From 2000 to 2003, the group pumped up home appraisals and arranged straw purchases of houses in Beverly Hills, Bel-Air and other neighborhoods. After obtaining seven-figure mortgages on many of the properties, the agents and co-conspirators defaulted on the loans, taking millions with them and leaving the banks with houses worth far less than their inflated purchase prices.
Authorities alleged the fraud ring secured $142 million in bogus loans from Lehman Bros. Bank and another lender. The group bought relatively inexpensive houses in high-priced areas, then used trumped-up appraisals to take out mortgages worth far more than the properties — sometimes nearly double the prices the ring paid for the properties.
A Bel-Air house the group acquired for $735,000, for instance, was resold to a straw buyer for $2.37 million with a $1.42-million mortgage.
The ring performed 81 such transactions, authorities said.
Babajian and Grasso allegedly made millions of dollars through the deals, prosecutors said, and Grasso got his own Beverly Hills home with no money down. Rizk received hundreds of thousands of dollars in inflated appraisal fees, prosecutors said.
Susan Yu, another of Babajian’s attorneys, said the evidence showed that Babajian was out of the office recruiting agents or working on other home sales deals during the period in which the fraud allegedly occurred.
“He was a target because of his name,” Yu said.
Babajian has represented Barbra Streisand, Bruce Willis, Warren Beatty, Lee Iacocca and many others in home sales deals, Mesereau said.
Grasso faces maximum sentences totaling 515 years. Rizk’s sentences could total 425 years. Sentencing is scheduled for Jan. 29.
A new report concludes the level of commercial loan defaults accelerating, but whether that means a surge of commercial foreclosures in San Diego depends on who is assessing the data. Nationally, the Deutsche Bank report noted more than $2 trillion worth of commercial paper is set to mature between now and 2013, and as much as $450 billion would not qualify for refinancing under current criteria.
“This downturn may well exceed 2001-2003 when cumulative default rates reached nearly 25 percent,” Deutsche Bank stated.
The bank said the national commercial delinquency rate reached 4.1 percent as of the end of June. While year-to-year figures weren’t immediately available, that rate was some 3.5 times higher than December.
The bank identified some 2,158 delinquent commercial mortgages representing $27.9 billion in instruments nationally as of the end of June.
The commercial foreclosure activity has been robust enough here that Del Mar Heights-based Trigild, a receiver and distressed property specialist, has expanded its headquarters to accommodate more project management and accounting personnel.
Bill Hoffman, Trigild president and CEO, said in a prepared statement that his company’s portfolio of properties has grown significantly over the last year, and now represents more than $2 billion in defaulted commercial loans. These include the hospitality, commercial office and retail, multifamily and unfinished development sectors.
Hoffman doesn’t expect the distressed commercial property business to slow down.
“Tight credit markets will continue to hinder investors’ ability to pay off loans, and as a result, the rate of commercial defaults is soon expected to top 5 percent,” he said. “With this in mind, we are anticipating a dramatic influx of business in the coming months, and are growing our firm and service to accommodate new clients and employees.”
Jamie Dick, a Newmark Realty Capital Inc. senior vice president, suggests that while commercial foreclosures, particularly when they involve payment defaults, are inevitable in many cases, commercial lenders who are faced with loan maturity defaults — a big balloon payment at the end _ are likely to be more accommodating.
“If the lender forecloses, what are they going to do with it?” Dick said. “There’s a saying going around. It’s called ‘extend and pretend.’ They extend hoping that things will be better when the loan matures again. We are seeing a lot of banks work with borrowers.”
However, Dick said there is a shrinking pool of lenders willing to refinance, meaning some will foreclose rather than attempt a workout. With the commercial mortgage backed securities market effectively dead, finding lenders who will loan at all has become increasingly problematic.
“I’d say that 2007 was the last normal year as far as the CMBS market goes. If you looked at a pie chart you’d see that up until then, CMBS was 65 percent of the market, so you can imagine all of that disappearing,” Dick said.
