From Blitz Conversion to Scratch and Dent

This article appears in the Dorchester Reporter.

There was a time when Peter Power knew some of the people who lived in the six-family houses across Parkman Street. But that changed after mid-September of 2007, when the three buildings were converted into condos, all within less than four weeks.

“The next thing I knew,” said Power, “nobody was living in them at all.”

By mid-October, a developer had bought all three buildings in separate transactions for a total of $2.2 million dollars. The units then sold, on paper, for a total of almost $4.9 million. All but one of them were sold within three days the after sale of their building. Lenders put up mortgages totaling $3.8 million.

Even more unusual was the assortment of condo owners—from the manager of the Bank of America Branch in Fields Corner, to buyers from Brooklyn, the Bronx, and even as far away as Atco, New Jersey and Norfolk, Virginia. On paper, some of them were owner-occupants. Others supposedly bought units as their second homes, or for investment—at a time when the condo market in much of Dorchester, and many other places, was in decline. Yet, judging from the difference between sales prices and mortgage amounts, the down payments for the units ran as high as $75,000.

Less than three years later, the developer, Michael David Scott, is under federal indictment for mortgage fraud, along with the bank manager, an attorney who worked on many of the transactions, and two other people accused of being recruiters for straw buyers. Scott and two other defendants pleaded not guilty last week. In the indictments, they are accused of paying the straws to buy units at falsely inflated prices, and making false statements to lenders about the buyers’ assets and down payments. Also pleading not guilty is the now former bank manager, Arthur Samuels, who stands accused of producing false documents and recruiting a straw buyer.

Before the first indictments were handed up late August, foreclosure petitions had been filed for 8 units in the buildings on Parkman Street. But, even without, in most cases, going all the way into foreclosure, the units that Scott sold for as much as $299,900 apiece would later be scooped up for as little as $55,000. Some were turned over for a nominal fee, with the buyer assuming the mortgage. In the interim, the buildings were painted on the outside and filled with new occupants.

But Power says the buildings still have problems. He mentions rodents attracted by trash containers that some residents don’t put out on the curb for collection. Plus, during the summer, there was a shooting in one of the buildings that, according to police, resulted in four arrests.

“It just brings the value of your house down,” says Power.

A lifelong resident of Dorchester, Power describes the buildings as a “flophouse” with “revolving tenants.” Saying he and his wife are thinking moving, he adds, “I actually do like Dorchester, but I don’t like what’s coming down the street right now. It’s not safe."


Federal authorities list fraudulent transactions by Scott and his collaborators on 48 units, all but six of them at locations in Dorchester—including the ones on Parkman Street. Most of the units have since been turned over to new owners. In at least one case, in a three-decker on Centre Street, there was a period when the doors and windows for one unit covered with plywood.

But there were also problems at another building listed in the indictment, a three-decker at 672 Adams Street.

“The lawn was disgusting. There was broken glass everywhere,” said a neighbor who described the building as “an eyesore.”

“We own our condo,” she said, “and we were afraid it would bring the price of ours down.”

Records show units in 672 Adams Street were all sold within a few days after it was bought under the name of Astoria Realty Trust. One unit was sold to Arthur Samuels. The others were sold to buyers from Virginia and Pennsylvania. Last year, foreclosure petitions were filed on two of the units. By February, all three units—which had sold less than two years earlier for a total of $870,000—were sold in separate transactions to a buyer from Quincy for a total of $140,900.

To buy all the properties listed in the federal indictment, Scott and his associates paid almost $6.2 million. On paper, the separate units sold—mostly within a few weeks—for a total of $13.9 million, while the mortgages put up by lenders came to almost $11.8 million. The highest loan totals were from Salem Five—more than $3.3 million—and Gateway Funding Diversified Mortgage Services—$4.4 million. And sources at both lenders say a loan officer who played a role in some of the transactions for Gateway later went to work for Salem Five.

Records show Scott and his associates, overall, sold more than one hundred units in Boston, mostly from condo conversions in Dorchester and Roxbury. Foreclosure proceedings were started on at least 80 of the units, while even some of the other units would be turned over in distressed sales. One lender—Gateway—wrote mortgages totaling more than $13 million for 44 of the units. Out of these, there would be foreclosure petitions filed on 35 units.

Many of the buyers purchased multiple units at multiple locations, and the same pattern can be found in multifamily transactions by other sellers. A partial review of records in Boston over the past few years shows foreclosure proceedings on more than 240 units against more than 100 owners of anywhere from 2 to 8 units. Some of those owners also turned over other units in distressed sales, without the filing of foreclosure petitions.

Researchers disagree about the effects of foreclosures on surrounding property, and they caution that poor conditions and price declines can also make distressed sales more likely.

The Rappaport Institute estimates a discount of 28% on sales of foreclosed (REO) properties, with the steepest discounts in areas where lenders have the most fear of property being damaged by vandalism.

According to a study by the Federal Reserve Bank of Boston, small multifamily properties make up less than one-quarter of the housing stock in Massachusetts, but they account for 33 percent of the post-foreclosure sales. Researchers say the REO property discounts were steepest in areas with lower income levels, a higher percentage of minority residents, and a sharper decline in overall prices.

In multifamily REO properties that were converted into condos, potential buyers face even more obstacles. With staggered foreclosures on individual units, observers say financing is more difficult to arrange in buildings without functioning condo associations.

“You’re going to be left with someone who’s going to be willing to buy for cash,” said one appraiser based in Dorchester, “and, when you’ve got the cash buyer, you’re going to be left with considerably less for it.”

Monthly reports by The Warren Group show that the sharp declines in the median prices for Dorchester condos have since been reversed, even if prices are still below the levels at the height of the housing bubble. In July and August of this year, after the expiration of federal tax credits, there was a fall-off in condo sales, though the median price was still getting higher.

According to a report by In Realty, housing prices strongly rebounded in the second quarter of this year in all areas of Dorchester. In the area where the market had been the weakest—between Blue Hill Avenue and Washington street—prices were going up, but volume was down. According to the report, one reason was the decrease in foreclosures.

Helping to bring down the number of foreclosures are the efforts to keep buildings occupied, sometimes through loan modifications or sales to occupants. The non-profit Boston Community Capital has arranged this kind of turnover for 85 units of housing, mostly in Dorchester, Roxbury, Mattapan, and Hyde Park.

“If we let nature and the market run its course, we have a real issue because of the inventory and the amount of time it’s on the market,” said the president of lending affiliates for Boston Community Capital, Patricia Hanratty. “If the people who are in one of these units can afford to buy it back at $70,000 or $80,000,” she asked, “why is that not under consideration?”

One reason is that, as speakers said last month in a Dorchester symposium on REO properties, non-profits are often outbid by for-profit competition. Though observers say the quality and intentions of the buyers are mixed, the competition increases demand for the housing supply. And, as the director of the city’s Dept. of Neighborhood Development, Evelyn Friedman explained, that can keep the property values from going too low to make repairs unprofitable.

