BusinessUpside down in Pontiac
Sandra Svoboda discusses this story on WDET (MP3)
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For a quarter-century, Carol Zimmerman has lived in her ranch house on Blaine Avenue on Pontiac's north side. The General Motors retiree used to know her neighbors. They were people like her. They owned their homes and took care of them, she says.
Now the property on the northeast side of Zimmerman's is a vacant lot — the home razed — which is fine with her because it's preferable to a dilapidated building with rats scurrying through it. Her son, earlier this year, bought the foreclosed home on the other side from the U.S. Department of Housing and Urban Development for $5,300. He rents it to a young family with a puppy that plays with Zimmerman's Yorkie.
Across the street from Zimmerman, a white-sided house sits vacant. No one has lived in it for years, Zimmerman says, and she hasn't seen signs of anyone there since weeks ago, when someone staked a "for sale" sign in front of it.
Records show it was one of the roughly 700 foreclosures in Pontiac last year that went to sheriff's deed sale; this one is now owned by Bryce Peters Financial Corp., a Reno, Nev.-based company that buys low- and no-equity properties from lenders. The home's 2008 taxes are delinquent, and the county is owed $1,435, treasurer's office records show. A neighbor cuts the lawn in the side yard but the grass in front grows wild.
"I hate to look out the window around here," Zimmerman says. "It's just not like it used to be."
Up her street a few blocks, two houses next door to each other are also foreclosed properties. One of the homes is owned by Citimortgage, which obtained it for $1, according to a quit claim deed after it went to sheriff's sale last year. The other house is owned by a lender — Taylor Bean & Whitaker, from Florida — which foreclosed on it last year. Both are vacant, according to neighbors.
These houses are among the hundreds in Pontiac that are or have been owned by landlords, investors and people who live outside the city. Purchased before the recent housing crisis, the landlords may have been renting them out, holding them as investments or looking to flip them — selling them for more than they paid.
Now, like the three on Blaine, many Pontiac houses sit and continue to decline in value, blight the community, attract nuisances, cost lenders and the city money in maintenance, and pull down the values of nearby properties. Some have resold for a fraction of their taxable values, further driving down home prices around them. Others will sit vacant for years.
In addition, some are headed for city-funded demolition, joining the roughly 160 homes the city has torn down in the last two years at a cost of roughly $10,000 each, says Allan Schneck, director of public works and community development. The longer they sit vacant, the more likely that they're stripped for copper or other items to sell, vandalized and headed toward condemnation, he says.
Their potential cost to the already struggling city is in the millions of dollars, and the story isn't unique to Pontiac. "You're seeing Michigan go through a tremendous transformation, and a microcosm of that is Pontiac," says Fred Leeb, the city's emergency financial manager appointed by the governor this year.
The shrinking property tax base isn't helping fill a potential $12 million deficit in this year's city budget. The future financial picture won't be much better, Leeb says, without improvement in the housing values.
"I would say that the housing stock of the city is one of the fundamental building blocks of making the city viable, successful and a good place to live," Leeb says.
Landlords say they suffered under the same market forces as single homeowners in Pontiac, where the foreclosure rate was third highest in the state last year behind Detroit and Flint, according to the U.S. Department of Housing and Urban Development. The city also accounted for one-third of all Oakland County foreclosures. About 6 percent of all Pontiac houses received at least one foreclosure filing (default notice, auction notice or bank repossession) last year, according to RealtyTrac Inc.
For landlords, the flood of foreclosed properties onto the market meant rent prices fell as a greater supply of rental housing became available. Landlords, like other homeowners, were upside down on their mortgages, owing more than the property was worth, but they also couldn't charge enough rent to cover their mortgages, says Kenneth Moses, one such landlord.
"All of a sudden, when the bubble burst you had rent prices going down with more property than tenants," says Moses, who lost his Pontiac properties and now works with his son, David Moses, at Avenue Group, a company that manages properties for other owners and investors. "All of a sudden, the tenants are going to move."