Dick said that CMBS was a $19 billion market in 1999, but reached $230 billion by 2007.
“And wait until 2017 when all the loans from 2007 will be coming due.”
Some loans are still available. Dick noted that lenders have shown a willingness to provide as much as $5 million, but with very few exceptions, getting access to more capital than that has been extremely difficult. When asked when capital will begin to flow more easily, Dick said it could be years from now.
“I think it’s like an icicle. It will melt, but it will be one drop at a time,” Dick said.
While there are pockets of overbuilding such as the Carlsbad and Interstate 15 office markets and the Otay Mesa industrial market, Dick said San Diego generally doesn’t have the surplus of space, currently the case in markets such as Phoenix and Las Vegas.
“Mainly, we just ran out of places to build. For example, we didn’t have all that land to build shopping centers,” he said. Dick said although some centers are hurting with the loss of some major tenants such as Circuit City, the retail vacancy is 6 percent at most – still a very healthy figure.
After the display of quarterly sales, reader ‘propertysearch’ asked about the pricing curve.
The cost-per-sf measurement is an imperfect tool when analyzing individual homes, there tends to be a complexity of other factors that weigh into the buying decision. But here it charts the trend fairly well of the quarterly detached home sales from Carlsbad to Carmel Valley:
Was last quarter just a blip in the downward trend, or is the trend looking for the floor?
The first two properties featured are already bank-owned, and the third has their trustee-sale date bearing down on them – and we’re not fooling around with subprime crackerboxes anymore:
Most of the defaulters I have spoken with claim that they are just doing a loan modification, and that everything will be OK. But what happens when their loan mod gets denied, or the bank’s terms aren’t that favorable – and the debtor has been used to not paying the mortgage at all, and enjoying the free rent program? Hard to believe that many of them will jump back on the old-payment train.
It’s probably why we are hearing more about the foreclosure tsunami – the banks have decided to play hardball, and they know that it’ll mean most loan-mod candidates will bail.
It was mentioned yesterday that we could be in for a “long cold winter” if sellers think they can start raising their list prices. The last two years in North SD County Coastal (Carlsbad to Carmel Valley) has seen detached sales drop off between the 3rd and 4th quarters by 33% and 28%, respectively:
Obviously it’s only August today, but if the foreclosure tsunami gets kicked into 2010, it could be chilly for sales over the next few months.
OT, but for those who are looking for more information about bubbleinfo.com, Jim TV, and Jim the Realtor, I just re-organized the link in the right-hand column called:
REAL ESTATE VIDEOS >>>> right column in caps under Real Estate Advice >>>>>>
At first this video seemed like it would be a quick 3-4 minute jaunt, but it turned into a full-length feature film instead – sorry.
Here’s the condensed version:
At the beginning of the year many of us thought that Carmel Valley would be finally taking a hit on price, and the 2,700sf models in Soleil/Bordeaux would end up well into the $700,000s by now. In 2008 they had sold from $800,000 to $925,000, and it sure seemed like the trend was southbound. Instead, they are selling like gangbusters:
Street Name
List Price
Sales Price
COE
Briarcrest
$775-$825K
$880,000
4/14/09
Flintwood
$775-$825K
$835,000
5/21/09
Mill Creek
$895,000
$840,000
6/16/09
Sonoma
$859,000
$855,000
6/17/09
Briarcrest
$792,000
$782,000
7/17/09 (backed to freeway)
Rabbit
$885,000
$880,000
6/18/09
Gamay
$859,000
$850,000
7/28/09
Porter Crk
$895,000
$892,000
7/31/09
Also included in the video is another look at the short-sale that listed on Sonoma for $765,000 in April by the realtor from Chula Vista. It was foreclosed in June, but this week the same agent re-inputs it on the MLS as a pending listing, priced $830,000 to $850,000! All I can figure is that he worked something out with the bank?
The enthusiasm is bubbling over too – there are now three houses listed well into the $900,000s: $924,900, $949,900, and the range $949,000 to $999,000!
