Collateral Foreclosure Damage for Condo Owners

Barbara Sanz has never missed a mortgage payment, but the plunge in real estate is punishing condominium owners like her anyway.

Four years ago, she bought her first condo in a glassy new Miami tower when the building was filling up. Now nearly one in six residents in the 43-story building is battling foreclosure and their contributions to the building association are shrinking. Each of the remaining owners has had to chip in an extra $1,000 assessment and $50 more a month for cable and Internet. That is on top of Ms. Sanz’s $450 monthly maintenance fee.

Even though she pays more, her building has broken washers and dryers and unusable exercise equipment, and her hallway is spotted with mold.

“It’s not fair,” said Ms. Sanz, a 32-year-old event planner. “The first two years, I enjoyed all of the benefits of living in a condo. I’m disappointed now. I hate the way the building looks.”

When people buy condos, they expect their monthly fees will cover many of the responsibilities that they would otherwise have as owners of single-family homes, like cutting the grass and paying the water bills. Now many find themselves nagging each other in the hallways to pay their assessments and adding special fees while haggling over chores. In Miami, Chicago and San Diego, condo owners are adjusting to the economic woes, sometimes by mowing themselves and working shifts for building security — all while lamenting their lost community.

“What motivated people to go into the condo market in a way that led to overbuilding was the expectation that it would be easier than owning a home on a maintenance basis,” said Sam Chandan, chief economist at the real estate research firm Reis. “The downside is that your fate is tied to 50 or 100 other people who may stop making their condo payments.”

Many of the numbers compiled on home sales specifically exclude condos, which account for one out of eight homes in the nation, and that missing data may be masking just how weak the housing market really is. Sales of existing condo units were down 26 percent in March from a year earlier, compared with an 18 percent decline for single-family homes, according to the National Association of Realtors.

The pain in the condo market, mostly in urban areas, may not only be deeper than in the rest of the housing market during this downturn but more prolonged. Bargain hunters say they are reluctant to buy into a building even when the upfront cost seems low because they might have to pay unexpected fees as distressed neighbors default on their mortgages or just stop paying the association fees that cover everything from taxes to pool maintenance to air-conditioning repair.

Marcus & Millichap Real Estate Investment Services, which is based in Encino, Calif., estimates that nearly 202,000 condo units will be added this year to the pool of 574,000 added nationally in the last five years. Next year will bring 94,166 more units onto the market.

“We have not even approached the bottom and will not approach the bottom until 2009,” said Hessam Nadji, managing director of research services at Marcus & Millichap.

The shabby condition of some condos means potential buyers insist on especially steep discounts on foreclosed units. Alessandro Comoglio, a 34-year-old investor from Italy, recently visited six apartments in Ms. Sanz’s Miami building with a real estate broker. Mr. Comoglio was surprised to find worn-out hallway carpeting and orange foreclosure stickers partly scratched off the doors in such a new building.

His willingness to spend stopped short of $200,000 for the condo units, which once sold as high as $700,000, according to the broker, Peter Zalewski. Mr. Comoglio also wants a written guarantee that he would not have to pay more fees.

“Nobody knows if the worst is yet to come,” he said. “Nobody knows how much prices will continue to drop.”

Rosa Rodriguez, a resident and property manager at Parkview Point Condos in Miami Beach, says her former neighbors have left her with so many problems that she would never buy a condo again. The 38 foreclosures in her 244-unit building and the unpaid dues nearly cost the residents running water because the building could not pay its bills. The building abruptly stopped repairing its ceiling lobby and left its wiring and ducts exposed when the board ran out of money. She avoids answering questions from visitors about ceiling repairs.

“We’re not going to tell them we don’t have any money,” she said. “That’s embarrassing.”

Buildings with few units can suffer even if it just one owner falls into trouble. Doris Wilson, who owns a one-bedroom apartment in a building in the Bronzeville neighborhood of Chicago, struggled to get a lender to pay $2,500 in association fees after it foreclosed on one of the seven units in her building. The bank eventually paid the money, and the association has since been able to paint its wrought-iron fence and clean the sewer system.

Still, Ms. Wilson worries that the expected sale of the foreclosed unit at about $94,000 will hurt neighbors who paid or refinanced their units for three times that price. In the short term, she dislikes asking her neighbors to pay an extra assessment of nearly $220. She dreads going to monthly condo board meetings, and she avoids some neighbors who are struggling to pay the additional fees.

“It’s personal,” she said. “Here they are going through a hard time and you have to ask them to pay.”

