April 7, 2011 – Washington, DC – Today, Congressman José E. Serrano sent a letter to the FDIC Chairman Sheila Bair, asking her to examine how banks value and sell mortgages held on distressed multi-family buildings, and the impact this has on the health and safety of building residents. The full text of the letter is below:
Dear Chairman Bair:
I am writing to register my concern about an ongoing banking issue which is having a severe impact on the health and safety of a great number of families in my Congressional District and across New York City, and which impacts the accuracy of how banking institutions in New York City and elsewhere report the value of their assets. Specifically, I am concerned about how banks are valuing the mortgages they hold for severely distressed multifamily buildings, and whether those valuations honestly reflect the physical condition of the properties.
As you are probably aware, the credit boom and subsequent housing crisis that dominated the early part of the last decade has played out somewhat differently in New York City—where approximately 64 percent of the population rent homes in multi-family apartment buildings—than it has in the rest of the nation. Between 2003 and 2008, hundreds of apartment buildings were purchased at substantially inflated prices by real-estate investors and private equity firms across New York City. These transactions were fueled by a number of banks and investment firms who provided as much as 80 percent of the capital for each of these deals in the form of short-term mortgages. According to New York City’s Department of Housing Preservation and Development (HPD), there are now more than 110,000 occupied apartments in multifamily buildings that may be overleveraged and at serious risk of disinvestment and/or foreclosure. Often these properties carry hundreds, if not thousands, of violations of New York City’s Housing Maintenance Code, including many that are considered hazardous.
To date, no area of New York City has experienced the negative consequences of this trend more than the Bronx. In 2008, my office worked with HPD, Senator Charles Schumer, Fannie Mae and their regulator, the Federal Housing Finance Agency (FHFA), to bring relief to residents living in a portfolio of 14 buildings which were facing foreclosure and had descended into nearly uninhabitable physical condition. In that case, known as the Ocelot portfolio, Fannie Mae and its regulator recognized that the poor physical condition of the portfolio had reduced the value of the loan. Additionally, the agencies recognized the substantial cost associated with restoring the portfolio back to decent, safe and sanitary conditions and accepted, in part, a revaluation of the loan to reflect its true value. The revaluation allowed for a sale to a responsible landlord who was able to provide the building with the repairs it desperately needed.
Presently, there are hundreds of distressed properties across the city whose mortgages are held by banks. If a property is facing foreclosure, in many cases, the bank simply seeks to sell the loans as quickly as possible, with seemingly little regard for the buyer’s intention for the properties. The vital issue is how these loans are valued by banks at the point of sale.
In my view, the value of a distressed property must reflect the cost associated with making that property livable and nonhazardous again. As these loans are based on using multifamily buildings as collateral, to the extent that such collateral deteriorates, the value of the loan should also decline. Unfortunately, the practice we see from banks does not account for the impaired physical condition at the point of sale. Instead, severely distressed properties are being sold at prices far in excess of their true value. Not only can this demonstrably put the life, health and safety of tenants at risk—who face the prospect of further disinvestment—it also puts enormous financial strain on municipal government, which is often left having to bear the cost of major capital and rehabilitation work.
I believe the FDIC has an important role to play in addressing this issue. As part of the FDIC’s authority to preserve the safety and soundness of the institutions it oversees, I believe the FDIC should investigate how banks are valuing multifamily mortgages and properties in their financial reporting and statements, specifically with a focus on how impaired physical condition affects the value of these loans. To the extent the FDIC has not already done so, I would ask that the FDIC develop safeguards to ensure that real estate asset values, especially in the multifamily market, are more closely scrutinized for possible changes in valuation based on deferred maintenance and/or substantial outstanding capital needs.
According to research on New York City’s housing and real estate market, New York Community Bank (NYCB), a state bank under the FDIC’s regulatory authority, holds the mortgages of more physically and/or financially distressed properties than any other lender in New York City. Currently, NYCB has 34 properties in foreclosure across the city, which have a combined total of just under 5,000 code violations. Of that number, 16 of these buildings are located in the Bronx and have a combined 2,635 outstanding code violations. Because of NYCB’s central role in many of the issues described above, I would ask that the FDIC begin its investigation into these loan valuation issues by making inquiries with NYCB. My hope is that the FDIC can work with banks under its regulatory authority to develop standards that would help determine a more accurate value for banks’ multifamily real estate assets, and prevent further harm from coming to residents of my community and others.
Thank you for your kind consideration and I look forward to your reply.
José E. Serrano
Member of Congress
Congressman José E. Serrano has represented the Bronx in Congress since 1990.