There are a lot more houses NOT selling in 92130, than are selling, especially higher up price-wise. But these exemplify some of the exuberance this year around CV – will it last? Can it last?
Rumors are circulating that San Diego County has 20,000, 40,000 or 60,000 bank-owned properties coming to market (I’ve heard all three numbers).
How many can we handle? All of them of course, because there’s nothing price won’t fix. But how many could come to market in the next six months, and sell without much disruption?
LET’S TRY TO PREDICT: HOW MANY MORE REOs COULD THE MARKET DIGEST?
Here’s the chart of San Diego MLS detached and attached monthly sales (in red) and the monthly NOD and Trustee Deed counts taken from Ward’s site:
The NOD counts are suspect because there are so many people defaulting to increase their chances of getting a loan modification. Plenty of them will be foreclosed in the future, with or without a loan mod, but it helps explain why there is such a gap now between NODs and Trustee Deeds.
Here are the overall totals for each year:
2008
NODs: 34,069
TDs: 19,575
MLS Sales: 29,728
2009 YTD
NODs: 25,243
TDs: 8,936
MLS Sales: 19,824
The MLS sales are up nicely this year, and are about 30% ahead of 2008 for the first seven months.
Last year there were the 19,575 trustee deeds that either went back to the beneficiary or were bought by a third party. By now the vast majority have been digested, and yet the demand remains high. It appears that the San Diego market can handle at least 20,000 REO sales per year.
In Oceanside today there are 10 buyers for every decent house that comes on the market, and prices are rising on those under $300,000. Throughout the coastal region there are multiple offers on every sharply-priced house.
For there to be an overwhelming surge in REO listings, the servicers would have to get busy foreclosing. There aren’t 20,000 bank-owned properties currently, let alone 40,000 or 60,000.
ForeclosureRadar shows 4,093 bank-owneds today, and the MLS has 2,317 active or pending REO listings, leaving only 1,776 not on the market.
I don’t think the ForeclosureRadar’s counts go back that far, but the servicers have had time to catch up. There might be another 1,000 or 2,000 bank-owneds lingering, but not 20,000.
There are also 8,429 properties that have received their notice of trustee-sale date. If the servicers get busy and foreclose on the bulk of those this year, let’s say 7,000, and add that to the 1,776 and 2,000, we’d have roughly 10,776 more bank-owned properties (or third-party flippers) to look forward to this year.
There were 17,262 MLS sales in the second half of 2008, so if there were another 10,000 REOs listed over the rest of 2009, I think market would gobble them up.
I have been very fortunate to have reporters quote me accurately. But this is stretching it – Forbes called a few weeks ago looking for my thoughts, and while I did say the things below, I said, “I don’t do loan mods, you need to speak to people that do them”.
Today they have this on their website:
In his 25 years as a real estate agent, Jim Klinge has seen plenty of borrowers try to work the system, especially in subprime-scourged North San Diego, where he works and lives. Like many in his industry, he says the Obama administration’s $75 billion loan modification plan is giving rise to another bout of fraudulent mortgage activity. “With all certainty, it’s being gamed,” he says.
I don’t have any specific examples of people doing fraudulent acts to obtain loan modifications. I would think that an in-depth story would state specific examples from those employed in the business. If you can’t find any, then don’t use just the thought as a headline.
For the folks who want to get in at the ground floor in Carlsbad, the street named Sierra Morena has been the place to look.
This house was purchased by the previous owner for $565,000 in December, 2004, and there were a handful of others that went for as much as $585,000 at the peak. They are cheaper because those on the other side of the street back to power lines, and have some evidence of cracked slabs.
This already went pending, listed for $327,750, but there will be others!
From 2000 to 2003, the group pumped up home appraisals and arranged straw purchases of houses in Beverly Hills, Bel-Air and other neighborhoods. After obtaining seven-figure mortgages on many of the properties, the agents and co-conspirators defaulted on the loans, taking millions with them and leaving the banks with houses worth far less than their inflated purchase prices.