And, because Pontiac has an unusually high number of rental properties, an overall decrease in their value has a disproportionate effect on the city's finances. In Pontiac, about 48 percent of housing units are renter-occupied, says Jason Booza, demographer at Wayne State University's School of Medicine who analyzed U.S. census data.
"I've heard higher numbers," says Leeb. "I've heard estimates as high as 70 percent."
Leeb notes, however, that the drop in the value of a home doesn't mean it's always been a financial burden on its owners.
"Just because they look shabby to you doesn't mean they haven't been profitable to a landlord because rents could have been a very high percentage of purchase price," he says. "Some landlords — not all — wanted to milk the properties to get the most revenue out of them for as long as possible and not continue to maintain them. They fall into disrepair and they're a blight on the community."
Whatever the past profitability of a property, once it goes into foreclosure, it's a drain on the community.
A 2006 study published by the Fannie Mae Foundation found that each foreclosed property reduced residential property values by an average of $159,000 within an eighth-of-a-mile radius.
The Homeownership Preservation Foundation found that the cost to municipalities of home foreclosures can be up to $34,200 per property.
Lighthouse of Oakland County, a nonprofit community development group based in Pontiac, used those and other studies to estimate that each foreclosed home costs a community — the homeowner, the lender, the municipality and the neighbors — an average of $22,330 if the home is resold in three months. If it isn't resold within 18 months, that figure grows to an average of $258,400, Lighthouse estimates, mainly because of lost property values nearby and because of the loss to the lender on the loan.
"When there is a large number of [foreclosed] homes in a small area, it's going to even more significantly impact the individual homeowners," says Greg Sterns, a housing counselor at Lighthouse.
While the dramatic increase of subprime lending has been blamed nationally for much of the housing market collapse and skyrocketing foreclosure rates, Metro Times found that in Pontiac, landlord- and investor-owned properties have been a significant part of the housing collapse as well. Some property owners walked away from just a few homes, others as many as scores. And hundreds of Pontiac's foreclosed properties have owners who live outside the city. Consider:
• A Bloomfield Hills woman has owned and rented out Pontiac homes for more than two decades, buying homes for low prices in the 1980s for cash, renting them out for years and walking away from them in recent years. The county this year has seized three of her properties, which are now for sale, after she failed to pay property taxes totaling about $25,000. In the last several months, the city has demolished three of her former properties and held hearings concerning at least two others.
• A Bloomfield Hills couple owned 13 Pontiac homes that foreclosed and went to sheriff's deed sale between 2006 and 2008. The homes had been mortgaged between 2001 and 2004 for a total of about $870,000.
• The previously mentioned Kenneth Moses, who has a Bloomfield Hills address, has lost 16 Pontiac properties to foreclosure since 2005.
But the property owners with perhaps the most devastating effect on Pontiac were Alan and Lori Faitel, a West Bloomfield couple who owned at least 60 of the 691 homes that were noticed for sheriff's deed sale last year in the city. Today about half those homes remain bank-owned while the other half resold for a dime on the dollar of the defaulted mortgage, according to county records.
By Lighthouse estimates, those forecloures could have a cost of millions of dollars to the Faitels, the lenders, neighboring homeowners and the city of Pontiac. Here's what happened with the Faitels and their gambled investments in Pontiac real estate.
Eight miles from downtown Pontiac, the Faitels live in a home they bought in the 1980s which currently has a state-equalized value of $170,220. The two-story house sits at the end of an out-of-the-way street off Hiller Road where the lots have long driveways and professional landscapers.
On his Facebook page, Alan Faitel describes himself as a foreclosure specialist. His wife, Lori, has authored a book about the traumatic brain injury she suffered 23 years ago. She lists one of her interests as community improvement. He races Mazda Miatas; she works as a physical therapy assistant. On her blog, she reported the couple skipped their usual winter getaway due to financial troubles.
The Faitels declined repeated requests from Metro Times to discuss their property dealings.
