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July 29, 2010 |
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| June 11, 2007 |
By: Jaime O. Hernandez |
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Clockwise from left: The Four Ambassadors, Jade, Sailboat Pointe, Cite
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ift through condominium foreclosure listings, and you are likely to see Deutsche Bank’s name as the plaintiff in hundreds of South Florida cases.
Deutsche initiated 325 foreclosure actions against condo owners in Miami-Dade, Broward and Palm Beach counties from Jan. 1 through May 4, more than any other financial institution, court records show. Even more staggering was the total unpaid mortgage value: $70.3 million.
But Deutsche isn’t overly concerned.
On paper, Deutsche and other major U.S. banks dominate the region’s foreclosure filings, but they are seldom the lender exposed to financial losses. Deutsche officials say the bank is the trustee or custodian of the loans, and most of them have been securitized and sold on the bond market to investors.
Investors who bought the securities essentially funded the loans and are the ones losing money on foreclosures. Deutsche and others actually are making money because they charge fees to represent investors in foreclosure proceedings.
“If a loan is sold into the secondary market in a securitization, then the bond owners of the securitization bear the ultimate risk,” said Joe Falk, legislative chairman of the National Association of Mortgage Brokers and a consultant for the law firm Akerman Senterfitt in Miami. “Their name may be on the note if the loan was securitized, but that fact may not be apparent on the public record, leading an observer to think they are at risk when in fact they are not.”
Bondholders include individual investors, corporations and foreign countries, Falk said. Hundreds of entities may own a single mortgage-backed security, and pieces of the pool can be sold numerous times. No matter how many times the securities are bought and sold, the trustee’s name remains on the public loan documents.
Officials at U.S. Bank and Bank of New York — two other two banks that have initiated the largest number of condo foreclosures in South Florida this year — say their exposure also is minimal in the growing foreclosure mess.
U.S. Bank is the plaintiff in 211 cases filed this year through May 4, with $43.4 million in unpaid mortgages, court records show. Bank of New York filed 164 foreclosure actions with $39.5 million in unpaid mortgages in the same time frame.
Wells Fargo, No. 4 on the list, initiated 131 condo foreclosure actions with $24.8 million in unpaid mortgages, court records show. HSBC rounded out the top 5 with 104 foreclosure actions and $17.6 million in unpaid mortgages.
The same five banks led both the condo foreclosure rankings and foreclosure actions of all kinds in South Florida through May 4.
Deutsche led all lenders with 2,125 foreclosure actions in Miami-Dade, Broward and Palm Beach counties, an analysis of court filings shows.
The $507 million total foreclosure value that Deutsche is looking to recoup represents 17 percent of $2.96 billion in unpaid South Florida mortgages in foreclosure.
A total of 2,259 of the 13,235 foreclosure actions initiated by financial institutions through May 4 involved condos. Nearly two-thirds of the condo foreclosures were in Miami-Dade.
Forty percent of all foreclosure actions with an unpaid mortgage total of $1.36 billion were in Miami-Dade, according to court records. Broward had 4,965 foreclosure actions for $872 million in outstanding mortgages. Palm Beach had 2,871 foreclosure actions with $735 million in unpaid mortgages.
The leading condo developments on the foreclosure list were Sailboat Pointe in Oakland Park, Jade Residences at Brickell Bay in Miami and The Tides of Hollywood Beach.
Twenty condo owners at Sailboat Pointe, a condo conversion, had foreclosure proceedings initiated against them, Jade had 17 foreclosures, and The Tides, another conversion, had 16. Other condos with a high volume of foreclosures include the Four Ambassadors near Brickell Avenue and Cite on Biscayne Boulevard north of downtown Miami.
Dire warning
Peter Zalewski, broker at Bal Harbour-based CondoVultures Realty, and a former Daily Business Review writer, said the high number of foreclosures at the three buildings is a sign of things to come.
Most of the owners who risk losing their units to foreclosure are speculators who entered the market after condo sales cooled and can’t sell them for as much as the purchase prices, said Zalewski, who analyzed foreclosure filings compiled by the Review.
“If the Jade is having trouble, just envision the problems these new properties not on the water will have,” Zalewski said. “The Jade and Tides, those are effectively the canary in the mine. You have two waterfront properties that are struggling. If investors can’t flip that, how are they going to flip something in an inferior location?”
Bill Raphan, Florida’s assistant condominium ombudsman, acknowledged a large number of foreclosures in a single condo complex could depreciate the value of other units. Owners who want to sell may have a hard time turning a profit, and buyers may find it hard to get financing when banks see values decreasing. 
Foreclosures often force condo associations to tack special assessments of hundreds of dollars onto everyone else’s dues to make up for any budget shortfalls from owners who skip maintenance fees. Raphan acknowledged Sailboat Pointe was an example.
“If you have a 20 to 30 percent foreclosure rate, someone has to make up for that,” he said. “There is a shortfall of income, and some condos have to special assess those costs.”
Special assessments also can hurt condo resales because condo boards are required to disclose assessments to buyers.
U.S. Bank filed to foreclose on 1,416 homes in South Florida to recoup $368 million in unpaid mortgages this year. Bank of New York filed 1,026 foreclosure suits with a total outstanding mortgage value of $281 million.
Officials at those banks insist the data is misleading on their exposure.
Like Deutsche, Bank of New York said it has little reason to worry because as trustee, its responsibility rests with the securities that include thousands of loans and not the individual mortgages.