Marki Lemons, a Chicago real estate broker, says that investors are hesitant to buy properties with many foreclosures because of the possible problems. Some buildings with four to eight units have had so many foreclosures that their condo associations have disbanded and windows have been boarded up. In these cases, she does not even want to represent sellers, because buyers cannot get financing and will have to pay all cash. Sellers will be disappointed by those buyers’ offers. “They’ll probably give 20 cents on the dollar,” she said.

So far, the Manhattan market has been largely spared, in part because of foreign owners who never sought a quick profit. By the end of the year, about 15,000 units will have been added during the five-year condo boom in Manhattan, according to Miller Samuel, a real estate research firm.

Jonathan Miller, the company’s chief executive, said that foreigners, who have bought up to a third of these new condos, typically put in more cash and plan to hold for some time.

“They’re in it for the long-term equity play,” he said. “They’re looking for a 10-year hold.”

Those who fear a downturn remember that Manhattan co-op prices suffered so much during the housing downturn of 1989 to 1993 that buildings had a hard time luring buyers. This financial instability hurt New Yorkers at all economic levels. Some recall neighbors handing over their Fifth Avenue apartments for $1 because they could not afford the maintenance fees.

Condo owners across the country are trying to ride out the slowdown. Since 2004, when Mark Mills bought his two-bedroom apartment for $622,000 in the 210-unit GasLamp City Square condo in downtown San Diego, 10 of his neighbors have succumbed to foreclosure. The building now has a $115,000 shortfall in its budget because residents failed to pay their condo dues.

He resents neighbors who have rented units they cannot sell to 20-somethings, who leave beer bottles in the lobby and hold late-night parties. He is tired of the constant beeping of a smoke alarm in a vacant unit, indicating a battery needs to be replaced. Still, Mr. Mills is staying because he expects he could get only about $550,000 for his home.

“We couldn’t sell it for what we bought it for,” he said. “I’m in it for the long haul.”

April foreclosures rise 65 percent on year: RealtyTrac

NEW YORK (Reuters) - U.S. home foreclosure filings in April edged up from March and were a whopping 65 percent higher than a year earlier, real estate data firm RealtyTrac said on Wednesday.

Home foreclosure filings in April totaled 243,353, up 4 percent from March, RealtyTrac, an online market of foreclosure properties, said in its U.S. Foreclosure Market Report. The figure is a total of default notices, auction sale notices and bank repossessions.

"The total number of U.S. properties with foreclosure activity in April was the highest monthly total we've seen since we began issuing the report in January 2005," James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.

In March, home foreclosure filings had risen 5 percent from February.

The surge in foreclosures indicates an increasing number of homeowners are struggling to make mortgage payments amid the worst U.S. housing market downturn since the Great Depression.

RealtyTrac, based in Irvine, California, said the national foreclosure rate in April was one foreclosure filing for every 519 U.S. households.

"These properties contribute to already bloated inventories of homes for sale, and put downward pressure on home values," Saccacio said, adding that the nationwide foreclosure rate could reach 2 percent by the end of the year.

"Areas of California, Florida, Nevada and Arizona continue to be particularly hard-hit," he said.

Nevada, despite a 5 percent month-over-month decrease in foreclosure activity in April, had the highest foreclosure rate in the country, with one filing for every 146 households, followed by California and Arizona.

All three states had been among the hottest U.S. housing markets during the boom years from 2000 to 2005.

Default rates and foreclosures have jumped over the past year as the housing market deteriorated. As interest rates on adjustable rate mortgages reset higher, many homeowners who have been unable to sell their homes or refinance existing home loans amid a drop in home prices have been forced into foreclosure.

Nevada had 7,276 foreclosure filings in April, up 95 percent from April 2007.

California's foreclosure activity was down less than 1 percent from the previous month, but it still ranked second highest in the nation with one filing for every 204 households.

California, the most populous U.S. state, reported 64,683 foreclosure filings, the most of any state and up 112 percent from April 2007.

Saccacio noted that this also meant an erosion of property tax bases, which was putting municipal budgets in peril.

"For example, the city council in Vallejo, California - part of a metropolitan area with a foreclosure rate that ranked sixth highest in the nation in April - last week voted to have the city file for bankruptcy," he said.

The city council of Vallejo, California voted last week to approve a petition for a bankruptcy filing for their former Navy town, which has seen revenues decline amid the housing slump while its employee costs have ballooned.

The vote positions Vallejo, a town of more than 100,000 residents along a main highway between San Francisco and the state capital of Sacramento, to become the first sizeable city in California to file for bankruptcy.

Arizona ranked third highest in the nation with one foreclosure filing for every 224 households in April, with 11,620 filings, up 26 percent from March and 181 percent higher than a year earlier, RealtyTrac said.

