Elected Officials Move to Prevent Next Mortgage Crisis:
Officials and residents gathered today at 1520 Sedgwick, the Birthplace of Hip Hop, to defend against threat of reckless predatory investment practice
New York, August 6, 2008 -- U.S. Senator Charles Schumer, Congressman José E. Serrano, State Senator José M. Serrano, Assemblywoman Aurelia Greene and Assemblyman Michael Benjamin today gathered at 1520 Sedgwick Avenue in the Bronx to call on the Canadian Imperial Bank of Commerce and other real-estate lenders to adhere to responsible underwriting standards and to stay out of a proposed sale of 1520 Sedgwick Avenue, a deal that threatens to severely over-leverage the currently affordable housing complex.
In February 2008, the low and moderate income families that live at 1520 Sedgwick Avenue, a Mitchell Lama located in the West Bronx celebrated what they thought was the final victory in their campaign to preserve their building as an affordable housing complex. The City's Department of Housing and Preservation Development (HPD) had formally rejected the proposed $9 million sale of the project to mega real-estate investor Mark Karasick on the basis that the sale price was not supportable. The celebration was premature.
In a move specifically geared to circumvent the city's authority, the owner is now threatening to buy-out of the Mitchell-Lama program (his right under current law) in order to sell the project to Mr. Karasick at the inflated purchase price.
The buying and selling of multi-family regulated and subsidized housing at unsupportable prices is a new trend in NYC, one which advocates and elected officials have dubbed "Predatory Equity". The practice closely mirrors the financial malfeasance which is still playing out in the sub-prime single family housing market. Banks and other mortgage lenders are willing to make unsupportable loans, provided they can shed their risk by selling the notes to Investment Banks who package them into complicated investment products and resell them to private investors as Mortgage Backed Securities.
Mr. Karasick and his lender, the Canadian Imperial Bank of Commerce (CIBC) orchestrated a deal like this back in 2006 at the Robert Fulton and Fordham Towers Apartment complexes, two former Mitchell Lama developments now protected under rent regulation. Mr. Karasick paid $41.5 million to acquire the buildings; $36.5 M of that came from a CIBC loan. An analysis of the deal indicates that rents would have to double to make the transaction financially viable; a legal impossibility under current rent regulation rules. As a result of the inflated purchase price, elected officials, tenants and advocates fear Mr. Karasick will not be able to afford to maintain the project in decent condition. Tenants have recently been reporting a decline in conditions and services.
"Tenants at Robert Fulton Terrace and Fordham Towers have contacted my office saying building maintenance services are deteriorating," said Assemblyman Michael Benjamin who represents the 490 families. "Of course conditions are worsening. The developer and the bank leveraged the properties to the hilt. And now the tenants are suffering."
No matter how the deal performs, you can bet CIBC isn't too worried about it. They sold the loan to a Wall Street investment bank, which was then packaged it into a Mortgage Backed Security and resold through a public offering.
Research compiled by Tenants & Neighbors and the Urban Homesteading Assistance Board unearthed similar deals underwritten by CIBC for another private equity developer; Apollo Real Estate Advisors. A portfolio of 22 building with 700 units located in the Bronx and Upper Manhattan now has an outstanding 2715 code violations. CIBC sold the mortgages on the entire portfolio to an Investment Bank who repacked it as a public security.
Now Karasick has his targets set on 1520 Sedgwick, noted for its historical significance as the Birthplace of Hip Hop. The purchase price is again unsupportable, evidenced by HPD decision to reject the sale while it was still in Mitchell Lama arguing that the price could not be justified by existing rental income.
"It's like watching a train wreck," said State Senator Serrano. "These deals are not based on sound underwriting and real-estate principals. It is pure speculation, and responsible lenders should not be engaging in these types of deals."
Elected Officials are urging CIBC as well as other potential lenders to stay out of the Sedgwick deal as long as the sale price is unsupportable. Additionally, they are calling on lenders to adhere to responsible underwriting standards across the board. Legislators are also in the process of developing regulatory proposals that will mandate responsible underwriting standards for lenders who are chartered to do business in New York.
"Predatory equity lending practices are eroding our communities, forcing our low and immoderate income families out of NYC," said Assemblywoman Greene who represents 1520 Sedgwick Ave.
In addition to the CIBC portfolio, over the past four years more than 13,000 units of subsidized housing have been bought and deregulated by private equity developers at prices that appear to be speculative.