Big Foreclosures vs. Little Foreclosures

Foreclosures Leave Apartment Buildings in Need of Repair

There was a really nice article in today’s Gotham Gazette about larger, non-owner-occupied buildings that are headed into default and foreclosure.  The author, Chris Opfer, does a good job of laying out the complications for tenants, who are frequently stuck when a building enters the netherworld of default.  With affordable housing really hard to find for low income renters (refer to my earlier post “Foreclosure: The Ugly Stepchild of Affordable Housing“), trying to relocate from a rent stabilized unit can be a real nightmare.

Big vs. Little – What’s the Difference

Tenants Turn to Lenders to Repair Buildings

So, just let me clarify that we’re talking about two very different kinds of housing stock.  Many properties with six or more units of housing are rent stabilized (for a very handy FAQ, click here).  In most cases, the owner does not actually live in the building, but is instead an investor who has purchased the property with the ambition of making a profit from it.  Property investors make profits in two ways:  by keeping expenses (mortgage payments, building repairs, maintenance, vacant units, etc.) lower than income (rents), or by selling a building for more than they paid for it.  During the bubble, many investors were more interested in the latter strategy than the former.  While property values were going up, up, up, this wasn’t so much of a problem, because you could sell your overpriced building to the next sucker who got incredibly cheap and easy financing.  But when the music stopped, someone got stuck with a building that they couldn’t sell, and that no longer made enough money in rents to pay for those expenses (especially that really high mortgage).

The city is still struggling to come to terms with the number of larger, rent stabilized properties in this condition.  Really excellent work has been done on this by University Neighborhood Housing Program through its Building Indicator Project.   If you want to geek out on some seriously juicy NYC based research, it’s well worth a read.  Oh, and it will scare the crap out of you:

“Currently, the BIP database tracks violation, lien and lender data for more than 62,000 properties in four boroughs of New York City, and the most recent data shows nearly 3,400 properties containing approximately 135,000 apartments scoring above our likely distress threshold of 800 points.  This represents 5.5% of all properties in the database, and is a significant increase from the fall of 2009 when 3.3% were likely distressed. The percent of properties also increased slightly in all boroughs except Manhattan since the spring of 2010, bucking the trend of scores dropping slightly each fall.”

I should also take a moment to acknowledge the equally compelling work done by the Citizens Housing and Planning Council on Zombie Mortgages – carefully detailing the costs and risks of the over-leveraged, multi-family properties.  Suffice it to say that there appear to be many larger, rent-stabilized properties at risk of foreclosure because of investor speculation in NYC.

Lucky Break: Foreclosed Home Returned to Owner

This is a very different problem than the issue of 1-4 family home foreclosures that is plaguing the country.  These properties are owner-occupied, and while the homeowners are in many cases also over-leveraged, there are other contributing problems (primarily loss of income and unemployment) that are causing widespread mortgage defaults.

From the perspective of reducing foreclosure-related displacement in big vs. little buildings, the critical difference in my experience is that in large buildings tenants are more likely to remain even if the building is foreclosed upon, but in small buildings tenants are almost always removed upon foreclosure.  Indeed, protections for tenants in larger buildings are much stronger and deeper than for tenants in smaller buildings.

There is another important difference that’s also worth mentioning:  in most little building foreclosures the owner / investor actually lives in the home.  Why is this such a critical difference?  Because when the owner lives in the property they have a real incentive to maintain the security and livability of the building as best they can.  That means a lot to their tenants, as you can imagine, and substantially reduces the likelihood that they will feel compelled to move because of deteriorating building quality.

Speeding Up vs. Slowing Down

So, here’s the real policy issue – in large scale properties when there is a mortgage delinquency it’s better to speed up the foreclosure proceeding.  In smaller, owner-occupied properties, it’s better to slow it down.  The reason is fairly straightforward:  with larger, non-owner-occupied buildings, getting to a resolution that includes a restructuring of the debt (usually through foreclosure) means the building can have a shot at a fresh financial start.  Many of these buildings would be fine if they weren’t saddled with unrealistic debt.  They have good paying tenants, are currently in reasonable repair, and meet an important need in the housing market.

On smaller, owner-occupied units, slowing down the process to allow homeowners more opportunities to correct their situation preserves options for both owners and tenants.  Because tenants in these properties are routinely evicted upon foreclosure, it’s better to try and correct the mortgage default through modification, refinance, repayment of arrears, or other similar strategies.

Note that both of these strategies are aimed at keeping tenants in place and reducing the overall number of folks who will be put out of their homes as a result of mortgage delinquency.

I should conclude by noting, for those of you who might want to know, that free help for tenants and homeowners is available in NYC by simply calling 311 and saying the word “foreclosure.”