Florida ranked fourth highest in the nation with one foreclosure filing for every 242 households in April, with 35,264 filings, up nearly 17 percent from March and 146 percent higher than a year earlier, RealtyTrac said.

Losing a Home, Then Losing All Out of Storage

ELK GROVE VILLAGE, Ill. — The foreclosure crisis is hitting yet another American locale: the self-storage center.

As they lose their homes, people are turning to these humble cinderblock and sheet-metal boxes to store their stuff. But some people cannot keep up with their storage bills any better than they could handle their mortgage payments, and storage companies are auctioning off their property for a pittance.

A cottage industry has developed to profit from these lost and abandoned items. The other day in this Chicago suburb, Stephanie Donahou and her son Marcus had only a moment to decide whether to bid on a unit in default. They could see a couch, a sewing machine, a fish tank, a washer and dryer, lots of Christmas wrapping paper, a television and other trappings of daily life.

“This is someone’s house,” Mrs. Donahou said. Her bid, for $160, was the highest. Mr. Donahou was not impressed. “Ma, you bought a junker,” he said, rooting through the material. They began to fill their U-Haul. Good material they would auction on eBay; middling stuff would go to yard sales.

The auctioneer, Blair Auction & Appraisal, has been conducting sales at self-storage facilities in the Midwest for more than a decade. “If a site used to have 10 auctions, these days it has 15 or 20,” said Wayne Blair, the owner. At one site in Detroit, he auctioned off the contents of 45 units.

Subprime mortgage loans had low “teaser” rates to lure borrowers. Many storage facilities offer the first month for free.

“You tell yourself, ‘I’m only going to put my things in for a short time,’ ” Mr. Blair said. “Before you know it, you’re behind. Then you have to pay penalties and interest. You owe $400 to $500. If you lost your job, you can’t come up with that, not if you want to feed your family.”

Nearly non-existent 35 years ago, self-storage has become ubiquitous, with 51,000 facilities nationwide. Even as the larger economy falters, the industry is flourishing. Executives say the mortgage crisis is one reason.

Dean Jernigan, chief executive of the U-Store-It chain, says people generally rely on storage when they are dealing with major milestones: marriage or divorce, a relative’s death, a job transfer or, in boom times, remodeling or building new homes.

Now he’s adding foreclosure to the list. “People are moving back down the property ladder,” Mr. Jernigan said.

Bill Martin, a 50-year-old former manager in the technology industry, lost his house in the Southern California community of Lake Forest last August. His local self-storage company sent a truck and driver to pick up his things, a service it offers all new customers.

“Storage has my hopes in it,” said Mr. Martin, who sleeps on a foldout bed in his mother’s guest room. “I don’t tell anyone this, but at least once a week I go over and look at my couch, my refrigerator, my TV stand, my mattress and realize I did have a life, and maybe there’s a way to go back to it.”

Investors agree that hard times for homeowners like Mr. Martin will yield good times for storage firms. U-Store-It’s stock is up 33 percent this year. Extra Space is up 18 percent. Public Storage is up 18 percent.

“People might lose their home but they’re not going to lose their things,” said Charles Ray Wilson of Self Storage Data Services, a research firm.

Yet some evidence suggests that is exactly what is happening. It is impossible to put precise numbers on the phenomenon, partly because the industry is highly fragmented — the majority of facilities are locally owned — and also because the topic is not one the industry cares to dwell on. But auctioneers who dispose of units in default, as well as the bidders who try to buy their contents, say they see increasing signs of strain. They note that more auctions involve people who appear to have had their homes foreclosed.

Fred Reger, an auctioneer in Washington and its suburbs, is seeing two trends, which he calls “matching luggage” and “residential units.”

The first means that he often sees a bunch of over-stuffed plastic bags when he opens a unit. “People used to put their belongings in boxes,” Mr. Reger said. “But Hefties are a lot cheaper. These people came in under stress, which explains why they defaulted a few months later.”

A “residential unit” is one where the renter tries to illegally live in the unit. “We used to see one or two residential units a month,” Mr. Reger said. “Now I’m seeing 6 or 8 or 10. At one facility in D.C. the other day, we had three residentials.”

Not every area is seeing an increase in auctions. Neal Grossman, who runs auctions at storage facilities in Ohio, said a higher percentage of storage customers are rescuing their possessions at the last minute.

When renters default on their monthly payments, facilities replace the lock with one of their own. That way, the renter cannot come around at the last minute and empty out his unit.

