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

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 Terminations May Be Next Phase Of Real Estate Crash

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 Completes Florida’s First Mass Short Sale

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

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.