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April 10th, 2006

Bubbles & Bank Fraud: Real Estate in SoHo and the Hamptons

by D. Clark MacPherson

The residential real estate market seems to be stabilizing in one regard. In Manhattan, studios and one bedroom apartments are selling, even if not briskly. Sales of family sized apartments of 2,000 to 3,000 square feet, including lofts, have slowed a bit. Mind you, the sales numbers have slowed down; the prices have not–at least, not yet. Townhouses are selling and those properties in the $4 million to $6 million range are seeing offers close to or at the asking prices. There is no “irrational exuberance” in this market, but property is moving. It is difficult to tell what effect the new developments will have on the market, since there are many ways in which a selling price can be massaged by the seller. But, with an acquisition cost of $500 per square foot and above, it is rational to expect that selling prices will be well in excess of $1000 per square foot on new units. In fact, it is highly usual for condos and coops right now to be asking in the $1200-1300 per square foot range. New developments are pushing $1500. According to Robert Agee of Carol Quatrone Realty (212-475-2006), the market is steady and apartments have maintained their value – but the rate of increase in prices has slowed. According to industry specialists, the slowing of sales will undoubtedly be first seen in incentives to the buyer since developers will do almost anything to avoid changing the plan numbers with the Attorney General. Expect to start seeing added help with closing costs, additional amenities added to the deal, and other perks that do not necessarily show up in the selling price, before the apartment price actually drops.

In the Hamptons there is now one major selling season–March to May. And, there is a lot of product on the market with more on the way. The most saturated segment of the market is in the $900,000 to $1.5 million range. Ho–s for sale from $300,000 to $500,000 do sell – if not as quickly as before. The $1.5 to $3 million segment is even more of a dullard. Buy a property for that price only if you expect to live in it for a long time. Once the price reaches into the $5 to 10 million ranges, things perk up a bit. Go figure!

The fact that the current Republican administration in Southampton Town has conducted a nearly decade long witch hunt to eliminate summer rentals – has adversely affected investment buying in the once robust summer market, which used to bring rentals as well as sales to the area. Starting with a Town Council member named Carolyn Zenk, who was a loose cannon while on the Town Board in Southampton, was partly responsible for the police tactics followed up by Supervisor “Skip” Heaney. The Town used Code Enforcement officers to make repeated visits to hassle tenants out of summer houses – and convinced them with threats of arrest to not come back. Threatened fines for not having a rental permit or exceeding the number of cars in the driveway went as high as $1,000 per citation. Raids occurred which mysteriously were arranged with the police and the Southampton Press reporters in the wings for instant coverage. The prosecutors in the Town, including the Gilmartin dynasty of lawyers, supported the questionable constitutionality of the police actions. The summer people, understandably, didn’t come back – and, neither did the rental market (although this season has shown some modest improvement). Most summer rental tenants who wanted a little fun went to the Jersey shore. They don’t have time to contest the constitutionality of a small town’s rental laws. That includes a whole segment of Wall Streeters with big bonuses and money to burn. All of this occurred because the Town of Southampton refused to spend the money on legitimate Code Enforcement and to uphold laws already on the books. To appease a few local political cronies in certain neighborhoods, they killed the investment market. Even for retirees with a second rental home that rented every summer.

One real estate broker, when asked why Heaney & Co. was doing this, said “They think they’re going to turn the Hamptons into another Newport, Rhode Island, where the rich spent summers in huge mansions.” Incredulous as that ridiculous small town attitude might be, it goes a long way to explaining why they sought to kill the goose laying all those expensive golden eggs. In short, where there were young people to go to the Hamptons to have fun, spend money and rent summer houses, there are now a lot of long faces. Even the senior citizens miss the kids.

For those of you who have purchased a condo, coop or single family house – the fun has really just begun. Especially if you used a mortgage broker who was more concerned with the commission than with the bank you were going to have to live with. Whenever the term Bank Fraud is mentioned, most of us usually assumes that some homeowner or credit card holder is guilty of some unpardonable sin–such as lying on an application.

