Posted by: distributorcap | September 22, 2008

Bailed out

Hundreds of thousands, if not millions of people are going through some terrible financial times right now. Unable to pay their mortgages, they risk losing their homes and any semblance of a ‘normal’ (whatever that means today) life.

While the housing crunch and mortgage meltdown on 2008 is unique in its size and its scope, I can understand what it is like to deal with the fear of losing it all and the daunting task of talking with financial institutions do not have your well being in mind – only their profits. At least my story has a happy ending. I hope the untold masses affected by this can find some happiness and solutions in their own personal mess.

Back in 1987, I bought my first apartment in New York City. Located in the zip code 10021 (which at one time was the zip code with the highest average income in the nation), it was a small one-bedroom co-op in the East 70’s. This is also known as Manhattan’s Upper East Side. Back in 1987 the UES was a trendy neighborhood to live in – lots of young singles, lots of frat boy bars, lots of restaurants, and near Central Park. Today the UES might as well be Siberia, as it is among the least desirable neighborhoods to live in.

Co-ops are the dominant type of ownership residence in Manhattan (and to smaller degree in the other boroughs of NYC). The primary difference between a co-op and a condo is that with a condo you actually own a piece of real estate – the physical apartment. With a co-op you do not own property, but rather shares in a corporation (the building) and you are given a lease to allow you to live in the space. The number of shares you own is determined by the size of the apartment. For tax purposes, co-ops are treated as real estate, but in reality it is not real property.

When you buy a co-op in NYC, the approval process is often rigorous. You turn over your complete financial, employment history and references. After all that you need to have an interview – to pass muster with the building. If this all goes well, the co-op approves the purchase and you move in. If you are rejected, the board does not have to tell you why (obviously there are reasons that cannot be used – but go prove it). Financial qualifications are stringent – it is rare for a co-op to accept less than 20% down, many are higher than that. Sub-prime and fancy starter mortgages are usually flat out denied. Many people complain about the strict co-op standards for purchase. But this process is what saved the housing market in NYC – as there have been very few defaults and prices, (until now) have remained relatively stable.

The building was a very nice pre-war built in 1933. The apartment had a step down to the living room, the bedroom was very small towards the back. The kitchen and bathroom had windows (rarities in NYC). It was a great little “starter” place. The price for this 500 square feet of Manhattan luxury living was $110,000 (folks this WAS 1987). I put $22,000 down and got an $88,000 5-year ARM at 9.0% (don’t ask). The payment was $836 per month, plus $490 a month for the co-op maintenance (which includes the doormen, the real estate taxes and the underlying mortgage on the building and a few other things) – for a total of $1326 per month. That was a rough number for me at that time based on my salary. But I did it. I renovated the kitchen, the bathroom and had some neat built-ins constructed in the “dressing room.” It was a nice apartment – small, not well lit (only indirect sun), but cozy.

Fast forward to 1993. My rate had gone up (do they ever go down) and I was now paying over $900 per month. My maintenance had also gone up – to a whopping $750! (this building had issues). I was now paying over $1650 per month and guess what – I was unemployed.

Unemployed wasn’t bad enough. On top of that the building was having huge problems. First there was all the “assessments” for repairs – the elevator, the washing machines, the doormen’s raise (they had gone on strike during my time there), the points on the roof of the building, the stoop, the lobby furniture etc. Then real estate taxes rose. Then it was discovered the management company (the firm that handles the operations and financial aspects of the building) was stealing money – which of course led to litigation. Then we had a tenant under the non-eviction (when the building converted, tenants not wishing to buy were allowed to remain) who hadn’t paid her rent in years and refused to come out of her apartment. The smell of dead rodents and other assorted things permeated the 6th floor – I lived on the 3rd. My maintenance kept going up and up – a big no-no for co-ops. I was bleeding money – with no job. I decided it was time to move.

In 1992-93 guess what was going on in NYC – a severe housing slump. I thought I would be lucky to get my money back. Wishful thinking. First no broker wanted to take my place – too small a price. So I tried to sell it on my own. After 6 months – no takers. Lots of sniffers, some lowball offers, but no one stepped up. Ads were getting expensive (there was NO internet). I got a broker who specialized in small places. Within 2 weeks I had 2 offers – wait till you hear what they were. The best was $60,000. The housing slump was that bad, the building was in that much of a mess and I was that desperate. I owed around $82,000 on the mortgage. $60,000 meant I was short to the bank for $22,000 – plus the 6% fee of $3,600. I wasn’t happy to say the least.

I didn’t have the cash to cough up, but I really needed to get out. I never considered walking away – that is just not in my bones. So I got a friend who was a real estate lawyer to advise me – and he said “lets negotiate with the bank – it couldn’t hurt.”