At 672 Adams Street, the new owner of the condo units sold the whole building in June to another buyer from Quincy for $235,000. With recent signs of repair work, the neighbor says, “In the end it turned out OK.”

At a three-family house on Bernard Street, in the Franklin Field area, the people who bought units from Scott and his associates in late 2005 even managed to stay in the building, after getting help from Boston Community Capital. Records show the units, including one with less than 1,000 square feet, sold for more than $900,000. Foreclosure petitions would later be filed on two of the units.

Hanratty said Boston Community Capital intervened at Bernard Street and other locations because the mortgages had monthly payments that were “incredibly high,” adding that “nobody looked to underwrite these loans to say this is what somebody could afford.”

Despite renovations, Hanratty said, the units, as they sold almost five years ago, were “vastly overpriced."

"They were very high, even then,” she added. “Just thinking about a three-decker on Bernard Street as being worth almost a million bucks is pretty challenging.”

The Mortgage Trail: From Bottom to Top

It’s hard to imagine what investment banks and derivatives have to do with three-deckers in disrepair, but there are ways to connect the dots. Starting at street-level, there’s last December’s report by Jennifer McKim for The Boston Globe about a trail of bad loans connected in some ways with a single developer. More than two dozen of the loans were by a single mortgage banking company—by the way, not a bank that was directly pressed to satisfy mandates of the Community Reinvestment Act (CRA). As the Globe reporter took pains to discover, the owners of the properties may have been victimized, though they didn’t always fit the profile of the local buyers who only wanted a place to call home but got in over their heads.

At the other end of the financial trail, there’s Salon.com, with Andrew Leonard’s review of the new book by Michael Lewis, The Big Short. And that begs the question of regulation, with one possible answer yesterday by New York Times columnist Paul Krugman. In short, the answer is that you need oversight with a real firewall to keep the bubble-and-burst from happening all over again.

You don’t have to look beyond three-deckers to see the market extremes, or find that what looks like a bad loan waiting to happen becomes—usually on someone else’s books—a foreclosure petition. A year and a half ago, my curiosity was aroused by a three-decker unit at 310 Fuller Street in Dorchester that sold for $365,000 on February 29, 2008—at a time when it was quite clear three-decker condo prices were definitely going downhill (see Dorchester Reporter). The other two units in the building had sold less than a year earlier for only $355,000. After foreclosure action on the units sold earlier, a foreclosure petition was filed on the more expensive unit last September by CitiMortgage, Inc. The loan--$328,000—was originated by a company called Dreamhouse Mortgage Corporation. On its website, the company said, "Our team of experienced mortgage experts is committed to your success and will go above and beyond traditional means to insure your satisfaction." You can write a book about it, but you can’t make this up.

The CRA is still being blamed for the meltdown because many toxic loans were absorbed on the secondary market by Fannie Mae and Freddie Mac. To the extent they enabled bad primary lending, the secondary lenders should have been regulated more aggressively. It would be easier to blame their failings on the CRA if the toxic loans had lacked for other investors. According to Michael Lewis, this was not the case. As Leonard writes, the loans were originated due to sheer market forces--being readily scooped up by leading investment banks: “These banks were not creating complex derivatives tied to subprime mortgages because of government policy pushing homeownership or because individual homeowners were irresponsibly prone to lying about their income. Far from it; these banks had discovered that billions of dollars could be made transforming lousy mortgage loans into securities supposedly safe enough that they could be sold to pension funds or anyone else. So they had a huge financial incentive to encourage the creation of even more crappy loans.”

After the Gold Rush

After the gold rush in the housing market comes reality. When Hendry street looked the way it did in the the view above left, three-decker units--even outside the most desirable locations--were still selling for more than $300,000 apiece. Not that anyone believed that made sense. In the view at right, from November, 2009, things look much better, thanks to the market, plus the intervention of government programs and non-profit developers. One conclusion is that if housing is more affordable, and market values seem more reasonable, there will be buyers. The tricky part is to make sure as many buyers as possible will fix up and maintain all those three-decker units that turned into condos and--eventually--foreclosures. See article about the market and the intervention in the Dorchester Reporter.

Housing Market Stirs Demand, Hits Snags

Note: this article appears in the Jul2, 2009 issue of the Dorchester Reporter.

Crosscurrents in Dorchester’s real estate market are pulling in different directions—extending the fall-off in prices of the past two years, but also showing signs of new vitality.

“If someone’s telling you there’s no business, they’re not in our neighborhood,” says the Dorchester office manager for Jack Conway & Co., Julie Simmons.

“There is a lot of activity now,” she says. “That $8,000 tax credit is really bringing people in.”

But even agents who vouch for people willing to buy and sell say their customers still meet obstacles.

“Definitely the buyers are there. They’re eager to buy because the prices are low,” says Patrick Dorcena, an agent who does business in Dorchester for Torrez Realty in Brockton. “What’s killing us are the banks.”

Working in favor of a turn-around in the market is the federal tax credit created primarily for first-time home-buyers. But tighter lending standards, especially for condos, have been holding off buyers who fail to qualify for government programs. And Dorcena says some lenders have been challenging sales prices with their own appraisals, or pulling out of deals at the last minute, slowing down sales by as much as six months.

According to figures collected by the Warren Group, the spring market in Dorchester hardly appears robust. Sales of single-family homes through the end of May are down from last year’s total by almost 20%, though the median price is slightly higher.

Condo sales in Dorchester are much more numerous, and they exceed last year’s total through May by more than 6 percent. But, over the same period, the median price for those units is down by almost 60 percent.

The owner of Just In Boston Properties, Justin Green, says the aggregate price for condos is “totally askew” because of the numerous distressed sales, often after foreclosures.

Many condo units in distressed sales have been selling for less than $100,000, and some for less than $50,000. But, in less than 2½ years, prices for one unit in a three-family house on Bellflower Street, just a few blocks from Andrew Square, have swung sharply both ways. In January, 2007, unit 3 sold for $360,000. All three units would later be foreclosed. After unit 3 was sold last November for $121,500, it was sold again in May of this year for $299,000.

According to Green, the streets between Edward Everett Square and Andrew Square are one housing market that could be poised for an upturn. And he says the same potential exists in other parts of Dorchester close to the Red Line.

“It stands to reason,” he said, “that something along a train line, a train line that’s been renovated, is a location that’s going to be in demand.”

And, just a few blocks from JFK/UMass. Station, a loft unit at 950 Dorchester Avenue sold in May for $410,000.

Between the extremes are unit sales with a less dramatic fall-off in price. One is a three-decker unit on Sawyer Avenue, on Jones Hill. It sold last month for $250,000, after having been on the market last summer for $279,000. The seller bought the unit almost five years ago for $309,000.

