Even the might of the New York real-estate market is not immune to the credit crunch, with foreclosures on the rise and a new breed of investors looking to make the most of the crisis writes Arthur Beesley,Senior Business Correspondent on Wall Street
SAM PANDE (45) owns a bar in New York. In 1992, when the city's property market was in one of its periodic downturns, he bought an apartment in a foreclosure auction for $40,000 upfront and $327 in monthly maintenance fees. The deal worked fine.
"It was an amazing bargain," he says. "The same apartment was worth about $200,000 a year ago, before the market collapsed." Pande is still well ahead on his investment, however, and now he's back for more. He's not the only one.
On Wednesday, in courtroom 130 of the New York state supreme court, about a dozen people have turned up for the weekly round of foreclosure auctions. Mobile phones buzz and there is agitated talk in different languages.
Manhattan properties are sold off here at 1pm every Wednesday in auctions announced in the classified columns of newspapers. It's a dusty room, with filing cabinets lined up against wooden panelling. There's no judge here, no jury. In God we trust, reads the legend above the bench.
As the US economy slides into recession, not even the New York property market stands aloof. The city suffers to a lesser extent than outlying boroughs, but the market is coming down all the same. In places such as Syracuse and Buffalo, in upstate New York, foreclosure is widespread.
The loss of a home is painfully disruptive and marks the beginning of a traumatic and uncertain phase of life. Stories circulate here of stressed out property owners, unable to make repayments, handing keys back to their lenders in despair. Some remain in their homes in desperation as banks take action against them. Many have nowhere else to go.
But other people are taking advantage of the situation. Although such purchases are not without risk, deals can be struck at 20-30 per cent less than the open-market value.
The foreclosure market thrives when the regular market goes down badly, but despite the bargains, the process is not without friction. "A lot of time when these foreclosures happen the people are still in the house. If it's sold then they have to leave," says Bill Mannion, an auctioneer and advertising agency owner who for 30 years has specialised in the sale of foreclosed property.
"They [the purchasers] have to get a marshal or a sheriff to evict them. On some of these co-op apartments I sell, they're sold to a third-party, somebody who shows up at the gate . . . People buy them with someone still living in them - the debtor or the shareholder are still living in there - and it's their responsibility to get them out." While there are professionals who engage in foreclosure purchases for a living, there are also newcomers chasing an easy profit.
Keith Siilats, an Estonian hedge-fund executive, is one of those waiting for the action to begin on Wednesday. Aged 30, and living in New York for 10 years, he's on the look-out for his first investment property "to hold or sell later". Siilats is disappointed, however. He has his eye on a four-lot auction of properties in Manhattan and Brooklyn. But when Michael Gould, the attorney handling the transaction, arrives, he says the sale is off. "It is postponed," he says. "It won't be happening today."
A dwelling at 6 Convent Avenue is auctioned. Apart from the bid from the bank that foreclosed on the property's previous owner, there are no other bids.
The sum in question is $527,036. The process couldn't be more informal. The man who announces the start of bidding wears trainers and it is all over within a minute. As those in the courtroom look on in silence, a lawyer present attempts a joke. "I'm going to do a dance later," he says.
THE COLLAPSE OF THE US HOUSING market is at the root of the financial turmoil sweeping through the world. What started as a serious problem with subprime mortgages granted to people with little ability to pay back their loans has evolved into a deeper problem.
Although the weekend papers here still carry glossy adverts for multi-million-dollar apartments perched in towers high above the city, research points to ruinous decay in the US market at large.
The latest estimates from the Mortgage Bankers Association suggest the number of loans in the foreclosure process rose to 1.47 million in the April-June period this year. This was twice the number in foreclosure compared with the same period last year and almost three times as many as in 2006.
According to the Wall Street Journal, nearly one in six home-owners owe more on their mortgage than the property is worth. In some US areas, values are down 30 per cent from their peak. With job losses last month at their highest level for five years, the risk of mortgage defaults is rising by the day.
There's worse to come, Bill Mannion says. "Over the last 20 years I've probably done at least 10,000 of these types of auctions. It's been getting busier lately. There's a lot more defaults, I think, coming around.
"It's trickling down slowly. I know that there's a lot of people in foreclosure now, but it seems that it takes a long time for these things to go through the works . . . It's easily a year delay from when you go into default before you actually have an auction."
MANNION'S OFFICE IS ON BROADWAY, not far from the supreme court building. On the bookshelf behind his seat, there's a huge gavel. Sirens wail intermittently from the street two floors down. Many home-owners are frantically engaged in efforts to stay afloat, he says. At present, about half of all foreclosure auctions are cancelled because owners retrieve the situation through renegotiation of their loan terms.
"You can pay up at the last minute. A lot of people do that. The banks are more than ever willing to work with you. The banks do not really want to do the foreclosure. It's expensive for them and, especially in this market, the last thing they want to do is take any non-performing loans back on their books," he says. "What the government is trying to do is make it easier for lenders to rewrite the face of a loan or to renegotiate the interest rates. I don't know how that is going to affect things yet, it's too soon to say. Nobody really knows how it's going to help."
Mannion says the foreclosure market facilitates the churning of property, creating an opportunity for another owner.
Asked, however, if he ever ponders on the difficulties encountered by people who lose their homes, he says it can be a "nasty" enterprise. "I do think about that sometimes," he says. "Sometimes it's sad, it really is. There are genuine hard-luck stories out there. There are people who have lost jobs, or through traumatic illnesses or even separations in their marriage and what have you.
"There's also some scam artists, some people who invested and they bought more than they could afford. There's a lot of that over there too. I've seen people that file bankruptcy to stop the sale - just a stalling tactic.
"I saw a woman bring a small child once and pinch the child to make the child cry to get sympathy. I literally saw her lean down to pinch the kid to make the kid cry so people would feel sorry for her that she was being foreclosed on. She needn't have done that, but it's a nasty business."