Today It Begins

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

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

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

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.