Alone in 32 Story Condo: How Did This Mortgage Close?
The story of the New Jersey firefighter whose family is the sole occupant of a high rise apartment tower in Fort Myers, Florida has been making the rounds. The oddity of it is generating a bemused buzz, with Google News identifying 507 articles on it.
No one seems to be looking past the headlines to question how this actually was allowed to happen. A cursory review of events reveals that some combination of fraud and incompetency had to occur in order for events to have transpired as reported.
While the visual of a 32 story apartment with but one light on may make for good TV, it reveals many of the same issues that underlie the entire housing collapse: Some form of Appraisal Fraud, Corruption, and significant incompetency of the lender.
First, the story:
“Victor Vangelakos and his family never have to worry about noisy neighbors in their luxury condo on the Caloosahatchee River.
There are no neighbors.
Vangelakos, 45, his wife, Cathy, and their three children are the only residents in the 32-story Oasis I condo on the east edge of downtown Fort Myers. The Weehawken, N.J., firefighter bought the condo from The Related Group, based in Miami, for $430,000 and closed on it in November. He planned to make it a vacation getaway and eventually his full-time residence when he retires in four years — but prices have fallen hard since the real estate bubble burst in early 2006.
Only a handful of those who put down deposits on the tower’s units actually closed on the deal. Those who did have swapped their Oasis I units for condos in Oasis II next door.”
Let’s take a closer look at what happened — this will be quite revealing.
This transaction appears to have closed late in 2008 — 3 years into the Housing collapse. Reports have the original purchase being made in 2005, (I assume that is pre-construction).
Did the lender (JP Morgan Chase) do their job? Did the Appraisal and Title firms actually perform their duties? If so, then how did this mortgage ever get approved? How did this transaction close?
Consider:
• Flawed Appraisal: How on earth did this property appraise for $433K ? There is a glut of Condos on the market in South Florida. And in case you forgot, Florida is the number 2 state in the nation for Foreclosures. (Trulia reported 35,000 local foreclosures).
Who was this Appraiser, and what the hell did they do other than rubber stamp the purchase price? At best, its neglient/incompetant discharge of duty. It looks to me more like the typical appraisal fraud we have seen over the years.
• JP Morgan Chase Due Diligence: Did the lender do any kind of due diligence? Even a cursory review would have shown the property was essentially unsold. How could they reach a determination of the property value at $433K? As the photo above shows, this was not the top floor penthouse that might be worth $1 million dollars if the building sells out.
How did they approve this purchase price without considering a) current market conditions and b) number of units sold in building? c) the reality that all other buyers had been moved to the second tower?
• Failure to Perform: The Developer obviously has failed to perform as contracted for in the purchase agreement.
As a side note, we cannot help but comment on the Big Lie — the statement from the spokesman from the Developer of the complex. Betsy Lu McCoy, vice president and associate corporate counsel for Related, stated: “We did not foresee, nor did anyone else foresee, the collapse of the real estate business and the concurrent collapse of the lending industry.” That is simply a false statement, one that is easily disproven.
My advice to the Vangelakos: Find a bright young attorney looking to make his bones on this case, one who will take it on for free (or low cost). Sue the Appraiser, the Title Closer, sue JP Morgan Chase, and of course, sue the Developer.
This mortgage never should have been approved for a lone apartment in a tower, and the transaction never should have closed. There is obvious Fraud somewhere here — now go publicize it.
>
Hat tip William!
>
Sources:
Lone tenants in Fla. high-rise seek exit from deal
Dick Hogan
USA Today/The Fort Myers News-Press,
http://www.usatoday.com/money/economy/housing/2009-08-02-lonelycondo_N.htm
Fla. highrise has 32 stories, but just 1 tenant
CHRISTINE ARMARIO
Associated Press, Aug 1, 2009
http://news.yahoo.com/s/ap/20090801/ap_on_re_us/us_lonely_highrise
The Related Group – Redefining Cities And Skylines
http://www.relatedgroup.com
August 4th, 2009 at 7:40 am
The guy’s a firefighter. You’re not going to give a firefighter the mortgage you promised him in 2005?
I don’t understand the rules on these conforming condo loans. If you have to be fifty percent occupied before you can get a loan, how do the first fifty percent get THEIR loans. It’s the “who would buy the first fax machine” argument all over again, sort of.
~~~
BR: Dangerous job, 20 years then retire at 75% pay
August 4th, 2009 at 7:41 am
Barry, you’re barking up the wrong tree as far as the appraisal is concerned. If they signed a contract in 2005, that’s when the appraisal was completed. It’s very likely that, in a misguided attempt to save money, JP Chase didn’t bother getting a new appraisal at the time of closing, relying instead on some type of AVM (Automated Valuation Model) to tell them their deal was still good.
~~~
BR: An appraisal done 4 years ago would not be required to be updated?
