' gave him an honest way to live a life of luxury.
"I drive a Hummer and own a 1970 vintage Oldsmobile 442," Scott said then. "I always wanted diamonds and now I own them legally and no one can take them away."
Scott is a witness on at least one-third of the deeds for homes sold to Kim. Of those, Kim sold more than a dozen homes to people who later defaulted. Kim sold two homes to Scott in August and September. Scott paid him nearly $100,000 more than Kim paid for the properties.
In October, when Scott was arrested on a domestic battery charge, he listed his home address as the Pasco house that Kim owns.
Scott declined to comment.
• • •
Deanna Jones notarized dozens of Kim's deals, including many where the buyers are now in default.
"I can go home and sleep at night," she said. "That's all that matters."
Jones said Kim did nothing wrong by involving ex-felons in his deals.
"You're saying criminals can't buy or sell property?" she said. "Why don't you write about all the teachers molesting kids? That's a bigger problem, don't you think?"
Jones pleaded guilty this year to grand theft and criminal use of personal information after she ran up about $10,000 in fraudulent credit card charges. She got 18 months probation.
Jones works for a Broward County title agency operated by Howard Gaines. A federal grand jury in Fort Lauderdale indicted him in June. Gaines was part of a conspiracy to obtain mortgages by using straw buyers, according to the indictment. As title attorney, he was accused of falsifying documents to the bank to make it look like the buyers qualified for the loans.
The indictment covered only transactions in South Florida. Gaines has a Tampa office that leases space in a building owned by Kim. His company processed more than one-third of Sonny Kim's sales in Hillsborough County. Of those, at least 18 have defaulted.
When asked if Gaines would comment, Jones instant messaged him, then read aloud his reply message. "He just said, 'Don't give (the reporter) my number, I have nothing to say.' "
• • •
Five mortgages for people buying homes from Kim in Tampa were approved in Florence, S.C., by a subsidiary of Washington Mutual Bank. The deals, worth a total of $1-million, went through within five months of each other. All defaulted.
Asked if the banks saw any red flags, a WaMu spokeswoman cited privacy and would not address specific cases.
Nor would officials at Wachovia comment on three loans for a total of $597,000 that were made to Frank and Sarah Acevedo within two months of each other for homes they bought from Kim. All three defaulted.
Kim sold six homes to buyers using $1.2-million in mortgages bearing a lender address of Suite 250, Bayport Plaza: the local home of First Franklin, then a division of National City Bank. The mortgages were approved in a matter of months; all defaulted.
Near Tampa International Airport, with its gleaming glass facade, marble floors and tenants such as Boeing and Morgan Stanley, the 11-story Bayport Plaza is a high-rent repository for a series of deals involving near-worthless real estate.
From here, First Franklin approved a $138,000 mortgage for a yellow clapboard house on N 34th Street that Kim sold in 2006. It has particle board nailed across a side window and dirt smeared along its front. The buyer defaulted within months. It's listed now at $29,000.
"Amazing. I didn't know you could get such high prices in that part of Tampa," said Dianne Hart, CEO of the East Tampa Business and Civic Association, which builds houses in struggling neighborhoods. "And the banks approved these mortgages? Well, I guess that explains why we're in the situation that we're in."
Inez Albury is the only name from First Franklin that appears on the public documents for that loan and two others in Sonny Kim deals that defaulted.
Her job was "closer," meaning Albury processed the loan applications after an underwriter had reviewed the appraisal justifying the loan amount and the borrower's credit and criminal history. She lost her job in late 2007 as the boom ended with a thud.
During the good times, Albury described an assembly line approach to keep up with demand at her office. Managers made it clear they needed to hit their numbers each month.
The pressure was intense by 2006 and early 2007, she said. She reviewed as many as 20 loan applications a day, sending each one down the line to a title agency, sometimes just minutes before a closing. She never rejected one.
"We had quotas we had to meet," Albury said. "We didn't have time to look at them."
The house at N 34th Street is now listed at one-fifth of the loan amount she processed. The loan was approved for a man arrested for delivering cocaine and multiple other charges.
"That's ridiculous," Albury said. "I felt like it had to be a good loan by the time it reached me. I was just doing the job I was taught to do. I wasn't the one making the decisions."
Getting an explanation from First Franklin is impossible. Its Tampa office closed this year. The company was bought in late 2006 by Merrill Lynch, which was trying to grab a share of the sub-prime profits it saw competitors like Lehman Bros. making.
When that market tanked, Merrill Lynch found itself stuck with billions in junk mortgages. Under pressure, it merged with Bank of America in September.
Washington Mutual and Wachovia also have gone under or were forced to merge.
• • •
Kim's sales represent a miniscule fraction of mortgages these banks approved, but they illustrate how reckless the lenders became.
Dissect any of the 35 sales involving homes that ended up in foreclosure after they were sold by Sonny Kim, and it's hard to believe that lenders made any attempt to verify anything.
That's no surprise to prosecutors and experts who have reviewed thousands of mortgage fraud files. They say that often what allowed scams to work were banks that freely approved loans for borrowers who made absurd claims, like the carwash employee who supposedly earned $40,000 a month.
"Saying there was lax oversight is too kind, there was no oversight," said Doug Pollock, an expert witness for federal agencies prosecuting fraud. "The whole reason we're in this mess is because of the lenders. This is corporate greed all the way up the ladder."
Nothing will improve without accountability on all levels, Pollock said, especially as the same banks get billions in a taxpayer bailout.
"The bad guys took advantage of a weak system," he said. "Law enforcement needs to prosecute these guys. But we're forgetting who's really responsible, and that's the bankers. No one is holding them accountable or making them change the way they do business.''
But the nation's top regulators suggest there's little payoff in a crackdown.
"There's no question that somewhere in this terrible mess many laws were broken," the chairman of the Securities and Exchange Commission, Christopher Cox, recently told Congress. "But, you know, cleaning up the mess through law enforcement after the fact, while important, is not ideal."
Federal mortgage fraud investigations are typically triggered after a lender files a "suspicious activity'' report. In the FBI's Tampa division, the number of such reports nearly quintupled between 2004 and 2007, from 430 to 2,041. This expanding caseload is swamping an agency that since 9/11 diverted most of its investigators to counterterrorism.
Rampant fraud has created market conditions that encourage more manipulation. As home prices fall because of the glut of foreclosures, the banks are desperate to sell. Someone flush with cash could do well.
Despite the bleakest market in years, Sonny Kim has sold 25 homes this year.
He fetched $185,000 in September for a home in Belmont Heights that had an appraised value of $128,000.
Kim keeps buying, too. On Oct. 20, he snapped up a house south of Bearss Avenue that sold for $198,000 in 2006. Kim paid just $83,000.
Kim bought it from WaMu. The owner had defaulted on his mortgage, and the bank needed to unload the house.
TAMPA — Thousands of miles from the trading floors of global stock markets, an abandoned house in one of Tampa's poorest neighborhoods is an improbable place to learn about why the world's financial system is collapsing.
But if you want to understand how we got into this mess, the stucco house at 4809 N 17th St. isn't a bad place to start.
Beer bottles and shards of glass litter the yard. A blue tarp covers much of the rotting roof. Boards shutter the windows.
This husk sold for $300,000 in 2006 with the help of a no-money-down mortgage from a subsidiary of Washington Mutual Bank. The owner defaulted; WaMu owns it now. Listed for $52,000, the house could be yours for $35,000 cash.
"What we had here was an obvious case of mortgage fraud," said Josh Parker, a Coldwell Banker Realtor.
The 17th Street house is one of a constellation of 90 homes stretching across Tampa, all bought and sold in the past four years by a 34-year-old tattoo parlor owner.
Most of the homes Sang-Min Kim sold are empty now. Many have code violations, and are clustered in impoverished neighborhoods such as Belmont Heights and Sulphur Springs.
The trail of foreclosures and blight is lined with the bad mortgages approved or assigned by Wachovia, Washington Mutual, Bank of America, National City Bank, Lehman Bros., Fannie Mae, Freddie Mac and Wells Fargo.
The loans — many made by banks now getting billions in a taxpayer bailout — dwarfed the true value of the properties. Some borrowers had no prospects to suggest they could pay off the loans. Multiple loans from the same bank branch sometimes went to a questionable borrower within weeks of each other.
"It's obvious the banks weren't paying attention, or worse," said Richard Hagar, a property fraud expert.
