Condo Terminators

Miami Realty Cycles and Today's Outlook

2012-01-09T07:45:00.001-05:00

Miami real estate is notorious for its boom and bust cycles. The typical real estate market needs 7 years to recover from a "correction" or bust. Our market has numerous segments which all went into correction at different times beginning with the "high end" or luxury residential market in 2004. The "mid-range market" and the primary markets for residential real estate began correcting in December of 2005. Some of these markets are primed for appreciation, while others are showing signs of life, without immediate price gains on the horizon.

The luxury realty market slowed down noticeably before the broader market slowdown at the end of 2004. This market consists of homes in the $1.5-2MM price range and upwards. Real estate taxes are proportionately larger for luxury homes, but insurance premiums can grow significantly larger for these properties since they are overwhelmingly located inside of flood plains, and outside the Citizens windstorm insurance pool.

After the 4 hurricanes of 2004 made landfall, Citizens stopped covering dwellings with value in excess of $1,000,000, as well as Second Homes. According to this Sun Sentinel story in November 2011, only 7,500 policies in excess of $1,000,000 are held by the state run insurer's rate payers. This means luxury homeowners are often forced to pay premiums to "surplus carriers" often through Lloyd's of London which are typically more expensive.

The luxury market's rising premiums, combined with rising property taxes and an increase in interest rates in 2004 caused an earlier freeze than the mid-range residential market. The earlier freeze, and a higher percentage of equity to debt insulated this market from the worst of the recent real estate bust. By all reports, 2011 was a banner year for high end real estate with record prices for condominiums in projects such as the W Resort and Apogee on Miami Beach. Even Shaquille O'neal's former home on Star Island sold for just north of $16MM.

My recent research in CocoPlum during the last 2 quarters of 2011 showed that while most of the sales at the start of the year were in the $1.5MM range, the last 2 quarters had more sales in the $1.7-$2.3MM range for non-waterfront homes. This is a strong indication that today's buyers are end-users and more willing to meet ask prices for the home they want.

Marketing times have dropped from 9-15 months last year into the 4-12 month range. All signs in the luxury market point to modest price appreciation and a robust market for luxury real estate in 2012

The "mid-range market" consists of most of the homes, townhouses and condominium apartments on the market under $1.5MM but above $500,000. This market took the worst beating with the evaporation of "Jumbo" loan products for those who would borrow more than the Government agencies will guarantee or insure, loans greater than $423,000.

Mid-range buyers tend to use more leverage, and less equity, than luxury buyers to finance their purchases.   In the past a buyer with a $100,000 down payment might finance 90% of the purchase price of $1,000,000. Jumbo mortgages were virtually non-existant from August 2007 through mid-last year.

  This resulted in many $1MM homes becoming $500,000 homes as a $100,000 down payment would ensure the ability to obtain a bank loan (20% down). The mid-range market was rife with speculation in the boom, but today is thoroughly dominated by end-users as investors still don't feel confident in their ability to buy a $500,000 home for all cash and turn a profit in resale.

The one exception to this would be in the condominium apartment market, as units in this price range, inside stable projects, with good views could be over-due for appreciation. The flood of developer units has slowed to a trickle, there's a dwindling inventory of new product in the mid-range condo market. Many units in the mid-range condo market were bought by investors and are now rentals.

The downtown Miami and Brickell condo rental markets have experienced a sudden revival of rents to pre-crash levels over the course of the last 12 months. Two bedroom units that once rented for $1400 a month in the bust are now demanding (and getting) monthly rents of $1650 and up, in low amenity buildings. In condominium economics, rents always lead prices due to the multi-family nature of all condo complexes.

During the next 12 months, the mid-range market should show significantly more activity, though pricing will likely remain flat for single family homes. With more Jumbo loans available, and many homeowners in the 6-7% interest rate band on their current loans, I expect a surge in refinancing activities from this group of homeowners to take advantage of cost savings. Due to existing owners finding savings, it will likely be another 18-24 months before owners in this market sees pricing power over buyers.

The primary market for single family homes and apartments below $400,000 and in particular below $150,000 has recovered strongly in Miami and is poised to show price appreciation in 2012. Cash investors have moved en masse to pickup properties which working and middle class buyers cannot afford without financing. Meanwhile, the financeable buyer pool has shrunk appreciably over the last 4 years with unemployment and lending standards rising, until now.

Our business provides high interest rate financing to investors who put up 50% of the cash purchase price of single family homes, typically post purchase. We are seeing investors purchase homes from banks at 60 cents on the dollar, which have been foreclosed and have maintenance issues. Banks prefer all cash offers from investors, leaving end-users to pay top dollar for rehabilitated homes.

A $90,000 single family home sale from a bank to an investor might re-sell for $130,000 with a $10,000 rehabilitation within a few months. There are finance fees, closing costs, sometimes permit costs as well as the investor's time in (typically) self-contracting the repairs. The investors are providing a service and adding value to the homes, while they are also willing to wait through the end-user finance process in exchange for a healthy profit margin.

When the homes are less expensive, the rehabilitation is more focused on current income and future appreciation as there are few or no bankers who will issue a loan under $100,000 these days. The new consumer protection rules virtually eliminate bankers' appetites for these smaller loans by creating excessive compliance risk, simultaneously restricting the risk premiums they may charge borrowers for smaller loans.

The Condo Conversion Bust has claimed hundreds of apartment complexes in South Florida. Once condos fill with landlords, where 100 unit projects have 50-60 different landlords and numerous dead beat units in the foreclosure process, they're classified as "investor hotels".   The end buyers have no options for financing in these projects, leading to rental concentration levels outside those allowed by the Government finance agencies.

Failed condo projects are beginning the Condo Termination process, which will gain steam in 2012. Liberating these apartment buildings from their condo agreements saves approximately 15% of the expenses, as well as the 10-25% collection losses failed condos expect on an annual basis, even with rules that require renters to pay association dues before rents. Once this market sees an overall attrition of 50% of the converted condos turned back into rentals, the remaining units should see price stability. It may take 3-7 years of condo termination activities before enough inventory is terminated to make condo ownership a viable store of value in the home once again.

The primary market has a huge overhang of inventor still coming to market, now through short sales as often as foreclosures. Recently, I have seen an increase in residential lending products available through private label mortgage issuers. As more dollars are added to the finance pool, and more jobs claimed by those earning middle class incomes, this market will get hotter moving forward. While only a trickle today, it promises to perhaps become at least a stream of liquidity which should stabilize prices within 12-24 months.

We are nearing the end of the bust cycle in most segments of the realty market. The luxury market is repaired and functioning today. The mid-range market is still undervalued as a whole, and primed to start the "move up" cycle once more financing programs are in place. The primary market for single family homes is a bargain under $100,000 and beginning to solidify up to $400,000 while the condo market in those price ranges is primed to be stagnant for years to come. Overall, the return of confidence in values and upward direction of the Miami real estate market today means that the last of the value buying opportunities are here, in the next 12-24 months. Don't be late!

"Are we there yet? Real estate's wild ride"

2011-10-12T17:10:00.000-04:00

This op-ed piece was originally published on Sunday, December 20th, 2009 in the Miami Herald but has since magically vanished from their website. I think it's a great work as people are suddenly interested in deciphering the current situation in the South Florida real estate market.

"Are we there yet? Real estate's wild ride"

BY GRANT STERN

Since I think that most participants in the real estate market would rather be somewhere else right now, I'd like to compare our local housing downturn and recovery to a family road trip to Disney World on the Florida's Turnpike. Back in late 2005, we left home and after four long years on the road, we've only made it to Yeehaw Junction.

``Sure, it's the middle of nowhere,'' we tell the kids in back, ``but it's also an important crossroads.'' In two years, we'd like to be frolicking in the Magic Kingdom, but sadly, all we see right now is more signs to buy advance tickets, and an exit in not-quite-there-yet St. Cloud.

In the rear-view mirror, we can see obvious displeasure and barely contained impatience brewing in the back seat. But a quick check of the map shows that the Magic Kingdom is only a couple more years away -- and the scenery is definitely improving.

The residential real estate market is showing progress in the most urbanized locales. However, signs indicate that a second stage to the housing crash is underway. Middle class people all over are slowly being squeezed out of their homes by unending furloughs and pay cuts.

PENT-UP SUPPLY

Compounding matters, there is a pent-up supply of homes of unheard-of proportions.
This means that while the housing market's fundamentals are shoring up -- appraisal valuations falling in line with sales prices and lending activity increases -- there's no double-digit percentage price improvements within sight.

Strong markets like the Miami Beach barrier island won't experience tremendous moves in any direction for the coming two years. And there is likely going to be mild price erosion in the suburban as well as high-end homes markets through the next two years.

As for condominiums, the boom is slowly transforming downtown Miami and Brickell neighborhoods into a realization of Walt Disney's original plans for EPCOT. In Walt's 1966 vision, urbanity would be constructed to the Nth degree. Everyone would work and contribute to the community -- the People Mover renders automobiles unnecessary -- and all dwellings are corporately owned, everyone is a renter. Surely, Mr. Disney never envisioned the landlords being from Colombia, Canada and Western Europe -- but the all-cash buying today will ensure that two years from now, absentee landlords will own a vast chunk of our central city district.

Recently, the FHA made a prudent move to modernize its condo finance program and expand the availability of its loans through brokerage outlets for all properties in 2010.

This should allow local buyers to jump into select projects with stable underpinnings in the district. By 2011, we should see a few of today's stalled high-rise projects become owner-occupied properties, promoting a more sustainable and local urban core.

However, FHA and Fannie Mae have both weighed in that, ``Any man that falls behind is left behind.''

CONDO SHAKEOUT

Some condo projects have deferred maintenance too long, cannot afford insurance coverage. Others have less stakeholder equity than a Scott Rothstein investor. In the coming two years, many associations will take advantage of Florida's revised Condominium Termination laws to conduct mass short sales. This should rid the condo market of its weakest players, although it won't weed out all of the properties scrambling to keep their wooden eye in place.

Two years from now, the real estate market still won't be all the way to the Magic Kingdom. But assuming that we complete the return to the modern business cycle -- with limited interference from hurricanes, politics and external factors -- our journey through the swamps of this market should be reaching civilization. In some markets, there will be great fundamentals. Others will be worse in 2011 than they were even in 2008 when all bets came off the table.