Though the tax credit for first-time homebuyers is scheduled to expire later this year, Green says the condo market in Dorchester could be in for some relief from new rules being introduced by the Federal Housing Administration (FHA). Starting October 1, the FHA will insure some mortgages for condos in buildings up to 4 units. That would make financing available with down payments of 3.5 percent. With conventional loans, the current down payment required on many condo units for buyers without serious credit problems can run as high as 20 percent.

Like Simmons, Green says there has been more activity recently, and he describes the spring housing market in Dorchester as “very strong,” with “a lot of sales.”

“We’re very busy here,” he said. “Not only is everybody working, but putting deals together and getting financing.”

But Simmons points to signs that recovery is still a way off.

“People aren’t moving as often as we would like in this business,” she said.

And the backlog on sales has an effect on rentals.

“A lot of rentals are sitting on the market there, and a lot of condos are being rented,” said Simmons.

“So regular condos,” she explained, “have to compete against the granite and stainless steel.”

Simmons says that makes for more of a renter’s market. But other agents say rents in Dorchester are holding steady, with prices mostly in the range of $1,100 to $1,300 a month. And Green says his agency sees more customers looking for apartments.

“The price of renting hasn’t increased too much,” he said, “but the demand has definitely increased.”

The senior organizer for City Life/Vida Urbana, Steve Meacham, says there have been “significant rent increases,” even in neighborhoods that bore the brunt of mortgage foreclosures.

“Banks were holding so much property off the market in low and moderate income neighborhoods in Boston,” he said, “that it was pushing up the rental market.”

Also seeing little relief for renters was the director of media and public relations for the city’s Department of Neighborhood Development, Lucy Warsh.

“We still have a major need for affordable units in most of the affordable neighborhoods, such as Dorchester and Roxbury,” she said.

In parts of Dorchester with more multi-family housing and a higher concentration of foreclosures, unit sales are often to investors buying in bulk. The city has turned over some foreclosed units in three-deckers, but with an eye toward having them redeveloped as rental property, preferably with an owner-occupant in one unit.

According to the city’s Department of Neighborhood Development, more than one-third of Boston’s mortgage foreclosures in 2008 were in Dorchester, and more than half of those were in condominiums--many created in three-deckers.

“We’re seeing that it’s not the best model for the three-deckers, unless you have a more affluent group,” said the director of the city’s Department of Neighborhood Development, Evelyn Friedman.

“One of the big challenges of a small condo association,” she argued, “is that if you have one person stop paying the condo fees, the whole association falls apart.”

The treasurer for the Dorchester Home and Garden Trust, Patrick Cooke, predicts recovery will be significantly slower in areas with the most foreclosures. And he says the foreclosures and the economic downturn are also cooling off the rental market.

“I don’t think it’s going to drop precipitously,” he said, “but it’s into a long, slow decline, and landlords are going to have to adjust their expectations.”

Cooke has been renovating houses in Dorchester for thirty years, and he has seen earlier downturns in the 1980’s and 1990’s.

“The downward pressure on the market is going to continue to be felt for some time,” he predicts.

In Dorchester’s multi-family housing, Cooke likens the latest downturn to a “can of worms,” confronting potential buyers with the expense of aging properties and the hurdles left by collapsing or non-functioning condo associations.

“The market,” he said, “almost has to get worse in order for these things to be salvaged.”

Mortgage Troubles Erode Faith in Ownership

Note: This article appears in the Dorchester Reporter.

The mortgage troubles plaguing multi-family housing in parts of Boston are putting new strain on belief in the benefits of greater access to home ownership.

In a public policy discussion paper on subprime lending and multi-family housing released on the last day of 2008, researchers for the Federal Reserve Bank of Boston argue that two widely-held beliefs in policy may have been overstated. One belief is that increasing owner-occupancy improves the quality of life for buyers and their neighborhoods. The other is in the growth of ownership among people of color—a trend that was also supposed to narrow the racial gap in wealth.

With the disproportionate toll of foreclosures on urban neighborhoods, advocates and public officials have put most of the blame on high-risk lending—especially subprime mortgages. But researchers at the Federal Reserve say the subprime loans and resulting foreclosures might also be viewed as a reflection of the buyers themselves.

“In other words,” say the researchers, “these borrowers are more likely to default because they have a history of delinquency (perhaps providing a signal of their preferences) or lack the financial means to survive an adverse financial shock or life event.”

Those same buyers would also be more vulnerable to a sharp downturn in the market. Adding to the risk would be the dependence on rental income and the need for repairs, especially in older buildings.

“If something goes wrong and you need to fix something, and nobody can live in the unit, you get into trouble very quickly,” said Paul S. Willen, a senior economist and policy advisor for the Federal Reserve Bank of Boston.

“The good thing about the absentee landlord,” said, “is they have a lot of reserves and they have a lot more resources than a small owner.”

The report from the Federal Reserve was confined to homes bought as multi-families. It confirms the number of black and Hispanic households who bought homes in Massachusetts doubled between 1998 and 2006. But the report also found the increase was solely due to subprime loans.

When researchers compared the number of home purchases to the number of home sales or foreclosures, they found the increase in subprime financed purchases between 2003 and 2006 in Massachusetts “was unlikely to have led to a significant increase in homeownership.”

And, according to researchers, as subprime lending increased from 2003 to 2006, there were more transactions in which buyers and sellers were both people of color. “In other words,” say researchers, “one could argue that it enabled a sort of churning of properties.”

A more recent discussion paper from the Federal Reserve also shows that subprime lending practices changed over time. The earlier subprime loans were mainly for refinancing, while the later loans were almost entirely for home purchases. Also increasing over time were loans that combined less documentation of the borrower’s income and assets with higher leverage—or a lower percentage of down payment. It was the increased leverage that researchers say contributed the most to the increase in defaults.

The resulting foreclosures are reminiscent of what happened in the late 1960’s and early 1970’s, when there was an attempt to expand home ownership opportunities for people of color by the Boston Banks Urban Renewal Group (BBURG). Under BBURG, loans were guaranteed by the federal government, so lenders had less reason to worry about risk—or finding a new buyer after a default.

Almost forty years later, lenders were passing on risk by selling their loans to financial markets. And riskier subprime and “Alt-A” loans—with higher interest rates—were also attractive to financial markets because of their higher yields for investors.

But the most recent downturn in Boston’s multi-family housing market brought yet another change in the pattern ownership—the conversion of three-deckers into condominiums on a massive scale. Before the end of the boom, when more desirable three-deckers were selling for $500,000 to $600,000, recorded sales prices on converted units in Dorchester were as high as $439,900 apiece.