The Faitels, like thousands of Michigan homeowners, have suffered financial losses in the housing market and are part of the foreclosure crisis that has hit homeowners hard. Some purchasers over-borrowed or financed with no-document or interest-only loans. As long as property values rose, homeowners would have equity in their investment. As long as homes on the market sold, there was an out. But with the subprime housing crisis and the drop in property values, selling came to mean taking a loss. As employment fell, more and more homeowners found it impossible to keep up with mortgage payments.
As real estate investors, the Faitels purchased numerous properties, mainly in Pontiac but elsewhere in Oakland County as well, during the 1990s and early 2000s. Some they rented. Some they flipped for a profit, records show, although it's impossible to know how much. Others they sold on land contract.
But in 2008, the Faitels' streak effectively ended and they defaulted on the 60 mortgaged homes in Pontiac that went to sheriff's deed sale. Another 17 were transferred last December to a business associate, John Stormer, who said in a letter to the city of Pontiac that he acquired them in lieu of them foreclosing. Stormer, who lives in Pennsylvania, shares a business address with Faitel, according to public documents, and several Oakland County properties list both the men as owners during the past decade.
For example, records show Stormer owned a two-bedroom house in the 100 block of Pontiac's Augusta Avenue and transferred it to Faitel in 1996 with a quit claim deed of $1. Faitel transferred it to Michigan Land Contract Buyers, one of his companies, in 1997 and then back to himself in 2002. Later that year he transferred it to a trust set up with the property's address as its name. It went back to him and his wife before it foreclosed in 2008. He had mortgaged the property with Meadowbrook Mortgage in 2002, but records show lenders transferred the loan. At foreclosure, Citimortgage owned it. Fannie Mae owns the property now.
The pattern is typical for the Faitels' properties.
"It sounds like they were playing by the rules in a broken system," says Andy Meisner, Oakland County treasurer, of the complex swapping of properties back and forth between related owners.
Metro Times examined records from the City of Pontiac, the Oakland County Equalization Division, Register of Deeds and Treasurer's Office and the Michigan Department of Energy, Labor & Economic Growth and found a bewildering flurry of buying, selling and transferring:
• The 60 homes were purchased between 1996 and 2007 by the Faitels, Alan Faitel alone or three of their five companies: Purdy Homes, Michigan Land Financing or Michigan Land Contract Buyers. Faitel, who has an active real estate broker license, now operates two other companies, Oakland Homes and Homes Today, according to state and county records.
• The Faitels used 16 different lenders or mortgage servicers for the last recorded loan on each property. Some did one or two loans but a few lenders mortgaged up to 12 of the properties.
• The 60 mortgages totaled about $3.9 million — an average mortgage of $65,127 per home. The notices of sheriff's deed sales recorded outstanding mortgages totaling $3.4 million — an average of $57,427 per home — when lenders foreclosed on them in 2008.
• The 60 properties have a taxable value of $1.8 million. Most of the 2008 property taxes were paid, but 15 of the properties only had partial payments made with thousands of dollars owed.
Among other real estate records were some irregularities in the Faitels' operations:
• Faitel did not properly file property transfer affidavits on some of his houses. Just 21 of the 60 properties have property transfer affidavits on file with the Oakland County Register of Deeds. By law, an affidavit must be filed within 45 days of a transfer. If the affidavit is not filed, a penalty of $5 a day to a maximum of $200 can be assessed. Meisner says he will "look into that."
• The Faitels claimed homestead tax exemption on at least 22 properties, sometimes for years, before the county caught up with them and rescinded the lower tax rate. Michigan law allows homeowners to claim the exemption only on a principal residence, allowing a significantly lower tax rate on the property. But if the state determines that the property is not the owner's principal residence, it can assess the owner tax and interest plus penalty for three years.
• All of the properties were transferred between the Faitels and his companies by quit claim deed, some several times. About half of the properties (29) had trusts that were named after the address of the property and were also named on quit claim deeds transferring property between the Faitels and the companies. "I can't think of a reason he would do that," says Laura Bartell, a Wayne State University law professor who specializes in real estate.