No matter what happens, we'll be paying the toll for our current dilemma for years to come. But in a couple of years, signs will appear more frequently and as a market we should feel like there's some positive direction. When involuntary unemployment declines, we'll all be back in line to buy tickets, with the Magic Kingdom in sight on the horizon.

Condo Market Fractures Lending Standards

2011-03-04T11:35:00.001-05:00

The deterioration of Condominium lending's standards between housing agencies has ruined the market for homeowners seeking financing. Agency lending standards for Condos had been settled for nearly 30 years, with the four main housing finance authorities accepting each other's certifications for most projects. Recently, the two lead agencies in Condo financing - Fannie Mae and the FHA - updated their guidelines to achieve divergent risk management goals. The end result is decreased access to credit, lower Condominium prices in comparison to surrounding single family homes and enhanced losses to mortgage holders. The Condominium market needs a unifying set of approval standards and reciprocal agreements between housing agencies to revive normal lending activity.

A little historical context and legislative history illuminates the speedy evolution of Condominium Property rights and financing over the last 50 years. Condominium real property exists as a purely legal construct, first recognized formally in modern law under France's Napoleonic Code of 1804. The Condominium form of ownership began formally in the United States in Puerto Rico in 1951.

After ten years of lobbying, the National Housing Act of 1961's Section 234 allowed the FHA to insure condo mortgage loans. Section 234 loans were wiped out by the HERA Act of 2008. HERA converted long used rules into flexible guidelines which HUD is open to interpret and change. The FHA issued the first new Condominium approval guidelines since 1974 in 2009, with the intent of improving risk management.

Thirty years ago, attorneys from the (now) government agencies of Fannie Mae, Freddy Mac, FHA and the VA gathered to create a common standard for the needs of lenders to finance condo mortgages. That document still provides some of the basic hoops every modern condo agreement should jump, such as minimum rental periods, recordation of documents with proper surveys etc.

Proceeding from those guidelines, there was a thirty year period of reciprocal acceptance of FHA Condo Approval by all parties, and over time, Fannie and Freddie virtually merged their standards with Fannie leading the way. The former private market-makers also created condominium approval review exemptions (aka "limited reviews") based on the loan to value and occupancy of the borrower which exist today.

Fannie Mae began changing their Condominium Approval process in 2007 by dropping direct reviews in favor of 100% lender delegated reviews. After the real estate market calamity in December of 2008 Fannie issued harsh new lending rules for properties in Florida and nationally for new construction projects. The agency has spent the last 24 months backpedaling from those tough guidelines, and spread fear throughout the market regarding condominiums.

Sadly, the fear spread by Fannie Mae's abrupt pullback sparked the consequences it sought to avoid, namely a collapse in condo prices throughout the market. In a Minsky Moment, Fannie began quietly advertising to industry sources that even it's toughest PERS approvals would be flexible. Eventually, they created a whole new approval category called "Special Approval Designation List". This "SPAD" list is so special, no lender or correspondent wants to issue loans into those projects.

The FHA was required by HERA to draft new Condominium Guidelines which they issued in late 2009. The implementation is still being phased in today, after 20,000 expiring projects were given a reprieve from expiration this past December. Unfortunately, during the break from past practice, Fannie Mae used the opportunity to cancel their reciprocity agreement.

The FHA's new guidelines have heavy emphasis on large cash reserve accounts, and restricting developers from renting unsold inventory while holding the units for sale or lease option sale. Fannie's new guidelines aim to take a blood sample of each building and analyze the physical plant for flaws, this in addition to the usual financial checkups.

The two largest standard setters have gone in opposite directions. As a result, the list of approved buildings for both agencies is shrinking. Mortgage lenders who entered the market after 2005 have suffered losses even with loan to value ratios of 50/50 after some condo prices declined 90% or greater. Condo owner/directors are rarely informed of the implications of sweeping changes affecting the marketability and price of their homes. All of this has been happening without stakeholder input in Washington, D.C. aside from the money center banks who now control vast swaths of the market for new mortgage loan originations.

The privatization of Fannie Mae and Freddy Mac casts a long shadow at their standards departments during the interregnum. It seems logical that new standards should be set in the private sector for Condos and the private non-profit corporations governing Condo property.

The fact that two large standard setters cannot agree, clearly indicates that there's no consensus on how to heal the wounded standards for what really separates a functional Condominium from a failed project. The prolonged existence of the rift is eroding investors' trust in the legal form of Condo ownership's ability to withstand shock. Ultimately, the condominium financing market needs new defining standards to resume normal functioning.

National Mortgage Licensing System Goes Live Today

2011-01-03T11:45:00.001-05:00

The National Association of Mortgage Professionals (aka NAMB) fought in favor of a national licensing system for many years.

The NAMB had twin goals of allowing better access to multi-state markets for loan originators while simultaneously looking to end the practice of company licensing for non-depository mortgage originators (ie. a "Mortgage Lender" could employ as many unlicensed originators as they wished, while Mortgage Brokers could only use licensees to originate). A tertiary goal was to stop abusers from state hopping since there was no sharing of data on abusive loan professionals, and in many cases (Florida inclusive) the state licensing systems only checked for state legal action and not Federal crimes (see Florida once again).

During the boom, unlicensed individuals committed some of the worst abuses. Countrywide Home loans, for example, was one of the top abusers of the system. The only sad omission from the new system is employees of nationally chartered banks. This means that another Countrywide could spring up, and send out legions of unlicensed people, to sell loans on a wholesale basis to non-depository lenders and brokers that are as a class, predatory. In addition, it was these types of bank reps who encouraged brokers to find loopholes in underwriting guidelines, present and obtain unwarranted lending exceptions or worse.

Ultimately, I agree with the perspective that it is counter-productive to asses the credit risks of a group of professionals disproportionately stung by the credit bust. Mortgage brokers are the only real estate lenders who must disclose all of their fees and loan pricing on the Good Faith Estimates today. The mortgage broker is the only check on bank and non-bank lenders' loan pricing and profit margins. In addition, a mortgage broker is one of the few outlets remaining for borrowers who need access to private capital (the "hard equity loan") when they do not qualify for a traditional bank loan.

As the agents of the banks, mortgage brokers have gotten hit pretty hard in the PR war, being that we're the front lines, the people that the public is acquainted with. The additional costs of new national licensing are a serious burden on Loan Originators and Brokers like myself, but needed to restore credibility to our profession. But make no mistakes, if every mortgage broker in the country is sidelined for personal credit issues, it will simply complete the process of tilting the tables completely in favor of the too big to fail banks who caused this mess in the first place.

The Pit and the Economic Pendulum

2010-12-17T14:48:00.000-05:00

The whole world knows, by now, that the United States real estate market is in a pit, and the pendulum of its cyclical market has swung to tight money, with corresponding low asset prices. Mixed economic signals abound, but the smart money is still placing bets that today’s prices.

The secondary market for mortgage loans is fully consolidated between three government-owned or sponsored agencies. New valuation models have emerged in the residential housing markets, based on financing and market to sales times, which are not uniformly factored into bank’s lending calculus before the boom or today.

The twin issues of valuation ambiguity and regulatory mayhem have conspired to cause a sharp consolidation of the national mortgage lending market into the hands of 5 money center banks who control nearly 65% of new originations, and limit competition through their oligarchy.

The barely-existent finance market is in the peak of the bust, while residential lending has been regulated to its knees

Investors have scoured the market for rock bottom deals in South Florida real estate during 2009 and 2010 with many pulling the trigger. This bear market rush virtually exhausted the supply of new construction condominiums in Downtown Miami within a couple of years, rather than the 5-10 year horizon gloomier souls predicted.

The bear market buying frenzy was helped by a combination of low prices, government assisted lending and many individual cash buyers from foreign lands. There is a new bifurcation of real estate values caused by the predominance of cash transactions by the great majority of individual buyers.

Two main investor’s pricing models have emerged for residential housing: Cash Basis and Financing Basis.

The Cash Basis pricing model from lowest price to highest is the foreclosure auction price, the “short sale” price and the REO or repossessed home price. Cash basis pricing is typically based on the market capitalization rate, or the percentage return an investment yields on a real estate investment proportionate to an interest rate on the equity invested. These prices assume anywhere from an immediate to 15 day closing, in cash.

In the middle, real estate pros refer to the “Cash Price” which is the price at which a cash buyer would buy a property without any obvious distress or for a bank owned property in reasonable state of repair. This is also a price where buyers will invest into a lender blacklisted, fractured or distressed condominium. In condos, this price is typically 50% of the comparable apartment’s Government Supported Housing price.

The Financing Basis price starts at the price a financed buyer would accept with a 20-25% down payments and bank or GSE agency financing. The final pricing nuance is: Government Supported Housing. The highest priced residential real estate, are homes that are eligible for 3.5% to 5% down payments. These are select condominiums and all single-family homes with sellers accepting financed contracts and up to 60-day closings.

Banks order real estate appraisals that currently only evaluate “Financing Basis” pricing of home sales. There’s no model of integrating the Cash Basis sales, unless there are only “Cash Basis” sales inside the sub-market. The resulting confusion is hurting banks’ ability to lend responsibly and borrower’s ability to leverage real estate. However, investors are using these pricing variations to buy up bank inventories below end user prices and turn around and flip these properties to end users paying a premium.

Just as national money center banks have become too large to fail, their lending units have taken virtual complete control of the primary mortgage market as supplied through mortgage bankers, brokers and retail originations through their banking franchises. The Freddy Mac rate survey indicates that even as underlying Treasuries rates have been getting lower, origination fees are rising. Furthermore, from July 2010 through October 2010 there was a 50 basis point (0.5%) drop in Treasuries that yielded only a 23 basis point drop in average lending rates.

Bank of America simply painted new colors onto the Countrywide Home Loans lending and servicing operations, and handed them the keys. Their disastrous robo-signer issues, and newly discovered possible securitization process flaws point to the inherent danger of consolidating too much financial control into a single institution. However, that didn’t stop the Octopus of Charlotte from dropping their mortgage broker channel in November. This means the largest lender in the country now has zero transparency regarding yield spread premiums issued to consumers through their entire origination channel.

The bull of a financed real estate market has been neutered by heavy-handed government regulation. The mandate that all loans have documented sources of income for repayment is excellent for wage earners, but completely locks self-employed persons out of the home finance markets. These entrepreneurs are risk takers, who traditionally were able to get a (safe for a generation) loan by simply showing their good credit behavior, cash in the bank and equity in the home. Traditional standards were 25% down payment for one of these loans.