Public records indicate many of the unit buyers were not occupant owners. Even some loans given for use of a unit as a primary residence went to buyers who received mortgages containing the same provision within a year on other properties. In other cases, owners of multiple units at different locations had mortgages for “second homes” that also restricted use of the property for income. And most of the lenders were mortgage companies or thrifts, which were less tightly regulated than commercial banks.

On many three-decker conversions, there were also piggyback mortgages. And researchers at the Federal Reserve say the default rates for these loans were abnormally high.

Observers say the risks were also increased in some cases by transactions at inflated prices—which had an effect on the rest of the market: when prices were climbing, other properties became less affordable; when the market fell, some of those properties had less value than what was still owed on the mortgage. According to figures for Boston from the Warren group, the sharpest falls in the median sale price for condos last year were in Mattapan (55%) and Dorchester (18%).

The changes in subprime lending practices took place in years when housing prices in Boston were still rising, or at least before a sharp downturn. And, as researchers for the Federal Reserve note, the change in practices was gradual. “Thus,” they wrote, “rather than plunging into uncharted waters, investors may have felt increasing comfort with each successive round of weaker underwriting standards.”

And Willen says prices during the boom years may have made those standards seem less important. “If house values are rising, it’s not that risky,” he reasoned. “If they’re falling, even a documented loan is going to be pretty risky.”

According to the city’s Dept. of Neighborhood Development, Boston had 1,750 foreclosures in 2006-2008, and more than half were on units owned by investors. As of last November 15, there were 955 properties taken by foreclosure that had yet to be resold.

Because so many of the foreclosed properties were owned by investors, Mayor Thomas Menino’s chief of Housing the director of the Dept. of Neighborhood Development, Evelyn Friedman, argues against putting all the blame on homeowners.

“I don’t think the issue is home ownership opportunities. The issue is the quality of lending,” said Friedman.

“Yes, we do want to have home ownership,” she said. “We want to have sustainable home ownership.”

And Friedman says that includes lending based on sound documentation of the borrower’s ability to pay.

“The lenders have to be made to be responsible for whom they’re lending to,” she said. “That’s the regulatory problem that has to be addressed.”

The executive director of the Mass. Affordable Housing Alliance (MAHA), Thomas Callahan, says the best way to stabilize the city’s multi-family houses is to have, in most cases, entire buildings in the hands of responsible investors and owner-occupants.

“It’s not the right solution to give up on owner-occupants as the bulk of the three-family owners in the city,” said Callahan.

“I think what you see in the market,” he notes, “is investor owners walking away quicker than owner-occupants do.”

Though Willen says some of the borrowers who ended up in foreclosure had taken home-ownership classes, Callahan says MAHA’s delinquency rates for two- and three-family homes were even lower than the rates for condos and single-families.

“I think two- and three-family home ownership in Boston and Massachusetts can be very stable,” he said, “if it’s done right.”

The city is using federal money to acquire 7 foreclosed properties by early next month directly from Countrywide Financial, which has been acquired by Bank of America. The city’s plan is to acquire more properties directly from companies holding the loans, and then to turn them over to private or non-profit developers and owner-occupants.

“I think the group of people we need to attract, and will be attracted to these properties,” said Friedman, “are the young first-time home-buyer who can’t afford Jamaica Plain or the Back Bay.”

A new challenge in the current downturn is that foreclosures in multi-family buildings converted into condos have taken place one unit at a time, and occasionally months or years apart. Friedman says the city will only try to acquire units where it would control the entire building.

And, if past downturns are a predictor, there is no guarantee that other properties sold after foreclosure will be stabilized quickly.

The executive director of Citizens Housing and Planning Association, Aaron Gornstein, predicts that, once the market reaches bottom—possibly after another wave of mortgage defaults caused largely by the economic downturn—recovery could take another five years. In the meantime, he says, the chance to buy cheap might not be enough to attract the kind of homeownership that benefits the neighborhood.

“Unfortunately,” said Gornstein, “it tends to attract investors who don’t have a long-term plan to invest in the neighborhood, who want to flip the property and get out.”

Three-decker Units: Any Owners at Home?

The following article was published August 21 in the Dorchester Reporter.

On a single dead-end street on Meetinghouse Hill, two extremes of Dorchester's troubled multi-family housing market can be found side by side. The difference between these two three-deckers on Navillus Terrace - creatively named for a man named Sullivan - reflects market price, but also conjures up a fortune-telling vision for the neighborhood.

With multi-family buildings accounting for a large share of properties heading toward foreclosure, and more foreclosure filings in Dorchester than any place in Massachusetts except Worcester and Springfield, the conflicting extremes are cause for concern, even if mixed with hope for a market recovery.

Late last September, after mortgage defaults led to a rash of boarded-up three-deckers on Hendry Street and elsewhere, causing property prices to plummet in Dorchester particularly, all the units in a three-decker at 10 Navillus - just three short blocks away from Hendry - sold for no less than $345,000 apiece.

The buyers seem to be habitual high-price mortgage borrowers. The mortgage on one unit was for a second home, and the lenders for the other units waived the requirement for owner-occupancy. Two of the owners have also bought units at other locations in Dorchester.

Next door, at 12 Navillus, there's a very different story. After changing hands three times in little more than two years, the entire three-decker was sold at auction last month for $260,000. The buyer was an investor and developer who also bought five other properties in Dorchester sold by auction since last November.

What neither vision at Navillus involves is owner-occupancy on even one floor, the thing most neighborhood activists say is most vital to improving any neighborhood.

The developer whose firm did the conversion at 10 Navillus, Michael "Dave" Scott, says, "You're going to see more investors buy this housing. It's going to be an investor's market."

Real estate analyst John Anderson has spotted both trends: unit sales at prices that still make him predict more foreclosures, and buildings at bargain prices often going to investor/developers who survived the slumps of the past.

"Everybody's having a field day, except the people who live in Dorchester," said Anderson. "We're still concentrating equity and wealth in the hands of the people who have it."

Pricey Condos in a Depressed Market

On paper, it would appear the equity in multi-family conversions is going to people like Scott, who shows up in several conversions as manager of the development company Southeast Properties. But Scott says he also pays back equity through renovations, and by providing jobs.

"I have a lot of expenses that you don't see," he said. "The rehab costs are really killing me."

Scott has been linked to conversions of more than one hundred units, whether in sales by himself, his development entities, or associates. Most of the units are in Dorchester and Roxbury, with many sales going to buyers who buy multiple units. Many of the buyers are listed as being from other states or locales outside of Boston, and the number of foreclosure filings against these buyers - whether at locations involving Scott or other developers - continues to climb.

Three weeks ago, in response to a Reporter article detailing at least eight foreclosures among his converted units, Scott said the figure was "impressive," given the overall market.

"If I don't have foreclosures, I think I'm doing something wrong," he said.