• • •
Kim, who has no criminal record in Florida, made millions selling houses. More than a third of the homes he sold are in default, with more expected. Some of the buyers have criminal records as drug dealers.
Real estate is popular among drug dealers, experts say. It's a cash investment that allows them to launder money, and the returns are terrific. Flipping a single house, a dealer can score more than he can grinding it out on a street corner for a year.
A common scam works like this: Someone with cash buys a crummy house cheap. A mortgage broker signs on and finds an appraiser to inflate the value. The broker shops the loan application, with false data about the borrower and the house. Bank loan officers approve it.
In recent years, this scam went unchecked as bank oversight mostly vanished. Banks had traditionally held onto mortgages for 30 years and had a self-interest in seeing that borrowers could repay the loans. But as lending rules were relaxed, banks sold the riskiest loans to investment firms, which dumped them into pools of thousands of other mortgages that investors would buy.
This pass-the-buck system did such a poor job policing itself, Hagar said, that "government now considers (mortgage fraud) a national security threat that's undermining our banking system.''
All it takes to prevent, Hagar said, is someone at the bank to ask a couple of questions. "This kind of fraud should be easy to spot."
• • •
"Sonny'' Kim, who was born in South Korea, owns Body Design Tattoos, an Asian-themed tattoo and body piercing parlor on N Florida Avenue. He's also listed as an owner of a flea market.
He started flipping property four years ago. In late 2005, he formed a real estate investment firm. Buyers paid Kim $10.7-million for homes he bought for $6.5-million, according to Hillsborough County property records.
What's his secret? Kim won't say. He politely declined any comment for this story.
His homestead tax exemption is on a house in Pasco's Meadow Pointe subdivision appraised at $215,000.
Kim lived there until recently, said Greg Ingram, who lives next door but never got to know his neighbor. Judging from a steady rotation of flashy cars in the driveway — a Hummer, a Mercedes, a Lexus, a Cadillac — Ingram assumed Kim worked at a car dealership.
In 2006, Kim bought an empty lot in a gated Lutz subdivision for $220,000 where he built a two-story, five-bedroom, five-bath house. Although it is not registered as his homestead, Kim lives there. Valued at $1.1-million, it's a world away from the homes Kim sells for profit.
Take the 54-year-old stucco house slumped at 7016 N Oregon Ave. in central Tampa. The back facade is crumbling. In October, a large maple branch lay in the front yard, tangled in an electrical wire it snapped on the way down.
Neighbors said they had not seen anyone in the house for six months. A June 18 legal notice tacked to the door cited the owner for weeds, debris and junk.
The deed from 2006 lists Kim's investment company as the seller and a Tampa woman as the buyer. Haydee Llanes got a $200,000 mortgage — more than double the property appraiser's current market value — and defaulted this year.
Her phone is disconnected. Her address is listed at a house that's abandoned. She defaulted on two other loans issued that same year. One was for a house she bought from one of Kim's business associates.
His name is Francisco Acevedo. Law enforcement knows him well.
• • •
In 1999, Acevedo made the mistake of paying a midnight visit to a home in Land O' Lakes that Pasco County sheriff's deputies were watching. They stopped him after he left the home and found $24,000 cash in the trunk of his car.
Prosecutors said Acevedo was the main source in a drug ring that sold $70,000 of cocaine a week in Hernando, Hillsborough and Pasco counties.
He shows up time and again in Sonny Kim real estate deals. He and his wife acquired seven homes from Kim. In more than a dozen other deals where Acevedo bought or sold homes, Kim prepared the paperwork.
After Acevedo's arrest for cocaine trafficking, Kim wrote the judge, describing Acevedo as a "hard-working citizen" deserving of a second chance.
Acevedo pleaded guilty to trafficking and got two years in prison. After his release on probation, he and Kim managed a property maintenance company together.
Now 31, Acevedo has his own real estate investment company called the Acevedo Investment Group. "Take control of your future," says the company Web site. "In America, the most common way to accumulate wealth is through home ownership."
Since February, he has been sued four times for foreclosure. His wife has defaulted on three mortgages. His father defaulted on a $164,000 mortgage for a home he bought from Sonny Kim.
Acevedo did not respond to messages seeking comment.
• • •
It takes 29 pages for the Florida Department of Law Enforcement to list the 45 times Thermozi Thomas has been arrested since 1980. Marijuana and cocaine possession and distribution. Arson. Insurance fraud.
He pleaded guilty for the 1999 false imprisonment of a woman he drove home from a bar. The arrest report said he wouldn't let her go until she had sex with him. While he smoked crack, the woman called 911.
Last year, a judge ruled he was "incompetent to proceed'' on a cocaine charge and let him go.
Through the years, most of the charges against the 46-year-old Thomas have been dropped, often because he was deemed incompetent to stand trial. His former lawyer says Thomas is schizophrenic.
Since 2000, Thomas has bought and sold about 35 homes, most with quit-claim deeds that don't show the true sales price. Kim acquired at least six homes from Thomas.
Thomas — repeatedly ruled incompetent for trial — prepared documents in at least two deals with Kim. After his latest arrest, Thomas was placed in a state hospital, said his former attorney, Ronald Young.
"I can't imagine this guy as a real estate magnate," Young said. "Unless he's the greatest actor in the world, I have a funny feeling that someone took advantage of him. There's no way he was in any shape to flip homes."
Then there is Andre Scott, arrested in 2003 after delivering cocaine to an undercover officer in a Kash n' Karry parking lot.
While on probation, Scott started flipping subpar houses. He said in a 2006 interview with a promotional magazine that "house hustling'' gave him an honest way to live a life of luxury.
"I drive a Hummer and own a 1970 vintage Oldsmobile 442," Scott said then. "I always wanted diamonds and now I own them legally and no one can take them away."
Scott is a witness on at least one-third of the deeds for homes sold to Kim. Of those, Kim sold more than a dozen homes to people who later defaulted. Kim sold two homes to Scott in August and September. Scott paid him nearly $100,000 more than Kim paid for the properties.
In October, when Scott was arrested on a domestic battery charge, he listed his home address as the Pasco house that Kim owns.
Scott declined to comment.
• • •
Deanna Jones notarized dozens of Kim's deals, including many where the buyers are now in default.
"I can go home and sleep at night," she said. "That's all that matters."
Jones said Kim did nothing wrong by involving ex-felons in his deals.
"You're saying criminals can't buy or sell property?" she said. "Why don't you write about all the teachers molesting kids? That's a bigger problem, don't you think?"
Jones pleaded guilty this year to grand theft and criminal use of personal information after she ran up about $10,000 in fraudulent credit card charges. She got 18 months probation.
Jones works for a Broward County title agency operated by Howard Gaines. A federal grand jury in Fort Lauderdale indicted him in June. Gaines was part of a conspiracy to obtain mortgages by using straw buyers, according to the indictment. As title attorney, he was accused of falsifying documents to the bank to make it look like the buyers qualified for the loans.
The indictment covered only transactions in South Florida. Gaines has a Tampa office that leases space in a building owned by Kim. His company processed more than one-third of Sonny Kim's sales in Hillsborough County. Of those, at least 18 have defaulted.
When asked if Gaines would comment, Jones instant messaged him, then read aloud his reply message. "He just said, 'Don't give (the reporter) my number, I have nothing to say.' "
• • •
Five mortgages for people buying homes from Kim in Tampa were approved in Florence, S.C., by a subsidiary of Washington Mutual Bank. The deals, worth a total of $1-million, went through within five months of each other. All defaulted.
Asked if the banks saw any red flags, a WaMu spokeswoman cited privacy and would not address specific cases.
Nor would officials at Wachovia comment on three loans for a total of $597,000 that were made to Frank and Sarah Acevedo within two months of each other for homes they bought from Kim. All three defaulted.
Kim sold six homes to buyers using $1.2-million in mortgages bearing a lender address of Suite 250, Bayport Plaza: the local home of First Franklin, then a division of National City Bank. The mortgages were approved in a matter of months; all defaulted.
Near Tampa International Airport, with its gleaming glass facade, marble floors and tenants such as Boeing and Morgan Stanley, the 11-story Bayport Plaza is a high-rent repository for a series of deals involving near-worthless real estate.
From here, First Franklin approved a $138,000 mortgage for a yellow clapboard house on N 34th Street that Kim sold in 2006. It has particle board nailed across a side window and dirt smeared along its front. The buyer defaulted within months. It's listed now at $29,000.