Mr. Grossman cut locks on 87 units in March but, as many people paid at the last minute, ended up auctioning only 21 of them in April. Both numbers were down from a year ago, he said, suggesting “the worst is behind us.”

In Chicago, on the other hand, the ranks of the dispossessed seem to be swelling. Storage facilities in Illinois that intend to auction off units in default must publish a legal notice alerting the owners. The suburban Daily Herald ran notices for 62 auctions in the Chicago metro area on a recent Monday, some of them involving more than 10 units.

Brook Snyder runs the Chicago operation for Blair Auction. A good-humored 34-year-old with a penchant for bright shirts and three-day stubble, Mr. Snyder has made a career of delivering bad news: He has been an assistant to court officers doing evictions as well as a process server delivering legal papers to people being sued.

“I try to treat everyone with respect,” Mr. Snyder said. “Anyone can have hard times.”

On auction days he drives from site to site, trailing a caravan of hopeful bidders. When everyone is assembled in front of a defaulted unit, he takes off the lock. Forbidden to enter or touch, bidders make offers based on a glimpse and well-honed instinct. The entire process is over in a moment.

In three brisk days, Mr. Snyder held auctions at 23 U-Store-It facilities. At the first site, in Gurnee north of the city, he raised the door on an indoor unit, revealing what was essentially a one-room apartment: bed raised high, recumbent bicycle in the corner, file cabinet, vacuum cleaner and, for power, many extension cords. The contents sold for $675.

The next warehouse, in Waukegan, brought a unit full of — depending on how you look at it — cherished household possessions or somebody’s trash. Most of the bidders took the latter view, disdaining an offer. Tonya Boyd bought the bulging plastic bags for all of $6. “It looks like someone had some troubles,” said Ms. Boyd, an employment specialist. There were piles of clothes, brand-new women’s shoes, old chairs, a dirty fan, kitchenware.

For some units, $6 is too much. “A dollar bill, first dollar bill takes it,” Mr. Snyder implored in front of one unit. “Come on, this is everything they own!” To no avail.

This is the eternal mystery of self-storage. If the material was worth money, it was foolish to let it go to default. If it was not worth much, why spend at least $50 a month to store it?

Mr. Jernigan, the U-Store-It executive, says budgets are stretched tight. “People pay their cellphone, rent, credit card before they get down to their storage unit,” he said.

Self-storage site managers describe an irrational tendency in some clients. One said she had seen customers who lost their possessions at auction come back and rent another unit. Mr. Snyder said he had removed a lock from the same delinquent unit six times in one year. Five times the renter had paid up at the last minute; the sixth time, a few weeks ago, it was auctioned.

“His luck ran out,” Mr. Snyder said.

Mortgage Holders Find It Hard to Walk Away From Their Homes

As American homeowners fall behind on their mortgages in growing numbers, bankers and policy makers worry that while many of these people cannot pay, some simply will not.

Millions of Americans are “upside down” on their mortgages — they owe more on their homes than their homes are worth. So far, however, there is little evidence that people who have the means to pay are walking away from their homes as values sink.

The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet “jingle mail,” the term for those tinkling packages of keys, appears to be far rarer than many seem to think.

Freddie Mac, the big government-sponsored mortgage company, estimates that just 0.14 percent of the defaulted mortgages in its portfolio involved properties that were abandoned by borrowers. Fannie Mae, another mortgage company, puts the figure in the single digits. Both companies deal in relatively conservative loans, so the total rate may be somewhat higher. Industry officials say they have no way of knowing for sure.

Even so, the idea that some people are simply refusing to pay their mortgages has gripped the popular imagination. The notion picked up momentum in the last few weeks after “Inside Edition,” the celebrity-focused TV news program, reported that Jose Canseco, the former American League most valuable player who made millions during his baseball career, abandoned his $2.5 million mansion outside Los Angeles to move into a smaller property.

“You look at the Jose Canseco issue and say that it’s a walkaway, but he is probably the only person on his block that did that,” said Robert Padgett, director of loss mitigation for Freddie Mac. “Those types of stories garner a lot of attention,” he added, but they are “isolated occurrences.”

Many economists agree. The low numbers from Freddie Mac and Fannie Mae are consistent with past housing busts, like the ones that occurred in Texas in the 1980s and in the Northeast and California in the early 1990s. Homeowners typically do not walk away from homes they live in unless they are unable to pay the mortgage, usually because of job loss, a death in the family, divorce or a big jump in their monthly payments. Real estate speculators, of course, do abandon properties when prices fall.

