The poster child for the foreclosure crisis has been a middle-income suburban family. But low-income urban renters also saw their buildings over-mortgaged at the height of the crisis, and now faceless hedge funds and nameless investors are replacing their desperate landlords — sometimes with disastrous consequences.
Six years after the foreclosure crisis helped tank the world’s economy, investors are snatching up “distressed” properties — those that are in foreclosure or facing foreclosure — and seeking to turn a profit on them. Advocates for affordable housing worry that this profit comes at the expense of tenants.
Joanna Paulino knows this all too well. She lives in a lower-income neighborhood in the Bronx borough of New York City. Her home is a prewar building, a once attractive structure like many others in the city’s outer boroughs. But after years of neglect, it is crumbling; there are more than 140 violations registered against the premises.
Paulino’s building was purchased before the housing crisis came to a head. The former owner, Asher Neuman, was able to secure a series of massive loans, even though he had no prior experience with property management. According to city records, he spent $1.9 million for his new building, even though the property was appraised as worth only $223,000.
“I thought this would be a side business,” said Neuman. “The guy who sold the building, I trusted him. I knew he was in the industry of owning buildings like this. I didn't look into the details. I didn't realize how bad it was.”
The building proved a nightmare to manage. As the number of violations continued to increase, so did the cost of maintenance. By 2012, Neuman was in charge of a building that was not only falling apart but also half empty, as tenants moved out seeking better living conditions. Eventually, he was unable to make mortgage payments and declared his real estate holding company bankrupt.
Enter Stabilis Capital Management, a private equity firm financed by some of New York’s investing elite. The fund purchased the mortgage from Neuman’s bank without first inspecting the building.
“Lenders in the secondary market are generally not permitted to contact a borrower on a loan prior to a loan being transferred, and a secondary market lender is not given access to a building as would be the case in a normal property sale,” Stabilis said in an email statement. “So to the extent that there are alleged issues with the condition of the property, a lender in the secondary market would generally not be in a position to know of such issues prior to becoming the successor lender.”
Stabilis is not the only firm in the distressed New York real estate game. Madison Realty Capital, Onex Real Estate Partners and Waterfall Victoria Master Fund are also major players that have attracted tenant advocates’ attention.
“The figure for the portfolios that we actively track is upwards of $5 billion in this kind of investment in New York,” said Celia Weaver, an organizer with the Urban Homesteading Assistance Board (UHAB), an advocacy group that tracks distressed debt players in the city. “But the actual number is likely much, much larger.”
This is because, Weaver said, equity investors are seeking to control the properties through mortgage notes — or debt — rather than deeds. The price paid for mortgages is not recorded in public databases, and banks are reluctant to disclose any information about such sales.
According to documents filed at the Office of the City Register, Stabilis bought mortgages on dozens of buildings in poor condition across the city over the past three years. At one point last summer, six buildings on which Stabilis held mortgages in the borough of Queens had 550 housing violations on 36 apartments.
Advocates for tenants worry about hedge fund and private equity firms’ intentions when they invest in distressed affordable housing in New York.
“These companies need to get certain returns on their investments, and when they’re investing in rent-stabilized housing, the only way to get the returns needed is through predatory tactics: reduced services, manipulating rent laws, forcing long-term tenants out to raise rents, etcetera,” said Elise Goldin, a tenant organizer with UHAB. “If a company is investing in a hotel in Manhattan, the results are much different — no one’s lives are impacted in the attempts to get the financial return.”
A spokesperson for Stabilis said the fund’s intention is to improve the buildings and pass them on to a new owner.
“Improving these assets is critical to improving the value and allowing a lender to recover the debt that is owed to it,” Stabilis said in an emailed statement. “We have been and remain committed to ensuring that buildings are brought up to code and tenants’ living situations are improved — always.”
The fund said it spent “tens of thousands of dollars on, among other things, clean up and utilities” in the building where Paulino lives.