Self-Employed people, as well as foreign persons, US Citizens who work abroad and wish to repatriate, permanent residents with legitimate foreign sources of income are forced to seek higher interest rate loans with 50% down payments. These high rate loans are also the only resource for borrowers whose FICO credit score falls below 640 for any reason. Non-Traditional and lower income documentation loans are only available for investment properties.

New regulations require a 3-business day waiting period on ordering appraisals. Federal disclosures have been transformed from simple, transparent documents that include all pertinent information on a page to a veritable paper mache’. The new Good Faith Estimate has triple the information, but obscures entirely lender loan profit margins and the total cost of home ownership.

The bear market cash buying frenzy is showing signs of acceleration even as new lending guidelines further depress available housing demand for end users.

Certainly, there’s a glut of available properties on the market and in the “shadow market”. However, these new regulations have created shadow demand as most end users are locked out of the finance market for their own protection. Ultimately, lenders pricing models need a complete, national overhaul to reflect current realities.

Until the real estate market shifts from an Investor’s market to an End User Buyer’s market, we won’t see the normal price appreciation that signals a healthy housing market. It will take years of momentum to chip away the worst of the new regulations, and revive the economically crucial mortgage markets on a national level. In due time, the pendulum will swing back again. . .

FHA Gives Condo Lending Market Reprieve

2010-12-09T16:34:00.002-05:00

As reported by Realtor.org and Mortgage News Daily this morning at 9 am, FHA announced a Condo Project Approval extension after the article Condominium Financing Markets Lose Government Insured Lending Supports was published to this blog and set for 7:30am release. HUD held an "industry call with Gary Long and his partner in the condominium policy department in Washington DC and revealed numerous facts about FHA's condo program through the years, as well as the implications of the new project approval changes.

Condo Projects will have a staggered expiration based on when they were approved starting at year end and proceeding through September 30th, 2011.

FHA condos extensions are by year approved. Projects approved with number of affected projects in parenthesis:

1972-1980 (403) and 1981-1985 (1800) expire 12/31/2010

1986-1990 (7800) expire 5/31/2011

1991-1995 (5700) expire 7/31/2011

1996-2000 (3800) expire 8/31/2011

2001-2005 (2000) expire 9/30/2011

2006 - Sept. 2008 (1700) expires 3/31/2011

HUD clarified that it will accept loans with an FHA Case Number issued up to and including the expiration dates, which clarified a point of lender concern that approval expiration was date based, not case based.

HUD's new FHA condo lending homepage contains current condo guideline resources including recertification processes which will be handled by a contractor with HUD supervision for the "HRAP" process. Once a condo has expired, it has 6 months to re-certify. Afterwards it will have to re-apply from scratch. Florida condos must use the HRAP process to re-apply directly through HUD. HUD's goal is to have a 30 day recertification process.

During the call, HUD also announced that the temporary guidance guidelines issued last year is also administratively in the extension approval process. These guidelines require all Florida condos to go through HUD review and allow certain leniencies as well. However, re-certifications can be handled by lenders using the DELRAP process if the original review was completed by HUD.

Condominium Financing Markets Lose Government Insured Lending Supports

2010-12-09T07:30:00.003-05:00

At the stroke of midnight last night, December 7th, the FHA officially invalidated the condominium approval list that it spent the last 30 years to create. With this last salvo against the condominium financing market, FHA is signaling the bottom in Condominium lending has just officially begun. The evolution of condo lending standards has devolved into a cacophony of competing standards. Clearly, lenders are unable to properly evaluate counter-party risk, building management practices and capital structure using any of the competing standards in Condo evaluation. The lack of end user Condominium financing amounts to the erection of an Ivory Tower to guard new condominium towers from commoners and homeowners.

The condominium market upon which most of the pre-2007 standards were built, reflected realities for fairly small apartment housing projects with shared ownership starting in the 1970s. Nobody at the time realized how much more complex and active the market would become when untethered from oppressive Co-Operative Housing Corporation rules and restrictions, when coupled with it's exposure to the mortgage interest tax deduction.

Condominium lending started slowly with the FHA in the early 1970s and by the early 1980s had an organized process to approve condominium projects directly through HUD. Over the decades, HUD amassed thousands of project approvals covering the 50 states, and available through the "FHA CondoLook" database. (link: https://entp.hud.gov/idapp/html/condlook.cfm) ***

The HERA Act of 2008 wiped out the old statute authorizing condo lending, and shifted funding authorization to the Single Family housing statute. This law caused expiration hard project approval rules, which FHA replaced with administrative guidelines. The FHA set out a complete refresh of their condominium project approval rules, and these went into effect 1 year ago.

Notably, the FHA guidelines are used to enable end user borrowers to place 3.5% down payments. After deducting the 1% financed FHA insurance premium, these buyers are borrowing 39 times their down payment.

The new guidelines discarded a 30 year old legal guidelines agreement between Fannie Mae, Freddy Mac, VA, FHA and HUD. In addition, FHA the approval process, due diligence practices and eliminated on site inspections. It placed new emphasis on budget reserves and site insurance analysis, while eliminating on site inspections and the bulk of new construction projects. As a result, both Fannie Mae and the VA cancelled their approval reciprocity with the FHA earlier this year.

Meanwhile, Fannie Mae spent 2008 implementing tough new "PERS" Condo Project Approval standards and mandatory national reviews. By the start of 2009, their failed "get tough on the market" approach yielded to a new "Special Approval Designation" list known as the "Spade" list by industry insiders. "Spade" approvals are so special that it has taken 9 months for initial lender adoption, mainly because this list included nearly every highly distressed project imaginable. In fact, it was virtually a case of creating an approved black list by Fannie Mae, since entry on the list virtually guaranteed that local banks and portfolio lenders shunned included projects.

As of today, Fannie accepts loans through it's PERS process, Special Approval Designation, "Full" Review and "Limited Review" (25% down payment by borrower minimum for no review) or absolutely no review at all for "Refi-Plus" loans. Got that? Complicating matters are state by state guidelines for Private Mortgage Insurers who exclude some of the largest condo markets entirely, such as Florida, leaving "Conventional" borrowers with a minimum 20% down payment on all condominiums.

The onslaught of exotic lending products pushed our multi-family single unit financing market is at it's nadir today. No single project standard is accepted across the secondary market for mortgage lending. Today's mass expiration of government insured lending eligible condominiums is a blow to every potential owner occupant looking for a starter home in condominium communities. Until project approval standards are re-evaluated altogether, from today forward, the Condominium finance market will be stuck in neutral until further notice.

(SEE UPDATE at 4:30pm today)

Condo Terminations May Be Next Phase Of Real Estate Crash

2010-06-22T06:45:00.000-04:00

Condo Vultures® Opinion Column

BY GRANT STERN

Nearly 18 months after beginning the lengthy and uncommon process, Condo Terminators has successfully unwound a 44-unit association in South Florida.
Think of it as a administrative do-over of a troubled condo complex that probably never should have ever been converted.
By our estimates, as many as 15 percent of the existing condos in Florida are legitimate targets for termination due to plummeting values caused by high foreclosure rates, unpaid maintenance fees, expired insurance, and serious code violations that jeopardize a project.
In terminating the Sunset Lake Villas condominium in suburban Fort Lauderdale, we are providing a much needed relief for a project where prices of individual units have plummeted to 10 cents on the dollar from the original boom time values.
Our plan of termination was recorded in the Broward County Public Records on June 11, clearing the way for the failed Sunset Lake Villas to revert back into a single-title apartment building.
The idea of terminating a failed condominium started with a hunch: while condo conversions had been the boom transaction, the mass short sale of a condo project had to be the child of the real estate bust.
Corporations are often viewed as entities with unlimited life. I knew that each and every building is required to have a clause allowing the dissolution, having drawn my own condo documents in my own projects.
At the time, I speculated that the same market forces, which so mispriced multifamily dwelling assets in the boom, would reverse themselves horribly during the bust.
This month, the idea became reality when my consulting group, Condo Terminators, announced we had successfully turned back the clock, offering another way for faster resolution of the foreclosure crisis.
Developer Anthony Galeotafiore of AJG Capital LLC in Bethpage, N.Y., assisted in bringing the transaction to fruition along with his counsel Sree Reddy of Roth Reddy & Associates in Miami Beach, who drafted the instrument of termination.
Pursuant to this plan of termination, a special purpose trust company managed by Condo Terminators took possession of the apartments.
This trust company is instructed to proceed with the orderly wind-down of affairs for the Homeowner’s Association by the plan.
The main purpose is to prepare the project for sale to AJG Capital, which intends to operate it as a rental apartment building.
Once the plan of termination was approved and filed, the building's title was transferred to the Termination Trust.
This transfer stripped the existing mortgage liens - all currently in foreclosure - from the individual units.
The mortgages are still valid and attach to each unit owner’s share of the proceeds of sale of the property - even if these proceeds are insufficient to cover the whole amount owed.
A real estate appraiser visited the property to determine market value for all units, as per the plan.
The Sunset Lake Villas project is being liquidated for its current fair market value estimated at around $18,000 to $22,000 per unit. The condo units had depreciated 91 percent from the sales prices in 2008.
Based on mortgage documents in the public records, the terminated units had a present loan-to-value in the 700 percent to 1,000 percent range.
In 2007, the Florida condo statute’s termination section was revised to provide an orderly process to wind down and terminate failed condos.
It allows these properties’ legal agreements to be dissolved, and for the properties to be reconfigured or sold to investors as multifamily commercial property.
Condo termination could potentially produce positive outcomes for local governments, banks, and the market as a whole in addition to savvy investors looking to profit from the bust.
Ultimately, I estimate that up to 15 percent of the post 2003 condominiums developed statewide in Florida could be legitimate targets for condo terminations in the course of the next five years.
Grant Stern is the owner of Morningside Mortgage Corp. in Miami. He can be reached at 786-220-0117.

Condo Terminators Appears on CNBC's Realty Check

2010-06-21T08:59:00.000-04:00

Click Video to Play:

Condo Terminators Completes Florida’s First Mass Short Sale

2010-06-10T06:00:00.001-04:00

FOR IMMEDIATE RELEASE

Grant Stern, founder of Condo Terminators in Bay Harbor Islands, Florida is pleased to announce Florida’s first Optional Condo Termination proceedings.

