Ga. counties sue HSBC for bad home loans

originally appeared in USA Today from The Associated Press:

Three counties in Georgia have filed a lawsuit claiming that British bank HSBC cost them hundreds of millions of dollars in expenses and damage to their tax bases by aggressively signing minorities to housing loans that were likely to fail.

The Georgia counties' failure or success with the relatively novel strategy could help determine whether other local governments try to hold big banks accountable for losses in tax revenue based on what they claim are discriminatory or predatory lending practices.

Similar lawsuits resulted in settlements this year worth millions of dollars for communities in Maryland and Tennessee.

Fulton, DeKalb and Cobb counties say in their lawsuit, filed in October, that the housing foreclosure crisis was the "foreseeable and inevitable result" of big banks, such as HSBC and its U.S. subsidiaries, aggressively pushing loans that were destined to fail. The counties say the crisis has caused them tremendous damage.

The lawsuit says predatory lending practices include: targeting vulnerable borrowers for mortgage loans with unfavorable terms; directing credit-worthy borrowers to more costly loans; putting unreasonable terms, excessive fees or pre-payment penalties into mortgage loans; basing loan values on inflated or fraudulent appraisals; and refinancing a loan without benefit to the borrower.

The counties are asking the court to order the bank to stop its behavior and to take steps to prevent similar predatory lending in the future. They are also seeking financial compensation for the damages they've suffered and punitive damages to punish the bank for its "willful, wanton and reckless conduct." The counties say the financial injury they've suffered is in the hundreds of millions of dollars.

A lawyer for HSBC and its subsidiaries, said he couldn't comment on the case. A federal judge has given the bank until Jan. 25 to respond to the counties' complaint.

According to DeKalb County Commissioner, it's not only the personal damage that was done to people in our communities. That has a ripple effect on our tax digest and the demand for public services in these areas.

The city of Atlanta straddles Fulton and DeKalb counties; Cobb County is northwest of the city.

The lawsuit says the banks violated the Fair Housing Act, which provides protections against housing or renting policies or practices, including lending, that discriminate on the basis race, color, national origin, religion, sex, family status or handicap.

The counties say their tax digests — which represent the value of all property subject to tax — have declined from a high point in 2009.

Fulton's tax digest has dropped about 12%, from $32.7 billion to $28.7 billion; DeKalb's has dropped about 20%, from $22 billion to $17.5 billion; and Cobb's has dropped about 15%, from $25.5 billion to $21.3 billion, the lawsuit says. That reduces their ability to provide critical services in their communities, the counties say.

In addition to decreased tax income, vacant or abandoned homes that are in or near foreclosure create additional costs for the counties, the lawsuit says.

Their housing code and legal departments have to investigate and respond to code violations, including having to board up, tear down or make structural repairs to unsafe homes. They have to deal with public health concerns, such as pest infestations, ruptured water pipes, accumulated garbage and unkempt yards. And fire and police departments have to respond to health and safety threats.

Lawyers for the counties declined interviews on the case, but one of them, said in an e-mailed statement that they are continuing to investigate other banks and could file additional complaints.

Similar suits were filed against Wells Fargo by the city of Memphis and surrounding Shelby County in Tennessee in 2009 and by the city of Baltimore in 2008. Those suits were settled earlier this year.

Both settlements included $3 million to the local governments for economic development or housing programs and $4.5 million in down payment assistance to homeowners, as well as a lending goal of $425 million for residents over the subsequent five years, according to media accounts.

As in those cases, the lawsuit filed by the Georgia counties says the bank, in this case HSBC, targeted communities with high percentages of Fair Housing Act-protected minority residents, particularly blacks and Hispanics.

Communities with high concentrations of such potential borrowers, and the potential borrowers themselves, were targeted because of the traditional lack of access to competitive credit choices in these communities and the resulting willingness of FHA protected minority borrowers to accept credit on uncompetitive rates, the lawsuit says.

The lawsuit says minority borrowers were disproportionately targeted with high-cost loans between 2004 and 2007.