Leeb says the city is aware of some of the strategies but has trouble keeping up as property owners change their business names and transfer properties. "These landlords are sophisticated businessmen," he says.
Of the 60 homes, 28 have been resold and with an average purchase price, as recorded, of $6,147. They had recorded purchase prices of between $1 and $15,500, and their collective resale price was about $160,000, not even a dime on the dollar of what Faitel owed on mortgages for them.
Eighteen of them appear to have been bought by individuals, some of whom own multiple properties in Oakland County. Ten have been purchased by corporations, some from out of state. One is on the city's demolition list.
The other 32 houses remain bank owned. Fannie Mae and Freddie Mac own five, First Place Bank and its subsidiary, Franklin Bank, own eight, and Taylor Bean & Whitaker owns seven. One of the bank-owned properties is on the city's demolition list. One bank has sued Faitel seeking money owed on a defaulted mortgage.
Metro Times contacted Faitel several times by telephone or e-mail during the last few weeks seeking his comments. He left one voice mail declining to talk, citing "financial issues."
Property manager David Moses, who knows Faitel and describes him as a "nice guy" as well as a friendly competitor in the rental business in Pontiac, says Faitel had more properties than most landlords in Pontiac but that he hadn't invested with any ill intentions.
Nationally, the Center for Responsible Lending calls the magnitude of foreclosures and associated costs "daunting." An estimated 69 million U.S. homes will lose about $502 billion in value this year because of other foreclosed homes located nearby, the center says.
Foreclosures are one factor in the overall decline in home value that has resulted in nearly one in five homeowners having "negative equity" — they owe more than their homes are worth, according to First American CoreLogic, a company that provides real estate and mortgage data. In the Detroit-Warren-Livonia area, about 52 percent of properties with a mortgage are in negative equity.
The drop in Pontiac's values has been severe. In Pontiac, the median price for a home has dropped from nearly $85,000 in 2005 to $15,000 last year and just $10,000 in the first half of this year, according to Realcomp II Ltd., a Farmington Hills-based real estate industry data provider.
"The median sale price has definitely decreased due to the foreclosures," says Francine Green, spokeswoman for Realcomp. In 2008 the company began tracking the number of foreclosed homes sold by its realtors. "If we look at just the foreclosed homes that have sold in this [year] time period, the average median sales price for them is $9,000. If we look at just the non-foreclosures, the average median sale price for them is $25,000," Green says.
The Faitels' mortgages on the 60 properties came a time when the "American dream" of homeownership was realized in greater numbers because loans were easier to get. Lenders competed for borrowers, loosening criteria and offering larger loans. Banks and other investors moved into the mortgage-backed securities market, pouring more than $2 trillion into it between 2000 and 2007. Investment peaked in 2005 at about $508 billion, having grown from $56 billion in 2000, according to the Center for Responsible Lending.
In the Faitels' case, the lenders were making loans on multiple properties they were gambling on. If they could flip them — resell them at a higher price — they could pay back the loans. If they could rent them at a high enough rate, they could pay the mortgage. But in 2008 they couldn't sell, couldn't generate enough income from rent and couldn't keep current with the mortgages.
The lenders foreclosed. The properties reverted to bank ownership or were purchased by new owners or corporations.
Because of problems with investors' mortgages, the Federal National Mortgage Corp., better known as "Fannie Mae," and the Federal Home Mortgage Corp., better known as "Freddie Mac," have revised their guidelines for how many mortgages investors can have and still receive Fannie or Freddie backing on the loans.
For Fannie-backed loans, the current limit is 10, says spokeswoman Amy Bonitatibus, which was an increase from the four allowed from September 2008 to February.
"For borrowers meeting our eligibility requirements, — which include a strong credit history and financial reserves — lenders will now be allowed to deliver loans where the borrower has financed up to 10 properties," she says.
A year ago, Freddie tightened its limit from 10 to four, says spokesman Brad German. "The change was made in response to deteriorating credit conditions connected to investment properties," he says. "Each borrower individually and all borrowers collectively must not have individual and/or joint ownership in more than four 1- to 4-unit properties that are financed," he says.