Miami - Condo Terminators, a specialty consulting group of Morningside Mortgage Corporation, in Bay Harbor Islands, Florida, has completed the filing process for Florida’s first mass short-sale of a failed condominium conversion on June 9 at the Sunset Lake Villas Condominium in Margate, Florida.

This project is expected to lead a wave of Condominium Terminations, resulting in mass short-sales of failed condominium conversions, reversion to apartment buildings, and the debut of a new legal instrument, the Plan of Termination.

Sunset Lake Villas is majority owned by Anthony Galeotafiore, Managing Member of AJG Realty LLC development group of Bethpage, New York. Sree Reddy, Esq., LLM, of the Miami law firm Roth, Reddy PA, drafted the Plan of Termination and represented the Developer at today’s proceedings.

Condo Termination was “the only way out” said Galeotafiore, “after all of the units we sold fell into foreclosure, all of the unit owners moved away or rented units without paying HOA dues. Nobody is financing condos, but apartment buildings are bankable”

Condo Terminators provided specialty business advice to the Developer and transactional advisory services to his council and accepts projects for these services throughout the state of Florida.

“Condo Termination transactions are the only way to resolve Florida’s real-estate slump and protect the rights of home-owners, banks and the value of our tax base,” says Condo Terminators President, Grant Stern, “The Condo Termination law is meant to cut through the tangle of lawsuits and provide fair resolution to the parties of interest, outside of court.”

For questions and further information, please visit www.condoterminators.com or contact Grant Stern directly at 305.219.0326 or info@condoterminators.com or Anthony Gaelotafiore, President of AJG Capital of Bethpage, NY at 516-933-3507 or agallo@ajgcapitalresources.com

CondoTerminators.com Launches Today!

2010-06-04T16:15:00.001-04:00

The CondoTerminators.com website is officially ready for prime time!

It includes news articles from this blog and specific information for condo owners, renters and investors. (free registration required, can use your GMAIL, AOL or YAHOO accounts)

South Florida Tax Base Absorbing 90% Drop in Condo Values

2010-06-02T17:32:00.001-04:00

Condo Termination can remove the weakest sales from the condo market and restore value to our eroding tax base. Failed condo conversions are seeing enormous drops in tax assessed values. Today's Miami Herald article highlighting the property tax appraised value updates showed another mid-teens double digit percentage drop from the year prior for South Florida's market taxable assessments. The new, larger homestead exemption passed when property values and taxes skyrocketed in the boom years is creating unintended consequences. When combined with dirt cheap apartments in failed condos, these developments promise to create new problems and iniquities in the tax base if left unaddressed.

The Miami Herald reports that the Broward County tax base shrunk by 12.1% last year and Miami-Dade by 13.4%. Some neighborhoods saw mild price increases or declines, while others dropped by up to 30%! This shrinkage means that while values drop, millage rates will have to be raised to provide the same services as the prior year, services get cut or create some tough choices for local politicians. Even worse, this could force tax bills to rise when homeowners were expecting tax relief in line with their new, lower property values.

Last week, CondoTerminators.com posted the Notice of Termination to the owners of a Margate, Fl. complex, which was tax assessed at $159,000 for 2009. The owner of the majority of the units challenged the 2009 appraisal and had it dropped to $117,000 per unit, saving $298 per unit. This week's released 2010 assessed values were for $15,500 per unit, an over 90% drop in valuation from one year to the next!

Florida's Homestead Exemption provides strong protection for homeowners against their creditors, as well as a discount in the assessed value of the home for property tax determination. In January 2008, it was sensible to extend tax exemptions to provide relief to new homebuyers whose value assessments were an order of magnitude higher than longtime owners who were capped at 3% annual increases with low purchase prices in the early 90s and prior.

The old inequalities where longtime homesteaders underpaid and new buyers overpaid will suddenly reverse, permanently if these failed condos are the basis for ongoing tax rates. The $50,000 Homestead Tax exemption combined with the 3% cap on increases means that a $20,000 condo purchased today, and homesteaded will take approximately 36 years to return those units to the tax base!

Non-Condo property owners are facing rising millage rates and tax bills. Condo prices are depressed due to the complete lack of financing options. Short of passing new legislation to force bankers to loan into condos, this will remain the norm for several years to come - and leave open a window of opportunity to permanently depress property tax bases. Condo termination will remove these underpriced units from the market and return their taxable values to higher, commercial income values based on cash flows.

Fannie Mae Requires Pre-Closing Credit Checks

2010-06-01T08:29:00.000-04:00

Home applicants must freeze credit activity or face scrutiny when they go to close on new home purchase loans. These Gap reports will raise the cost of consumer credit, while ultimately not affecting consumers' need to increase credit lines after home buying. Traditionally, housing is the driver of American consumer activity, with new homes requiring furnishings, appliances and general improvements in re-sales of existing homes.

Second Credit Checks For Home Buyers: Be Prepared

Megan Mollman, HousingWatch Contributor

(excerpted below)

Starting June 1, Fannie Mae has a new rule going into effect which requires the lender to check for additional lines of credit, such as a new credit card or a car lease, that a borrower may have obtained that have not been reflected on the credit report over the course of the loan process.

Tip No. 1: Get the house before the car

Across the board, mortgage brokers say that opening new lines of credit is the easiest thing to trigger the lender's attention, especially with the news of Fannie Mae's mandate. For example, this means opening up a store card at Lowe's to get a head start on buying some new appliances or paint or leasing a car to have something shiny to park in your new garage.

Grant Stern, president of Morningside Mortgage Corporation in Miami, Fla., believes car loans are "the No. 1 culprit" in lenders turning down a prospective buyer's home loan. "We always tell people as mortgage brokers, 'Get the house first, then they will give you the car," he says.

Tip No. 2: Don't switch professions (or tax brackets)

Brokers say its not earth-shattering to change jobs in the same field, especially if you are making more money at the new place of employment, but it's complicated when a professional is moving job classifications, for instance, from employed to self-employed, or from a salaried-position to a commission job. "Moving from an employee to a contract basis is a dagger," says Stern, as two years of federal tax returns need to be included with a loan application. "[In this case], it could take three years to get approved for a mortgage."

Today It Begins

2010-05-27T00:19:00.000-04:00

This afternoon, my firm initiated the first Condo Termination in the State of Florida since the 2007 legal requirements revisions at a 44 unit multi-family condominium complex in Margate, Florida.

The waiting period before a condo can ratify a Plan of Termination through a Special Meeting is two weeks. Our vote is going to be held at the Trustees office on June 9th at 9 am. After the Plan is ratified, and recorded, the Condo Association will continue to exist, but building will be deeded to a Condo Termination Trust managed as a special purpose entity by Condo Terminators and Howard W. Mazloff, Esq. an experienced real estate attorney.

Condo Termination Benefits Everyone

2010-05-19T17:21:00.001-04:00

The Florida condominium statute provides an orderly process to terminate failed condos and revert them into apartment buildings with single owners. Condo Termination has the potential to produce positive outcomes for local governments and the Florida Condo market as a whole. Local governments are facing eroding tax bases due to mass cascading failure of the Florida condo market. The market for condominiums in Florida is oversupplied with liquidation priced condo units. Removal of failing condos from the housing stock will ultimately speed the recovery process in the Florida condominium market. Communities face a wave of decaying multi-family housing projects and "investor hotel" condos without adequate cash reserves and looming deferred maintenance. Condo associations all over the state lacking insurance, reserves with high levels of negative equity should be removed through Condo Termination, soon.

Local governments, school boards rely on property taxes for their operating budgets and to pay debt service. The Florida Constitution requires that this local tax money is set aside for the exclusive use of counties. With the implosion of thousands of condominium unit values, local tax bases are shrinking faster than budget predictions. When a few units inside the project sell at liquidation prices, and financing is frozen, local tax assessors have little choice but to write down values for the entire project. The net effect is raising property tax millage rates across the board. Single family homeowners with lower absolute value depreciation will feel the squeeze, while condo investors get the tax break from lower assessments. County governments will still be forced to cut back on services due tax base erosion, while homeowners will feel the squeeze of higher proportional taxation on their depreciated homes. Condo Termination will allow multi-family housing to be assessed at the leased income value, which is higher than market value where condo prices have crashed.

There's no mechanism to transfer distressed units to new end users without abundant financing. Agency and Government lending authorities place financing restrictions on projects that are largely investor held. Financing for fractured condos still poses tremendous challenges for developers with inventory and investors alike. Investors are weary of lending into or buying into condos due to the potential for sharply rising HOA dues or potential Special Assessments. Condo bulk buyers face the potential of developer's liability buying as few as 7 units. Condo Termination will reduce inventory quickly without requiring thousands of loan workouts and new loans in a tight credit market.

Local economies benefit by the maintenance and repair cycles in multi-family housing. The Florida condo market has a vast supply of Class B and C condominium units where rentals once existed. Healthy condo associations set aside hundreds of thousands of dollars over the course of years for the purpose of replacing roofs, aging plumbing, and improving electrical and/or fire systems. Like apartment buildings, condos require regular maintenance and periodic replacement of major components. Many projects near the end of their economically useful lives were sold to condominium converters and sold to end users with a few engineering reports, limited reserves and abundant financing. Lacking sufficient operating funds, these condos have limited or depleted reserves. Deferring maintenance will further reinforce the negative cycle condos are experiencing. Condo Termination will invite value seeking investors to purchase failed condos in need of repair, creating jobs and helping local economies.

Many new communities were launched with unsound footing and inadequate reserves during the recent real estate boom. Condo Termination will reverse eroding tax bases in the Florida condo market by removing liquidation priced units. It will reduce inventory quickly, without thousands of bank transactions when negative equity is drowning communities. The recovery process will accelerate with lower inventories and establishing criteria for communities that are failed. Apartment house maintenance will be performed by value seeking investors after Condo Termination, which will stimulate local economies and maintain high quality of housing stock. Ultimately, I believe that up to 15% of the post 2003 condominiums developed statewide in Florida could be legitimate candidates for Condo Termination in the course of the next 5 years.

Miami Condo Developer Kicked Around by Northern Trust

2010-05-17T11:15:00.000-04:00

Often banks cause the very problems they seek to avoid by their pre-emptive strikes against developers who borrow to build. Northern Trust bank is not your typical real estate lender, but made a special exception to lend money to a long time client, Developer Mario Egozi.

After the project's completion, the bank spent over a year refusing to allow changes to the developer's business plan, nor support his efforts to obtain condo certification from Fannie Mae, nor the FHA.