No, we’re talking about the other kind – where the banks continually try to screw homeowners and credit card holders once they are indebted. Clearly it has become a great American tradition. And, of course, the Bankruptcy laws have been adjusted to keep the loans on the books, no matter what.

Let’s start with a little known detail of home mortgaging called the Yield Spread Premium, YSP for short. You already know, if you have a mortgage, that mortgage brokers charge “points” to find you a bank willing to take your money. What you may not know is the fact that there are usually cozy deals between the banks and the brokers that cost you even more money. The Yield Spread Premium is basically a kick-back to the broker from the bank for having steered the particular sucker to that particular bank. The Yield Spread is a fee paid to the broker for having signed up a mortgagor for a higher rate – thereby allowing the bank to increase its take over the life of the loan. In other words, amigos, you are paying more for your loan because the higher rate is giving the broker another little gift for bringing you to the guillotine. A number of court cases have been focusing on this issue, but thus far (even at the appellate level) rulings seem to favor the banks. One judge, Emerson, seems to fall all over herself to benefit the banks.

Why, does this happen? Get this: because the mortgage broker and you do not have “a fiduciary relationship.” What does that mean? It means, folks, that although you trust a mortgage broker with an important money decision – he or she and you don’t have a true financial relationship, according to the courts. Now, do you still think that Judges are impartial? Or, that the issue is too big for the courts to take on with the pervasive Bank frauds against the consumer?

We’ll move on to some of the favorite “banks” that are operating in this best of all possible markets. Take the now demised Fairbanks Capital, a bank that morphed into a couple of other entities before the class action lawsuits caught up with their antics, especially in California. By the time they cashed in the chips on the East Coast it was clear that the Federales were closing in and they folded. But, not completely. It appears that Fairbanks has raised its ugly head now as Select Portfolio Servicing. Even the phone numbers remained the same. And, recently Credit Suisse-First Boston has purchased a block of ownership (100%) in that company. There’s big money in mortgage servicing. Another secondary lender that seems to have risen to the top of the rancid cream category is ASC (America’s Servicing Company). The number of websites devoting a good portion of their bile to ASC appears to be growing.

Why does this matter??Ǭ What’s the problem that these secondary lenders buy the loans from the initial lender (often the broker who got you the loan) with whom your mortgage broker does the deal? Well, for one thing, there is a lack of responsiveness and obligation since you did not close the loan with them. The brochure and information on the initial lender is no longer relevant for you. Many homeowners are finding that when they first buy their house, the loan gets transferred two, three or four times before it ends up, and stays with, a mortgagor that they become familiar with. The horror stories of returned checks, banks with no phone numbers, incorrect addresses for statements, or no mortgage statements being sent at all, and incorrect posting of payments, are increasing. It has become a shell game for the borrower or homeowner. As a result of these secondary market loans, fees of $50,000 in points and yield spread premiums get followed up with three or four transfers of loan servicers, and destroyed credit.

Oh, and one more point. When repeatedly asked to provide some proof that the new lender actually “bought” the loan from previous lenders–not one of these companies could, or would, provide any proof (other than a “Welcome Letter”) that they, in fact, had any right to collect a mortgage payment from the homeowner. Such “servicers” or secondary lenders, avoid any obligation to the homeowner other than ruining their credit. Think of it, what’s to stop a scammer from simply sending his own “Welcome Letter” to any homeowner with instructions as to where to send the new mortgage payment.

There are a few websites to let you know what’s really going on in the homeowner lending market. It’s not pretty. Your best defense is to educate yourself. Ask questions and don’t forget to call your lawyer. Google the bank name and servicing company for complaints and you will see that you are truly not alone in your plight. There is no question that more class action lawsuits are coming. *

Filed Under: Articles | New York | Politics

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