That’s utterly absurd!
August 4th, 2009 at 8:07 am
[...] News Sources wrote an interesting post today onHere’s a quick excerptThe story of the New Jersey firefighter whose family is the sole occupant of a high rise apartment tower in Florida has been making the rounds . The oddity of it is generating a bemused buzz, with Google News identifying 504 distinct articles on it. Yet no one is looking past the headlines to question how this actually happened. Even a cursory review shows that some combination of fraud and incompetency had to occur in order for these events to have transpired as reported. And while the vis [...]
August 4th, 2009 at 8:23 am
My hometown! Good ‘ol Ft. Misery–known for Deion Sanders, pedophiles, mass graves and now this. Unless you’re fishing Pine Island Sound, there is absolutely nothing redeeming about Lee County.
August 4th, 2009 at 8:24 am
Ha! I saw that article, was going to send it to you. That’s got to be one for the historical wall o’ shame
August 4th, 2009 at 8:36 am
Having a high rise all to yourself sounds like heaven on Earth to me. If i were him i’d start squatting in the penthouse.
But i wonder if he has to pay the monthly dues for every vacant condo as well as his own? That is the really scary part of owning a condo these days as more and more of your neighbors get foreclosed and your dues start skyrocketing, which of course drives the condo value down even more in a vicious death spiral.
August 4th, 2009 at 8:36 am
Right out of my playbook, sent also to Realtycheck.cnbc.com on Sunday, give me a little credit Barry
Vangelakos
This loan should not have closed:
Flawed Appraisal: The value of this property @ closing in 12/08 could not have been 433K, because of the glut on the market and foreclosures. Appraiser should be SUED.!!!
Negligence on the part of JP Morgan:
Due diligence would have revealed that the value of the property was not 433K, NO WAY, Morgan should have made a loan on loan to purchase price withoug considering current market conditions!!
Developer, has not performed-period
~~~
BR: Several people sent something in, but you — and Janet — were the key ideas used. I will add the hat tip above
August 4th, 2009 at 8:46 am
He should look on the bright side…
If it keeps getting ‘headlines’, he’s sure to get invited to the White House for a beer…
August 4th, 2009 at 8:56 am
since it obviously doesn’t meet Fannie’s requirement for Warrantability, yet, i suspect JPM has them on a portfolio loan; however, if it was approved w/a Limited Review and sold to Fannie… I suspect their checking to see if they own it.
this rabbit hole will get very deep and the Vangelakos’ may end up w/a free condo.
August 4th, 2009 at 9:11 am
He’s got a lawyer. His lawyer has filed two class action lawsuits. According to the article: “The family’s attorney said he has filed two lawsuits on behalf of would-be tenants.”
His apartment was not the only one sold in the building. All of the other tenants either backed out of their contracts or accepted offers to move to the landlord’s other tower, which is not empty and is right next door. As the article says: “Only a handful of those who put down deposits on the tower’s units actually closed on the deal. Those who did have swapped their Oasis I units for condos in Oasis II next door.”
The article doesn’t say whether the people who didn’t close had a legal right to do so or whether they defaulted on their contracts. Did he have a legal right to walk away and simply make a different decision from everybody else? No way to tell from the article.
He doesn’t need to be living alone in that building. He has chosen to do so. He refused the landlord’s offer, because he wants to be bought out at his original cost instead. According to the article: “He’d like for The Related Group to buy them out.”
So the bottom line appears to be that the guy is staying alone in the tower as part of a legal strategy to try to get rescission of his contract, and since somebody had to have called the reporter or an editor to have gotten this article written, it’s not unreasonable to think that his lawyer’s strategy also includes a public relationship component. Maybe the guy has good claims against the landlord, the bank, the appraiser, etc., and maybe he doesn’t. If in fact he does, then I imagine he will succeed in getting his money back, assuming that the landlord is solvent. If the landlord is not solvent, presumably he will get his share along with the other creditors. The fact that he is a firefighter is interesting, but has no bearing on his claims.
There certainly are not enough facts in the article to leap to the conclusion that fraud was committed. If it was, his lawyer will certainly make that charge in his lawsuits. Maybe he has, but the article doesn’t say so. It says that he has sued “because the building wasn’t finished as promised.” That is a breach of contract claim, not a fraud claim.
The sale was made in 2005, two years before property values began to collapse. At least, that’s what the post above says: “Reports have the original purchase being made in 2005, (I assume that is pre-construction).” The pre-construction valuation that was put on the tower has certainly proven to be a mistake, and the loan has turned out to be a bad one for the bank. That does not necessarily mean that the valuation – which sounds like it was in line with other valuations made at the time – was fraudulent. I would not rush to accuse people of serious crimes.
August 4th, 2009 at 9:20 am
To me it sounds like it has something to do with the “upgrade” to tower 2. What if those went down as sales so that JPM had reason to believe it was worth over 400. Just and idea.