In fact, researchers say the rich are no more or less likely to walk away — “ruthlessly default” is the economic term for it — than those of more modest means. A person’s credit history is usually a better indication of how he will behave than his income. How much money a person put down on the house when he bought it also makes a difference.

Investors “are going to default right away because they have negative equity,” said Robert Van Order, an adjunct professor of finance at the University of Michigan. “But that’s different from people who moved into the house.”

Owners who live in their homes do tend to default more when home prices fall. That is because being under water leaves borrowers fewer options if they run into financial trouble. When prices are rising, borrowers can usually sell their houses for more than they paid or refinance their mortgages.

Most homeowners default when there is “an intersection of two events: they don’t have equity in their houses and they run into trouble,” said Mr. Van Order, a former chief economist at Freddie Mac.

An estimated 9 million American households, or 10.3 percent of all single-family homes, owe more than their home is worth, according to Moody’s Economy.com. By comparison, 4.8 percent of home loans were in foreclosure or delinquent by 60 days or more at the end of last year, according to the Mortgage Bankers Association.

For a variety of reasons, most homeowners find walking away difficult and expensive.

A foreclosure can make it hard for borrowers to get other loans and sometimes even an apartment. Economists refer to these as “transaction costs” that offset the benefit borrowers might get from defaulting on an underwater home loan.

Lenders can also pursue deficiency judgments against borrowers to recoup the difference between what is owed on the debt and what the property is sold for after foreclosure. Such claims are time-consuming and expensive to win, so most lenders do not pursue them. In the past, some lenders have sought judgments against a few borrowers to deter others from walking away, said Grant S. Nelson, an emeritus law professor at the University of California, Los Angeles.

In an attempt to reduce the incentive to default, Fannie Mae recently increased to five years, from four years, the time borrowers have to wait after a foreclosure to get another Fannie Mae loan. The company will make exceptions under extenuating circumstances.

The Bush administration has said that the only people who deserve housing relief are those who cannot pay, not those who will not pay.

“Let me also emphasize that any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator,” Treasury Secretary Henry M. Paulson Jr. said in late March. “Washington cannot create any new mortgage program to induce these speculators to continue to own these homes, unless someone else foots the bill.”

Nonetheless, some real estate professionals, particularly those in markets where home prices are falling fast, say borrowers who can pay may be tempted to walk away.

Brett Barry, a real estate agent in the Phoenix area, said some of his clients owe $100,000 more than their houses are worth. Single-family home prices have fallen 24 percent from their peak in the summer of 2006 in the region, according to the Standard & Poor’s Case-Shiller home price index, and the decline shows no sign of abating.

While some of Mr. Barry’s clients are having a hard time making payments, others who can afford to keep paying are also thinking about leaving because they worry their homes will be under water for many years to come.

“These markets are driven by psychology,” Mr. Barry said. “If people see that the market will continue to decline and they are already in the hole by 50 to 100 grand” they will leave.

One of his clients, a woman named Vivian, recently mailed the keys to her second home to the bank and walked away.

She and her husband bought the house outside Phoenix in 2004 in hopes of retiring there near one of their daughters. They put 20 percent down on the $240,000 house and at first made their payments without struggle.

But her husband, who was the primary income earner in the family, died suddenly last year from a staph infection. Vivian said she could no longer afford to keep paying the mortgage on two homes, because her only source of income now was a monthly Social Security check.

“I can’t sell it, I can’t pay for it,” said Vivian, 64, who spoke on the condition her surname not be used.

Though no two stories are exactly the same, such cases are not uncommon, housing specialists say.

The boom of recent years left many Americans financially vulnerable because they had borrowed too much against their homes, thinking prices would not go down. Others speculated by buying multiple homes. The housing and mortgage industries championed the notion that home prices had never declined nationally and that buying a home, even in a frenzied market, was always a good investment.

Jon Madux, a founder of the site YouWalkAway.com, which helps borrowers leave their homes, said a majority of the site’s clients default because of financial hardships. But in the Southwest and Florida, more of its customers are investors who bought multiple condos or houses and are now not able to find renters or sell for more than they owe.

The Mortgage Bankers Association estimated that the owners of 18 percent of the homes in foreclosure as of September 2007 did not live in those properties. Many used riskier loans, which are defaulting faster than more conventional mortgages.

Peter Chinloy, a real estate and finance professor at American University in Washington who has studied how borrowers behave when home prices fall, said policy makers should recognize that the problems are most severe in a few states in the Southwest, the Midwest and in Florida, and should aim relief in those places. It is also most severe for loans made between 2005 to 2007, when credit was at its easiest.

“One of the thing that has not gotten much attention,” he said, “is how localized the problem is.”