An Essay: On the Third Day of Christmas ... by gimleteye

(The following series, the Twelve Days of Christmas will conclude Christmas Day 2011. This is Part Nine. Scroll down for earlier installments.) It is tempting to view the housing market crash as just another real estate cycle and those who failed to outrun it, victims of excess optimism or just bad luck. As 2011 draws to a close, bright signs on the real estate horizon – at least in Miami—have to do with foreign buyers. But this is not necessarily good news for taxpayers or voters who are still stuck with the rising bills of the housing boom; in Miami alone the costs of unfunded infrastructure deficits are in the billions, while current deficits continue to pile up. Like snowbirds, foreign investors have no "skin in the game" about governance locally or the immensely difficult work of civic engagement through which consumer advocates, housing activists, and environmentalists are fighting a steep backsliding that would never have seemed possible, a decade ago.

In looking back at the Christmas 2004 edition of the now defunct Sunpost, it is easy to read the glorification of developers and the record of the outcome, only a few years later. For example, the Sunpost wrote: “Kenneth Baboun is the president of the Miami-based chapter of the BBB Group, the company that is now developing 1390 Brickell Bay and, according to the website, has aspirations to construct other projects in Miami. To quote directly: "The BBB Group, a successful, dynamic firm destined to become one of the main driving forces behind the new Miami." The BBB group also has offices throughout the United States and Latin America. Estimated at $150 million in value, 75 percent of the 364 loft style residences are already sold. The 39-story tower also includes a five-star restaurant, two pools and a gym.”

 Four years later: “The Third District Court of Appeal on Wednesday upheld a Miami-Dade Circuit Court judge's ruling that barred buyers in the ill-fated 49-story 1390 Brickell Bay condominium project from seeking possible profits from the sale of their units had they been built. Developer Kenneth Baboun and his company BBB Group abandoned the $90 million project in February 2006, blaming hurricane-related delays and rising construction costs. (South Florida Lawyers, March 7, 2008)

Another example: “Greg Altshuler is the point man of an Israeli investment and development firm. As such he is the face for Axis at Brickell Village, a twin 40-story development designed by Arquitectonica which will include about 20,000 square feet of retail. "We see Brickell as full of existing amenities and proximity to centers of employment," Altshuler told Miami Today in an October article as the logic for the company spending $200 million last June to obtain the site for Axis. "Our ultimate goal is to create housing for the Brickell area." Altshuler is a partner with Brack Capital Real Estate, which has projects underway in New York, London, Budapest and China, according to Miami Today. In the past 10 years, BCRE has been a principal in over $3 billion in investments in the United State and Britain and has handled $4 billion in transactions.”

Only three years later, the full on public relations boom—that wrapped up millions of homebuyers in the Ponzi scheme of the housing boom—had also ground to dust. “The European lenders to the Axis at Brickell Village condominium in Miami gave the developer another 36 months to repay its construction loan, but several real estate experts have questioned whether that’ll be enough time. On Feb. 27, Paris-based Societe Generale, which is a trustee for a group of undisclosed lenders, granted BCRE Brickell an extension until Sept. 30, 2011, to pay off its construction mortgage. The loan was made to the developer in 2006 for $183.5 million. Their modification also made undisclosed changes to the capitalization terms – the developer’s equity in the project – and gave the lender the ability to accelerate the maturity of the loan should it stop performing. The two 39-story towers, at 1101 S.W. 1st Ave., were completed in May 2008. Of Axis’ 718 units, it has issued 174 deeds, according to court records. Like those at many downtown Miami condos, sales at Axis slowed, with just 11 deeds issued so far this year, with an average sales price of $304,500 a unit. Axis buyers have paid an average of $378 a square foot since sales started. When Axis started construction, developer Brack Capital Real Estate Group announced that the condo had sold out its preconstruction contracts. (South Fl Business Review, March 27, 2009)

Agustin Herran is one of the developers praised to the skies in the 2004 Christmas edition of the Sunpost. Among his list of accomplishments; Herran is often noted on Eyeonmiami in connection with partnerships seeking to move the Urban Development Boundary. The bank where he is a founding board member, U.S. Century Bank, still stands as the symbol of hubris of the housing boom and bust. The bank is teetering on the verge of failure and would likely have been shut down long ago if not for the fact that it keeps company with nearly 100 Florida banks so sick that the FDIC seemingly can’t cope with the volume.

The Sunpost wrote of GREC, one of Herran’s companies, in 2004: “Based in Miami, GREC has built shopping centers, developed single family neighborhoods, renovated office buildings and converted apartment buildings into condominiums. Projects to GREC's credit include Island Place at North Bay Village, Aquasol in Miami Beach, Villaggio In The Grove, Island Place at Bay Harbor, Coral Reef Shopping Center, Sunset Park Plaza, etc., etc. At the helm of GREC is Agustin Herran. But besides overseeing office and condo developments all over Miami-Dade, Herran is also the director of U.S. Century Bank, a general partner for Quantum Developments (which built 574 single family homes along Coral Way), the president of Tire Group International (an international tire wholesaler) and he is charge of building Sedano's Supermarkets in Miami-Dade, Broward and Palm Beach counties.”

The Sedano’s story is one of the Hispanic business successes in the United States. Its business model tracked the rapid growth of Hispanic populations in South Florida, who needed low cost housing and sought it far from places of work, as the cheapest lands became available through the conversion of farmland and environmentally sensitive Everglades wetlands.

