Saturday, November 28, 2009

Week in Review

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!!!


“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.


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.


Friday, November 20, 2009

Why Condominium Termination?

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.

Thursday, November 19, 2009

FHA remodels condo lending guidelines



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.

Thursday, November 12, 2009

FHA Modernizes Condominium Lending

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

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.