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Renters becoming latest victims as foreclosure crisis widens
The pattern is also showing up in smaller cities. Apartment buildings and complexes are entering foreclosure in Lexington, N.C., and Des Moines, Iowa. In East Palo Alto, Calif., an investor bought about 1,800 units, or about half the rental properties in town, failed to pay the loan, and one weekend "tore up all their computers, shut down their offices and left," said Mayor Ruben Abrica.
A recent study by Richard Parkus, the head of research in commercial mortgage-backed securities at Deutsche Bank, found that loan performance on multifamily buildings is deteriorating at a dramatic pace. Some 65 to 75 percent of multifamily buildings could face problems refinancing at their current rates, he said in an interview. These problems could "sit and fester" for a while, he said, or result in a burst of loan failures.
"We're at the front end of that wave," said Raphael Bostic, assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development. "Are we concerned? Absolutely."
A 'sugarplum notion'
Analysts say international speculators and private-equity firms took on mortgage payments larger than their income from rents in such buildings. Some may have hoped they could eject rent-regulated tenants in favor of higher-paying ones.
"It was a sugarplum notion," said David Jones, president and chief executive of the Community Service Society, an advocacy group for low-income New Yorkers, who calls this "predatory equity."
Other buyers may have simply been over-exuberant in a market that seemed as though it could boom forever.
"There was this pervasive view: 'We're all going to the moon, it's going to be a big party from here on out, somehow this could last,' " Parkus said. "Nobody should have lent on these strategies. They're ridiculous."
Other factors have intervened as well. A decline in property values has made it difficult for owners to refinance. High unemployment has pushed up vacancies, cutting into landlords' income.
Yet analysts agree that the potential crisis is different from the one that devastated single-family homeowners.
"It wasn't as outright reckless or abusive or fraudulent as single-family lending," said Jack Markowski, president of the Community Investment Corp. in Chicago and the city's former housing commissioner.
The impact on tenants is uneven. New York City officials say the owners of the vast majority of buildings in foreclosure there are likely to maintain decent standards of living. Yet, of the 200 properties on the city housing agency's 2008 list of buildings with the worst maintenance problems, at least 77 had been in foreclosure, according to data from PropertyShark.com.
In buildings where a landlord is struggling to make loan payments, maintenance is often the first thing to go. Garbage can pile up, lists of overdue repairs get longer, and vermin multiply.