It's not clear how or if that rule could have affected the Faitels at the time they received mortgages. Eric Johnson, the CEO of Meadowbrook Mortgage, says during the lending heyday, some lenders did limit the number of mortgages one borrower could have. But investment properties in Pontiac weren't considered risky until recently, he says.
Johnson says he has had clients who did well with their investments in Pontiac: "Those that acquired property in the late '80s and early '90s had a tremendous return on their initial investments. Their rental properties grew and they were experiencing good returns."
Some still have them, he says, others, like Faitel, have walked away.
Elliot Spoon, professor of law at Michigan State University, speculates that either lenders were "in cahoots or they didn't care" about making so many loans to individuals. "They were going to sell the loan anyway," he says. "They might have sold them to a variety of investors who didn't know that [Faitel] had 60 loans in this neighborhood. Each one thought they were getting a good loan."
Some lenders have learned from the last decade of mistakes, Spoon says. He doesn't expect to see a repeat anytime soon of the environment or policies that led to one investor getting so many loans in Pontiac.
"Lenders across the board are much more strict about their underwriting criteria so that at this point, you're not going to find lenders making loans like I think they did to this fellow so easily," he says. "I think they're requiring more equity in the properties and they're requiring that the borrowers show that they have income to support paying the mortgages."
Meanwhile, Michigan has adopted a registration and licensure for lenders, although no federal laws have changed related to lending practices, says Sandra Berchtold, spokeswoman for the Detroit FBI office. Leeb, the Pontiac financial manager, says he has no plans to seek any restitution from property owners, but others are advocating for it. Detective First Lieutenant Marty Bugbee, commander of the Michigan State Police Fraud Investigation Section, says a task force looking at mortgage fraud has discussed how restitution might be made in successful criminal prosecutions. "As terms of a sentence, a judge can order restitution," Bugbee says, though he isn't familiar with any specific Pontiac cases.
Lisa Nuszkowski, co-director of the Michigan Foreclosure Task Force, says these property owners should be held accountable and somehow cover some of the post-foreclosure costs of the properties. They may not be charged with crimes, she says, but while they profited, they have cost their lenders, the city and the county hundreds of thousands of dollars.
"The communities are the ones who ultimately pay the price for this kind of scheme," she says. "They pay a price in mitigating the crime and the blight that vacant and abandoned properties attract as well as declining property values and dwindling tax revenues. We need to seriously question who should be held accountable for this kind of community devastation as well as the kind of lending practices that allowed this situation to happen in the first place."
Pontiac, as one city official says, serves as a microcosm of the national collapse of the housing market and the tsunami of foreclosures that followed. And of the nearly 700 foreclosures that were slated for sheriff's sales last year, at least 60 were mortgaged by Alan and Lori Faitel of West Bloomfield.
The 16 lenders they mortgaged the properties with between 2002 and 2007 present a cross-section of the mortgage industry, from giants to much smaller outfits. The fates of those companies, too, reflect the rise and collapse of mortgage markets nationwide. Here are some of them: On a single day in February 2006, the Florida-based Taylor Bean & Whitaker did 10 mortgages for the Faitels totaling $595,250. All went to sheriff's sale within six weeks of each other in 2008, county records show. On Aug. 24 of this year, Taylor Bean filed for federal bankruptcy protection, three weeks after closing its mortgage lending business. Earlier in August the Federal Housing Administration suspected Taylor Bean because of a missing required annual financial report, having "misrepresented" issues with an auditor and "irregular transactions that raise concerns of fraud," according to Reuters. Freddie Mac and the Governmental National Mortgage Association also suspended Taylor Bean from issuing mortgages. Taylor Bean owns seven of the properties Faitel had mortgaged while U.S. Bank owns the other three.
Based in Bloomfield Hills, Meadowbrook Mortgage financed 12 of the 60 properties for Faitel between 2002 and 2005. On Sept. 16, 2005, Faitel mortgaged six properties with the lender totaling $461,000, according to county records.