August 4th, 2009 at 9:21 am
Maybe JPM could approach China. I hear they’re looking to buy some real estate. And they pay good prices too. I smell suckerbait.
August 4th, 2009 at 9:30 am
Fight back? Come on! That’s not what homebuyers are conditioned to do in America. You just bend over and take it like the pawn you are. At least now, the fed is providing some lubricant to make it a little less painful.
August 4th, 2009 at 10:00 am
The real disgrace: A public employee is able to “retire” at 49 into a half a million dollar condo that he can afford to purchase at age 45. Your tax dollars at work. The rest of us will be working into our 70’s and this guy is gone at 49. And now, since his “speculation” didn’t turn out the way he wanted, he’s going to use those union strong arm tactics and GET WHAT HE WANTS! He wants all his money converted to a better place in the next building….because he’s entitled! That’s the “teachable moment” from this story.
August 4th, 2009 at 10:01 am
@busybody:
I would not rush to accuse people of serious crimes.
Last time I checked civil fraud (tort) was different from criminal fraud, both in terms of standard of proof and elements. The SEC, for example, deals mostly with civil fraud in securities, not criminal fraud.
August 4th, 2009 at 10:07 am
A few questions:
Exactly what do they pay firefighters in New Jersey, anyway? If he financed the purchase price at 5% for 30 years, he would have a nearly $2,400 monthly payment, excluding condo fees, taxes and insurance.
And this is a second home? And he’s 45 and is up for retirement in four years?
Assume he makes $100,000 per year as a firefighter (surely it’s not more). That would put his monthly payment of principal and interest at roughly 30% of his gross income. Now since his job is in New Jersey, he’d still have to have another place up there. Maybe it’s paid for, maybe not, but carrying two properties seems a bit of a stretch, when one of them sucks up 30% of gross income, and even if New Jersey pays its firefighters better than union workers at a GM factory.
Which brings up the next problem. New Jersey won’t likely be able to afford much longer to pay its firefighters at sums allowing them money to “invest” in Ft. Myers condos, nor will it long be able to afford to allow otherwise able-bodied workers to begin drawing retirement at an age where they may live another thirty years or so.
In microcosm, this little example illustrates a number of the market-crushing realities that the economy faces. Of course, if New Jersey can somehow figure a way to become too big to fail (maybe it should become a car company, or an investment bank cum bank holding company), then Uncle Sam will make good on all its promises, until it can’t, and the realization sinks in that nothing, not even the federal government, is too big to fail.
August 4th, 2009 at 10:12 am
Interesting tidbit about the wife being accused of embezzling from her court clerk job:
http://www.tallahassee.com/article/A4/20090730/BUSINESS/90730073/1003
August 4th, 2009 at 10:14 am
Barry, your post is nothing but populist pandering.
First off…The appraiser owed the fiduciary duty to JP Morgan—not the Purchaser. The Purchaser has little if any legal ground to sue an appraiser who works for the lender…and whose sole job it is to assess whether the condo is sufficient collateral. If the condo is not sufficient collateral, then JP Morgan might have grounds to sue the appraiser—not the freaking purchaser. [Yes, there is MUCH to find fault with this appraisal system and new appraisal rules have attempted to address them...but they were not in effect at the time this Purchaser bought the property.]
Second…Sue the title company? On what grounds? Do you even know what the function of a title company is in a residential real estate closing? There’s no assertion that the title company missed any liens or encumbrances. Do you really think vacancy rates are recoded in the county courthouse? “Sue the closer/title company”…a ridiculous assertion.
Third…Sue JP Morgan? For what? What exactly are the damages in this lawsuit? That JP Morgan gave him a loan on property that wasn’t work what EITHER JP Morgan or the Purchaser bargained for? It’s a non recourse loan for crying out loud…it’s not as if JP Morgan can take back the property and sue this guy for damages. This guy’s out his downpayment and his credit takes a hit. JP Morgan’s left with a dilapidated, depreciated property and a hefty write-down. They both got what they deserved.
So what’s exactly is this Purchaser entitled to in your sweeping lawsuit? The windfall of an eliminated mortgage balance? Should he just be able to walk away with absolutely no consequences for his own mitigating and similarly reckless behavior?
~~~
BR: My critique is from a macro perspective, showing flaws in the overall RE funding system.
While the appraiser may owe a fiduciary duty to JPM, there is no doubt they screwed the pooch here. Never underestimate what a little embarrassment can do in that venue.
You are correct as to the title company.
As to JPM, this is a mortgage that never should have been made. And since it was made, they should be more cooperative in allowing a transfer tot he occupied building.
As to a windfall to the buyer — if you have read anything I have written over the years, you would know how absurd that statement is.
August 4th, 2009 at 10:24 am
Jorsey Firefighters with condos in Florida… I see speedos !
