The Foreclosure Crisis
The Foreclosure Crisis and the Apartment Sector
As the commercial real estate sector experiences increasing rates of mortgage default, lawmakers have expressed a desire to protect the residents of distressed apartment buildings. Early efforts included a proposal that would have allowed the government to prematurely force "at risk" apartment properties into bankruptcy without the consent of the owner in order to convert them into affordable housing.
This back-door effort to convert market-rate apartments into affordable housing would place financing of all multifamily properties at much greater risk by enabling the federal government to swoop in and foreclose on a property in the absence of any clearly defined guidelines. Such a draconian measure goes far beyond the controversial single-family mortgage cramdown legislation and could create such uncertainty among multifamily lenders that no loans would be made.
Moreover, this kind of federal intervention circumvents the normal processes owners and lenders undertake to resolve financing issues and address property concerns. To the extent that government action is needed to help manage, restructure or liquidate troubled assets, those actions should be undertaken via new commercial real estate financing programs offered under the Term Asset-Backed Loan Facility (TALF) or efforts created by the U.S. Department of Housing and Urban Development.
Such government assistance programs should be carefully targeted to avoid further distressing the capital markets and wasting taxpayer dollars. They should also not compete with private sector equity investors, but should attract investment capital to areas currently not served by private investors. Finally, they should not support the transfer or taking of a property without the consent of both the property owner and lender.
A "forced foreclosure" mechanism was originally included as an amendment by Rep. Nydia Velazquez (D-NY) to a mortgage reform provision (H.R. 1728) that passed the House of Representatives in May 2009. No action was taken on the measure in the Senate, however.
After extensive dialogue between NMHC and members of the House Financial Services Committee, lawmakers passed a revised plan on December 10, 2009. The measure was included as part of the comprehensive financial regulatory reform measure (H.R. 4173) that addresses consumer credit protections and establishes sweeping rating agency, derivatives, banking and financial institution regulatory changes.
Instead of "forcing" properties into foreclosure, the financial regulatory reform bill directs HUD to develop a program to protect residents of selected at-risk multifamily properties by providing new equity to address deferred property issues and establishing long-term sustainable financing for such properties based on current rental income and operating and replacement reserves. Importantly, the measure specifies that any transfer of at-risk properties requires the agreement of owners.
During the Senate's financial regulatory reform debate, Senator Charles Schumer (D-NY) offered an amendment that was ultimately not considered that mirrors the House's voluntary program. A conference committee is now resolving differences between the bills. It is not clear whether this issue will be addressed in the final bill, but it is significant that both the House and Senate now appear to be leaning toward a voluntary at-risk" program instead of "forcing" properties into foreclosure.
Key Legislative, Regulatory and Court Action
Last Updated: May 2010