"Amazing. I didn't know you could get such high prices in that part of Tampa," said Dianne Hart, CEO of the East Tampa Business and Civic Association, which builds houses in struggling neighborhoods. "And the banks approved these mortgages? Well, I guess that explains why we're in the situation that we're in."
Inez Albury is the only name from First Franklin that appears on the public documents for that loan and two others in Sonny Kim deals that defaulted.
Her job was "closer," meaning Albury processed the loan applications after an underwriter had reviewed the appraisal justifying the loan amount and the borrower's credit and criminal history. She lost her job in late 2007 as the boom ended with a thud.
During the good times, Albury described an assembly line approach to keep up with demand at her office. Managers made it clear they needed to hit their numbers each month.
The pressure was intense by 2006 and early 2007, she said. She reviewed as many as 20 loan applications a day, sending each one down the line to a title agency, sometimes just minutes before a closing. She never rejected one.
"We had quotas we had to meet," Albury said. "We didn't have time to look at them."
The house at N 34th Street is now listed at one-fifth of the loan amount she processed. The loan was approved for a man arrested for delivering cocaine and multiple other charges.
"That's ridiculous," Albury said. "I felt like it had to be a good loan by the time it reached me. I was just doing the job I was taught to do. I wasn't the one making the decisions."
Getting an explanation from First Franklin is impossible. Its Tampa office closed this year. The company was bought in late 2006 by Merrill Lynch, which was trying to grab a share of the sub-prime profits it saw competitors like Lehman Bros. making.
When that market tanked, Merrill Lynch found itself stuck with billions in junk mortgages. Under pressure, it merged with Bank of America in September.
Washington Mutual and Wachovia also have gone under or were forced to merge.
• • •
Kim's sales represent a miniscule fraction of mortgages these banks approved, but they illustrate how reckless the lenders became.
Dissect any of the 35 sales involving homes that ended up in foreclosure after they were sold by Sonny Kim, and it's hard to believe that lenders made any attempt to verify anything.
That's no surprise to prosecutors and experts who have reviewed thousands of mortgage fraud files. They say that often what allowed scams to work were banks that freely approved loans for borrowers who made absurd claims, like the carwash employee who supposedly earned $40,000 a month.
"Saying there was lax oversight is too kind, there was no oversight," said Doug Pollock, an expert witness for federal agencies prosecuting fraud. "The whole reason we're in this mess is because of the lenders. This is corporate greed all the way up the ladder."
Nothing will improve without accountability on all levels, Pollock said, especially as the same banks get billions in a taxpayer bailout.
"The bad guys took advantage of a weak system," he said. "Law enforcement needs to prosecute these guys. But we're forgetting who's really responsible, and that's the bankers. No one is holding them accountable or making them change the way they do business.''
But the nation's top regulators suggest there's little payoff in a crackdown.
"There's no question that somewhere in this terrible mess many laws were broken," the chairman of the Securities and Exchange Commission, Christopher Cox, recently told Congress. "But, you know, cleaning up the mess through law enforcement after the fact, while important, is not ideal."
Federal mortgage fraud investigations are typically triggered after a lender files a "suspicious activity'' report. In the FBI's Tampa division, the number of such reports nearly quintupled between 2004 and 2007, from 430 to 2,041. This expanding caseload is swamping an agency that since 9/11 diverted most of its investigators to counterterrorism.
Rampant fraud has created market conditions that encourage more manipulation. As home prices fall because of the glut of foreclosures, the banks are desperate to sell. Someone flush with cash could do well.
Despite the bleakest market in years, Sonny Kim has sold 25 homes this year.
He fetched $185,000 in September for a home in Belmont Heights that had an appraised value of $128,000.
Kim keeps buying, too. On Oct. 20, he snapped up a house south of Bearss Avenue that sold for $198,000 in 2006. Kim paid just $83,000.
Kim bought it from WaMu. The owner had defaulted on his mortgage, and the bank needed to unload the house.
Wednesday, November 26, 2008
FHA-Backed Loans: The New Subprime
The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more
By Chad Terhune and Robert Berner of Business Week, 11/19/2008
As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.
You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.
For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.
More Bad Debt
As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That's on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: "Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon."
The resilient entrepreneurs who populate this dubious field are often obscure, but not puny. Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country's largest subprime lenders, with 750 branches and 5,000 brokers across the U.S. Cugno, now 59, took home millions of dollars and rewarded top salesmen with Caribbean cruises and shiny Hummers, according to court records and interviews with former employees. But along the way, Premier accumulated a dismal regulatory record. Five states—Florida, Georgia, North Carolina, Ohio, and Wisconsin—revoked its license for various abuses; four others disciplined the company for using unlicensed brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to file for U.S. bankruptcy court protection in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.
But Premier didn't just close down. Since it declared bankruptcy, federal records show, it has issued more than 2,000 taxpayer-insured mortgages—worth a total of $250 million. According to the FHA, Premier failed to notify the agency of its Chapter 11 filing, as required by law. In late October, an FHA spokesman admitted it was unaware of Premier's situation and welcomed any information BusinessWeek could provide.
You'd think the government would have had Premier on a watch list. According to data compiled by the FHA's parent, the U.S. Housing & Urban Development Dept. (HUD), the firm's borrowers have a 9.2% default rate, the second highest among large-volume FHA lenders nationally.
Now, members of the Cugno family have started a brand new company called Paramount Mortgage Funding. It operates a floor below Premier's headquarters in a three-story black-glass office building Jerry Cugno owns in Clearwater. In August 2007, only weeks after Premier sought bankruptcy court protection, the FHA granted Paramount a license to issue government-backed mortgages. "I am the only person in the country who really understands FHA," Cugno says with characteristic bravado.
One day recently, Nicole Cugno, his 27-year-old daughter and a Paramount vice-president, was on the phone at her desk, giving advice to new branch managers. Despite past troubles with Premier, the family says Paramount dutifully serves borrowers. The Cugnos stress that the two companies are legally separate organizations.
Similarly worrisome stories are playing out around the country. In Tucson, First Magnus Financial specialized in risky "Alt-A" mortgages, which didn't require borrowers to verify their income. State and federal regulators cited the company for misleading borrowers, using unlicensed brokers, and other infractions. It shut down last summer and laid off its 5,500 employees. But in May, the FHA issued a group of former First Magnus executives a new license to make taxpayer-insured home loans. They have opened a company called StoneWater Mortgage in the same office building that First Magnus had occupied.
G. Todd Jackson, an attorney for StoneWater, said in a written statement that the new company "is not First Magnus." StoneWater employs "a new business model, with different loan products, in a different market," he added. First Magnus had "a long record of compliance," he said. "Isolated incidents and personnel problems occurred, but none were remotely systemic, and all were promptly addressed and corrected by management when discovered."
Back to Life
Nationstar Mortgage, based in suburban Dallas, closed its 75 retail branches in September 2007 after the subprime market crashed. But in August, Chief Information Officer Peter Schwartz told the trade paper American Banker that Nationstar now plans to emphasize FHA-backed loans, which he called a "high-growth channel." The lender received federal approval in March to offer government-guaranteed loans. Just a year earlier, it agreed to pay the Kentucky Financial Institutions Dept. a $105,000 settlement—one of the largest of its kind in that state—to resolve allegations that Nationstar employed unlicensed loan officers and falsified borrowers' credit scores. Nationstar didn't admit wrongdoing in the case.
"All loans we originate conform to industry best practices, as well as all applicable federal and state laws," says Executive Vice-President Steven Hess. The settlement in Kentucky, he adds, isn't "relevant to our FHA status."
Lend America in Melville, N.Y., uses cable television infomercials and a toll-free number (1-800-FHA-FIXED) to encourage borrowers in trouble with adjustable-rate mortgages to refinance with fixed-rate loans guaranteed by the FHA. Anticipating the real estate crash, the Long Island firm switched its strategy in 2005 from subprime to FHA-backed mortgages, says Michael Ashley, Lend America's chief business strategist. This year, the company will make 7,500 FHA loans, worth $1.5 billion, he says. "FHA is a big part of the future," Ashley adds. "It's the major vehicle for the government to bail out the housing industry."
But why the federal government would want to do business with Lend America is perplexing. Ashley has a long history of legal scrapes. One of them led to his pleading guilty in 1996 in federal court in Uniondale, N.Y., to two counts of wire fraud related to a mortgage scam at another company his family ran called Liberty Mortgage. He was sentenced to five years' probation and ordered to pay a $30,000 fine. His father, Kenneth Ashley, was sentenced to nearly four years in prison. "I was just a pawn in a chess game between my father and the government," says the younger Ashley, who is 43. "It doesn't affect my ability to do lending." The default rate on Lend America's current FHA loans is 5.7%, or 53% above the national average, according to government records.