Before the beginning of the subprime lending boom in 2003, annual foreclosure rates in metro Atlanta less than 1%, but U.S. Department of Housing and Urban Development data show the estimated foreclosure rates for each of the three counties now average more than 9% and are as high as 18% in communities with the highest percentages of minority borrowers, the lawsuit says.

It is the alleged targeting of minority communities that entitles the counties to seek action against HSBC for loss of tax income and other expenses, the lawsuit says.

If you can show that you yourself have suffered harm by an illegal act under the Fair Housing Act, even if you are not the target, even if you are not the intended victim, you can still sue to stop the behavior and to recover any damages that you can prove you suffered because of the violation of the Fair Housing Act, according to a lawyer whose firm was involved in the Memphis and Baltimore lawsuits.

The costs incurred by counties because of high rates of foreclosure are reflected in court records and related fees for each home, and police and fire departments can calculate the costs of responding to a given address, the lawyer said. He said it takes a lot of time and effort to gather the necessary records to prove the harm.

Another discouraging factor could be a lack of political will, according to a vice president of the National Fair Housing Alliance.

Politicians may not want to go up against the banks she said, adding that there will likely be other local governments that give this a try but she doubts the number will be high.

But an assistant law professor at the University of Georgia, says she thinks more cases are likely, at least in the short term as municipal governments continue to feel the squeeze of a tight economy and seek ways to refill their coffers.

They may try to test federal courts in different parts of the country, she said. Successes in multiple jurisdictions could lead to more attempts, but if courts start knocking the suits down that would likely discourage them, she said.

Atlanta Leads the Nation in Problem CMBS Loans

Atlanta Business Chronicle

 

Metro Atlanta has 226 problem CMBS loans — the highest total of any U.S. city.

In May, metro Atlanta had more CMBS (commercial mortgage backed securities) loans in special servicing than Phoenix (215), Dallas/Fort Worth (210), New York (198) and Houston (169), according to Trepp Inc., the New York company that tracks troubled CMBS loans.

A special servicer handles problem CMBS loans, which can include the possibility of imminent default on the debt.

Metro Atlanta held this dubious ranking for much of the past year, according to Trepp. And the fact that Atlanta has more loans in special servicing than any other city is yet another sign the region is a poster child for risky real estate deals, insiders say. Georgia already leads the nation in shuttered banks, many the victims of toxic development loans.

The issue took center stage at an Atlanta Real Estate Investment Advisory Council meeting June 10 that drew the biggest CMBS players in the field, including Berkadia Commercial Mortgage LLC (partly owned by Warren Buffett’s Berkshire Hathaway Inc.), Fitch Ratings and Atlanta-based Trimont Real Estate Advisors.

In Atlanta, 98 loans secured by apartment complexes are in special servicing, followed by 69 loans secured by shopping centers, 46 by office buildings and 28 by hotels, according to data provided by Transwestern Commercial Services.

The total balance of all the loans is $9.3 billion, according to Transwestern.

Atlanta ranks eighth nationally in the loan volume in special servicing, according to Trepp.

The CMBS issue stems from weak underwriting standards in the boom years between 2005 and 2007 and a 30 percent to 50 percent crash in property values since then. Many of those loans are now under water, and many building owners have less cash flow to work with.

“The No. 1 issue is that values have fallen as vacancy has risen,” said Jay O’Meara, a senior vice president with the commercial real estate giant CB Richard Ellis Inc.

“The average loan to value was up to 80 percent. When many owners didn’t put a lot of equity into their deals, there wasn’t much of a margin for error.”

Nationally, much of the concern in on the nearly $70 billion in highly leveraged short-term loans originated at the height of the market, according to an analysis by Deutsche Bank.

Many of those loans start to mature this year.

Since 2005, CMBS debt helped finance the acquisition of downtown’s Peachtree Center, and Midtown’s One Peachtree Pointe and Campanile building.

In recent months, each of the buildings has been transferred to special servicers.