A review of additional and more recent transactions on properties where Scott has been involved shows roughly two dozen petitions to foreclose. That figure includes units where Scott represented a buyer with power of attorney, or where units in a conversion that involved him were sold again, usually within no more than a matter of months.

Scott says he sells units to "legitimate buyers," even though, he allows, they "sometimes make bad choices." He notes that condo units purchased for investment take time to pay off.

"I think it's a good investment," he says, "because after taxes, you're making money and you're building up equity over time."

But, for a good deal of his unit buyers, time tends to run out.

"It's a scary market," says Scott. "Everybody's pointing fingers. It's a high-risk area."

Scott points his own finger at appraisers, underwriters, and some buyers. He also points at 70 Sawyer Ave., a three-decker where a developer named Edward Mazurkiewicz sold three units for $439,900 apiece to a buyer from Hyde Park, Cristobal Toledano. The sales took place in May and June of last year. By May 1 of this year, foreclosure petitions had been filed in all three units.

He also points to Draper Street, where several converted units have drawn foreclosure petitions. Three of them were at 85 Draper St., a house purchased by Giles Moss-Hayes, who was represented through power of attorney by Patrick F. Lee. At 80 Draper St. across the street, Lee sold two units that would later draw foreclosure petitions. Each of them sold in November 2006 for $374,900.

Lee also represented Moss-Hayes in the conversion of 110 Norton St., where all three units sold in May and June of 2006 for $350,000 apiece. Foreclosure petitions would later be filed on all three units.

Over the past two years, there have been 17 foreclosure filings in buildings where Lee figured in a condo conversion. In his most recent transaction, Lee was the buyer for three units in a house on Theodore Street in the Franklin Field area where foreclosures are taking a serious bite out of housing prices. He bought the units in January of this year, at $315,000 apiece, from, wait for it… Giles Moss-Hayes.

A review of more than 200 conversions over the last two years in Boston - mostly in Dorchester and Roxbury - shows more than 100 foreclosure filings against owners who bought more than one unit, sometimes in the same building. Names that appear as unit buyers with mortgage trouble sometimes turn up later as investors converting more units, or as people with power of attorney to represent other buyers.

One of the stand-ins is Jerrold Fowler, a buyer from Norfolk, Virginia, who purchased a unit from Scott on Avondale Street in Lower Mills in November 2006. A foreclosure petition on the unit was filed last month. In the interim, Fowler was given power of attorney to represent buyers in seven other unit sales involving Scott.

Another unit buyer recycled into a developer was Tariq Muhammad. He lost three units to foreclosure in a three-decker at 43 Whitfield St.

After two of the units there were sold at auction to another developer with his own trail of mortgage troubles, they were resold this year to buyers from out of state.

In the developer role, Muhammad converted a three-decker at 310 Fuller St., where he sold two units last year for $355,000 apiece, and one this year for $365,000. A foreclosure petition on one of the units sold last year was filed in July. Meanwhile short sales and bank-owned condos, albeit without existing condo associations - have gone for less than half of that price on Fuller.

The New Market: Owners or Investors

In a local multi-family market where Anderson sees an "incestuous mess," some see opportunities, at least in the long term, and probably without more condos.

One investor and developer, who is mainly avoiding conversions, says there is a market for three-deckers and "plenty of value" in Dorchester. But he also says media reports have frightened off buyers, and even scared some owners into walking away from their property.

"There's some good buys out there," he says, "and, instead of waiting for the market to bottom out, they should be out there buying."

Some predictions call for the Dorchester market to begin recovering in one or two years. The executive director of the Mass. Affordable Housing Alliance, Thomas Callahan says there has recently been a "fair amount of activity" in its "soft-second" mortgage program to make purchases more affordable for first-time home-buyers.

"We are definitely seeing people taking advantage of the market drop," he said.

But Callahan says even the current lower prices on three-deckers are no match for the affordability of the early 1990s, when these houses were within range for buyers with an annual income of $30,000.

"What we say in our classes," Callahan notes, "is that three-deckers are not for everyone. You've got to really want to be a landlord."

Potential buyers interested in multi-family housing still have to compete with the market for conversions. A survey of recent conversions in Dorchester - on Mt. Vernon Street, Rill Street, Adams Street, Everton Street, Torrey Street and Topliff Street- shows several buyers who have also bought units at other locations. The prices are lower than figures for the condo conversions of two and three years ago - for sale of the entire building and for units, most of which have been selling for less than $300,000 apiece.

While the city works toward bringing owner-occupancy back to vacant houses on Hendry, at least one non-profit community development group is exploring ways to break the foreclosure cycle at other properties. Codman Square Neighborhood Development Corporation Executive director Gail Lattimore said it's difficult to get cooperation from most of the companies in charge of foreclosure sales.

And putting the properties back into control of owner-occupants or "good-guy" investors, she said, will require more intervention from the private and public sector.

"I'm a little concerned," she said, "that if there are lots of investors out there, I don't think it bodes well for Codman Square and the rest of Dorchester being stable as we go forward."

Editors note: Patrick F. Lee shares part of his name with a principal in the development firm Trinity Financial, but other than that, there is no connection between the two men.

All information about transactions referred to in the story was drawn from the Suffolk County Registry of Deeds.

Three-decker Condos: Rebound or Relapse?

The following post appears as an article in the Dorchester Reporter.

To judge by sale prices for three-decker condominiums in Dorchester, the housing slump is over—at least at a few locations. The prices do have connections to names that repeatedly turn up in foreclosure filings, and they stick out like tree stumps in a flood of declining values, but that hasn’t stopped the flow of credit—whether from small lenders or high-profile companies such as JP Morgan Chase.

One example of a unit with a rising price is a top-floor condominium in a three-decker at 43 Whitfield St, a few blocks west of Codman Square. After selling for $330,000 in February, 2006, the unit would be taken by foreclosure. In April of this year, Fannie Mae let it go for $65,000. Then, after less than two months and a certain amount of improvement, there was a new buyer who put up $339,000, with a 20% down payment.

The last transaction in June also stands out as a turnaround for the seller. This was a company called SRC Investments, whose president and treasurer, Sirewl Cox, figured in nine other transactions that have drawn foreclosure filings since last September. It was a director of the company, Lord Allah, who bought Unit 3 at 43 Whitfield St from Fannie Mae in April. Later the same month, he bought Unit 1, for $45,000. Each time, he turned over the property the very same day to SRC Investments for $100.

Once SRC Investments took title, it received mortgages for both units from a lender based in Jamaica Plain, Capital Trust LLC. Though Capital Trust was lending to a company that had no record of previous borrowing in Suffolk County, the mortgage notes—for loans totaling $72,000--were signed by Cox.

Attempts to reach Cox at phone numbers in Easton, Mass., and a broker’s office listed in Dorchester were unsuccessful. Capital Trust has yet to respond to messages by email and phone asking how it could give mortgages to someone with a paper trail showing several recent bad loans.

