Just a driveby to note, from yesterday’s NYT, that the tenants could only cobble together something like $4+ billion on a property that sold for $5.4 billion, so the attempt to coop or condo the deal was unsuccessful. Boy, that’s the best money the tenants never spent.

We all know that Barney Frank and Chris Dodd made this housing debacle possible, but you are welcome to blame “Bush.” What a joke!

Several questions:

1. Did Tishman-Speyer/BlacRock complete the rehab they were intending to do on the property?

2. Who will hold title to the property?

3. I hear that it makes good public housing. Is that true?

BTW, as you know Wachovia is really Wells Fargo.

Doesn’t matter. It’s all good news for John McCain.

We all know that Barney Frank and Chris Dodd made this housing debacle possible, but you are welcome to blame “Bush.” What a joke!

Democrats and Republicans alike bought into the divorce of real estate finance from fractional reserve lending seasoned with artificially low interest rates designed to keep most of the “irrational exuberance” around.

If the libertarian right could not make a successful go of their ideology through Alan Greenspan, you all might as well just pack it up and head home for a beer and prepare for socialism.

thanks masaccio.

This is a nice write-up of an interesting and important story.

After your readers finish reading this, they might enjoy megan mcardle’s article on bad decision making in the commercial real estate market in the jan/deb 2010 ATLANTIC.

Mcardle used stuyvesant town/peter cooper village as the concrete example in her piece.

There are some important social and economic issues lurking here.

To whit,

It turns out that it isn’t only ” foolish, greedy” individuals buying subprime houses who make serious errors in real estate judgement.

Can you believe that highly knowledgable commercial real estate businessmen make the same errors.

And then there’s the matter of whether commercial real estate will be the next bubble that pops.

And if so, how much damage might it do to a fragile economy.

The plan was to do major capital improvements so that Tishman Speyer and BlackRock could remove the apartments from rent stabilization rules. That would permit them to increase rents to market rates. New York Courts ruled that they acted illegally in doing so, so they couldn’t increase cash flow enough to pay off their debts. I can’t tell how much of that was actually done.

Right now, it looks like the control of the property will be turned over to an agent, who will manage the complex and maybe sell it. The mortgage money goes to the agent of the SPE who will pay it out in accordance with the documents of the CMBS.

Maybe one of our NY people can say more about the utilization of the property. And yes, Wachovia was swallowed by Wells Fargo in the frenzy of late 2008-early 2009.

The ultimate jingle mail: “Here’s the keys to 11,000 apartments, they’re all yours.” BTW, Morgan Stanley has walked away from some of its CRE deals also. Next up, Wall Street telling us it’s “immoral” for homeowners to walk away from their mortgages.

So I guess Barney Frank used some nefarious type of mind control and forced the Republican majority in the House (then led by Gingrich and Tom Delay) , while Dodd forced the Republican Senate Majority (led by Bill Frist and Mitch McConnell) to do this awful thing then?

And it goes on and on.

The property is apparently worth no more than $2 billion.

So do Tishman Speyer Properties and BlackRock Realty get to buy it back for $2 Billion?

Who will stop the madness?

I don’t think there have been lots of instances of politicians stating that it is immoral for homeowners to walk away from underwater properties. Certainly the linked article did not make that case. It referenced one official who stated that it transforms them to “mere speculators” (hardly a moral judgment, unless speculating is now immoral), and the body of the link spoke more of homeowners’ own internal moral reservations, or fears about their credit reputation, or social stigma.

Beating up on this meme of “politicians chastising homeowners for immorally abandoning their homes” seems a bit of a straw-man, are there really that many quotes out there?

That mind control can really screw things up, especially when you throw in a Ouija board and some mysterious incantations…

I would imagine they would have difficulty lining up the financing since, for both individuals and commercial entities, defaulting on a mortgage tends to damage one’s credit reputation.

Fannie Mae and Freddie Mac are two of the largest investors, with at least $1.5 billion in commercial mortgage-backed securities, called CMBS.

Were Fannie and Freddie in the investment from the start?

hey massaccio, I’ve been trying to get you

wondering if you ever got a look at the deal whence jp morgan was allowed to acquire washington mutual’s assets without having to own the liabilities attached to those assets

an incredible and probably illegal deal that was approved

for instance, if I bought a bond for 48,000 dollars that would be worth 50,000 at maturity, jp morgan acquired the 48000 dollars I laid out but washington mutual still held the liability, making my bond worthless with nobody to go after

sick stuff there that needs the light of day

the other thing I was wondering if you looked at is that cit, one of the biggest lenders to small business is being allowed to go out of business

But TARP made the government money! How is this possible?

So Fannie and Freddit are two of the largest investors in this failed enterprise, which leads me to assume this is not the only commercial mortgage deal those entities were involved in. It is therefore quite troubling that Geithner has agreed to an unlimited guarantee for their failed enterprises.

I have a feeling that this is just the beginning of a very bad scenario starring the commercial mortgage industry – that is, very bad for the taxpayers.

Perris, those are great questions, but it is not easy for those of us in the great heartland (Nashville) to get any information. We may have to rely on the main stream media.

This is a fascinating question. The politicians do a bit of it directly, but the point I am trying to make is that there is a lot of moral force acting on individuals that makes them refuse to act in their own best interest. This is from an article by Professor Brent White of Arizona, talking about a paper from the National Bureau of Economic Research:

The Guiso, Sapienza, and Zingales article does however confirm something that policy makers and lenders already know and use to their advantage: people are less likely to default if doing so will make them feel like immoral or irresponsible persons – and are especially unlikely to default if they believe others will think of them as immoral or irresponsible persons. Guilt and shame are powerful motivators, and there is no doubt that many people who have faced foreclosure feel a great deal of both.