First I learned my mortgage had been sold – numerous times (an omen of things to come in 2008). He was a very good lawyer – he knew how to negotiate, knew how to talk the talk, and really knew how to work a bank. I don’t know what he said to get the bank to acquiesce, but it worked. After about 3 weeks, the bank (which I had learned later had already written down my mortgage) said they would close the deal if the buyer paid $60,000 in cash (she was) and I coughed up $5,000 in cash (I did). The $17,000 difference was chalked up to debt “forgiveness.”

We then had to sell it to the managing agent. They had to approve the write down and the sale. They were very hesitant – mainly because of the apartment price and what it would do the value of the other residences in the building. My lawyer was very tough with them – basically dangling the keys in front of their face saying “go collect.” They approved the next day.

He said it paid to make nice with the bank, and play hardball with the management. It worked and he wouldn’t take one nickel from me (now THAT is a good friend). The deal was closed and my credit score was saved. I moved around the corner to a rental where I could see my old apt from my window. I did take him and his wife to the fanciest restaurant in the city, and got them tickets to a show. Must have been a bad show, since they got divorced 2 months later.

I never thought of walking away and handing the keys to the bank. People were doing that in 1993. I would have stayed (and been miserable) until I got a buyer. But something worked right for me that time. I realize my plight was small in comparison to what is going on today, but i fully relate to the frustration of being unable to sell when you have to and dealing with an impersonal bank.

BTW – that $17,000 debt forgiveness is not a free lunch – you are supposed to get a 1099 from the bank and treat it as income – in other words pay taxes on it as income. The big surprise ending to the story was that I was actually able to negotiate with the IRS for an extension on the tax burden from this additional income. The lady I spoke with at the IRS could not have been nicer and more sympathetic to my plight. These were the Clinton years. Today I would bet that person is a Bush-loving douchebag.


Responses

  1. In many, if not all parts of the country, you buy a splendid house for those sums.This is why I will never understand the NYC real estate game of mortgage plus apartment fee.At least with a house, as long as you have a fixed note, your payment remains the same, barring some huge tax reassessment based in an increase in value. Plus, the notion of going before a board and laying your soul bare (financial details, record, cock size) is antithetical to me. But, to each his own.

  2. Cap;I know the feeling well. It has happened to me more than once.Two years ago I lost everything again. Five months ago I have been able to buy another home with a 25 year mortgage and I had a down payment.Now I wonder if I will have an income. My biggest problem is my age. Getting close to sixty and I don’t know if collapse happens again whether I will have the strength, desire or opportunity to be able to pull off another recovery for me and my dependents.This worries me because I know what it is like to go hungry, for many they do not.We will see what happens.

  3. By the way, I am really angry that debt to equity for Lehman was 30 to 1 and Bank of America 11.75 to one. If things go bad I still believe in peace.There are those who will use violent means to keep what they have or to eat. Social upheaval will be a real possibility in a year or two.

  4. Fascinating story. I didn’t really understand how co-ops work. My brother is trying to sell his condo right now, and it’s miserable. He lives in a beautiful loft across the street from Harpo Studios (OPRAH) and the building association has raised his assessment for all kinds of repairs, and there is pending litigation against the building. The place is worth about $100,000 less than what it was appraised at 2 years ago, but at least he has equity in it and is not going to lose real money.By the way, I dealt with the IRS when I was a freelance photographer in the Reagan years, and I owed money because I screwed up my quarterly withholding tax. THey were really nice to work with, actually.

  5. I own my house. It’s a modest wood frame home in a blue collar ‘hood, but it’s got maybe 1,800 square feet of space and a big yard.I make enough money to sell it and buy a fancy place out in the burbs, but in this economy, why would I?Nope.I am doing all I can not to stimulate the economy. I don’t want to encourage the GOP criminals by buying into their ‘bail out the rich guys and screw the people’ plans.People, hoard your money.Lie low-change may be coming.

  6. I can see why people work in NYC but I’ll never understand why they live in Manhattan. Thanks for sharing your story.

  7. These prices are absurd

  8. And I thought the prices for homes around here had become crazy! Thanks for educating me on co-ops and life in Manhattan.

  9. What ichabod said.I’m reconsidering my feelings about firearms at this point.

  10. I am weighing whether to buy another house or continue to rent. While the message we hear is that home ownership is usually better, I am beginning to doubt whether that is the case. Home ownership seems to suck up all available income in taxes, maintenance, insurance and the like. While rent is rent. If you don’t intend to pass a nest egg on to the next generation (something that seems to be becoming rarer anyway.) I don’t see much benefit, esp in a stagnant or falling market.

  11. I am so glad we had a financial advisor when we bought our home nearly ten years ago. We were advised to take the higher rate and stay away from the balloon. Not only did we keep a fixed rate, this month we were able to refinance at an even lower rate and keep a fixed rate. Yet I see a lot of homes for sale in our historic neighborhood. I feel bad for some of them. Some – not so much. Although my wife thinks we should even pity the assholes. I guess I’m not always magnanimous.