On its website, Capital Trust says its approach to lending provides “speed and flexibility that traditional banking environments cannot provide.” The website also says Capital Trust can “provide creative financing options for opportunistic real estate transactions” and “quickly fund loans that make sense.”

But some observers of the real estate market in Dorchester say what doesn’t make sense is the Unit 3 sale price of $339,000. One observer said, even with “top of the line” renovations, the market value would only run as high as $300,000.

Another observer familiar with the market said, “Based on what the current market conditions are, I won’t imagine it would be three-anything.”

When the unit sold June 3, the buyer on the deed was a Christine Hoyte of San Francisco, California. JP Morgan Chase gave her a mortgage of $271,000, on condition that she use the condo as a second home. To complete the transaction, she also gave power of attorney to a stand-in named Larneshia Bryant, whose name appears on the mortgage note.

But other documents show Bryant also has connections to Cox. The two of them were shown as joint tenants of a condo in another three-decker in Dorchester, on Roxton St, where a lender filed to foreclose on the mortgage in February of this year. The unit is listed as being owned by Cox and Larneshia Bryant Alexander.

Over a period of three months earlier this year, there were foreclosure filings against Bryant on seven other properties. Two of the properties were bought from Cox in 2006, less than two months after he acquired them. Two others, also turned around in less than two months, were bought from another seller whose mortgage was signed by Cox with power of attorney.

Bryant has one other tie to Cox, through a business entity called Strategy Investments. The company was organized three years ago, with Cox as president and director, and Bryant as treasurer and secretary. The company bought two properties—one in Dorchester and the other in Roxbury—on which lenders would later file to foreclose.

Strategy Investments is listed on the directory of an office building at 40 Court Street for Suite 700. That’s also the official address for SRC Investments.

The notary who stamped the mortgage note for Unit 3 at 43 Whitefield St, Rebecca Konsevick, was asked whether Bryant was supposed to represent the interest of the buyer.

“That was my understanding,” said Konsevick.

When told about Bryant’s business ties to Cox, the notary was asked which side Bryant was on when she signed the mortgage for Hoyte.

Said Konsevick, “I have no idea.”

* * * * * *

The previous owner who lost all three units to foreclosure at 43 Whitfield St was Tariq Muhammad. He bought these units and another in a three-decker on Wheatland Ave from Iris and Kelvin Sanders. The other two units at Wheatland Ave were bought by Cox, and both also went down the road to foreclosure. Over the past three years, lenders have filed petitions to foreclose on a total of 12 units sold by Iris or Kelvin Sanders—all of them in Dorchester.

Muhammad also bought a three-decker for conversion at 310 Fuller St, with the help of a $120,000 loan from Kelvin Sanders. The house shows signs of repairs. After selling two units last year, each with 5% down payments for $355,000, Muhammad sold a third unit in February of this year for $365,000, with a down payment of 10%.

Just down the street, a realtor at Dorchester Associates, David Cahill, has been working on the sale of a whole three-decker which has been listed on the market for $369,021. When asked about the slightly lower price for a single floor sold in February--$365,000—Cahill called the figure “ridiculous.”

“When I see those prices pop up in the public record, I just shake my head,” he said. “It’s unbelievable.”

By way of comparison, Cahill noted the difficulty in selling condos at the new development right next to Ashmont Station, The Carruth. Based on that, Cahill says, it would be harder to sell condos in most other parts of Dorchester, especially if they’re farther away from rapid transit and commercial centers. The condos at 310 Fuller Street are roughly half way between Ashmont Station and the commuter rail stop at Morton Village.

“It’s not an area where people are going to go shopping for condominiums,” said Cahill.

But that didn’t stop Marcus Emile.

He was the buyer at 310 Fuller St who paid $365,000 and signed for a loan of $328,500. The loan was from Dreamhouse Mortgage Corporation. On its website the company says, “Our team of experienced mortgage experts is committed to your success and will go above and beyond traditional means to insure your satisfaction.”

The unit at Fuller St wasn’t the first for Emile. Four weeks earlier, he bought another property, in the St. Mark’s area, a three-decker unit at 15 Santuit Street for $340,000—from Kelvin Sanders. The down payment on the unit was 10% and the loan was from Countrywide Bank.

As with previous three-decker acquisitions by Kelvin and Iris Sanders, there was also a single buyer who took multiple units. In this case, the buyer was John Castodio. One deed shows him as being from Stonington, Connecticut. One of his mortgages for 15 Santuit St requires him to use the unit as a second home. On the other mortgage, the owner-occupancy requirement has been waived.

Cahill says the transactions at high prices make some owners more reluctant to sell at the normal market rate. And if more of the high-priced units go into foreclosure, he warns, there will be more converted three-deckers without active condo owners associations—which might limit the unit’s next sale to cash-only.

“No bank in their right mind’s going to finance it,” he said.

* * * * * *

Less than two years ago, some three-decker condo units in Dorchester, often with freshly made improvements, were selling for as much as $435,000. At least ninety units were sold in conversions—mostly in Dorchester—involving Michael D. Scott (and other variants of the name) and his associates or their business entities. So far, there have been at least eight foreclosure filings on the properties. Some of the units have recently been listed for sale, at prices as low as $174,000, and one unit—on Lafield St—sold June 30 for $190,000. Less than two years earlier, Scott sold the unit to a buyer from Maryland for $375,000.

Some properties bounce from one foreclosure to another. This happened at 24 Gayland St, Dorchester, a conversion in which Scott figured. After the first buyer lost unit 2 to foreclosure, Scott bought the unit and sold it again at a higher price less than two weeks later, in February of last year. The new buyer also has mortgage trouble. A foreclosure petition was filed against her last month.

There have also been repeat foreclosures among Cox and his associates. After he lost a property he originally bought on Claybourne St with Jacquelyn Pittman, Cox bought a property that Pittman lost to foreclosure on Reservation Road in Hyde Park. That purchase led to another foreclosure petition, against Cox.

Pittman also lost a property to foreclosure at 2 Rock Ave in Dorchester. It was purchased in January of last year by Larneshia Bryant. A foreclosure petition was filed against Bryant in March of this year.
















www.298fuller.com

Barney Frank on Politics of the Mortgage Crisis

To explain the mortgage crisis that became a global credit crisis, US Rep. Barney Frank (D-Mass.) started by putting the blame on the party politics of Ronald Reagan. Instead of borrowers, brokers, financial markets or even the Federal Reserve Bank, the current chair of the House Committee on Financial Services went back twenty years to the former president’s philosophy of government.

“Reagan’s central idea,” said Frank, “was ‘Government is not the answer to our problems—government is the problem.’ His philosophy is why we’re here today.”