Lehman Brothers Bank, now bankrupt, both owned and financed subprime lenders. The bank was the top underwriter of subprime loans in 2004, according to the Center for Public Integrity, pumping $106 billion into subprime mortgage-backed securities in the peak years of 2005 and 2006. Lehman Brothers also ranked 11th on the list of subprime lenders, loaning at least $47.6 billion in subprime loans, according to the Center. Six of Faitel's properties sold at sheriff's sale last year were mortgaged with Lehman Brothers in 2004.
In 2003, the Faitels used Franklin Bank for mortgages on seven of the 60 houses and a year later added two more. In November 2003, the holding company of First Place Bank, based in Warren, Ohio, purchased Franklin Bank. Eight of the nine houses remain bank-owned. John Stormer, a Faitel associate, purchased the ninth home.
When Washington Mutual failed a year ago, it was considered the biggest bank collapse in U.S. history. Federal banking regulators took it over after big losses on its portfolio of subprime loans. Faitel had one mortgage with Washington Mutual, a $63,247 loan made in 2005.
Wells Fargo is the nation's largest mortgage company and was the eighth largest maker of subprime mortgages in recent years, doing at least $51.8 billion in subprime loans, according to the Center for Public Integrity. The lender received $25 billion in federal bailout funds last fall. Two of the 60 sheriff's sale properties had mortgages with Wells Fargo, both done in 2006.
Aegis Wholesale Corp. financed three Faitel mortgages in 2003 for $64,000, $64,000 and $69,600. In 2007 the New Jersey Department of Banking and Insurance pulled Aegis license to do business there. Also that year Aegis agreed to settle a fair lending complaint filed by the National Community Reinvestment Coalition with the U.S. Department of Housing and Urban Development Office of Fair Housing and Equal Opportunity. As part of the settlement, Aegis agreed to eliminate its $60,000 minimum property value requirement. In its complaint, NCRC alleged that such a policy had the effect of discriminating against African-American, Latino, and Native-American homeowners as well as against people with disabilities.
Before filing for bankruptcy two years ago, American Brokers Conduit was the wholesale mortgage section of American Home Mortgage and did the mortgages for two of Faitel's properties: a $68,000 loan in 2005 and 2006. Last year, Palm Beach billionaire Wilbur Ross bought the mortgage servicing company and renamed it AHMSI. This year, the two Faitel homes American Brokers Conduit had mortgaged resold for $8,000 and $5,500.
Central Pacific Mortgage was headquartered near Sacramento before it collapsed in 2007. Its president, John Courson, is now the president and chief executive office of the Mortgage Bankers Association of America based in Washington, D.C., and lobbies for the industry. In 2000 Courson purchased Central Pacific Mortgage from CitiMortgage, Citigroup's mortgage business. Faitel mortgaged one of the 60 properties with Central Pacific in 2002 for $68,000, according to county records. In 2008, the notice of sheriff's sale gave a consideration of $67,450. In March, Gjon Lucaj purchased the home for $2,500 from Fannie Mae.
Greenpoint Mortgage Funding was acquired by Capital One Financial Corp. in 2006 and shut down a year later. Greenpoint had done loans that did not require documentation of income if borrowers had good credit, the Center for Public Integrity reports. Faitel financed one of the 60 houses with Greenpoint in 2002.
Since 2001, Charles Gottlieb has done business as Mortgage America Inc., Loan Warehouse Inc., Loan Auction and Realfi Inc., according to state records. All are Waterford-based. In 2007 Realfi did six of the 60 Faitel mortgages that foreclosed last year including the most recent two: $54,000 and $52,500 loans on properties Faitel bought in the 1990s.
A spreadsheet of the Faitels' foreclosed properties (pdf)
Research assistance on this article was provided by Listings Editor Megan O'Neil and interns Lorena Craighead, Jacob Goodman and Brady Benson.
Sandra Svoboda is a Metro Times staff writer. Contact her at 313-202-8015 or email@example.com.