Three-decker Windfalls Cause Worry

Would you pay $355,000 for one floor of the three-decker shown to the right, at 310 Fuller St in Dorchester? That’s how much two buyers paid this year, one in May and the other in July. Even if it turns out the buys are phantom acquisitions, the mortgages for each newly converted unit are real. The documents at the Suffolk County Registry of Deeds leave no doubt there was financing--$337,250 for each unit, from Wells Fargo and Homecomings Financial. Just as real would be any of that money passing on to the owner who sold the units, at least what remains after the cost of repairs and acquiring the whole house. In this case, the entire house was purchased from a previous owner for $585,000. There may have been some renovation before the condos were sold, but there appears to have been a need for a good deal more—at least to attract the buyers who would meet the sale price and lenders who would feel the property had value.

So, what about the value of the units? Mortgage payments, property taxes, water and sewer bills, and a condo reserve fund would easily make for monthly payments greater than $2,200. Unless a condo buyer simply wanted to live in the building, and wasn’t concerned about the fall-off in values (which began well before the units were sold), the purchase might make sense. But, for an absentee owner, the only way to have a chance of breaking even would be to use the unit as a one-floor rooming house.

Despite the credit crisis that took hold after the transactions on Fuller St, three- and six-family conversions in Dorchester have continued, with unit sales continuing into October (though with some fall-off in prices). Some of the buildings look much better than the one on Fuller St, and there are reasons to believe these conversions were preceded by upgrades. But even in converted buildings with upgrades over the past three years, some units have entered the foreclosure pipeline. Some of those have been resold at lower prices. And one was even bought by a developer who played a role in converting the same building less than 15 months earlier. After his foreclosure purchase, he sold the unit again, less than two weeks later, with a mark-up of $110,000.

If the investors doing conversions can make money even from distress, they must be getting help from appraisals. And, during the housing boom into 2005, many parts of Dorchester and Roxbury that suffered the most in past housing slumps were seeing noticeable improvements. But prices for some converted units in those neighborhoods—in one building as high as $375,000 for units purchased in April 2006 (with 100% financing, adjustable interest and a balloon rider) look scary.

If unit loans go bad, that’s certainly a problem for lenders, though not necessarily the ones originating the loans. Among two dozen condo unit loan defaults tracked in Dorchester over the past couple of years, nearly all the foreclosure filings were not by the originator, but by another company holding or servicing the loan. So there’s little wonder that the original lender had little reason to care about the unit-buyer’s ability to repay. And, if it mattered little that the buyer was a hapless would-be owner-occupant with good intentions, it might also matter little if the buyer were a transactional avatar, partly vouched for by a creative appraisal and, in some cases, represented by a proxy granted power of attorney. In other words, instead of targeting real buyers who might be more vulnerable, lenders could, in some cases, be leveraging a trade in the real estate market’s equivalent of “dead souls.”

When loans go bad, there are other repercussions. The fire sale prices for units foreclosed in one building can depress the values next door. As bad loans transmigrate through financial markets, more investors are spooked. And, as lenders get spooked by capital markets, they tighten the reins even on legitimate loans. That leads to a sharp drop in the pool of qualified buyers, which depresses property values even more. While some areas or parts of the housing market won’t feel much of that pain, others will be hit hard.

Housing markets have been through slumps before, only to bounce back. But what has changed since the last cycle is the shift of home mortgage lending from banks and credit unions—regulated by the Federal Reserve Bank and other federal and state agencies—to the much more loosely regulated mortgage companies. During a hearing earlier this week at the Reggie Lewis Center in Roxbury, the chair of the US House Committee on Financial Services, US Rep. Barney Frank, noted the effect of the lending shift away from banks and credit unions.


“If they were the only originators of mortgages,” said Frank, “we would not have this crisis.”

That’s why Frank envisions a new law that, as he put it, “will cover all mortgage origination with the same set of rules.” That would even include the requirements that currently apply to banks under the Community Reinvestment Act. But, even at this week’s hearing, fellow Democrats on the Frank’s committee (US Rep. Stephen Lynch and US Rep. Michael Capuano) acknowledged there could be difficulty getting the regulatory upgrade approved by the Senate and President Bush.

Even if there were new laws to make home mortgage lending less predatory and less volatile, some things cannot by undone by the next upswing in the market. As one housing investor in Dorchester pointed out, conversions of three-deckers weaken the pervasive (if less than universal) element of owner-occupancy that provides stability in hard times. It also appears developers doing the conversions bought some of these buildings from populations that put down roots and added social capital to the community—whether Irish-American, African-American, Cape Verdean, Haitian-American, or Asian-American. It could turn out that unit buyers—if they’re real people to begin with—might engage with their community in comparable fashion. But, for now, there’s reason to wonder.