Frank was speaking Monday in a forum at the John F. Kennedy Library, but he was also in Dorchester, the heart of the mortgage crisis in Boston. According to an article appearing the same day in Banker & Tradesman, housing foreclosures in Dorchester had more than tripled in the first quarter of this year, compared with the same period in 2007, to a total of 171. That was more than half the total for whole city.

When it came to assigning blame, Frank included everyone from champions of deregulation in financial services to prominent Republicans in Congress, and even the former chairman of the Federal Reserve Bank, Alan Greenspan.

Frank had praise for Greenspan’s monetary policy—keeping interest rates low when some believed employment levels were high enough to be inflationary. But he faulted Greenspan with a “rigid ideological distrust” of deregulation. Most of the foreclosures currently being tracked in Boston were made by mortgage companies, which were usually much less regulated than banks. Once the loans were made, they were recombined and sold in financial markets, where high risk was often outweighed by high returns and high ratings for investors.

When prompted by the moderator, New York Times columnist Paul Krugman, Frank rejected explanations of the mortgage crisis as being caused by low interest rates, cycles in the real estate market, or requirements of the Community Reinvestment Act.

“It was not just the housing bubble,” said Frank. “People made housing loans that shouldn’t have been made.”

Also contradicted were the arguments by lenders (including those attributed to former chair of Countrywide Financial Corporation, Angelo Mozilo) that it was wrong to equate higher-interest subprime lending with predatory lending, and that subprime loans actually expanded home ownership opportunities for people of color. Frank took the side of UMass. Boston researcher James Campen, who showed a disproportionate concentration of subprime loans in the Boston area among people of color—even those with higher income.

“It’s not that in a fair situation they would have gotten zero loans,” said Frank. “In a fair situation, they would have gotten prime loans.”

But Frank also extended blame for the ensuing mortgage meltdown to a way of thinking that resembled a policy theme of President Bush: the “ownership society.”

“We made a mistake,” said Frank, “when we equated providing decent housing for everyone with giving everyone the right to own a home.”

To place lenders and mortgage originators under the same regulation as banks, the Committee on Financial Services approved legislation last November. The bill would set a standard for a borrower’s ability to repay a loan, and there would be an extension of liability to the investors who buy loans in the secondary market.

Opponents of the legislation say it will make loans even more expensive and make it difficult for owners of small businesses to get mortgages on the basis of stated income. High-interest subprime loans based on income statements that were erroneous or falsified have been blamed for many of the mortgages that would end up in foreclosure.

Frank credited the current Federal Reserve chairman Ben Bernanke with being “useful” by favoring the kind of regulatory powers allowed by Congress in 1994. Those were powers that Frank said Greenspan “explicitly refused” to impose on mortgage companies.

“What we have now are people afraid to buy things,” said Frank.

“Good regulation,” he argued, “is an important part of bringing the market back.”

Another of Frank’s ideas for bringing back the housing market is a compromise on the part of subprime lenders. Instead of trying to recapture the full paper value of bad loans, the companies holding the mortgages would allow refinancing by the Federal Home Loan Bank at lower interest rates. The new mortgages would then be sold in the secondary market. Frank says this could “avert many hundreds of thousands of foreclosures.”

“Housing prices would still go down—as they should,” he said, “but at a less dizzying rate.”

After the forum, Frank emphasized the refinancing would only be available for properties used by owners as their primary residence. That would exclude much of the housing that has been faced with foreclosure in Boston, where it’s not unusual to find a single owner defaulting on mortgages in multiple units. To help neighborhoods hard hit by foreclosures of these units, the legislative proposal Frank announced in March with US Senator Christopher Dodd would also provide $10 billion for acquisition and repair of vacant properties. The money could be used by public agencies or community-based non-profits.

“We want to give the money to the cities to buy these properties,” said Frank.

The outcome on response to the mortgage crisis by Congress also depends on the election in November. Frank positioned himself much closer to the Democratic candidates, Hillary Clinton and Barack Obama. Though he said Clinton’s call for a foreclosure moratorium was “unworkable,” he contrasted the Democrats with the backing for John McCain from a supporter of deregulation and foe of the Community Reinvestment Act, former Texas Senator Phil Gramm. For Frank, it was one more piece of the argument that, for all its disrepute, party politics makes a difference.

Mapping Foreclosure: By Waves, By Dots

From a distance, the Boston housing market looks more like a wave, or one of many troughs in a receding tide. Some parts of the city are further down than others, just as some tidemarks around the country stretch farther out to sea. Up close, the steps backward or forward are small, like the fitful trudge of horseshoe crabs.

At a meeting of Mayor Menino’s Foreclosure Intervention Team Wednesday morning, there were some steps forward to report from an especially beleaguered area around Hendry Street in Dorchester. A tenant facing eviction from a house recently in mortgage trouble was about to sign a one-year lease. The city was offering to buy five three-decker condos that were taken by foreclosure. There was an offer to buy a three-decker beset with mortgage trouble and a legal dispute. And the city was in discussions with the US Dept. of Housing & Urban Development over a vacant property around the corner on Coleman Street. Buyers had agreements to buy two other houses on Hendry Street and Clarkson Street. And one more three-decker on Hendry Street would soon be up for auction.

The Hendry Street area was also getting attention from the police, as well as outreach to property owners and tenants. And, to help break the deadlock on foreclosed housing throughout Boston, the Mayor’s administration had also filed a home rule petition to impose a surtax of 10%.

The rest was putting the numbers in perspective.

“We’re not as bad as ’93 and ’94, but we never want to get there,” said the mayor. “And all the predictions we get are the worst is yet to come.”

Officials say one sign that more trouble is on the way is that only 30% of the adjustable-rate mortgages they’re concerned about have jumped to a higher interest rate.

“Nine hundred eighty-two loans have already reset,” said mayoral advisor Pat Canavan. “We’re anticipating in the next few months, through April of ’08, 750. So, we’re not at the peak of this issue yet.”

Also growing is the percentage of properties for which banks fail to find a new buyer. That means the party holding the mortgage takes title, dotting the city’s map (above) with one more “Real Estate Owned Property” or “REO.” According to the Dept. of Neighborhood Development (DND), in 2005, 48% of the foreclosures in Boston ended up as REOs. In 2006, it was 81%. Last year, the figure was 93%. Currently, the city has 565 REO properties.

DND figures put the number of foreclosure petitions on Residential property in Boston at 2432, which is up from the 2006 total by 75%. There were 703 foreclosure deeds, which is up from the 2006 figure by 169%. According to DND’s Deputy Director, William Cotter, the totals are evenly split between property owned by occupants and investors.

Cotter says 76% of the foreclosed properties are in four parts of Boston: Dorchester, Roxbury, Mattapan and Hyde Park. In parts of those areas with concentrations of subprime lending and foreclosures, he explained, property values fell last year by 10-15%.

“There are other neighborhoods in our city that are not affected in any way,” he added, “but this value is directly related to the problem.”

