Who Benefits?

Even Batman knows.

Christine Haughney’s article on fighting foreclosure has proven to be quite enlightening and a bit ominous for the real estate market particularly in Manhattan.
In fact there were certain parts of this article that freaked me out.

SHERRI CAUGHMAN prides herself on being the kind of conscientious New Yorker who does her homework before making any major purchases. So when Ms. Caughman, 44, a supervisor in the city’s food-stamp program, decided last November to buy a two-family house in Jamaica, Queens, she took a class on buying real estate, researched the property through city records and vetted the terms of her mortgage with her former sister-in-law, a real estate broker.
Ms. Caughman was also counting on help from her elderly parents, who would move into the downstairs apartment and help out with the mortgage on the $515,000 house. But three days after she closed on the house, her parents decided to move back to South Carolina. Suddenly, Ms. Caughman, who makes $40,000 a year, was left to pay a $3,699 monthly mortgage. In April, Ms. Caughman visited Neighborhood Housing Services after she missed her first mortgage payment. There, her counselor advised her to stop making mortgage payments and prepare to sell. To date, she has skipped three payments.

This is also happening in Manhattan.

In some parts of New York City, especially Manhattan, owners may even profit from these sales. Fourteen months ago, Michael and Bonie Bonilla bought a $1.65 million condo at the Chadwin House on Seventh Avenue in Chelsea with a $1 million mortgage. Mr. Bonilla, who runs a restaurant in the Hudson Valley, said that he and his wife bought the apartment partly as an investment. But Mr. Bonilla said they stopped making payments when his business slowed down.
On April 23, their apartment appeared in public records as a pre-foreclosure because of missed mortgage payments to the Bank of New York. Now they are putting it up for sale. “It was too big of a mortgage, and business went down for me,” Mr. Bonilla said. “We decided to sell it.”

These are two people from two very different financial classes. Yet, they should be able to fend for themselves but they are still in a lot of trouble. What concerns me is the actions that are being taken, particularly owners missing mortgage payments.
I do not recommend owners miss their mortgage payments. Even if you are about to sell, it is wise to maintain them best as possible. The simple reason is that your financial history is like herpes. It never leaves you. If you have a history of missing mortgage payments, it will come up in your credit report the next time you put in a rental application, apply for a mortgage, car loan even cellular service. The result will be either outright rejection or be forced to pony up additional money for security.

However, if you are in a no-win situation where you are literally on the razor’s edge and your finances are in complete shambles then by all means stage a strategic retreat. The key word is strategic. That means talking to your lender to do a workout on your mortgage. If that is not a viable solution and you need to liquidate, then figure out the best solution in selling your home whether it is using a broker or doing a FSBO. I would also encourage those of you who are on the verge of foreclosure talk to a real estate lawyer to determine what your rights. There are plenty of lawyers out there who are more than willing to give out free advice. You just have to look for them.

Ryan Slack, the chief executive of PropertyShark, said that foreclosure rates have always been higher in Queens because it has the highest concentration of detached single-family houses, which account for nearly 90 percent of foreclosures, he said. That, he explained, is because banks allow the buyers to take out large mortgages.
Queens has more than 270,000 single-family houses, while Brooklyn has about 200,000 and Staten Island has about 100,000, according to PropertyShark.com. He added that owners of Manhattan condominiums, which often don’t require large down payments, could also run into trouble if there was a slowdown on Wall Street.
“If there were a major problem in the job sector — particularly in the financial industry — I think you would see massive foreclosures in Manhattan condos,” Mr. Slack said.

I would have to concur with Mr. Slack. Manhattan is the Island of FIRE. (Finance Insurance and Real Estate) If anything occurs to dampen that flame we are f**ked. With the way the stock market is running, that may not occur for quite sometime. However that can change considering the reports on the state of our economy.