Asked about FHA oversight of former subprime firms, agency spokesman Lemar Wooley says: "FHA has taken appropriate actions, where necessary, with these lenders with respect to their participation in FHA programs." First Magnus, Nationstar, and Lend America met all applicable federal rules, Wooley says. But on two occasions since 2000 one office of Lend America in New York temporarily lost its authority to originate FHA-backed loans because of an excessive default rate, he says. Wooley says the FHA wasn't aware that Lend America's Ashley had been convicted. The firm didn't list Ashley as a principal, Wooley says. FHA lenders are required to disclose past regulatory sanctions and are forbidden to employ people with criminal records.
Founded during the New Deal, the FHA is supposed to promote first-time home purchases. Open to all applicants, it allows small down payments—as little as 3%—and lenient standards on borrower income, as long as mortgage and related expenses don't exceed 31% of household earnings. In exchange for taxpayer-backed insurance on attractively priced fixed-rate loans, buyers pay a modest fee. Lenders and brokers can get a license to participate in FHA programs if they demonstrate industry experience and knowledge of agency rules.
During the subprime boom, the FHA atrophied as borrowers migrated to the too-good-to-be-true deals that featured terms such as extremely low introductory interest rates that later jumped skyward. But since the subprime market vaporized in 2007, FHA-backed loans have become all that's available for many borrowers. By fall 2008, FHA loans accounted for 26% of all new mortgages being issued nationwide, up from only 4% a year earlier. As of Sept. 30, the most recent date for which data are publicly available, the FHA had 4.4 million single-family mortgages under guarantee, worth a total of $475 billion.
A Swelling "Tsunami"
Congress and the Bush Administration are strongly encouraging lenders to apply for FHA approval and tap into the government's loan-guarantee reservoir. In September, the agency guaranteed 140,000 new loans, up from 60,000 in January. In October, as Congress and the White House scrambled to respond to the spreading financial disaster, the FHA began to extend $300 billion in additional loan guarantees under the banner of a new program called HOPE for Homeowners. The limit on the amount buyers may borrow will rise in January to $625,000 from $362,790 in 2007.
Some current and former federal housing officials say the agency isn't anywhere close to being equipped to deal with the onslaught of lenders seeking to cash in. Thirty-six thousand lenders now have FHA licenses, up from 16,000 in mid-2007. FHA "faces a tsunami" in the form of ex-subprime lenders who favor aggressive sales tactics and sometimes engage in outright fraud, says Kenneth M. Donohue Sr., the inspector general for HUD. "I am very concerned that the same players who brought us problems in the subprime area are now reconstituting themselves and bringing loans into the FHA portfolio," he adds.
FHA staffing has remained roughly level over the past five years, at just under 1,000 employees, even as that tsunami has been building, Donohue points out. The FHA unit that approves new lenders, recertifies existing ones, and oversees quality assurance has only five slots; two of those were vacant this fall, according to HUD's Web site. Former housing officials say lender evaluations sometimes amount to little more than a brief phone call, which helps explain why questionable ex-subprime operations can reinvent themselves and gain approval. "They are absolutely understaffed," says Donohue, "and they need a much better IT system in place. That is one of their great vulnerabilities."
Joseph McCloskey, a former director of FHA's single-family asset management branch, says workers reviewing lender applications have had difficulty for years tracking whether executives of previously disciplined mortgage firms were applying for new FHA licenses. "Technologically, they are challenged," McCloskey, now a consultant to FHA lenders, says of his overmatched former colleagues.
The FHA's Wooley disputes these criticisms. The agency can cross-check names and thoroughly examine lender applications, he says.
Like Flies to Honey
There are numerous law-abiding FHA lenders and brokers, just as there are subprime mortgage firms that behaved honestly and cautiously in recent years. But the current economic crisis has turned the FHA into a profit magnet for all kinds of financial players. Major Wall Street investment firms are finding their own angles, which are entirely legal.
In April 2007, Goldman Sachs (GS) purchased a controlling stake in Senderra Funding, a former subprime lender in Fort Mill, S.C. Goldman, which has received $10 billion in direct federal rescue money, converted Senderra into an FHA lender and refinance organization. The strategy appears likely to produce hefty margins. In September, Goldman paid 63¢ on the dollar in a $760 million deal with Equity One (EQY), a unit of Banco Popular (BPOP), for a batch of subprime mortgage and auto loans. Through Senderra, Goldman plans to refinance at least some of the mortgages into FHA-backed loans. Because of the government guarantee, it can then sell those loans to other financial firms for as much as 90¢ on the dollar, according to people familiar with the mortgage market. That's a profit margin of more than 40%.
Goldman's dealings suggest another reason FHA-insured lending is booming: The federal guarantee creates an incentive for banks to buy FHA loans and bundle them as securities to be sold to investors. This is happening as the securitization of subprime and conventional mortgages has largely ceased.
Operating far from Wall Street, the Cugno clan of Clearwater exemplifies a certain indefatigable American spirit in the face of economic setbacks. Whether that enterprising drive is always something to celebrate is less clear.
The Cugnos concede that their older mortgage firm, Premier, had its flaws. "My dad's company got too big," says Nicole Cugno. "It was too hard to control." At its peak in 2006, Premier originated $1 billion in loans each month and had annual revenue of more than $200 million. It sold what amounted to franchises to brokers around the country who frequently operated with little supervision from the 200-employee home office. "Everybody had a few bad apples, and I had a few of them," Nicole's father, Jerry, says. "If they got in trouble, we fired them."
Mark Pearce, deputy commissioner of banks in North Carolina, one of the five states that banned Premier, counters that the company seems to have invited abuses. North Carolina investigators concluded that Premier's branch in Charlotte allowed, among other deceptive practices, unlicensed brokers from around the country to "park" loans there for a fee. The aim was to make it appear that the mortgages were associated with a licensed broker trained and supervised by a substantial firm. "This is a company that should not be doing business in North Carolina," Pearce says.
But the Cugnos are very much staying in business. While Premier's bankruptcy proceedings continue in Tampa, members of the family are employing essentially the same model with their new company, Paramount. Only this time they are stressing federally guaranteed FHA loans. Paramount charges branches $1,625 a month to use its name, FHA license, and software. On its Web site, it tells brokers that FHA loans are "the new subprime."
"We're taking some of the things Premier did and tweaking [them]," says Barry McNab, a former Premier executive who now heads FHA lending for Paramount. About 9 out of 10 Paramount loans have FHA backing, he explains. It's difficult to evaluate most of those guaranteed loans, since they are so new. But a look at the experiences of some past Premier borrowers isn't encouraging.
U.S. District Judge Richard Alan Enslen in Kalamazoo, Mich., began a June 2007 written opinion about Premier's practices with this observation: "The crooks in prison-wear (orange jump suits) are easy to spot. Those in business-wear are not, though they do no less harm to their unsuspecting victims."
The case before Judge Enslen concerned Marcia Clifford, 53. She won a civil verdict that Premier had violated federal mortgage law when it replaced the fixed-rate loan it had promised her with one bearing an adjustable rate. Enslen also found that Premier had misrepresented Clifford on her application as employed when she was out of work and living on $700 a month in disability payments. Despite his ire, the judge decided to award Clifford, who did sign the deceptive documents, only $3,720 in damages, an amount based on unauthorized fees Premier had pocketed.
By Chad Terhune and Robert Berner of Business Week, 11/19/2008
As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.
You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.
For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.
More Bad Debt
As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That's on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: "Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon."
The resilient entrepreneurs who populate this dubious field are often obscure, but not puny. Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country's largest subprime lenders, with 750 branches and 5,000 brokers across the U.S. Cugno, now 59, took home millions of dollars and rewarded top salesmen with Caribbean cruises and shiny Hummers, according to court records and interviews with former employees. But along the way, Premier accumulated a dismal regulatory record. Five states—Florida, Georgia, North Carolina, Ohio, and Wisconsin—revoked its license for various abuses; four others disciplined the company for using unlicensed brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to file for U.S. bankruptcy court protection in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.