  12. I guess I’m lucky in many respects. I paid off my place last september but I’ve been out of work for 9 months now. I don’t see much getting better any time soon but what can you do? I’m definitely considering a change in careers.I feel for you Ich but you need to keep trying. You know the alternative.

  13. “Wise” people have been telling my boyfriend and I for years that we should be buying a house or apartment because we are wasting our money on rent. However, if we can’t afford this place anymore, we can just up and go as of March (we signed 6 months with month to month after that). We also took every dime of our savings and invested it in the Australian dollar. It’s a commodity based economy and every time the dollar falls and/or oil goes up, our bank account goes up. While I think we will personally be ok (at least in the short term), my father referred to Milton Friedman as his “hero” and I know he invested all his money in the stock market he believed so much in. I have no idea how much money my parents have left, but based on the sound of his voice on the phone last week, I don’t think it is very much. My little sister works for AIG. She’s so fucked that she’s actually laughing about it and her back up plan is to move to Hawaii and work at a bar with me. That’s another thing. Business in the booze business is booming. Go figure. The one thing that keeps me from panicking is that my mid-twenties ‘haven’t bothered with a career and family yet’ lifestyle allows me amazing flexibility. Not only to help myself, but to help anyone I love that will need us in the coming years. But people without that flexibility… I don’t know how you guys are handling it. Your story makes me feel a bit better to know that getting through it is somehow possible. Although, like you said, that was 1993…

  14. DCap,O/TMcCain’s Chief of Staff?He’s been outed! Come stop by when you have a chance.

  15. Christopher — the game of real estate in NYC is not for the feint of heart. The coop board thing is daunting, but usually no big deal. The meeting for the apt I currently own consisted of me playing with her dog and drinking orange juice.Ich – I feel for you my friend. I so wish you the best. This is not easy. Icg – people will do what they have to eat. Terminator meets Soylent Green meets Escape from NYBubs – I was amazed how nice the IRS was. And actually helpful, this whole crisis so didn’t have to happenKz – twentys make a great mattress stufferDr m – to live in manhattan it has to be in the genes. There is definitely a charge from living here. I cant explain itDr z- those were 1987 prices. A 500 sq ft apt in downtown manhattan today is around $550,000Sklyer – I went on a shoot for a show we do – it was a 2 bedroom, 2 bath loft apt – around 1,300 sq ft. nice place. Big windows. $4.5 million – TODAY after the crashDean – I am hoarding bumblee bee and trader joes break fast bars. Also taste-y-cakes since they and cockroaches are the only things that will survive the war palin will startTouj – it all depends – I am glad I bought, but renting also had its advantages. Even tho I rented a dump (it was a dump) – I am glad I have my own place that I renovated. There are plusses and minuses to both.Robert – balloons and ARMS – suck. I am with you – NOT magnanimousDemeur 0- I feel for you my friend also. All the good thoughts I can channel (not a praying guy here)Jen – tell your father his hero has been so discredited he should find another one. A lot of people are unhappy – my father kisses the ground every day he owns only one stock and has only CDs and money markets – small interest but peace of mind – that is the depression baby in him. Booze and drugs — I think I see more and more dealers on the street latelyhandling these times and bush-induced crap aint easy. I don’t sleep a lot

  16. DCap: I had to deal with the IRS for clients when I was a tax lawyer. They were always nice and reasonable, as long as you were truthful and up front. The people who do the actual work for the IRS work hard and get a lot of grief–particularly from politicians and the rich. No surprise that you were able to negotiate a good deal. I’m saving my pennies with the hope that maybe I can buy in about a year (because the prices will have to come down, even in NYC), but part of me is worried about it because I remember 1992 and 1993. Scary times. I didn’t own a place, but I could still see what was happening, and it was ugly.

  17. the shit has hit the fan, yet lehman brothers’ hotshots will be splitting a $2.5 billion bonus!

  18. really amazing story,…and that you survived and learned and got through it…these are horrendous times we will see what happens…and pray that it never happens again…

  19. really amazing story,…and that you survived and learned and got through it…these are horrendous times we will see what happens…and pray that it never happens again…

  20. Isn’t this bailout just like making us all pay for our own rape kit?

  21. I’m so glad you shared this story. You’ve given me an idea. Thank you.

  22. I never knew this! At that time, so many people I knew were walking away and taking huge co-op losses. In 1995 I almost bought a co-op in White Plains that was selling for $11,000… the buyers had paid $30,000 in 1899.The whole coop thing just freaked me out though, although as you said, it has helped NYC to a great extent.

  23. Back in ’93, Skippy and I were on the other side of he housing slump equation. We bought low, and if things stay the way their, we’ll buy low, too.


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