August 4th, 2009 at 10:59 am
Dan Duncan prompted me to check out Mass. law in this area. Prior to 2006, Massachusetts protected appraisers by statute — specifically it prohibited claims by borrowers based on the contents of appraisals. Here’s a case excerpt to give a sense of how courts treated these kinds of claims pre-2006:
The lender obtains an appraisal report in order to determine “[w]hether the value of the property is sufficient to secure the loan.” [cite omitted]. Thus, the purpose of the report is to inform the lender that the property has a sufficient fair market value to secure the requested loan. The risk of negotiating a fair price for the property remains with the buyer-borrower. The report is not intended to certify resale value to the borrower. [emphasis mine]
-Macoviak v. Chase Home Mtg Corp, 667 N.E.2d 900 (1996).
But that provision was expressly repealed, so have things changed in Mass.? Not necessarily. In 2006, a Mass. trial judge said the following in dismissing a borrower’s claim against an appraiser for reasons independent of the statutory prohibition still in force at the time of closing:
Although the plaintiff paid for the appraisal, Stokes was retained by the bank to perform the appraisal for its exclusive benefit. The plaintiff did not contract directly with Stokes, nor was she an intended beneficiary of a contract between Stokes and the bank. Accordingly, while the plaintiff might have incidentally benefited from proper performance of the appraisal, she may not seek to enforce a
claim for breach of contract.
-Jamgotchian v. Stokes, No. ESCV-06-1566 (Ma. Super. 2006)
So Dan Duncan would have some strong arguments in Mass., as well. Nice job.
August 4th, 2009 at 11:00 am
He’s another in a long line of morons who closed on a mortgage he should not have.
Of course, the answer is to sue everybody else for his idiotic mistake.
August 4th, 2009 at 11:19 am
Who is paying the maintenance fees? They must be gigantic for a single owner.
August 4th, 2009 at 11:37 am
@Tranzor Z:
I was getting ready to post and say that the firefighter should argue that he was a “third-party beneficiary” of the appraisal. But it appears Mass. law does not allow that.
Regarding the wife’s problems, it does not surprise me in the least as that is what you often find in cases like this. These things are almost never cut and dried.
August 4th, 2009 at 11:43 am
@Okie:
Looks that way, although the 2006 case was “just” a trial court decision. Not sure what Florida courts would hold; I have a hard enough time keeping the law straight in my little state up here.
August 4th, 2009 at 11:48 am
Dan Duncan makes great points, all very legit. There is nothing to sue the title company over. And JP Morgan should be suing the appraiser and possibly pull a “Wells Fargo” by suing itself just like one division of Wells sued another division.
August 4th, 2009 at 1:34 pm
Does anyone have recent examples or anecdotes about appraisers being sued for any reason? I’m just interested to see if there is any incentive for them to give an informed opinion.
I recently had a property appraised by two different banks. The first bank had an ‘independent appraisal’ value of 1 million, and approved me for a 1 million mortgage.
The second bank got an ‘independent appraisal’ of 1.3 million, and approved me for a 1.3 million mortgage. Turns out, the second bank holds the construction loan on the property, so if it doesn’t sell, they have to foreclose on the developer. If the bank doesn’t get 1.3 million, they take a loss on the property. The ‘independent appraisal’ magically hit the number exactly, not +/- 50k.
August 4th, 2009 at 2:13 pm
Firemen shouldn’t be able to afford retirement condos? Many firemen I know work second jobs, this guy’s wife is accused of stealing a few hundred dollars so that didn’t cover the downpayment.
I don’t know if anyone committed fraud with his mortgage but everything was so fast & loose in the bubble states in those years, there are dozens of ghost towers like this down there.
His only mistake was putting 100K cash into the purchase, if he hadn’t he’d be in complete control now
August 4th, 2009 at 2:16 pm
Off topic but I just read a good review of Barry’s book in the Grey Lady from Sunday.
They recommended that members of Congress read it cover to cover over their August recess (We here in PA, call it goofing off, or VACATION. They can’t tell the truth about anything)
August 4th, 2009 at 2:17 pm
[...] Leave a Comment A discussion on Barry Ritholtz’s blog this morning — and specifically a thoughtful comment by Big Picture reader “Dan Duncan” – prompted me to check out Massachusetts law in this area. Prior to 2006, Massachusetts [...]
August 4th, 2009 at 2:43 pm
He made $152,210 last year:
http://jackontap.blogspot.com/2009/08/this-explains-lot.html
August 4th, 2009 at 3:02 pm
In most cases out here, the developer would have a captive lender which was already providing the construction financing, so if JPM was already on the hook they would have no incentive to reappraise or reevaluate but neither should they have any objection to switching to the other tower, in fact it would be absurd not to unless it would force them to reevaluate and take a loss.
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