But Premier didn't just close down. Since it declared bankruptcy, federal records show, it has issued more than 2,000 taxpayer-insured mortgages—worth a total of $250 million. According to the FHA, Premier failed to notify the agency of its Chapter 11 filing, as required by law. In late October, an FHA spokesman admitted it was unaware of Premier's situation and welcomed any information BusinessWeek could provide.
You'd think the government would have had Premier on a watch list. According to data compiled by the FHA's parent, the U.S. Housing & Urban Development Dept. (HUD), the firm's borrowers have a 9.2% default rate, the second highest among large-volume FHA lenders nationally.
Now, members of the Cugno family have started a brand new company called Paramount Mortgage Funding. It operates a floor below Premier's headquarters in a three-story black-glass office building Jerry Cugno owns in Clearwater. In August 2007, only weeks after Premier sought bankruptcy court protection, the FHA granted Paramount a license to issue government-backed mortgages. "I am the only person in the country who really understands FHA," Cugno says with characteristic bravado.
One day recently, Nicole Cugno, his 27-year-old daughter and a Paramount vice-president, was on the phone at her desk, giving advice to new branch managers. Despite past troubles with Premier, the family says Paramount dutifully serves borrowers. The Cugnos stress that the two companies are legally separate organizations.
Similarly worrisome stories are playing out around the country. In Tucson, First Magnus Financial specialized in risky "Alt-A" mortgages, which didn't require borrowers to verify their income. State and federal regulators cited the company for misleading borrowers, using unlicensed brokers, and other infractions. It shut down last summer and laid off its 5,500 employees. But in May, the FHA issued a group of former First Magnus executives a new license to make taxpayer-insured home loans. They have opened a company called StoneWater Mortgage in the same office building that First Magnus had occupied.
G. Todd Jackson, an attorney for StoneWater, said in a written statement that the new company "is not First Magnus." StoneWater employs "a new business model, with different loan products, in a different market," he added. First Magnus had "a long record of compliance," he said. "Isolated incidents and personnel problems occurred, but none were remotely systemic, and all were promptly addressed and corrected by management when discovered."
Back to Life
Nationstar Mortgage, based in suburban Dallas, closed its 75 retail branches in September 2007 after the subprime market crashed. But in August, Chief Information Officer Peter Schwartz told the trade paper American Banker that Nationstar now plans to emphasize FHA-backed loans, which he called a "high-growth channel." The lender received federal approval in March to offer government-guaranteed loans. Just a year earlier, it agreed to pay the Kentucky Financial Institutions Dept. a $105,000 settlement—one of the largest of its kind in that state—to resolve allegations that Nationstar employed unlicensed loan officers and falsified borrowers' credit scores. Nationstar didn't admit wrongdoing in the case.
"All loans we originate conform to industry best practices, as well as all applicable federal and state laws," says Executive Vice-President Steven Hess. The settlement in Kentucky, he adds, isn't "relevant to our FHA status."
Lend America in Melville, N.Y., uses cable television infomercials and a toll-free number (1-800-FHA-FIXED) to encourage borrowers in trouble with adjustable-rate mortgages to refinance with fixed-rate loans guaranteed by the FHA. Anticipating the real estate crash, the Long Island firm switched its strategy in 2005 from subprime to FHA-backed mortgages, says Michael Ashley, Lend America's chief business strategist. This year, the company will make 7,500 FHA loans, worth $1.5 billion, he says. "FHA is a big part of the future," Ashley adds. "It's the major vehicle for the government to bail out the housing industry."
But why the federal government would want to do business with Lend America is perplexing. Ashley has a long history of legal scrapes. One of them led to his pleading guilty in 1996 in federal court in Uniondale, N.Y., to two counts of wire fraud related to a mortgage scam at another company his family ran called Liberty Mortgage. He was sentenced to five years' probation and ordered to pay a $30,000 fine. His father, Kenneth Ashley, was sentenced to nearly four years in prison. "I was just a pawn in a chess game between my father and the government," says the younger Ashley, who is 43. "It doesn't affect my ability to do lending." The default rate on Lend America's current FHA loans is 5.7%, or 53% above the national average, according to government records.
Asked about FHA oversight of former subprime firms, agency spokesman Lemar Wooley says: "FHA has taken appropriate actions, where necessary, with these lenders with respect to their participation in FHA programs." First Magnus, Nationstar, and Lend America met all applicable federal rules, Wooley says. But on two occasions since 2000 one office of Lend America in New York temporarily lost its authority to originate FHA-backed loans because of an excessive default rate, he says. Wooley says the FHA wasn't aware that Lend America's Ashley had been convicted. The firm didn't list Ashley as a principal, Wooley says. FHA lenders are required to disclose past regulatory sanctions and are forbidden to employ people with criminal records.
Founded during the New Deal, the FHA is supposed to promote first-time home purchases. Open to all applicants, it allows small down payments—as little as 3%—and lenient standards on borrower income, as long as mortgage and related expenses don't exceed 31% of household earnings. In exchange for taxpayer-backed insurance on attractively priced fixed-rate loans, buyers pay a modest fee. Lenders and brokers can get a license to participate in FHA programs if they demonstrate industry experience and knowledge of agency rules.
During the subprime boom, the FHA atrophied as borrowers migrated to the too-good-to-be-true deals that featured terms such as extremely low introductory interest rates that later jumped skyward. But since the subprime market vaporized in 2007, FHA-backed loans have become all that's available for many borrowers. By fall 2008, FHA loans accounted for 26% of all new mortgages being issued nationwide, up from only 4% a year earlier. As of Sept. 30, the most recent date for which data are publicly available, the FHA had 4.4 million single-family mortgages under guarantee, worth a total of $475 billion.
A Swelling "Tsunami"
Congress and the Bush Administration are strongly encouraging lenders to apply for FHA approval and tap into the government's loan-guarantee reservoir. In September, the agency guaranteed 140,000 new loans, up from 60,000 in January. In October, as Congress and the White House scrambled to respond to the spreading financial disaster, the FHA began to extend $300 billion in additional loan guarantees under the banner of a new program called HOPE for Homeowners. The limit on the amount buyers may borrow will rise in January to $625,000 from $362,790 in 2007.
Some current and former federal housing officials say the agency isn't anywhere close to being equipped to deal with the onslaught of lenders seeking to cash in. Thirty-six thousand lenders now have FHA licenses, up from 16,000 in mid-2007. FHA "faces a tsunami" in the form of ex-subprime lenders who favor aggressive sales tactics and sometimes engage in outright fraud, says Kenneth M. Donohue Sr., the inspector general for HUD. "I am very concerned that the same players who brought us problems in the subprime area are now reconstituting themselves and bringing loans into the FHA portfolio," he adds.
FHA staffing has remained roughly level over the past five years, at just under 1,000 employees, even as that tsunami has been building, Donohue points out. The FHA unit that approves new lenders, recertifies existing ones, and oversees quality assurance has only five slots; two of those were vacant this fall, according to HUD's Web site. Former housing officials say lender evaluations sometimes amount to little more than a brief phone call, which helps explain why questionable ex-subprime operations can reinvent themselves and gain approval. "They are absolutely understaffed," says Donohue, "and they need a much better IT system in place. That is one of their great vulnerabilities."
Joseph McCloskey, a former director of FHA's single-family asset management branch, says workers reviewing lender applications have had difficulty for years tracking whether executives of previously disciplined mortgage firms were applying for new FHA licenses. "Technologically, they are challenged," McCloskey, now a consultant to FHA lenders, says of his overmatched former colleagues.
The FHA's Wooley disputes these criticisms. The agency can cross-check names and thoroughly examine lender applications, he says.
Like Flies to Honey
There are numerous law-abiding FHA lenders and brokers, just as there are subprime mortgage firms that behaved honestly and cautiously in recent years. But the current economic crisis has turned the FHA into a profit magnet for all kinds of financial players. Major Wall Street investment firms are finding their own angles, which are entirely legal.
In April 2007, Goldman Sachs (GS) purchased a controlling stake in Senderra Funding, a former subprime lender in Fort Mill, S.C. Goldman, which has received $10 billion in direct federal rescue money, converted Senderra into an FHA lender and refinance organization. The strategy appears likely to produce hefty margins. In September, Goldman paid 63¢ on the dollar in a $760 million deal with Equity One (EQY), a unit of Banco Popular (BPOP), for a batch of subprime mortgage and auto loans. Through Senderra, Goldman plans to refinance at least some of the mortgages into FHA-backed loans. Because of the government guarantee, it can then sell those loans to other financial firms for as much as 90¢ on the dollar, according to people familiar with the mortgage market. That's a profit margin of more than 40%.