“The companies that do have the exposure are the ones who made that loan,” said Kevin Heine, a Bank of New York spokesman. “Part of our responsibility is to make sure investors receive the principal and interest payments that they are expecting from the investments they made. We will also pursue foreclosure proceedings on behalf of the investors.”
When a mortgage broker originates a loan and sells it, the buyer is likely to bundle that loan with thousands of others into securities sold on the Wall Street bond market. The buyer that securitizes the loans will hire an institution like Deutsche, which does not securitize, to serve as trustee on the securities and a mortgage servicing firm to accept payments from borrowers.
Public records are not updated to show whether a trustee like Deutsche has a financial stake in a loan.
Officials at Deutsche, U.S. Bank and Bank of New York declined to say how much South Florida residential real estate exposure each institution has in its loan portfolio. Federal Deposit Insurance Corp. data does not break down the loan portfolio of banks by region or property type.
Wells Fargo officials did not return a call for comment before deadline. The San Francisco-based bank has run into trouble in the past year because of a large amount of delinquent subprime mortgages in its portfolio.
HSBC’s exposure
London-based HSBC Group announced late last year that its earnings likely would suffer this year because of an increase in bad U.S. loans. When asked to comment on its South Florida condo foreclosure exposure, a bank spokeswoman issued a statement saying HSBC holds “the majority of our mortgage loans in our portfolio.”
“We are committed to our customers and have a number of programs within our company to help reduce foreclosures and preserve homeownership,” the statement said. “We believe that foreclosure is the worst alternative for all parties concerned and go to great lengths to work with our customers to avoid foreclosure. Financially, the average loss on sale at foreclosure is 20 to 25 percent of loan value.”
The statement said HSBC modifies interest rates for borrowers with adjustable-rate mortgages.
Coral Gables-based Bayview Financial had the highest dollar value in condo foreclosures among Florida-based financial institutions. Bayview ranked 19th on the list with $2.67 million in outstanding mortgages and 28th on the overall foreclosure list with $12.7 million in unpaid home loans.
Bayview is a 10-year-old real estate investment firm that buys and services prime and subprime loans. It also securitizes mortgages and underwrites commercial loans of at least $100,000. Company officials did not return a phone message before deadline.
The subprime mortgage crash has led to greater government scrutiny.
Regulators, lawmakers and other public officials have responded to surging foreclosures with tighter lending standards and a push to crack down on everything from nonbank lending to securitized debt.
Ohio Attorney General Marc Dann has likened subprime lenders to armed robbers and said he wants to sue Wall Street firms because their bond sales enabled consumers to get mortgages they couldn’t afford.
Congress is considering a New Jersey law enacted in 2003 as a model for potential national legislation that would allow homeowners whose loans are the result of abusive lending to be compensated by the lenders and investors who purchased the mortgages.
Some collateralized debt obligations, or CDOs, of asset-backed securities have become black holes. Junk bonds and subprime mortgages pump up some packages.
Sales of CDOs worldwide have soared since 2004, reaching $503 billion last year, a fivefold increase in three years, according to data compiled by Morgan Stanley.
About 40 percent of CDO collateral is residential mortgage-backed securities, and about three-quarters of that is in subprime and home-equity loans, according to a study by Joseph Mason, an associate finance professor at Drexel University’s business school, and Joshua Rosner, a managing director at research firm Graham Fisher.
One of their main conclusions: investment-grade CDOs “will experience significant losses if home prices depreciate.”
CDO holdings already have declined in value $18 billion to $25 billion because of falling repayment rates by subprime mortgage holders, Lehman Brothers Holdings estimated in April.
As home prices sink and mortgage defaults climb, bond investors who financed the five-year housing boom stand to lose as much as $75 billion on securities backed by subprime mortgages, according to Newport Beach, Calif.-based Pacific Investment Management.
In spite of the growing number of foreclosures in South Florida, experts say individual foreclosure actions have no palpable effect. Mortgage-backed securities generally include thousands of home loans with a geographic spread, so it would take a large number of bad loans in one pool for bondholders to be hurt.
Secondary market investors have clauses in their mortgage purchase agreements allowing them to force originators to buy back a bundle of loans if the early payment default rate hits a given rate, typically 1 percent of the pool, within the first year of the loans.
Buyback provisions have been in mortgage purchase agreements for years, primarily to protect investors against mortgage fraud.
But more than 50 mortgage companies have put themselves up for sale, closed or declared bankruptcy since the beginning of 2006 as the subprime failure rate climbed, according to data compiled by Bloomberg.
Companies from Detroit-based General Motors to Zurich-based UBS have fallen into the subprime sinkhole.
GM’s profit plunged 90 percent in the first quarter because of mortgage losses at its 49 percent-owned GMAC finance company.
Swiss banking giant UBS said in May it would shut its Dillon Read Capital Management arm after the hedge fund manager lost $123 million in the first quarter, partly on subprime investments. The shutdown cost is expected to hit $300 million.
Investment banks that bundle loans into securities and sell them in the secondary market may face a warier market if more mortgages fail, Falk said.
“If you were issuing an investment call to bonds and the bonds suffered losses, the next time you issued a bond, who’s going to buy it?” he asked. “The buyers will demand a higher price, stricter underwriting guidelines, stronger representations and warranties for bad acts, or additional corporate guarantees.”
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