The Latest Victims Of The Foreclosure Crisis: Low-Income Apartment Renters

The Foreclosure Crisis' Unexpected Victims: Low-Income Apartment Renters

The following is produced in partnership with The Dylan Ratigan Show's weeklong "No Way To Live" series on the financial crisis and its impact on ordinary Americans.

NEW YORK -- First, a heating pipe broke in the adjacent apartment, sending a powerful blast of steam into his home along with an unrelenting stench. Then, chunks of the ceiling started falling into his bathroom, and black mold began creeping up the walls. Cockroaches thrived in the suddenly tropical apartment. In December, mice popped up from the gaps between the walls and the baseboards.

But each time Sergio Cuevas sought the attention of the landlord, hoping to arrest the deterioration of his apartment in the Bronx, he got nowhere. It was like the management company had ceased to exist.

This was not the result of another derelict slumlord, but rather an example of a lesser-explored aspect of the national foreclosure epidemic: Cuevas and some 400 other tenants living in ten apartment buildings in a working poor stretch of the Bronx have found themselves stuck in the legal cracks of the American real estate reckoning, their homes claimed by no one. When trouble arises, there is effectively no landlord to call.

The investors who bought their buildings at the height of the real estate bubble, hoping to flip them for quick profit or jack up stabilized rents, have washed their hands of a bad bet. The bank that has initiated foreclosure says it does not yet have legal title, meaning it lacks responsibility. The court-appointed receiver who controls the property says he doesn't have enough money to attend to the burgeoning problems.

The scene here in the Bronx is emblematic of a growing national problem. In apartment buildings scattered in low-income neighborhoods from New York to Phoenix to San Francisco, families with scant resources and uncertain legal rights are literally watching their ceilings crumble and their floors collapse as they wait and hope for a resolution.

Some cities have sought to compel banks to attend to the real estate seemingly under their control, but complain that they have limited authority to inject themselves into private property deals. When they do take action--writing up building code violations--a lack of clearly defined ownership means there is no one from which to demand action.

By now, stories of investors availing themselves of cheap credit to buy into speculative new subdivisions in sun-belt stretches of Florida and California have become legion. But the real estate boom also enticed speculation on the continued spread of gentrification in low-income communities, drawing in investors from far and wide.

This is how a Los Angeles-based company called Milbank Real Estate came to possess this motley collection of apartments in the Bronx.

(New York City Mayor Michael Bloomberg (left) and City Council speaker Christine Quinn (center) speak with Milbank resident Maggie Maldonado in early January.)

The buildings were built in 1920s, erected to house a then-exploding New York City population whose ranks were being swelled by immigration. The Bronx beckoned as a marker of upward mobility, its concourses and new apartment blocks offering a respite from more densely populated neighborhoods in Manhattan.

Despite the neglect in more recent decades, many of the buildings retain hints of their former glory. Ornate moldings are still visible under layers of lumpy plaster patch-work. The more expansive apartments have generous kitchens and dining rooms, along with three bedrooms and two bathrooms.

Some of the tenants who have lived in the buildings for decades have managed to hang on to original parquet floors. They remember the fireplaces and wrought iron benches in the lobbies, the flowers in the courtyards. They feel a strong sense of pride in the neighborhood.

But as the city declined, and as the Bronx burned, the original owners gave way to a parade of some of New York City's most notorious slumlords. Each landlord collected rent checks and spent as little as possible on repairs, doing the bare minimum to stay legal. The same courtyards that had once boasted landscaping eroded to bare dirt. Drug dealers set up shop under staircases and in vacant apartments--those units now marked with spray-painted logos, black Xs on red front doors.

By the time Milbank Real Estate entered the picture in 2007, most of the buildings were already in a state of considerable disrepair according to the Northwest Bronx Community and Clergy Coalition, which works with tenants in the buildings.

The collection of five and six-story brick buildings were out of character for the company, which specialized in taking rundown commercial buildings and sprucing them up--from the Figueroa Tower in downtown Los Angeles to a trio of office buildings on the airport approach in Houston.