Goldman's dealings suggest another reason FHA-insured lending is booming: The federal guarantee creates an incentive for banks to buy FHA loans and bundle them as securities to be sold to investors. This is happening as the securitization of subprime and conventional mortgages has largely ceased.
Operating far from Wall Street, the Cugno clan of Clearwater exemplifies a certain indefatigable American spirit in the face of economic setbacks. Whether that enterprising drive is always something to celebrate is less clear.
The Cugnos concede that their older mortgage firm, Premier, had its flaws. "My dad's company got too big," says Nicole Cugno. "It was too hard to control." At its peak in 2006, Premier originated $1 billion in loans each month and had annual revenue of more than $200 million. It sold what amounted to franchises to brokers around the country who frequently operated with little supervision from the 200-employee home office. "Everybody had a few bad apples, and I had a few of them," Nicole's father, Jerry, says. "If they got in trouble, we fired them."
Mark Pearce, deputy commissioner of banks in North Carolina, one of the five states that banned Premier, counters that the company seems to have invited abuses. North Carolina investigators concluded that Premier's branch in Charlotte allowed, among other deceptive practices, unlicensed brokers from around the country to "park" loans there for a fee. The aim was to make it appear that the mortgages were associated with a licensed broker trained and supervised by a substantial firm. "This is a company that should not be doing business in North Carolina," Pearce says.
But the Cugnos are very much staying in business. While Premier's bankruptcy proceedings continue in Tampa, members of the family are employing essentially the same model with their new company, Paramount. Only this time they are stressing federally guaranteed FHA loans. Paramount charges branches $1,625 a month to use its name, FHA license, and software. On its Web site, it tells brokers that FHA loans are "the new subprime."
"We're taking some of the things Premier did and tweaking [them]," says Barry McNab, a former Premier executive who now heads FHA lending for Paramount. About 9 out of 10 Paramount loans have FHA backing, he explains. It's difficult to evaluate most of those guaranteed loans, since they are so new. But a look at the experiences of some past Premier borrowers isn't encouraging.
U.S. District Judge Richard Alan Enslen in Kalamazoo, Mich., began a June 2007 written opinion about Premier's practices with this observation: "The crooks in prison-wear (orange jump suits) are easy to spot. Those in business-wear are not, though they do no less harm to their unsuspecting victims."
The case before Judge Enslen concerned Marcia Clifford, 53. She won a civil verdict that Premier had violated federal mortgage law when it replaced the fixed-rate loan it had promised her with one bearing an adjustable rate. Enslen also found that Premier had misrepresented Clifford on her application as employed when she was out of work and living on $700 a month in disability payments. Despite his ire, the judge decided to award Clifford, who did sign the deceptive documents, only $3,720 in damages, an amount based on unauthorized fees Premier had pocketed.
Clifford's name now appears along with a lengthy list of Premier's other creditors in the bankruptcy court in Tampa. Unable to make her $600 monthly mortgage payment, she received an eviction notice in June and says she is likely to lose her three-bedroom house in Belding, Mich. "It was a bait and switch," Clifford says, sobbing. "The folks at Premier are coldhearted."
Janice Dixon is also owed money by Premier. In March 2006 an Alabama jury awarded her $127,000 in damages related to a fraudulent refinancing in which, she alleged, the company didn't disclose the full costs of her borrowing. "Who will fix this?" Dixon, 49, asks. "They will continue to do these same things over and over."
Wooley, the FHA spokesman, says the agency noticed Premier's default rate rising earlier this year. But he adds that both Premier and Paramount met FHA requirements.
Low Income? No Problem
Like the Cugnos, Hector J. Hernandez lately has shifted his mortgage business away from subprime and toward FHA loans. The Coral Gables (Fla.) lender has a different twist on the business: He uses FHA-backed loans to help hard-pressed borrowers buy condominiums in buildings he owns.
Sascha Pierson was an unlikely borrower. She had no employment income when she bought a three-bedroom condo in Palmetto Towers, a Hernandez property in Miami, in July 2007 for $318,000. She borrowed almost the entire purchase price from Great Country Mortgage Bankers, Hernandez's loan company. Pierson, 29, says she is pursuing a psychology degree online from Kaplan University. She lives on a $42,000 annual educational grant from the government of the Cayman Islands, where she is a citizen. But the grant ends this year, and even with two roommates, she doesn't know how she's going to pay the $2,600 monthly bill for her mortgage and condo fee. "I am seriously worried about defaulting on my loan," she says.
Less extreme versions of Pierson's situation seem common at Palmetto Towers, a pair of eight-story stucco buildings Hernandez acquired in 1996. BusinessWeek interviewed eight condo owners at the complex, all of whom had obtained FHA-backed loans from Great Country. All eight, including Pierson, say they agreed to terms that required them to make mortgage and condo-fee payments that total considerably more than the FHA's guideline of 31% of their monthly income. Four of the eight owners say they received cash payments at closing of $10,000 or more as incentives to buy. The payments, which the FHA says are prohibited, were included in the loans. Pierson says she received $19,500. "They called it a 'cash-back opportunity,'" she explains.
Her neighbor, Lorena Merlo, 27, received a Great Country check for $14,640 at the closing in April on her $316,375 three-bedroom unit. Merlo, a part-time legal assistant, and her husband, Renny Rivas, a drywall laborer, earn a total of $52,000 a year and have two young sons. Their monthly home payments amount to 58% of their gross income, way over the FHA limit. "We are four months behind on our mortgage," says a mournful Merlo.
Defaults and Denials
Of the 158 units in Palmetto Towers, 66 are in foreclosure, records show. An additional 33 are unsold. Great Country has originated 1,855 FHA mortgages since November 2006; 923 of those were in default proceedings as of Oct. 31. The firm's 50% default rate is the highest in the entire FHA program.
Hernandez blames the high failure rate on the disastrous South Florida real estate market, not Great Country's practices, which he says are all legitimate. Asked in a phone interview whether he encourages buyers to purchase condos they can't afford, paying them questionable cash incentives, he says flatly, "That is not true." He adds: "[The buyers] are lying. They are disappointed by falling prices."
In October, however, the FHA decided it had seen enough. It ended Great Country's guaranteed-lending privileges in the Miami and Orlando markets where it had been active. Borrowers on nearly half of the company's defaulted loans made payments for only three months or less; 105 borrowers never made any payments at all. Brian Sullivan, another FHA spokesman, says the agency has referred the case to its inspector general's office. In response to BusinessWeek's questions, the Florida Financial Services Dept. has started a separate investigation, a person close to the state agency says.
But don't assume that Hernandez is through with FHA-guaranteed loans. At the Palmetto Towers sales office, Alexis Curbelo, a loan officer for Great Country, explains in an interview that buyers can now obtain FHA loans through Ikon Mortgage Lenders in Fort Lauderdale. Public records show Ikon closed a Palmetto Towers FHA loan in September for $222,957. Edgard Detrinidad, Ikon's president and a former business associate of Hernandez, denies he is financing any other loans for Hernandez's buyers.
Friday, November 14, 2008
Foreclosures may alter home values
By Will Van Sant, St Petersburg Times Staff Writer In print: Friday, November 14, 2008
In a sign of how the real estate market has imploded, property appraisers plan to figure in foreclosure sales when they value homes next year.
State Department of Revenue rules advise county property appraisers to ignore foreclosures and other types of "distressed" sales in favor of arms-length deals between willing buyers and sellers.
The belief is that such open market sales are truer indicators of home values. But that's only the case when foreclosure sales are relatively rare, not rampant like they are now, property appraisers are saying.
"The number of foreclosure sales we are dealing with now is so much greater than I have ever seen that I believe they have become part of the market," said Pam Dubov, Pinellas County's property appraiser-elect.
Warren Weathers, Hillsborough County's chief deputy appraiser, said that Dubov is right and that his office also will look at how to gauge the effect of foreclosure sales on values. In Pasco County, Appraiser Mike Wells has already done so for this year's tax roll.
"Some of the Department of Revenue rules are for a normal market," Weathers said, "and this is not a normal market."
Dubov and Weathers have yet to come up with a method for weighing how the inclusion of foreclosure sales will effect homeowners' property tax bills.
It's complex and uncharted territory, they said. Next week, appraisers from across Florida are meeting in St. Petersburg, and Dubov said she plans to raise the issue.