So far in 2007, courthouse filings for pre-foreclosures have doubled in Queens, Brooklyn and Staten Island, according to Jessica Davis, the president of Profiles Publications Inc., which tracks and publishes these filings. She said that the average number of weekly filings in both Queens and Brooklyn jumped to about 120 in each borough from about 60 a year ago.
Ms. Davis also sees more missed payments in Manhattan. For the first time in the five years that her company has tracked this data in Manhattan, she said, the number of weekly filings grew to about a dozen in the first quarter of this year, up from four a year ago.
Many of these apartments carry million-dollar mortgages, Ms. Davis said, and she predicted that a tenth of these cases would end in foreclosure 12 to 18 months from now.
“It gives me knots in my stomach to see these rates of pre-foreclosure,” she said. “This is not something to shrug your shoulders at.”

At one point there could be a critical mass of Manhattan foreclosures but I think a lot of the owner occupied apartments will in the pre-foreclosure stage for quite sometime. As for the selling option, I do not see that as a possibility since it is highly unlikely that owners will be able to command the prices that they desire.

Even if Manhattan owners sell, where are they going to go? Queens? Hells no. When you buy in Manhattan, you stay in Manhattan. Even if there is any money left over after they liquidate they are going to have a helluva time trying to find something comparable and renting in Manhattan is pretty much out of the question. They would have to move out of Manhattan in order to find something affordable.

So like the final season of Friends, these unfortunate owners are going to drag out the foreclosure process out as long as possible before the inevitable occurs.

It appears from this article that the optimal strategy is to sell. But why is this option being pushed? Why sell? Why not promote a mortgage workout?

From my perspective, the question that needs to be asked is “Who Benefits?”

The obvious person that benefits from a sale is the owners since they are able to release themselves from this burden of crushing mortgage payments. If it is not a FSBO, the brokers will definitely benefit from being able to sell a property that needs to go quickly and is attached to a desperate seller. However the party that benefits the most from a sale are the lenders.

Lenders also are eager to work out deals because they don’t want to be stuck with the expense of carrying and then selling foreclosed houses. A loan in default in the New York area can cost a lender at least $60 a day, according to Cynthia Rosicki, the founding partner in Rosicki, Rosicki & Associates, a law firm in Plainview, N.Y., that represents lenders.
When banks don’t sell foreclosed houses at auction, they have to assume the costs of removing the owners or any tenants they might have. If they enlist the help of a real estate broker, they will have to pay a commission when the property sells.

It all comes down to cutting your losses. As stated above, time is money when a loan is in default. However not only is the bank losing money from missed payments but also they are losing money from the manpower and the resources needed to deal with a distressed property.

Even if a workout option is utilized, it is still going to consume a significant amount of resources. The five alternatives in a workout are the following
1.Restructuring the mortgage loan
2.Transfer of the mortgage to a new owner
3.Voluntary conveyancy of the title to the mortgage
4.Friendly foreclosure
5.Prepackaged bankruptcy.

These alternatives are not free of charge for a bank and can be complicated and time consuming. By having the owner sell, all the costs of liquidating the property are in hands of the owner. They are the ones who have to take the wheel of the sinking ship and put out the capital outlays. And when the property sells all the lender has to do is collect their share of the profits and get the hell out of dodge.

In the last couple of years, lenders have already made a killing gathering these mortgages and bundling them as bonds for foreign consumption. The last thing lenders want is to be responsible for a bunch of liabilities. They already went through that bulls**t during the 80’s when people literally turned in their keys to the banks and walked away from their properties.

The lenders may take a hit on missed mortgage payments and the final sale price. But who cares? The owners are still on the hook for any other payments and even if they don’t pay, lenders don’t have to spend the money to baby sit properties till the next cycle or be prey for specialists in distressed properties who are highly skilled in getting these real estate diamonds in the rough at rock bottom prices from the clutches of lenders.

The next couple of years are going to be s**tastic. Expect stories about Manhattan owners whipping schemes to avoid foreclosure and other demented behavior. Also expect buyers getting sick deals from frustrated owners who are trading in New York to live in Providence.