But buying into a piece of the Bronx and taking on tenants seemed to make commercial sense. New York was home to millions of renters willing to hand over ever-larger monthly sums for housing, and pressing further and further away from Manhattan in pursuit of extra space and¬ good value.

Milbank bought a total of 17 buildings in the Bronx, 10 with one $35 million mortgage, and the other seven with individual mortgages. All are in different stages of foreclosure.

The 10 buildings in the Bronx were walking distance to subway lines reaching offices in Manhattan, and they were renting at far below market rates because they were rent-regulated. If Milbank could chase out tenants who were behind on their rent, renovate the apartments, and then start charging market rates, it could capitalize on the spread of gentrification to the outer rings of the city, all the way to the Northwest Bronx.

Milbank's calculations were not being made in a vacuum. Other investors were also eyeing properties in low-income neighborhoods, and aiming to push out rent-regulated tenants. A British company, Dawnay Day, gave newspaper interviews about how easy it was to duck rent controls before openly offering East Harlem tenants small sums of money to leave. A Queens venture, Vantage, repeatedly filled housing court dockets with dubious claims that tenants hadn't paid rent as a means of pressuring them to leave, according to the New York Attorney General's office, which ultimately secured a $1 million settlement.

Between 2005 and 2007, roughly 100,000 apartments in low-income neighborhoods in New York were bought by investors who planned to raise the rents or flip the properties, according to housing advocacy groups.

Banks were more than happy to fund the speculation, offering easy credit terms with little scrutiny, say investors.

"Underwriting was a lot more loose in those days, and analysts looked at the portfolios very, very optimistically, with rapid annual growth in the income," said Milbank's chief executive, Aaron Yashouafar.

Underscoring the degree to which the American real estate bubble was a global affair, the German lending giant, Deutsche Bank provided the finance that enabled a California-based venture to take hold of these ten buildings in the Bronx, delivering a $35 million commercial mortgage.

Housing experts say that the loan could never have been extended in a time of traditional risk assessment: even in perfect condition and with high occupancy, the buildings would seemingly justify a mortgage no higher than $22 million. Deutsche Bank declined to comment.

During the property boom, banks routinely extended risky loans for purchases of run-down buildings in low-income neighborhoods, for the same reason they exuberantly handed out mortgages for single-family homes, and even to people with sketchy credit: they were bundling these loans with millions of others and selling them off through bond sales to investors around the globe.

"They didn't care if the borrower ever paid," said Harold Shulz, senior fellow at the Citizens Housing and Planning Council, a research and advocacy group in New York. "They almost universally had no personal liability."

In the bathroom of a Milbank apartment, concrete had been poured into a dent to stop the tub from sinking any further into the floor.


According to Milbank's chief executive, during the 18 months that his company was in control, it invested some $13 million into the properties and brought them into compliance with local codes.

But the receiver subsequently appointed by a Bronx court to oversee foreclosure proceedings, Joe Cicciu, says Milbank allowed the buildings to sink into a deeper state of disrepair, putting off needed work on electrical and plumbing systems, while allowing roofs to sag and boilers to deteriorate. A troublesome retaining wall behind one of the buildings, 2770 Kingsbridge Avenue threatened to collapse into the building. In a pro bono assessment, the Baer Architecture Group estimated that refurbishing the buildings could cost up to $24 million.

On a recent visit one apartment that had just been vacated looked like someone had taken a sledgehammer to it. Plastic trash bags and tape had been applied to cover gaping holes in the ceilings, which sagged under the weight of water from leaking pipes. Speckled patches of black mold had taken over entire walls. In the bathroom, concrete had been poured into a dent to stop the tub from sinking any further into the floor.

To low-income housing advocates, all this deferred maintenance was easy to explain: owners who had bet on easy profits were cutting their losses, and scrimping to avoid further outlays.

"These investors were carrying enormous mortgages," said Dina Levy, policy director at the Urban Homesteading Assistance Board, an affordable housing advocacy group, which closely watched events at Milbank, and similar portfolios around New York City. "They couldn't afford to maintain the mortgages and maintain the buildings. It wasn't like it was palatial before, but under Milbank, services just stopped. There was a rent roll of $5 million. Virtually none of that was put back into the buildings."