See also story in the Dorchester Reporter for October 18.

New Superintendent Confronts Old Problem

In her appearance Saturday at Freedom House, Boston School Superintendent Carol R. Johnson was expecting questions from the audience, but it was Ian Powell who made her stop and think.

“What motivates you in what you do?” asked the 21 year-old student of Boston Arts Academy from Dorchester.

“That’s a very good question,” said Johnson.

Powell explained his idea of motivation was “something that gets you started every day.”

“For me,” he told the superintendent, “it’s like my music.”

After taking more time to think, the superintendent began by recalling her childhood in Tennessee, when her grandmother and other African-Americans were overcoming fear to exercise their right to vote.

“I was born at a time when everything was segregated. I actually remember the first time my grandmother voted. I always get emotional about that. She was 60 years old,” said Johnson.

“I think my passion about the work,” she said, “is to make sure the sacrifices they made were not in vain.”

What began with a prolonged silence ended with a prolonged applause. But, for much of the five hours at a conference on education, the talk was about other kinds of barriers that have recently kept 40% of Boston students from finishing high school in four years. The conference took place three days after release of a report on Boston’s persistent dropout problem, done for the School Dept. by the Parthenon Group.

The report linked the dropout problem to indicators going back at least as early as middle school. Among the students with a high dropout rate were 9th graders who failed at least one subject, and 8th graders who missed school one day a week. There were also high dropout rates for students—many of them immigrants—who enter the system after grade 8, and students with learning disabilities. And dropout figures were higher for black and Latino students than for white and Asian students.

“Kids have been dropping out for many years before they hit the streets,” said the executive director of the Boston Private Industry Council, Neil Sullivan.

“We have the potential to set up an early indicator system based on this research,” he said, “the challenge now is to set up a response that is effective at all these points.”

One response suggested by Johnson was to give failing 9th graders a chance to recover credits and graduate with their age group. According to Johnson, there’s also a national trend of black male students being over-referred to special education.

The coordinator for the Latino Education Action Network at Mass. Advocates for children, Samuel Hurtado, blamed the dropout problem on “a culture of cover-up” in the School Dept. Even Johnson spoke of a need to look at “the structural issues that are working against high expectations for all.”

“Kids are very sensitive to being respected or not respected,” said Johnson. “Without even verbalizing it, we convey our expectations.”

Students and recent graduates at the conference described their own struggles to overcome discouragement.

Cindy Printemps considered dropping out after her brother died from a shooting and two close friends were arrested. “At that moment,” she said, “I didn’t want to care.”

An intern with Freedom House, Printemps credited a teacher with talking her out of giving up. She went on to finish high school and currently attends Bunker Hill Community College.

According to a survey by the Boston Student Advisory Council, dropouts often report the lack of a “strong relationship” with teachers.

“As long as there’s a strong relationship, you probably will be in school,” said Moriah Smith, the student representative on the Boston School Committee.

Students and graduates at the conference also talked about how they were perceived by adults, and how those perceptions could be discouraging. A street research and referral special with the Private Industry Council, Emmanuel Allen left Jeremiah Burke High School, but eventually returned and went on to graduate from a four-year college. Even while in college, he wore clothing and jewelry that made a professor ask him if he was a drug-dealer. “Because where I’m from, everybody’s broke,” Allen said he told the professor. “And I don’t want to look like I’m broke.”

The District City Councilor from Roxbury, Chuck Turner, noted there were students coming back to school from lock-up facilities who lacked mentoring.

“We need as volunteers from the community,” said Turner, “to join hands with the School Department to do something about this problem.”

A deputy superintendent for schools in Dorchester, Roxbury, Jamaica Plain and West Roxbury, Janet Williams, said students need to feel there’s an adult who believes it’s important for them to be in school. She said she tried to do this by visiting families at home or checking up on a high school student who was at the Holland School in Dorchester when Williams was the principal.

“It's that will in here," said Williams, "to establish a relationship with parents, so they know how important it is for their children to get an aeducation."

One former dropout who asked the superintendent a question was 19 year-old Ana Maria Rivera, a student at Boston Adult Technical Academy. Serving students ages 18-22, the academy is housed in the Madison Park High School Complex in Roxbury.

Rivera says she likes being able to work mornings before starting school in the afternoon, and she likes the smaller class sizes.

“The teachers give us more one-on-one time,” she said. “We get treated as adults.”

On Saturday Rivera stepped to the front of the hall to ask Dr. Johnson for the academy to have a school building of its own, where students could come in earlier and use computers. The academy’s headmaster, Sheila Azores, said the students were like guests in someone else’s school.

“These are the success stories,” said Azores. “They have dropped in.”