Developer alleges Helms-Burton Act violation - South Florida Business Journal by Paul Brinkmann

excerpts from story published in the South Florida Business Journal on May 8th, 2010

Mario Egozi, the Cuban-born developer of a $24 million luxury condominium in North Bay Village, is citing the controversial Helms-Burton Act in a legal battle to fend off a foreclosure lawsuit by a development group with past connections to a resort in Cayo Coco, Cuba.

Egozi, 52, worked primarily as an architect rehabbing upscale homes in New York until 2005, when he convinced his longtime family bank, Northern Trust Bank, to provide a $16.9 million construction loan for his dream project, the 16-story Cielo on the Bay. But Northern Trust sold the loan last year to a company called 7835 NBV LLC, some of whose principals are affiliated with French-Canadian real estate firm Thibault Messier Savard & Associates. At least one member of that firm, professional hockey legend Serge Savard, was also involved in tourism development in Cuba several years ago.

That connection with Castro’s government should disqualify the new owner from doing business in the U.S., Egozi alleges. An attorney for 7835 NBV disputes Egozi’s allegations; the case is now before a bankruptcy judge in Miami. Egozi is stung by Northern Trust’s decision to sell the loan. In an e-mailed statement, attorneys for 7935 NBV denied that the company was in violation of the Helms-Burton Act. “Neither 7935 NBV nor its members have conducted business with the government of Cuba,” said Jose Casal, a litigation partner with Holland & Knight. “A separate foreign entity indirectly related to one of the investors of 7935 NBV’s owner held an interest in a joint venture with other foreign investors who invested in a hotel project in Cuba.”

Egozi has alleged that Northern Trust breached its fiduciary duty to him by suggesting midway through the project that he pledge $3.5 million to cover his personal guarantee, then walking away from the project. Cielo on the Bay includes 35 units originally priced from $750,000 to $1.8 million.

The building is considered a top-flight luxury condo with incredible views, said Grant Stern, a mortgage broker at Morningside Mortgage. “Northern Trust didn’t work with Mario, they just kicked him around,” Stern said. “Northern Trust Bank was always such a chi-chi service-oriented bank that took care of long-term customers,” Percal said. “But the bank was very aggressive and self-centered here.” On a recent balmy day, Egozi glanced up at the building, and said: “I was prepared to walk away with the loss of equity, but there was this pledged collateral also. What I am hoping for now is that they will leave me alone and let me do my project."

FHA Busts Red Tape, More Lender Responsibility

2010-05-14T15:15:00.000-04:00

Obama's Federal Housing Administration cut red tape, and eliminated one of the least useful and most arduous processes for small businesses who wish to do business with the Federal Government. The direct link to FHA's final rule

Mortgage Insurer Turns to Lenders to Police Brokers by Nick Timiraos

excerpts from story published in the Wall Street Journal on May 8th, 2010

The Federal Housing Administration, the government agency that insures a bigger and bigger portion of home loans, plans to rely more heavily on lenders to police mortgage brokers.

The changes will put more of the onus on lenders to make sure there is no fraud or faulty underwriting in the loans they fund, and less on the FHA. The lenders could be held liable for losses if a loan insured by the FHA goes bad and there are signs of fraud or mistakes in the underwriting.
...the number of brokers approved to arrange FHA-backed loans swelled to 9,043 at the end of 2009, from 5,759 two years earlier. The FHA has required mortgage brokers to submit an annual audit to the agency and to maintain a $63,000 net worth. It also tracks the performance of brokers' loans.
...Under changes set to take effect May 20, the FHA will stop certifying mortgage brokers or tracking the individual performance of loans that they originate. Instead, it will require lenders to sponsor brokers and to assume responsibility for those loans, including losses from fraud or poorly underwritten loans, such as those in which the income stated on a loan application doesn't match accompanying financial documents.
Mortgage brokers have borne the brunt of blame for bad loans made during the housing bubble, and lenders have become more wary of dealing with them as a result.
The National Association of Mortgage Brokers generally supports the FHA's changes. Grant Stern, president of Miami brokerage Morningside Mortgage Corp., said they represented a "huge cut in red tape" that should produce better rates for consumers.

Why? Why would this produce a consumer benefit?

Mortgage lenders do not disclose to consumers the payments they receive for originating and then selling loans (service release premium" and yield spread premium) to GNMA, the secondary market maker for FHA insured loans. However, most investors reasonably know before closing what those premiums will be through the Rate Lock process - and many banks offer Rate Lock guarantees to their customers. The prior reasoning for non-disclosure is that banks couldn't know for certain how much they would earn upon sale - implying some rate risk. Some lenders do in fact have rate risk, but no loan correspondents would have rate risk.

Ginnie Mae (GNMA) performs the Mortgage Backed Security sales function of Fannie/Freddie but doesn't issue underwriting guidelines or portfolio loans. (a possible future model for the GSEs I would add)

Mortgage brokers must disclose to consumers any yield spread premiums earned - and have for some time - that are earned from lenders as a result of raising the loan's interest rate to obtain a bank payment.

FHA Loan Correspondents under the mini-eagle program acted like mortgage brokers, but probably table funded (the lender makes the loan with the lender's and immediately assigns the loan to the lender over the table) most of their loans, to gain the ablility to hide their Yield Spread premiums and so be noted as the lender of record on the mortgage itself and avoid disclosure.

Yield spread premiums are significantly higher for FHA insured loans, nearly 100 bps above agency premiums - which indicates that the market IS paying Originators a premium for insured loans. If you take a look at the Agency vs. FHA "loan level price adjustments", you'd see that the GSEs are paying substantially less to buy loans than FHA investors, which translates into higher payouts to originators for lower rates with FHA. Yet, FHA average rates are far higher than the Freddy Mac Weekly rate survey.

To give a couple of simple scenarios:

a) A First time homebuyer (FTHB) with a 680 credit score putting down 3.5% with a $100,000 FHA insured loan at 5.5% rate would give an originator's YSP of 4% or $4000 for originating the loan. Imagining that you have the same FTHB in a market with Private Mortgage Insurance available (let's imagine we're in Texas) and the borrower is getting a 95% LTV Fannie Mae loan: $2438

b) A First time homebuyer with a 680 credit score putting down 20% with a $100,000 FHA insured loan at 5.5% rate would give an originator's YSP of 4% or $4000 for originating the loan. Imagining that you have the same FTHB and the borrower is getting a 80% LTV Fannie Mae loan: $3188

The FHA loan carries an Up Front Financed Mortgage Insurance Premium of 2.25% currently (up from 1.75%) which the PMI loan lacks, but still, you can see why the interest rates on FHA loans have been higher, banks simply make more money writing them higher. If you don't have to tell anyone how much money you're making, and everyone is charging higher rates - then you charge the higher rate to make more money, regardless of the best interests of the consumer.

The GSE loans have so much more competition that banks and lenders simply can't act that way, since they'll lose market share to lower interest rate providers. There's a lot of premium built into the FHA loans that is being earned by FHA approved loan correspondents and not disclosed to consumers. Allowing more outlets to market these loans and outlets that have stronger consumer disclosures of the origination premiums should lower rates.

It's an important story in the housing finance markets that FHA rates could trend sideways or lower as mortgage rates rise due to this important procedural change. The FHA is really pushing for a more efficient market for its loans and reducing red tape! I'd say this is news considering that public perception might be strangely the opposite.

Postlude: To my loyal readers, I offer an apology for leaving a large gap in recent posts, but with the coming of the Summer, arrives the coming of a great many new posts to this blog.

FHA Raises Insurance Premiums and Credit Standards

2010-01-20T19:22:00.000-05:00

The Federal Housing Administration (FHA) announced today that the government wants better credit quality from its low down payment buyers, as well as higher up-front premiums to be paid by all new borrowers who participate in it's Mortgage Insurance Program. In addition, the FHA commissioner David Stevens announced that "seller concessions" - the practice of sellers enticing buyers using the proceeds of realty sales to subsidize buyer's closing costs - would be halved from 6% of the purchase price to 3% after the comment period expires during the summer. The push by President Obama's appointees to modernize the FHA programs and guidelines is focused on averting the kind of loss making claims explosion experienced by the FHA insurance fund during the 1970s.

The credit change to restrict borrowers who have FICO scores of 580 from borrowing more than 90% of the purchase price of a home is not surprising. The minimum down payment on FHA loans currently stands at 3.5% of the value of the purchase. The FHA's rules and regulations were written prior to the wide adoption of the FICO score. The broad use of the FICO credit scoring system was adopted universally during the late 1980s but truly blossomed during the real estate boom, then bust of the 2000s, when lenders went so far as to issue loans solely based on collateral and FICO scores.

Raising the Upfront Financed Mortgage Insurance Premium (UFMIP) from 1.75% to 2.25% increases the costs to borrow for all new FHA loans immediately. The UFMIP is paid by every borrower regardless of down payment, the fee is added to the balance of all FHA insured loans at closing. The borrower pays the fee over 30 years or when the FHA loan is paid off in full. Today's announcement specified that this UFMIP change was a prelude to making a risk-based Mortgage Insurance Program fee scale - which will require legislation to accomplish. The Secretary announced that he will seek a change that will redistribute the UFMIP fees to borrowers with higher risks due to lower equity contributions or lower credit scores.

The reduction in sales concessions from 6% to 3% to pay closing costs, aka the "seller kickback", is aimed at raising borrower's equity ratios in their homes. Government Sponsored Agency loan programs only allow sales concessions greater than 3% when borrowers have 20% down payments. Modern FHA lenders receive generous premiums for issuing insured loans, and the need for 6% of a sales price towards closing costs provided more opportunity to send money to intermediaries, than pay for actual borrowing costs.

The Obama Administration's push to modernize the FHA's programs while their market share explodes has been handled evenly during the last year. The changes are in line with the market's expectations for prudent lending. The FHA's new set of policies should ensure that risk premiums are paid sufficiently to cover losses, as well as to discourage risky real estate transactions at the fringes. High risk loans may account for a small percentage of the insured pool, but likely represent a large percentage of un-reimbursed losses to the government.

Week in Review

2009-11-28T19:12:00.000-05:00

Wow! Three publications in a three day week! It's always great to give a little more commentary since a news interview might last 30-45 minutes and consist of several emails, but all you see in print is 1 or 2 sentences....