One Peachtree Pointe, developed by John Dewberry, was up for foreclosure. It has so far avoided going back to the lender.

Wells Fargo & Co. foreclosed upon the Campanile building earlier this year.

The latest notable Atlanta office building in special servicing is Powers Ferry Landing East. A nearly $50 million CMBS loan secured by the office complex was transferred to the special servicer LNR Partners Inc. June 11, according to Fitch Ratings.
Trouble on the horizon

There will be more CMBS woes to come, including commercial real estate in Raleigh. Many borrowers will be unable to get refinancing without injecting a large amount of equity. And, many are going to be unwilling to infuse equity into a loan that is already under water, according to Deutsche Bank.

Nationally, about 4,560 loans have been transferred to special servicers as of May, representing $81 billion in loan volume, according to Trepp.

Commercial Brokers Re-Think Strategy

Atlanta Journal-Constitution

Michael Bull, president and founder of Bull Realty stands with his partners (from left) Kyle Stonis, Daniel Latshaw, Paul B. Zeman, and Rob Whitmoire in their Atlanta office .

With commercial real estate transactions at a crawl, some brokers in what was once one of metro Atlanta's hottest businesses made no money last year.

Many left the field, just as residential real estate agents did when that market crumbled.

The Atlanta Commercial Board of Realtors -- the nation's largest commercial board -- saw its membership drop 10 percent between 2007 and 2009, said Alan Joel, 2010 board president.

“We anticipate we will drop another 8 percent this year,” said Joel. "By the time we’re all said and done, we are going to be around 2,700 members,” compared with about 3,300 three years ago, he said.

In an effort to recruit and retain top producers, at least one company is offering a piece of the business without any cash investment. Through a new Partners Plan, Michael Bull, president and founder of Bull Realty in Atlanta, has named four partners to participate in profit sharing,  among other incentives.

Bull said the plan sets his firm apart from global companies and one-man shops, where the possibility of ownership for brokers does not exist.

“In the last two years, we lost two agents during the downturn and added eight,” said Bull. “We hope the Partners Program will attract seasoned brokers looking for entrepreneurial opportunities. Most commercial brokers are commission only.”

Earnings for commercial brokers vary widely in good times, from around $100,000 to more than $1 million a year, industry experts said.

When the economy sank, some brokers saw their incomes sink too, said Bull. Commission income last year was down  80 percent nationwide, he said.

“Bull was down 35 percent. We started to see pick-up in the fourth quarter,” he added.

Joel, a principal in Joel & Granot Commercial Real Estate, said brokers "who produced well before can ride out the storm."

Paul Zeman, a Bull partner who is  senior vice president of health care real estate services,  formerly ran outpatient diagnostic imaging centers.

He said he joined Bull Realty in 2007, “before things got really ugly.”

He said he never considered bailing out but added, "the partnership is a big bonus. It is an enormous incentive to stay here and work hard.”

Georgia had 104,697 licensed agents and brokers in August 2008, including residential, commercial, individual and firm licenses, according to the Georgia Real Estate Commission. That number now stands at 98,667.

"That's a drop of nearly 6,000 over the past 18 months," said commissioner Jeff Ledford.

The number of people who had licenses but were not using them rose to about 24,000 at the end of 2009, he said, leaving close to 75,000 active licensed agents as of Feb. 1.

The real estate brokerage industry is more  important to metro Atlanta's business community than ever,  said Sam Holmes, vice chairman of CB Richard Ellis in Atlanta.

Companies  are very focused on reducing operating costs to improve revenue, Holmes said, "and that is what our business does. Through real estate negotiations and facility management services, we help save money. "

Indeed, not all commercial brokers had a rough 2009.

Greg Baxendale, vice president of tenant advisory services at Transwestern, said last year was one of his top two or three years. The commercial real estate veteran said when the market began collapsing he switched focus to companies that were growing, including medical, biomedical, engineering, and renewable energy firms.

"It is important to continue to change and refine your business plan quarterly and even monthly," he said.