"We have to do some gaming of this and see what it looks like," she said. "I just know we can't do business as usual."
But both she and Weathers agree one likely result is that homeowners in areas with lots of foreclosure sales whose homes are assessed near market value will see their property tax bills drop next year, assuming governments don't raise tax rates.
In Pasco, Property Appraiser Wells said that in the spring he told his staff to consider foreclosure sales when developing the current tax roll. Wells said he did so after talking with his staff, his attorney and few others. He has yet to hear complaints from the state, or from homeowners who saw their tax bills dip.
"I believe it allowed me to come up with a fairer picture of the market, and what is going on out there," Wells said.
Jim Overton, Duval County property appraiser and president of the Florida Association of Property Appraisers, said he was unaware of Wells' move but isn't surprised others are eager to follow. The issue was discussed recently among appraisers at the national level, he said, and will be taken up by his association in coming months.
According to Dubov, Gov. Charlie Crist's office has asked the Department of Revenue for a review of the matter. Other than to say two or three appraisers have been in contact about the issue, the department declined to discuss what Dubov, Weathers and others plan.
Hernando County Property Appraiser Alvin Mazourek said he also was considering how to incorporate distressed sales into next year's values.
Though some homeowners may see their tax burden lift a bit, the decision by property appraisers to include foreclosure sales in their market analysis could reduce the amount of revenue going to already strapped local governments.
Incoming Pinellas administrator Bob LaSala said that in such a precarious economy it makes sense for appraisers to innovate and change their practices, even if it makes his job tougher.
"I wouldn't begrudge the homeowner who is struggling with a tax bill a solution that might make sense in this broader picture just because I've got constraints as well," LaSala said.
Florida is second only to California in the number of struggling borrowers who have lost their homes to lenders. In Tampa Bay area counties last month, 26 percent of real estate deals involved banks selling off properties reclaimed through foreclosure. Another 9 percent were "short sales," where borrowers behind on mortgages settle with lenders for less than what's owed.
That means in October more than one in three deals were distressed. The figure in September was 28 percent.
By comparison, in September 2007, 6 percent of sales were distressed; in September 2006, just 1 percent.
Peter K. Murphy, a real estate consultant with Home Encounter in Ybor City who provided the data on distressed deals, said that last month banks were selling foreclosed homes for 60 percent of market value.
Federal grants to be used to buy up South Florida foreclosures
South Florida governments are gearing up to spend more than $161 million in federal grant money to stimulate the housing market.
The buyer of that ramshackle foreclosure down the street just might be the government.
In coming months, South Florida cities and counties will be armed with more than $161 million in new federal grant money and a mandate to stabilize falling home values and decay in neighborhoods hardest hit by the real estate downturn.
Their spending plans include buying and rehabbing, reselling or renting out property repossessed by banks through foreclosure, a first for many small municipalities without housing authorities. Cities may also use money to develop new projects and tear down neighborhood eyesores.
Miami Gardens' plans include using homes to help young adults aging out of foster care. Miramar wants to give financial aid to middle-income home buyers
.
Hialeah wants to build more $300-a-month rental units. And Miami-Dade plans to use some money on the once fraud-wracked redevelopment of the Scott Carver housing project in Liberty City.
The funds represent South Florida's share of a $3.9 billion pot offered as part of a larger housing stimulus plan passed by Congress this summer.
The stimulus money comes as the state's housing market continues to slog along under historic foreclosure rates, unsold homes and growing economic malaise. In all, Florida will get $541 million, with $91 million going to state government.
When it comes to house hunting, governments don't lack for choices. As of Oct. 31, banks owned 10,725 homes in Miami-Dade and 10,234 in Broward, according to RealtyTrac data released Thursday.
And foreclosures keep rising: In October, foreclosures were up 53 percent in Broward and 97 percent in Miami-Dade over a year ago, RealtyTrac reported. The figures mean one of every 114 homes in Broward is either headed into foreclosure or already bank-owned. In Miami-Dade, it's one of every 93 homes.
Lenders have already begun knocking on doors at Miami-Dade agencies, county officials said. The county will get $62.2 million, the largest share of any locality in the country.
''This is not a whole lot of money in reality, but I think there will be a whole broad spectrum of people we can help. The magnitude of the problem is really huge,'' said Robert Cruz, chief economist for Miami-Dade.
NEW UNITS
Housing administrators' tentative plan is to spend almost $37 million buying bank-owned single- and multi-family properties, hoping to add roughly 342 new units to its affordable housing stock. The county now owns 10,000 units. There are 71,000 people on the waiting list for those as well as privately owned units through Section 8.
The rest will be spent demolishing 80 blighted structures as well as on homeownership counseling and mortgage assistance for about 130 families. The county will leverage nearly $9 million for infrastructure needed to complete work on the Scott Carver HOPE VI housing project, which will help bring 236 new units online when finished. In all, they expect to directly aid 1,500 families.
The County Commission will vote on the plan next Thursday. Broward approved its plan Thursday.
FORMULA USED
To decide how much money communities get, the U.S. Department of Housing and Urban Development used a formula accounting for the number of subprime loans, bank-owned homes and defaults. How they use the money is largely up to them, provided they create more affordable housing for low- to middle-income families.
''The fact you got a large amount indicates the size of the problem in your community,'' said Dan Rosemond, Miami Gardens' community development director. The city will get $6.86 million it will use to buy 25 homes. Code enforcement officers have already identified 25 that will be demolished.
Four other Miami-Dade cities qualified -- Miami, North Miami, Hialeah and Homestead, widely known for their foreclosure problems.
Other municipalities could get money from the state's entitlement.
Thirteen jurisdictions in Broward will get money, including the county's $17.76 million. Miramar gets more than $9 million, which it plans to use to help an estimated 75 new buyers with financing and grants.
Some government administrators who are entitled to far less question how much good the money can do.
North Miami housing manager Tom Calderon said with only $2.84 million, the city may be able to buy 12 bank-owned foreclosures among the roughly 1,000 within its boundaries.
Calderon said ideally the money would be used to target areas with the most foreclosures. Studies have shown a single foreclosure can lower the values of all homes within an eighth of a mile by 0.9 percent. The impact is amplified as the number of foreclosures on the block increase. But in North Miami they are everywhere, Calderon said.
''The money is for neighborhood stabilization, but how do you stabilize an area when there might be three or four on the same block and you can only buy one or two? You still have the vacant homes,'' Calderon said.
CHALLENGES
Cities face other challenges in using the money as prescribed, such as suddenly bearing the burden of owning and managing property.
''The city of Homestead does not want to be a landlord, I'll tell you that right now,'' said Laurin Yoder, the city's community development manager. Homestead was considering hiring a property management company or deeding their foreclosures to a nonprofit that would maintain the homes until they could be sold.
Miami Gardens plans to hire real estate agents to do the negotiating.
Cities will be responsible for their homes' upkeep, property taxes and insurance. Another challenge: The homes must be sold to income-eligible buyers who intend to live there. The sluggish housing market and credit crunch could make that difficult.
''Are we going to get banks to loan to people? Because money is still tight. And we have to find qualified individuals,'' said Dan Keefe, assistant to the Plantation mayor.
To line up homes with potential buyers, Keefe said Plantation would likely start by reaching out to city employees first. North Miami plans on doing the same, since financial help can be offered to households making 120 percent of the area's median income, or up to $72,350 for a family of four. The income limits are high enough to help people like police officers and teachers, Calderon said. In Broward, families of four making as much as $85,440 are eligible.
EARNINGS OBSTACLE
A separate obstacle comes, though, in making sure 25 percent of city grant money goes to families of four earning less than roughly $30,000 in Miami-Dade and roughly $36,000 in Broward.
''It's difficult to put a family of four making $30,000 into a home because even if you gift it to them, there are taxes, insurance and the regular cost of owning a home,'' said Homestead's Yoder. ``We're not exactly sure how we're going to make it work.''
Hialeah's solution is to use its entire $5.38 million to build a rental complex similar to a recently finished 300-unit affordable housing project on Okeechobee Road, said Fred Marinelli, director of the city's grants and human services department.
''We would rather get it close to the people, rather than turn around and give it to the banks,'' Marinelli said, adding the grant allows the city to develop these units on Hialeah-owned land. He expects to build around 45 units that will be leased to residents on the county's affordable housing waiting list for $300 a month.