Unsurprisingly, Hispanics comprise the largest demographic hit by the foreclosure crisis.  According to a 2010 report by the Center for Responsible Lending, Latinos in California suffered nearly 50 percent of foreclosures. "The signature finding of this report, that there is a disproportionate rate of foreclosures for Latinos, is really stunning," said Paul Leonard, director of the California office for the Center for Responsible Lending. "The data shows that high-cost loans correlate with foreclosures and that there was a big presence of subprime lending to the (Latino) demographic and in areas where there are concentrations of Latinos." (“Foreclosures in state hit Latino homes hardest, SF Chronicle, August 18, 2010)

In New York, “A recent study by the New York Communities for Change organization found that blacks and Hispanics constituted 32 percent of homeowners in New York between December 2009 and December 2010, but a full 56 percent of those were notified pre-foreclosures, making them 175 percent more likely to be foreclosed upon than the general population of homeowners facing the same fate.” (“Latinos devastated by wave of foreclosed homes in New York, Huffington Post, Sept, 1, 2011)

As outlined in this series, the conversion of lands from agriculture or open space to commercial and residential literally deformed the functions of local government during the boom years. The sheer weight of political money from developers like Herran and the trade associations that represented their interests—like the Latin Builders Association in South Florida—steered the function of government away from providing for the health, welfare and safety of taxpayers and straight to the business of converting elected offices into bargaining chips.

It happened consistently in Congress, too, where the Congressional Hispanic Caucus was one of the most steadfast allies of Fannie Mae and Freddie Mac, the quasi-private entities that remain at the heart of the financial crisis for their massive endorsement of mortgage securitization based on the Wall Street frenzy for profit.

In January 2003, Mel Martinez, former chairman of Orange County Florida, and then Secretary for Housing and Urban Development, addressed a national convention of builders in Las Vegas: “We also must work in close partnership to dispel the myth that our nation is experiencing a "housing bubble." (Wed. Jan 22, 2003, http://www.hud.gov/news/speeches/nahb0103.cfm)” It was the same month of the inauguration of Jeb Bush, where he claimed the highest achievement of his administration in his final term would be to empty Tallahassee of workers; that is to say, regulators.

The bolts holding the train wheels to the train axles had been loosened. In November 2003, the Congressional Hispanic Caucus warned the Federal Reserve to back off any notion of a inhibiting the housing boom.

Fannie Mae had recently donated $1 million to the Congressional Hispanic Caucus Institute. In the Caucus letter to Fed chair Alan Greenspan, it wrote: “Against the backdrop of the distressing fact that Hispanics already lag behind other Americans in homeownership, we ask that you carefully weigh the effect of releasing a report … that seems to gloss over the very real benefits of the GSE’s (ie. Fannie Mae). Although the report was released by Greenspan, its recommendations were ignored by the White House and Congress both. (“Reckless Endangerment”, Gretchen Morgensen, 2011, page 255)

Though the boom has gone and the bust has come, in key respects the formula is still in place. Consider: Willy Bermello—engineering company executive, developer and former president of the Latin Builders Association—who famously wrote in the Miami Herald in 2005 that the boom “is not made of latex but of stainless steel” was implicated in campaign contributions gathered for the mayoral campaign of Tomas Regalado through contractors based in the Dominican Republic: “The 16 contributions of $500 each were delivered by William Bermello, a Miami architect, from July to September in 2009, Regalado told El Nuevo Herald. The checks were issued by Dominican contractors linked to Mobiliaria Arena Gorda. Bermello is a partner at Bermello Ajamil & Partners, a Miami enterprise involved in the luxurious Los Altos project in the tourist zone of Casa de Campo, whose contractor is Mobiliaria Arena Gorda.  (“Miami Mayor Regalado might have received illegal campaign contributions”, Miami Herald, July 28, 2011) Bermello, a sophisticated investor in political campaigns and former president of the Latin Builders Association, did not respond to the Herald for comments.”

Al Hoffman, Bush campaign consigliere and former chairman of WCI Communities that went bankrupt in 2008, erasing $1.8 billion in shareholder value, gushed, “It can’t be stopped!”

The builders said, “we only provide what the market wants” but the housing boom in Florida and the fastest growing areas of the nation was not about stable economic growth: it was a vast profit engine for Wall Street financiers who had unlocked the key to create leverage in the trillions based on the humble home mortgage, and compensation based on the fabrications of profit, while in the trenches, where local zoning councils and elected officials have proven easiest to manipulate, the supply of Everglades wetlands, farmland, and green spaces was guaranteed. Condo canyons stripped public access to the oceanfront and rivers and bays. The entire development scheme in Florida seems as though it purposefully was designed to keep voters and taxpayers dumb as ox tied to the wheelhouse, turning in grinding circles to fund infrastructure like highways, schools, and water works; all required to keep the whole scheme intact until it collapsed under its own weight.

In hindsight, the building boom and the vapor trails of destroyed equity prove an economic model that cannot succeed, except for a few: those skilled enough and well-placed to take advantage of either early money and early gains or as scavengers.  To a significant degree, those who caused the modern version of the Great Depression are still in place. They have suffered no consequences. They still control the power in Congress and in state and local government. And to a remarkable degree, they have succeeded in blaming too much regulation for faults in the economy, crippled by inadequate regulation and a determined unwillingness to enforce against violators. (… to be continued)