Priced to sell: South Florida housing market shows signs of life - Business - MiamiHerald.com by Monica Hatcher

"The market for so-called jumbo loans, or those worth more than $423,750 in South Florida, dried up more than two years ago, said mortgage broker Grant Stern."

Absolutely, the return of the Miami housing market is helping spur sales, along with the Federal tax credit for first time buyers. What's really aiding in the process too is low interest rates combined with prices that are affordable. The median home is selling for around 3 times the median household income. This is a welcome improvement from the 6 times income pricing of just a few years ago...

However, the mid-market homes in the $400-1,000k price range are lagging on the market, well beyond marketing times for homes priced under $300,000. Part of this has to do with the income curve required to purchase more expensive homes - there are fewer people with the earning power to acquire larger homes in fancier locales.

But deeper down, the mid to high end market is truly paralyzed by the lack of financing opportunities when loan amounts grow north of $417,000 - which is the Fannie Mae national conforming limit. Fannie Mae is authorized to issue loans up to 125% of the median home price in 2007 - which means that in the Miami district, the maximum "Agency" loan is $423,750 - hardly a great improvement.

The secondary market to sell these "Jumbo" or "Non-Conforming" loans crashed horribly in the summer of 2007 along with the private secondary markets for "Alt-A" home loans and more exotic loan products. Without a market to sell these loans, banks who issue them are forced to keep the loans - possibly to maturity - and have become very circumspect about issuing credit to high net worth people. I know this may come as a shock, but the risk profile for "Jumbo" loans is actually very similar to Sub-Prime lending - because these loans are larger and therefore carry higher risk!!!

An Upturn in the Housing Market May Be Reversing - NYTimes.com

“They’re not buying as investors, they’re buying as homeowners,” said Grant Stern of Morningside Mortgage Corporation in Bay Harbor Islands, Fla., near Miami Beach. “Nobody expects a 50 percent gain. Flat is the new up.”

Right now housing prices are flat, but with the bout of deflation we are fighting - this actually means that home prices are rising in real terms; ie. if you're earning 1% interest, but prices have fallen 2% during the course of a year, you have a 3% improvement in your spending power.

Edgewater Lofts condos sold in bulk deal - South Florida Business Journal:

Grant Stern, president of Miami-based Morningside Mortgage Corp., said there is a lot of interest in the area of Edgewater, which is north of the Adrienne Arsht Performing Arts Center. Renters, in particular, are looking to buy in nearby buildings because of the near market-bottom prices. Another reason for the interest is that some of the buildings have gotten FHA approval for loans.

He said future buyers have to be realistic about what they are getting when they buy in Edgewater Lofts.

“It’s not going to get exciting for you,” said Stern, about the unit’s prospective buyers and unit demand, which would normally drive pricing upward. “ Chances are that the minute it gets exciting, someone is going to come in and obstruct your view.”

This is a game that is going to go on for many years in the post-boom downtown environment. When it comes to views, there's un-obstruct-able and there's other. There are plans for projects throughout the Biscayne and Brickell corridor which have been approved and are simply waiting for the economic cycle to rise towards the skies!

Personally, I have a client who recently completed a land assembly in a Central Business District area - and got a Major Use Special Permit (MUSP) at a cost of nearly $500,000. They are long term players - and know that it will be 7-15 years before they can develop the 1,000 unit project they envision!

The Platinum Condo, is a developer client whose building is mentioned in the article - built a 22 story condo and got FHA approved with the help of Morningside Mortgage. They have a 2nd tower planned and permitted on the east side of their current project. However, they ensured that both towers would have outstanding views by planning the projects simultaneously. It's rare to see that kind of coordinated development in Miami - as it takes years to create major land assemblies. The Platinum developers spent nearly 2 decades.

Planning and zoning information is public domain. However, a good real estate brokerage should have extensive information available not only on current projects, but as well on the projects that are planned which may affect the view of a unit which any buyer is seeking to purchase.

Why Condominium Termination?

2009-11-20T13:02:00.001-05:00

Condo termination has the potential to mitigate the damages caused by the condo market collapse and to distribute benefits to the distressed owners, lenders with impaired loans, local markets in general and entire communities at large. There are four main players are suffering during this downturn: Unit Owners, Banks, Markets and Communities. This article will seek to address specifically the difficulties faced by unit owners and mortgage holders. Ultimately, condo market trouble affects all residents of a given area because a condo project is integrated into surrounding communities, even if the front door is gated.

The unit owner in a broken condo can be terribly burdened supporting a failing project, and the time, expense and headache of a short-sale may prevent orderly exit from their properties. Most cannot afford the time off work, or attorney's fee to conduct a short sale. Most are unaware of the option to give Deed in Lieu of foreclosure. Condo Termination produces a mass short sale. It doesn't require any individual to spend thousands of dollars on representation which will pit the individual owner's needs vs. the association's well being.

Most Unit Owners have limited real estate experience and are simply looking for a home as shelter and long term investment. Few Unit Owners have experience as a licensed Community Association Manager or Condo Attorney which is needed to perform distressed servicing. Many associations are falling out of compliance with State accounting requirements. Even worse, many more associations are dropping insurance coverage, putting at risk the property improvements, compensation in the event of the worst and putting the Boards of Directors at risk for liability in the event of a catastrophe. Condo Termination has mechanisms to transfer decision making authority into the hands of full time real estate professionals who act according to a pre-determined plan and stabilize the property improvements while winding down the condo's affairs.

Just this past week, I spoke with a condo owner who wiped out her savings trying to support a terribly failed condo project with mass delinquency. Her story to me was that her 1000 sq. ft. apartment's monthly maintenance assessments skyrocketed from $800 a month (a high figure for a non-luxury property) all the way up to over $2000 monthly! She says that currently, the project is still charging over $1300 monthly and that the unit owners are close to 100% underwater on a valuation basis. However, she and her peers have no clue of a way out of their situation . . . Condo termination provides an alternative to bankruptcy courts for failing projects where creditors may get a terrible haircut, but ultimately, shareholders will be stuck paying attorney's fees, trustee's fees, and as much as the property can generate to repay the other stakeholders, while lasting for many years.

I also encountered a Condo Association President this week, who presides over a failing "investor hotel" condominium over 100 miles from his home address. An "investor hotel" is a mortgage industry term for a condominium which is primarily consistent of individual landlords, with an attendant negative connotation. This President assured me that dropping insurance for casualty was a necessity due to the terrible expense.

I advised this President that it would be possible he could be held personally liable if there's a major casualty and that he would be wise to issue an emergency assessment of the membership to immediately resume coverage. The President actually said that "the Board wasn't interested" in this type of action because "nobody would pay anyhow"!! Condo Termination can reduce or eliminate poor decision-making by interested parties; to protect first, the rights of the inhabitants, and preserve the property improvements' value.

Lenders hold a tremendous amount of loans which are under water just waiting for the expense and loss of the foreclosure to REO sale process. A typical foreclosure can cost the bank up to 25% of the collateral property's market value between attorney's costs, filing fees, lost revenue, sales commissions, taxes, back assessments and carry costs in inventory. Lenders are too short on staff to process the multiple short sales, modifications, foreclosures, deed returns and other distressed loan resolutions.

Loan workouts also require expensive lender reports on value, title searches and staff time. The short sale process, where a bank cuts its losses early, is difficult for banks to execute case by case, as they are attempting to get the best price, while eliminate Non-Arm's Length sales to relations whereby the borrower benefits from the debt relief. Condo Termination provides an Arm's Length method to sell condominium property, while lowering the administrative costs and satisfying risk management requirements. Additionally, lien holders can liquidate holdings knowing that they will never have to pay carrying costs or posses the units - unlike individual workouts which may simply time shift the inevitable.

The next article in this series will address the benefits of Condo Termination to housing markets and how that translates into community support. There are myriad benefits to Condo Termination, which, if realized, will create a positive feedback loop and arrest the erosion of communities with high concentrations of single family homes in multifamily housing projects.

FHA remodels condo lending guidelines

2009-11-19T15:18:00.000-05:00

Reprinted from: Condo Vultures® Opinion Column

Thursday, 19 November 2009 09:47

The Federal Housing Administration recently released its new condominium lending guidelines, and with the stroke of a pen wiped 29 years worth of dust off of the most sought after lending certification in the country.

The new guidelines include a major overhaul to the process by which lenders approve projects and modern requirements, increasing discretion in some areas while providing strong guidance in others. The changes were mandated in HERA Act of 2008 , which moved the statutory source of funding from a condominium only pool into the general housing pool.

More importantly, FHA is using this guidelines change to simultaneously improve their standards and process, while eliminating cumbersome red tape that will reward condominiums in good standing that were previously locked out of the pool.

The FHA was wise enough to issue temporary guidance simultaneously, allowing new buildings that qualify to sell out their remaining inventory in 2010 and support distressed markets in a responsible way. I believe that this FHA condo program renovation is a great first step in laying a long-term foundation for a recovery of the condominium housing markets.

A quick backgrounder on the Department of Housing and Urban Development (HUD) could help clarify the workings of the FHA.

The National Housing Act (NHA) of 1934 established the FHA to stem the tide of foreclosures during the Great Depression; prior to the NHA typical home loans were 5 year term loans (interest only) after which the entire principal balance was due in full. The FHA insured loans for up to 30 years, in essence creating the 30 year fixed rate mortgage - the standard loan issued today. The FHA's activities are spelled out (in detail) in the NHA and any activity it undertakes is authorized by that statute.

The FHA's revisions are a concrete result of the HERA Act of 2008 enacted by the Democratic Congress and signed into law by President Bush.

Back when Section 234 of the NHA was authorized, the condominium was still a novel new method of shared ownership, and Cooperative Housing Corporations were the mature way to distribute ownership in multi-family housing projects.

Prior to HERA, the FHA issued condominium loans exclusively under Section 234 of the NHA and single family home loans under Section 203. This entailed different pools of funds, and when sold to investors, different pools of loans, some with condos, some with detached single-family homes.

Once the new guidelines are fully implemented, this division will cease entirely, and the FHA will recognize condominiums in a formal way as legitimate single-family residences contained within a multi-family dwelling.

The installation of a single approval standard, coupled with modern standards is a boon for all condominium owners.

The Full and Spot system confused all parties as to the approval requirements for any particular project.

Using the Spot Approval system, buyers had to pay for certifications each time a loan was to be issued, and go through the process as if it was the first time. Even worse, half the questions on the Spot checklist were boilerplate requirements which provided little useful underwriting information. The Full approval process contained major gray areas in important matters such as budgeting and insurance requirements, which had a chilling effect on applications due to the expense and complication applying.