Milbank never was able to realize its goals, and the decline of housing values soon made its investment a loser. Milbank eventually stopped paying the mortgage, prompting the bank to initiate foreclosure proceedings in March 2009.


For the people living in these Bronx apartments, the beginning of foreclosure proceedings was merely the start of the next phase of trouble.

The commercial mortgage on the buildings disappeared into the same vortex that has swallowed millions of home loans, a place of considerable uncertainty over who owns what, leaving no clearly responsible party on the hook.

When a building is foreclosed on, it's handed over to the financial institution that holds the mortgage. But even Milbank's chief executive, Yashouafar, says he has no idea who owns the mortgage he had defaulted on.

According to New York City property records, Wells Fargo bought the loan 2008. Wells also runs the mortgage-backed securities trust tin with which the loan was pooled, named COMM 2006-C8, according to SEC filings.

Once the buildings landed in foreclosure, Wells employed a special servicer, Miami-based LNR Property, to recoup as much as it could from the mortgage -- typically by reselling buildings.

Because the mortgage was effectively chopped into little pieces and thrown in with several others, it's possible thousands of people have a stake in the loan without knowing it. Wells Fargo did not respond to several requests for comment.

The company that Wells Fargo engaged to service mortgage, LNR, has been seeking to sell the buildings, prompting worries among tenants that it will simply dump the properties on an opportunistic slumlord. City officials who have attempted to involve themselves in the sale complain that LNR has not been forthcoming about its plans, heightening the danger of another irresponsible landlord taking over.

"LNR has not been willing to work with tenants, the City Council and HPD to find a solution for the buildings," said New York City Council speaker, Christine Quinn, referring to the city's department of Housing Preservation and Development, speaking through a spokeswoman. "We have asked multiple times."

LNR did not respond to several requests for comment from The Huffington Post.

Once foreclosure proceedings began, the court appointed a receiver, Joe Cicciu, to handle the buildings until the process was completed. He collects rents and uses the money to run the buildings. But by the time he stepped in, in the spring of 2009, so many tenants had stopped paying rent and so much work was required that he simply lacked the funds to keep up, he complained.

"Peeling paint, leaky pipes, cracked walls, broken floors, weren't being addressed," he said. "One thing compounding the other."

Many apartments required a complete renovation, he said, averaging $20,000 to $30,000. Even the better units typically demanded several thousand dollars worth of fixes.

"It's like putting a Band-Aid on a stab wound," said one resident Peter Silva, 58, who says he has spent over $5000 fixing his ground-floor apartment.

This was exacerbated as those tenants that could afford to move elsewhere, abandoned their apartments to escape the worsening conditions, shrinking his available funds further.

Over the last three years, the vacancy rate in the ten buildings has swelled from ten percent to 30 percent. Many tenants have launched rent strikes, citing the appalling conditions. Others have simply stopped paying rent, realizing that no one was really watching the shop. Those who stayed amounted to the most vulnerable people -- elderly tenants on meager fixed incomes, people who lacked the funds for a security deposit on a new apartment, and a core of long-term tenants who had raised families in the buildings and could not conceive of another home.

Amid this downward spiral, the basic works of many of the buildings have begun failing critically. In some, ancient steam heating systems now turn rooms into saunas, while leaving others freezing cold. Tenants have gone without heat or hot water for weeks at a time. In August 2008, a fire took out the entire sixth floor of one of the buildings, 2770 Kingsbridge Terrace, in October 2009 another fire took out six apartments in 2505 Aqueduct Avenue. The units affected in both fires are still derelict.

Almost all the elevators in the buildings have, at various points, ceased functioning. Locks on some front doors have been broken for months at a time, opening the way for drug dealers to simply walk in and set up shop in hallways and vacant apartments, say tenants.

Desperate for help, tenants have taken to calling the city's all-purpose 311 telephone hotline, a much-touted initiative of Mayor Michael Bloomberg. They have called the department of housing preservation and development. They have called the city council and the mayor's office.