HUD RULES
Cities that have decided to buy, though, are also concerned about adhering to HUD rules requiring them to negotiate a 5 percent discount with lenders for each property and a 15 percent discount for all properties combined. Smaller cities, who may be able to buy only a handful of homes, wonder if lenders will cooperate.
''The county's $62 million is a lot different than our $7 million, and banks have a little more economy of scale in terms of trying to negotiate with the county,'' Miami Gardens' Rosemond said.
Of the many obstacles cities must navigate in spending the grant money, perhaps the most daunting is the time in which to get it all done. Local governments had six weeks to pull together their spending plans to meet a Dec. 1 deadline. After they get the green light, all the money must be obligated in 18 months and projects done in four years.
''The government expects us to act quickly, so we're not going to have time to create a new program because those need to be tested, and time is of the essence,'' said Gus Zambrano, Miramar's economic development director. The city will use a program that is already in place to distribute its $9.31 million in grants and loans to individuals who will buy foreclosures, in some cases sharing future profits with homeowners.
The biggest flaw Calderon of North Miami sees is that none of the grant money may be used to help people currently at risk of foreclosure, a point of confusion for many current homeowners.
''We're not allowed to use one penny for prevention,'' Calderon said, ``It's for neighborhood stabilization. But how do you stabilize a neighborhood better than making sure people stay in their homes?''
The buyer of that ramshackle foreclosure down the street just might be the government.
In coming months, South Florida cities and counties will be armed with more than $161 million in new federal grant money and a mandate to stabilize falling home values and decay in neighborhoods hardest hit by the real estate downturn.
Their spending plans include buying and rehabbing, reselling or renting out property repossessed by banks through foreclosure, a first for many small municipalities without housing authorities. Cities may also use money to develop new projects and tear down neighborhood eyesores.
Miami Gardens' plans include using homes to help young adults aging out of foster care. Miramar wants to give financial aid to middle-income home buyers
.
Hialeah wants to build more $300-a-month rental units. And Miami-Dade plans to use some money on the once fraud-wracked redevelopment of the Scott Carver housing project in Liberty City.
The funds represent South Florida's share of a $3.9 billion pot offered as part of a larger housing stimulus plan passed by Congress this summer.
The stimulus money comes as the state's housing market continues to slog along under historic foreclosure rates, unsold homes and growing economic malaise. In all, Florida will get $541 million, with $91 million going to state government.
When it comes to house hunting, governments don't lack for choices. As of Oct. 31, banks owned 10,725 homes in Miami-Dade and 10,234 in Broward, according to RealtyTrac data released Thursday.
And foreclosures keep rising: In October, foreclosures were up 53 percent in Broward and 97 percent in Miami-Dade over a year ago, RealtyTrac reported. The figures mean one of every 114 homes in Broward is either headed into foreclosure or already bank-owned. In Miami-Dade, it's one of every 93 homes.
Lenders have already begun knocking on doors at Miami-Dade agencies, county officials said. The county will get $62.2 million, the largest share of any locality in the country.
''This is not a whole lot of money in reality, but I think there will be a whole broad spectrum of people we can help. The magnitude of the problem is really huge,'' said Robert Cruz, chief economist for Miami-Dade.
NEW UNITS
Housing administrators' tentative plan is to spend almost $37 million buying bank-owned single- and multi-family properties, hoping to add roughly 342 new units to its affordable housing stock. The county now owns 10,000 units. There are 71,000 people on the waiting list for those as well as privately owned units through Section 8.
The rest will be spent demolishing 80 blighted structures as well as on homeownership counseling and mortgage assistance for about 130 families. The county will leverage nearly $9 million for infrastructure needed to complete work on the Scott Carver HOPE VI housing project, which will help bring 236 new units online when finished. In all, they expect to directly aid 1,500 families.
The County Commission will vote on the plan next Thursday. Broward approved its plan Thursday.
FORMULA USED
To decide how much money communities get, the U.S. Department of Housing and Urban Development used a formula accounting for the number of subprime loans, bank-owned homes and defaults. How they use the money is largely up to them, provided they create more affordable housing for low- to middle-income families.
''The fact you got a large amount indicates the size of the problem in your community,'' said Dan Rosemond, Miami Gardens' community development director. The city will get $6.86 million it will use to buy 25 homes. Code enforcement officers have already identified 25 that will be demolished.
Four other Miami-Dade cities qualified -- Miami, North Miami, Hialeah and Homestead, widely known for their foreclosure problems.
Other municipalities could get money from the state's entitlement.
Thirteen jurisdictions in Broward will get money, including the county's $17.76 million. Miramar gets more than $9 million, which it plans to use to help an estimated 75 new buyers with financing and grants.
Some government administrators who are entitled to far less question how much good the money can do.
North Miami housing manager Tom Calderon said with only $2.84 million, the city may be able to buy 12 bank-owned foreclosures among the roughly 1,000 within its boundaries.
Calderon said ideally the money would be used to target areas with the most foreclosures. Studies have shown a single foreclosure can lower the values of all homes within an eighth of a mile by 0.9 percent. The impact is amplified as the number of foreclosures on the block increase. But in North Miami they are everywhere, Calderon said.
''The money is for neighborhood stabilization, but how do you stabilize an area when there might be three or four on the same block and you can only buy one or two? You still have the vacant homes,'' Calderon said.
CHALLENGES
Cities face other challenges in using the money as prescribed, such as suddenly bearing the burden of owning and managing property.
''The city of Homestead does not want to be a landlord, I'll tell you that right now,'' said Laurin Yoder, the city's community development manager. Homestead was considering hiring a property management company or deeding their foreclosures to a nonprofit that would maintain the homes until they could be sold.
Miami Gardens plans to hire real estate agents to do the negotiating.
Cities will be responsible for their homes' upkeep, property taxes and insurance. Another challenge: The homes must be sold to income-eligible buyers who intend to live there. The sluggish housing market and credit crunch could make that difficult.
''Are we going to get banks to loan to people? Because money is still tight. And we have to find qualified individuals,'' said Dan Keefe, assistant to the Plantation mayor.
To line up homes with potential buyers, Keefe said Plantation would likely start by reaching out to city employees first. North Miami plans on doing the same, since financial help can be offered to households making 120 percent of the area's median income, or up to $72,350 for a family of four. The income limits are high enough to help people like police officers and teachers, Calderon said. In Broward, families of four making as much as $85,440 are eligible.
EARNINGS OBSTACLE
A separate obstacle comes, though, in making sure 25 percent of city grant money goes to families of four earning less than roughly $30,000 in Miami-Dade and roughly $36,000 in Broward.
''It's difficult to put a family of four making $30,000 into a home because even if you gift it to them, there are taxes, insurance and the regular cost of owning a home,'' said Homestead's Yoder. ``We're not exactly sure how we're going to make it work.''
Hialeah's solution is to use its entire $5.38 million to build a rental complex similar to a recently finished 300-unit affordable housing project on Okeechobee Road, said Fred Marinelli, director of the city's grants and human services department.
''We would rather get it close to the people, rather than turn around and give it to the banks,'' Marinelli said, adding the grant allows the city to develop these units on Hialeah-owned land. He expects to build around 45 units that will be leased to residents on the county's affordable housing waiting list for $300 a month.
HUD RULES
Cities that have decided to buy, though, are also concerned about adhering to HUD rules requiring them to negotiate a 5 percent discount with lenders for each property and a 15 percent discount for all properties combined. Smaller cities, who may be able to buy only a handful of homes, wonder if lenders will cooperate.
''The county's $62 million is a lot different than our $7 million, and banks have a little more economy of scale in terms of trying to negotiate with the county,'' Miami Gardens' Rosemond said.
Of the many obstacles cities must navigate in spending the grant money, perhaps the most daunting is the time in which to get it all done. Local governments had six weeks to pull together their spending plans to meet a Dec. 1 deadline. After they get the green light, all the money must be obligated in 18 months and projects done in four years.
''The government expects us to act quickly, so we're not going to have time to create a new program because those need to be tested, and time is of the essence,'' said Gus Zambrano, Miramar's economic development director. The city will use a program that is already in place to distribute its $9.31 million in grants and loans to individuals who will buy foreclosures, in some cases sharing future profits with homeowners.
The biggest flaw Calderon of North Miami sees is that none of the grant money may be used to help people currently at risk of foreclosure, a point of confusion for many current homeowners.
''We're not allowed to use one penny for prevention,'' Calderon said, ``It's for neighborhood stabilization. But how do you stabilize a neighborhood better than making sure people stay in their homes?''
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