City officials say their prevention programs reduced the number of potential foreclosures by 30%.

“This effort today,” said Cotter, “and the effort of the mayor is to stay ahead of those things—stay ahead of the REO properties and the abandoned and vacant property, so that we can minimize the overall impact. If we can do that, the decline may not be as low, and we can help the market recover more quickly.”

As in years of decline during the early 1990’s, early 1980’s and much of the 1970’s, a small amount of time could make the difference between a house fit to market and a house damaged by vandals or plundered for materials such as copper pipes.

Even if worse things have yet to strike the Boston housing market, it’s still possible to go from foreclosure sale to profitable investment in a single day, even when a property’s losing value. Records show that’s what happened January 31 with a three-decker on Armandine Street in Dorchester. One buyer purchased the three units from three different lenders for a total of $299,000. Then, in what might be called a condo deconversion, the whole house was sold the same day to a pair of buyers for $450,000, with a 10% down payment. The same three units sold in 2006 for a total of $810,000.

Foreclosure Rescue Vs. the Contractor Special

If there’s anything too hopeless for President Bush’s foreclosure prevention plan, it's the “contractor special” near Codman Square in Dorchester. Located in a three-decker (photo, right) on Whitfield Street, the condo is one reason why some believe the President’s plan falls short. And it helps explain why, as Boston Mayor Thomas Menino pointed out, the resetting of adjustable mortgages to higher interest rates is only one link in the subprime chain-reaction.

"The Bush administration's proposal is simply not enough,” the mayor said in a statement issued Thursday. “An astounding 80% of the City of Boston's foreclosure prevention clients in adjustable rate mortgages never even made it to the first rate reset. I hope that Congress understands that solving the nation's foreclosure problems is going to take a lot more than a little tweaking around the edges of the mortgage industry. We need Federal assistance to help save the working class neighborhoods across the nation that are being ravaged by the greed of the lending industry over the last decade."

Like Menino, others familiar with subprime lending in Boston agree the proposal announced November 6 by Treasury Secretary Henry Paulson is too limited. It would only apply to adjustable subprime mortgages starting from between January 2005 and June 2007, with resets scheduled for three years later. The five-year freeze on interest rates would be voluntary. And the result could still be a net gain overall for lenders and investors, since the diminished returns on interest might still be greater than proceeds from sales after foreclosure.

“The limited scope of the announcement will be disappointing for the millions of homeowners at risk of foreclosure,” said a statement from the CEO of the Neighborhood Assistance Corp. of America (NACA), Bruce Marks. “President Bush is abandoning the approximately one million homeowners already on the brink of foreclosure.”

But Marks credits the plan with setting a “new standard for government intervention,” comparing the interest rate freeze to the wage and price controls imposed by President Nixon in 1971. Those controls led to short-term relief, only to be followed by double-digit inflation less than three years later. If the current spasm of tight credit were to ease up and the housing market to reverse its downslide, then the comparison with Nixon’s strategy would seem more flattering.

Marks also credits Bush with avoiding a repetition of the government’s bailout of the savings and loan industry in the 1980s. But, while Marks emphasizes an influential step toward widespread relief on mortgage interest rates, the executive director of Americans for Fairness in Lending, James Campen, sees more obstacles.

“The plan, as it seems,” said Campen, “is going to involve a lot of individual processing to see if people meet the criteria.”

Even when a mortgage meets the criteria in the President’s plan, the property owner would have to ask for help. And to get help, the owner would have to live in the property that secured the mortgage. Real estate analyst John Anderson says that’s why the plan will have limited ability to stall foreclosures and their ripple effect on hard-hit markets such as Dorchester.

“Keeping mortgage rates fixed for 3 or 4 years is not going to have any effect,” he says. “It’s going to have no effect on a condo in Dorchester that nobody moved into.” Or at least where the owner on paper might not have a principal residence.

Which brings up the case of the three-decker with the “contractor special.” After its conversion to condos, all three units were sold to a single buyer in February, 2006, each for $330,000, and each with a mortgage from a different lender. On paper, the buyer was committed to using two of the units as his principal residence. On a third unit, the lender waived the occupancy requirement. Within 19 months, there were petitions to foreclose on all three units.

By October the “contractor special,” unit 3 at 43 Whitfield St, was on the market for $77,000. An ad says the unit has been gutted, with the start of a rehab and “some great extras,” including “the start of a marble bathroom,” not to mention a jacuzzi tub and “some new cabinets.”

At least unit 3 might be better than unit 1, which is on the market for only $63,000, and which an ad says is only “partially gutted.” Also mentioned in the ad: “There is no kitchen and no working bathroom.”

How could the price have fallen so much in less than two years? Was it wear and tear from the occupants? Were the units way overpriced (and over-appraised) when they sold in 2006? What’s more definite is that the seller in 2006 made more than half a million dollars, minus anything that might have been spent on improvements. The million-dollar three-decker might be an aberration, but sales prices were real enough to feed comparisons by appraisers, even for transactions in which the buyer was an owner-occupant who kept up mortgage payments. Now those buyers could once again find their property values affected by figures from 43 Whitfield St, though in the opposite way.

“You put these prices into ‘comps,’” said Anderson, “you’ll have prices dropping off the end of the table.”

“The problem is not the fraud,” he said. “It’s the people who buy the houses predicated on the fraud.”

Until the market started going downhill, there was always the possibility that even the worst case of a foreclosure could be followed by resale at a higher price. “The whole thing,” said Campen, “was based on being able to get refinanced.” And, as Campen notes, loans that went bad for buyers and investors still made money for another party, as may very well have been the case at 43 Whitfield Street.

The idea of a reprieve on ill-advised loans has also met with some backlash, since there would be a price passed on, at least to some investors. It’s possible the price of foreclosures avoided or deferred might be smaller than a loss of revenue from interest payments, but Anderson says the best way for a market to recover is to let prices fall as abruptly as possible.

“I’m a market person,” he says. “The quicker it crashes, and the quicker you get it over with, the better.”

But Anderson and Campen agree about the need for better regulation, even if it does little for people who’ve already borrowed trouble.

“Markets do work, as long as you have standards,” said Anderson.

And the tight credit that’s currently blamed for stifling demand has been equated with a loss of trust in financial markets. Lenders modifying loans on a large scale could be even one more reason for distrust by investors needed to replenish capital for mortgages.

“You can’t run an advanced market on trust. You have to have regulations,” said Campen.

The regulations that still apply to banks have largely been sidestepped by mortgage companies in the subprime debacle. That greater freedom to innovate did in a way expand home-buying opportunity, but innovation has also meant banks losing money as investors on mortgages they would have shunned as lenders. To make that less likely, Campen says the federal government should impose regulation on mortgage companies and appraisers.

“What really has dried up the market,” said Campen, “is a lack of regulation.”

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.