The most significant individual guidelines change was the allowance of the Right of First Refusal in condominium documents - so long as this Right does not conflict with the Fair Housing Act.

The FHA’s rationale was that violations of the Act are criminal anyhow and many associations have the Right - while few are prosecuted for non-compliance. There are new caps on HOA dues delinquency percentages; however, the prior rules eliminated all buildings with special assessments under Spot Approval. The new Budget review guidelines adopt a Fannie Mae form which can now become the standard for lender communications in the area and only lead to more clarity for all parties.

When it comes to matters of process, the removal of the legal certification requirements is quite possibly FHA's greatest slice into housing red tape since 1934. Under the prior rules, a condominium had to hire an attorney to review the Condominium Documents and certify to the FHA that they met a 37-page legal standard, which was drafted in December of 1980 during the waning days of the Carter Administration.

Every time I encountered a building with fewer than 100 units and had to inform them that the certification costs alone would run $2,000, it pretty much killed their interest in FHA approval. However, that was after a 6 month-long search to find a practitioner willing to create a specialty in those types of reviews.

Lastly, the FHA issued temporary guidelines, which are in effect for the coming year that should help local developers sell units to local buyers in South Florida with financing. Chief among these is the reduced pre-sales requirement in new projects which allows projects with 30 percent pre-sales to earn approval and sell up to 30 percent of their units to financed buyers with FHA loans.

Two weeks ago, I visited the HUD Headquarters building on L'Enfant Plaza in Washington, DC to meet with their Condo Standards staff and learn the rationale behind their revisions and presented specific case studies of projects in our approval pipeline - as well as statistics generated by Condo Vultures®.

The main topic of conversation was the stigma placed on loans into projects approved with Fannie Mae’s new process. The FHA wisely looked for guidance in the core logic of Fannie Mae's guidelines intended to protect the institutions that back these loans.

However, Fannie’s initially stiff guidelines, rapid implementation with little input and then relaxation of the rules created the impression that the whole process was a sham. Now that there is discretion in the standards, the staffers were sensitive to the reality of the situation; that their decisions today will effectively pick winners and losers in the condo market. By issuing temporary rules alongside the new program, it sends a strong signal that the FHA understands the market, and that this is a process with real standards, but open to buildings experiencing temporary dislocations in this market.

The FHA was originally created to backstop the national housing market and is visibly providing much needed support to the market, in a responsible fashion. FHA’s handling of the new shift from a rules based statutory condo approval process to a guidelines based process is providing much needed modernization to their programs and leadership to the market as a whole.

The updates are modern, well considered and should promote condo lending, while simultaneously protecting the insurance pool from damaging claims in excess of premiums. The improvements to process should result more condominium approvals with lower costs to consumers as well as developers. It’s a credit to the Obama administration that his political appointees and career staff at HUD truly learned the lessons of Fannie Mae's disastrously erratic implementation of the condominium guidelines.

These FHA condo updates will really gain traction in the 3rd and 4th quarters of 2010. For the buildings that qualify, they are the light at the end of the longest tunnel.

FHA Modernizes Condominium Lending

2009-11-12T17:00:00.000-05:00

The Federal Housing Administration released their new Condominium lending guidelines this past Friday and with the stroke of a pen wiped 29 years worth of dust off of the most sought after lending certification in the country. The new guidelines include a major overhaul to the process by which lenders approve projects and modern requirements, which increase discretion in some areas while providing strong guidance in others. The changes were mandated in HERA Act of 2008 (link: http://www.gpo.gov/fdsys/pkg/PLAW-110publ289/content-detail.html), which moved the statutory source of funding from a condominium only pool into the general housing pool. More importantly, FHA is using this guidelines change to simultaneously improve their standards and process, while eliminating cumbersome red tape that will reward condominiums in good standing that were previously locked out of the pool. The FHA was wise enough to issue Temporary Guidance simultaneously, which will allow new buildings that qualify to sellout their remaining inventory in 2010 and support distressed markets in a responsible way. I believe that this FHA condo program renovation is a great first step in laying a long-term foundation in the recovery of the condominium housing markets.

A little background information (link http://www.hud.gov/offices/adm/about/admguide/history.cfm) on the Department of Housing and Urban Development aka HUD (link hud.gov) is in order to understand the workings of the FHA. The National Housing Act (NHA) of 1934 established the FHA to stem the tide of foreclosures during the Great Depression; prior to the NHA typical home loans were 5 year term loans (interest only) after which the entire principal balance was due in full - the FHA insured loans for up to 30 years, in essence creating the 30 year fixed rate mortgage which is the standard loan issued today. The FHA's activities are spelled out (in detail) in the NHA and any activity it undertakes is authorized by that statute.

The FHA's revisions are a concrete result of the HERA Act of 2008 enacted by the Democratic Congress and signed into law by President Bush. Back when Section 234 of the NHA was authorized, the condominium was still a novel new method of shared ownership, and Cooperative Housing Corporations were the mature way to distribute ownership in multi-family housing projects. Prior to HERA, the FHA issued condominium loans exclusively under Section 234 of the NHA and single family home loans under Section 203. This entailed different pools of funds, and when sold to investors, different pools of loans, some with condos, some with detached single-family homes. Once the new guidelines are fully implemented, this division will cease entirely, and the FHA will recognize condominiums in a formal way as legitimate single-family residences contained within a multi-family dwelling.

The installation of a single approval standard, coupled with modern standards is a boon for all condominium owners. The Full and Spot system confused all parties as to the approval requirements for any particular project. Using the Spot Approval system, buyers had to pay for certifications each time a loan was to be issued, and go through the process as if it was the first time. Even worse, half the questions on the Spot checklist were boilerplate requirements which provided little useful underwriting information. The Full approval process contained major gray areas in important matters such as budgeting and insurance requirements, which had a chilling effect on applications due to the expense and complication applying.

The most significant individual guidelines change was the allowance of the Right of First Refusal in condominium documents - so long as this Right does not conflict with the Fair Housing Act. The FHA’s rationale was that violations of the Act are criminal anyhow and many associations have the Right - while few are prosecuted for non-compliance. There are new caps on HOA dues delinquency percentages; however, the prior rules eliminated all buildings with special assessments under Spot Approval. The new Budget review guidelines adopt a Fannie Mae form which can now become the standard for lender communications in the area and only lead to more clarity for all parties.

When it comes to matters of process, the removal of the legal certification requirements is quite possibly FHA's greatest slice into housing red tape since 1934! Under the prior rules, a condominium had to hire an attorney to review the Condominium Documents and certify to the FHA that they met a 37 page legal standard, which was drafted in December of 1980 during the waning days of the Carter Administration. Every time I encountered a building with fewer than 100 units and had to inform them that the certification costs alone would run $2000 it pretty much killed their interest in FHA approval. However, that was after a 6 months long search to find a practitioner willing to create a specialty in those types of reviews. The first building, which I processed for approval, the Bank Lofts Condominium, is a gut condo conversion project, and was certified by Andrew Fritsch from the West Palm Beach office of Broad & Cassel. He drafted the condo documents and issued a certification, but balked on certifying projects to which he had not been the original author. "The rules require you to flyspeck someone else's documents", Fritsch said, "and the risk to reward ratio is terrible."

Lastly, the FHA issued temporary guidelines, which are in effect for the coming year that should help local developers sell units to local buyers in South Florida with financing. Chief among these is the reduced pre-sales requirement in new projects which allows projects with 30% pre-sales to earn approval and sell up to 30% of their units to financed buyers with FHA loans. Two weeks ago, I visited the HUD Headquarters building on L'Enfant Plaza in Washington, DC to meet with their Condo Standards staff and learn the rationale behind their revisions and presented specific case studies in projects in our approval pipeline as well as statistics generated by Condo VulturesTM. The main topic of conversation was the stigma placed on loans into projects approved with Fannie Mae’s new process. The FHA wisely looked for guidance in the core logic of Fannie Mae's guidelines intended to protect the institutions that back these loans. However, Fannie’s initially stiff guidelines, rapid implementation with little input and then relaxation of the rules created the impression that the whole process was a sham. Now that there is discretion in the standards, the staffers were sensitive to the reality of the situation; that their decisions today will effectively pick winners and losers in the condo market. By issuing temporary rules alongside the new program, it sends a strong signal that the FHA understands the market, and that this is a process with real standards, but open to buildings experiencing temporary dislocations in this market.

The FHA was originally created to backstop the national housing market and is visibly providing much needed support to the market, in a responsible fashion. FHA’s handling new shift from a rules based statutory condo approval process to a guidelines based process is providing much needed modernization to their programs and leadership to the market as a whole. The updates are modern, well considered and should promote condo lending, while simultaneously protecting the insurance pool from damaging claims in excess of premiums. The improvements to process should result more condominium approvals with lower costs to consumers as well as developers. It’s a credit to the Obama administration that his political appointees and career staff at HUD truly learned the lessons of Fannie Mae's disastrously erratic implementation of the condominium guidelines. These FHA condo updates will really gain traction in the 3rd and 4th quarters of 2010, for the buildings that qualify they are the light at the end of the longest tunnel.

Followup to Anatomy of a Struggling Condo - interview with an innocent bystander

2009-11-12T02:11:00.000-05:00

A local saying goes: "It's a small Miami". When I picked Unit 3911 in Jade at Brickell - it was random through a search of the Miami-Dade Property Tax Appraiser's office where I merely wished to find a unit sold in both 2006 and 2008 to illustrate a unit with an inflated sale and a short sale.. One of my readers introduced me to a local gentleman who actually spent a substantial amount of time inside of the unit itself as a guest of his boss in a local hedge fund who lived in the unit as a tenant!

My source no longer works for the same hedge fund, and for purposes of obscuring his identity, we'll call him Sam, and his boss, the tenant, Frank. Sam explained that the 3400 sq. ft. apartment was truly stunning, with a balcony wrapping around the southern face of the building offering city and ocean views. Its flow-through floor plan is covered wall to wall in white marble. This single family home replacement in the sky rented for a mere $8000 per month to Frank, the fund manager, after the sale from Nueva Dia, Inc. to Cellini, LLC to Gilberto Lopez.