One tenant even called a priest. This proved to be one of the more successful moves: Working through the Northwest Bronx Community and Clergy Coalition and the Urban Homesteading Assistance Board, tenants finally succeeded in gaining the attention of the city. At the first meeting, in September 2010, they gleefully set up chairs for city officials under a leaking, sagging ceiling in the lobby of one of the buildings, at 3018 Heath Avenue. Aghast, and reluctant to find themselves under a dangerously deteriorating ceiling, the visitors declined to sit down, tenants recall.

But the spectacle apparently proved effective. Following the meeting, the city inspected each building, and ordered about $80,000 of urgent repairs to the privately owned buildings, placing a lien on the property to eventually cover the costs.

Despite claiming it lacked ownership, LNR paid the property taxes as well as water and sewer fees and insurance premiums, according to the receiver.

"If they didn't, there would have been a lien against the property by the city," Cicciu said. He added that LNR's decision to pay for insurance underscores its willingness to spend to spare itself potential legal liabilities in event of a fire or other accident. "They took care of those things, but they did it to protect their interests." But the major systems were left to languish without maintenance.

"It's like putting a Band-Aid on a stab wound," said one resident Peter Silva, 58, who frustrated that his home was slowly rotting, spent, by his calculations, over $5,000 batting leaks in his ground-floor apartment, repeatedly re-plastering his ceilings and walls. But he can't fix his entire building's plumbing system. Silva says he has tried everything to get someone to pay attention, to no avail.

"It's very frustrating, and nobody seems to care."

In April 2010, tenants sued LNR as a representative of the investors who held the mortgage, arguing that if they could take care of the property taxes, they should be able take care of the property.

Judge Stanley Green of Bronx Supreme Court agreed, forcing the special servicer to contribute $2.5 million towards major repairs.

"The decision shows that the courts will no longer allow irresponsible lenders to walk away from the human tragedies their lending practices create," Jonathan Levy, the lawyer at Legal Services NYC who led the case, said after the victory. "Tenants can use this decision to hold lenders accountable throughout the city as the crisis in multifamily lending continues to unfold."

While LNR and the bank appealed the decision, they agreed to start paying from some of the most urgent repairs, including the slipping retaining wall at 2770 Kingsbridge Terrace and to cover the cost of heating fuel through the winter of 2010 to 2011.

Two members of New York's Congressional delegation, Sen. Chuck Schumer and Rep. Nadia Velazquez, both Democrats, successfully inserted a provision in the financial regulatory reform bill passed last year that calls on federal agencies to make sure rental buildings in foreclosure were sold to new landlords with a commitment to affordable housing using sustainable financing.

But housing advocates assert the legislation has no funding, and amounts to a suggestion more than a mandate.


Right around Christmas, Cicciu moved tenants living in the most deplorable conditions -- like Sergio Cuevas -- into less dilapidated apartments.

These days, the tenants are consumed by talk about who may buy their apartment buildings. A firm offer is apparently in hand from a landlord, who owns several other buildings in the Bronx. He has been actively reaching out to win the tenants' approval, promising to fix up the properties.

But some tenants worry that he will take over the buildings, do the work as promised, and then substantially increase their rent to recover his costs.

For the past month, tenants have been holding lengthy meetings about whether to encourage an offer from the potential buyer.

Thanks to the lawsuit, some urgent repairs are progressing. On a recent visit, workers were examining the mechanics under an elevator shaft and gutted apartments waited for new walls. But for some of the more critical problems, time is running out. The retaining wall behind 2770 Kingsbridge Terrace has begun giving way, prompting the receiver to start moving tenants out of the building and into another.

Despite the neglect in more recent decades, many of the buildings retain hints of their former glory. Ornate moldings are still visible under layers of lumpy plaster patch-work at 2505 Aqueduct Avenue.

On a recent evening, Maggie Maldonado was going door to door, handing out flyers and cajoling tenants into attending a meeting about the prospective buyer. She walked past the black Xs on the doors of the vacant units.

Maldonado, who has lived here for 33 years, she says cannot imagine another home, even as this one crumbles seemingly by the day; even as the uncertainty continues over who, if anyone, will take responsibility.

"I stay here because of the rent that I pay," she said. "It's affordable. I've had my best of times here, I've had my saddest times here, but this is home. It's something worth saving."

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