As Linda, a single mom in Tampa who asked that her last name not be used, explained, “As a mom, I feel like I let my children down… It’s a terrible embarrassment, and it’s humiliating.” Linda is not alone: a recent qualitative sociological study of the internal costs of foreclosure found that feelings of personal failure, shame, and embarrassment dominated the accounts of individuals who had lost their homes to foreclosure. Moreover, such feelings predominated even when individuals were not at fault for their predicament, but were ictims of the declining economy and/or unethical practices by mortgage brokers.

I won’t quote the whole thing, but it completely supports my view that there are powerful social control mechanisms, not just politicians, at work on this issue. Here’s a link to a site where you can download it.

Of course, what the banksters and the government really fear is that if enough people do it, there will be a tidal wave which will swamp their leaky ship. Here’s an article directly addressing that.

How many articles have you seen like this one, pointing out that there were one million jingle mails last year? More evidence for my view.

masaccio, thanks for running down the basic structure of this CMBS.

To those wondering what kind of place Stuy/Cooper is, the two developments were built in the aftermath of WWII, when NYC, like most cities, faced a major housing shortage. The scale at the time was middle class, and there’s always been some degree of public subsidy, at least through the rent control/stabilization system run by the city.

At the time of the sale they were still an important source of middle income affordable housing in Manhattan, which hasn’t had much of this in recent years. As such, though I haven’t been there and seen them in years, I assume they’re still a bit nicer than standard public housing, as they seemed to me back in the day. Nonetheless, the notion that 100-odd solid but non-air conditioned buildings with 1950-level service conduits, room sizes and the like could be economically converted on-the-fly into semi-upscale condos and sold at boomtime Manhattan rent/NOI per unit always sounded worthy of raucous scorn to many.

There’s a Stuy Town blog, Lux Living (eloquent, eh?), which looks pretty up-to-date. Recent news, which includes several interesting articles I’ve seen since the walkaway. And the historical importance of both Stuyvestant Town and Peter Cooper Village is enough that material on them can be found in a lot of library books on postwar urbanism, history of urban housing and planning, and that kind of thing.

I had a 2 bedroom there 13 years ago (the current $3700 per month for a 3 bedroom is out of my league – and the 13 years ago $2100 for the 2 bedroom made the job worth net of housing worth less than equivalent jobs in other cities – and the apartments while having great grounds, nice at the time, and in a great location were not “Lux” or even “above average” at the time) – I am curious as to what happens to the $200 million owed tenants after the Court ruling that they had been illegally overcharged.

MET life took back the first mortgage of $3 plus billion when they did the initial sale – yet I do not see them listed as a creditor – but given the price of Met stock from its high of 70 to today’s 30′s, I suspect there is a loss in the security that they took in exchange for that mortgage.

Yet more evidence was provided just this evening on ATC, in which real estate economist William Wheaton opined, among other questionable assertions, that we probably would not see the wave of option ARM defaults which some have forecast for the next couple of years, because mortgage borrowers would be so reluctant to surrender all their hard-won gains. He can be heard at this page. At one time Wheaton’s position in the small urban and REEcon field was such that “we’ll not speak of this again.” I wonder.

Anyway, it is clear, and to me has been since I realized a few years ago what was up, that the conceivers of this monstrous scam were absolutely counting on the middle class borrower’s conventional sense of probity to grab their potatoes out of the fire for them.

Oh, and speaking of focal points and marching orders, do note if you visit the ATC story what is the main theme of which Wheaton’s interview is the centerpiece:

Can Government Fix The Struggling Housing Market?

President Obama is expected to talk about jobs in Wednesday’s State of the Union address, but should his administration be doing more for the housing market? William Wheaton, professor of economics and urban studies and planning at the MIT Center for Real Estate, says there’s little the government can do to fix the housing sector.

Poor Professor Wheaton. A shame he can’t think of a thing that could be done. Maybe he should try reading the internets.

I’ve lived across from Stuyvesant Town/Peter Cooper Village for almost twenty years. The buyout by Tishman Speyer has ruined what was once a middle class oasis in NYC. I say it WAS a wonderful neighborhood. Now it is used as a frat house for NYU/New School/School of Visual Arts students.

Before Tishman Speyer, people would say “I got into Stuyvesant Town or Peter Cooper Village,” and it was very big deal because they knew they’d live in very nice (not luxurious) housing at a reasonable (for New York City) rent. People stayed for decades and (for people living outside NYC)basically treated the complex as if they had a stake in it. It was a good community.

If you had told me five years ago that a neighborhood could change so radically, so quickly for the worse I wouldn’t have believed it, but the neighborhood has deteriorated so much in the last few years that I’m going to move as soon as my lease expires, and that’s saying something in NYC! It’s almost as if they moved the drug dealers in.

Anyone with half a brain (unlike Robbie Speyer) could have told you at the time of purchase that they way overpaid. STY Town is very pleasant, but it’s First Avenue, not Fifth Avenue.

The saddest thing of all is that its the long-time residents who pay the price, not those putzes the Speyer family. Greed is a terrible thing.

1. Derivative transactions cost taxpayers a fortune.

No, Lehman going bankrupt cost a fortune.

Usually when people draw this distinction, they are arguing that derivatives are good things, and only went bad because of some external issue, like Lehman’s bad management. My point, made in a number of posts, is that the vast cost of derivatives, including in this case notably, a bunch of interest rate swaps, far exceeds any utility. That will continue to be so, because Wall Street remains convinced that their models are wonderful, despite all evidence to the contrary, and as I point out, are back in the game with a vengeance. You can read the prior posts by clicking on my name at the top of the page.

This is an ongoing debate, and I will offer other opportunities for readers to explain the benefits of derivatives in the face of their enormous costs and risks.