According to public records, Frank got one heck of a deal on his rent payments. The monthly interest payments to WaMu totaled over $28,000 a month. However, Gilberto’s mortgage was one of the infamous Pay Option ARM loans which only required a monthly payment of $10,157 monthly for the first year. The total cost of ownership, with interest, tax and maintenance payments was likely in excess of $38,000 and Gilberto was losing $30,000 monthly waiting for his apartment to appreciate. Odd, right? Even for the boom times, that’s a pretty steep operating loss . . .

Frank apparently conducted quite a lot of his business from the apartment as it was in close proximity to his office and offered a spectacular view of Miami. Sam spent quite a lot of time in the unit too. As noted in the last column, the unit slid into foreclosure, and he was served with legal paperwork as the tenant.

At that point, Frank tried to contact Gilberto, in Colombia, and find out why he was not paying the maintenance. The voice on the other end of the cellphone was in the city of Cali, and sounded young and spoke limited, but passable english. . .

What Sam found unusual, was that letters started to appear which were addressed to Julian, the manager. Even more strange some letters arrived addressed to Victor Patiño, who they suspected may be a notorious trafficker with the same name who can even be found in Wikipedia. However, they never met Victor, though according to Sam – the property manager Julian bore a striking resemblance to the gentleman in Wikipedia with the same surname.

According to Sam, though the owner/landlord was Gilberto Lopez, his property manager and rent collector was in fact Julian Patiño, the Manager of Cellini, LLC. Cellini LLC bought and sold the apartment within a 3 day period at the end of November 2006 . . . This certainly could be a tipoff to a potential Straw Buyer scheme. It is highly unusual to see the seller managing property for his buyer through the years - especially when the seller only owned the property for 3 days.

Eventually, Frank grew frustrated with the uncertainty of living in an apartment with potentially unstable leasing terms and requested a personal meeting with Gilberto. According to Sam, a frail older gentleman, who spoke little English and Gilberto’s son who was a non-english speaker.

Presumably, this last meeting with Gilberto was with the actual gentleman owner. In these situations, it’s not exactly polite to ask for identification – so Sam wouldn’t say that this was certainly THE Gilberto Lopez – but he did report that this gentleman really had little clue even with the help of translation, about the apartment or it’s issues. He did however agree to a reduction in Frank’s rents to $6,000 per month... whereupon Frank found a new home fairly quickly.

None of this is material, which a court would admit, but undoubtedly, the pool table doesn’t seem to have an even roll. A semi-intelligent bank should be flying red flags any time there’s a transaction with multiple sales in a 1 week. At the end of the day, this kind of transaction was a needless loss of WaMu’s equity and debt holders who were wiped out in the collapse, and potentially a crime committed against other unit owners and lien-holders who lost dues, property values and shouldered the burden of carrying this unit without dues paid for an extended period.

Anatomy of a Struggling Condominium

2009-10-23T15:49:00.000-04:00

The condominium association that is the focus of the Oct. 22nd article Condo board tries new tactic to collect delinquent fees by Monica Hatcher is the Jade Brickell Condominium. This project has been a poster child of the boom for many years. For the sake of illustration, I have gone through Miami-Dade County Public Records to deconstruct just one of the many dubious chains of transactions that were the stock in trade for gaming the real estate bubble.

In 2004 Nueva Dia Incorporated bought a developer unit $1,975,000 for Unit 3911 in the new construction Jade Brickell Condominium - 4/4 luxury condominium 3,415 square feet of living area - almost a house in the clouds . . . during the proceeding 2 years the apartment appreciated and was sold.

Cellini, Limited Liability Company, purchased Unit 3911 for $2,200,000 on November 27th, 2006. This delivered a reasonable 5% compound rate of return to Nueva Dia Incorporated on its real estate investment. But Cellini, LLC - like the Renaissance sculptor of the same name - had plans in the works to sculpt a financial masterpiece. However, to put the finishings on this creation - a fool was required as the model, benefactor, buyer and borrower. Cellini LLC also had to add lender to their masterpiece - a fair and hearty soul, whose can do attitude would sweep away the stingy customs of conservative mortgage bankers.

Mr. Gilberto Lopez bought Unit 3911 of Jade Brickell Condominium from Cellini, LLC on November 30th, 2006 (just 3 days later for those who are counting) for a purchase price of: $3,350,000. Mr. Lopez likely called his mortgage banker at (866) WAMU-YES and asked them to show him the "Power of Yes"- wherefore, he obtained a mortgage loan from Washington Mutual Bank, FA in the amount of $2,512,500 for his second home. Perhaps he was a Mariachi Singer? Alas, Mr. Lopez's motivations in delivering such solid returns to Cellini, LLC and/or any relations they may or may not have is not known, but the rest is public record.

The Management and Shareholders of Cellini, LLC must have rejoiced at their new masterpiece. A 3 day gain of 35% on their investment filled their coffers with a 7 digit profit and for an annualized return on investment of 4265%!! The masterpiece was complete!!

Sadly, Mr. Lopez was unable to maintain his payments to the Jade Brickell Condominium Association and slightly 1 year after his purchase date, in December 2007, the HOA filed suit to foreclose on the Unit 3911 for unpaid dues. Two months later, as the boom really lost steam, Washington Mutual also filed suit to reclaim Unit 3911 for unpaid mortgage payments as well. Public record shows that in May of 2008, the Jade 3911, Incorporated company purchased the apartment for merely $1,600,000, likely a cash purchase, since there isn't a recorded mortgage.

Winners:

Nueva Dia - a good buy and reasonable profit on sale
Cellini, LLC - a million dollar gold plated statue by the original Cellini and no buyer's remorse
Local Government - $55,000+ in transfer taxes, mortgage taxes, recording fees and higher property tax assessments throughout the building
Local Attorneys - they always win, huh?
WaMu - someone got paid for making the loan, underwriting the loan, closing the loan, servicing, etc. then, when the going got tough, they were Out!

Losers:

Gilberto Lopez - his credit, his down payment, maybe his reputation as a financial individual, hopefully nothing more. Sadly, Gilberto was likely a victim in this transaction at best - at worst, who knows.
Jade Brickell Condo - management expenses, attorneys fees, lost revenue, late bills, depreciated neighboring units, etc. etc. etc.
JPM Chase - $900,000+ but who knows how much was cushioned by the FDIC's sugar to get them to take the WaMu Medicine
FDIC - probably holding the bag
US Taxpayers - certainly holding the bag

Condo board tries new tactic to collect delinquent fees

2009-10-23T10:10:00.000-04:00

As published in the Miami Herald yesterday, Oct. 22nd the article Condo board tries new tactic to collect delinquent fees by Monica Hatcher points out one of the latest "bleeding edge" tactics that condominium associations are using to try and collect enough dues to survive this crisis.

The focus of Ms. Hatcher's article, the Jade Brickell Condo has been a poster child of the boom for many years. These strong-arm tactics are turning Condo Associations into realty investors in a last ditch effort to stave off bankruptcy, receivership of the association or wholesale degradation of property improvements.

Ironically, the new judicial decrees are allowing condominiums to do to delinquent owners what banks are being punished for doing to delinquent owners - to enforce court remedies on real property while avoiding due process in court. As if the legal issues weren't difficult enough, there are State Sales Tax implications to weigh when Condo Associations become landlords.

This leads me to imagine that perhaps condominiums should reserve a certain percentage of their units solely for rental purposes to benefit the association as a regular practice. Ultimately, some associations will be declared unfit and terminated as a result of the success or failure of today's Hail Mary legal tactics.

Condominium associations are a not for profit entity created to maintain, operate and own common areas in shared living communities like apartment and town house developments. They are not truly intended to be landlords, nor are they investors, nor are they designed to evaluate the market transactions that they facilitate. If associations are unable to pay the bills, they may wind up taken over by their creditors in receivership - or forced to file bankruptcy to forestall the complete loss of control over the property by its owners. Perhaps its time to re-evaluate this not-for-profit as standard practice in the hopes of making condominium associations more intelligent creatures.

The real irony is that courts are allowing condominiums to do what banks may not - gain benefit from legal action through unorthodox tactics. The goal of these blanket receiverships are to give income to the HOA while saving the costs associated with filing individual foreclosures on all units. Meanwhile, banks are filing foreclosure, and in many instances, instructing their legal council to refrain from pursuing repossession actions further in hopes of avoiding monthly assessment payments. Banks are avoiding full repossession, where they have to pay for contents insurance (known as the HO-6 contents policy), property management fees, bookkeeping fees and - in many cases - costs to rehabilitate foreclosed property. Banks are attempting to raise the cost basis of their bad loans by racking up large default interest bills which will never be paid, so when they eventually satisfy their mortgages with short sales, they can reap

Some condominium law firms have argued - successfully at times - that these delay tactics are not equitable in the eyes of the law and obtained court orders for banks to begin paying pre-foreclosure monthly assessments on property which they do not own in fact. In this circumstance, the bank gets stuck with the continuing assessments while the association then attempts to place the rental income into receivership to satisfy as close to 100% of dues outstanding as possible.

Condominium associations may not be prepared for the tax implications of becoming a landlord. "Remember that leases with less than 6 months duration are subject to Florida sales tax, which associations may not be presently collecting," said Steven Price, a CPA with the local firm Goldstein, Schecter & Koch. Associations should carefully review their leasing policies to ensure that they are registered with the Florida Department of Revenue if they are conducting short term leasing or face a tax levy in the future.

Perhaps condo associations should be directed to spawn their own subsidiary, for-profit investment companies to buy up and lease out a reasonable percentage of their units as a matter of normal business. An association owned, for-profit venture could provide an income for maintaining the property through good and bad times, Strict limits on leverage would have to be maintained for these controlled entities. However, in good times, this type of arrangement could be suitable to lower the monthly maintenance assessments and build replacement reserves for condo buildings. This practice could provide a safer, lower cost source of leverage in lieu of Special Assessments - by allowing banks to mortgage a small percentage of the property directly, rather than encumbering the entire association, which could then be reserved for emergency settings only.

The radical legal tactics and creative decisions issued by local judges can act as a band-aid for many struggling associations in Florida. However, it only takes 1 successful challenge by a unit owner to unwind the judge's order. The stakes in the event of a successful challenge could be high, a struggling association having to repay rents collected as well as the possibility that they may have to pay attorney's fees to the challenger. If an association is challenged before something like this worst case scenario, it will be wiped out afterwards. Unless there's an obvious benefit to these radical tactics, or the property's distress is largely past, we suggest evaluating Condominium Termination as an alternative to dubious practices.