When Rescue Means Eviction

By PHILIP SHISHKIN - Wall Street Journal

In 2003, Daphne Webb, a 73-year-old mother of nine, had a heart attack, quit her cleaning job and was soon struggling with medical bills. She and her husband fell behind on the mortgage payments on their white clapboard house in Montclair, N.J.

"Everything came down all at once," says her husband, William, whose $45,000-a-year income as a bus driver wasn't enough to keep the family financially afloat. By 2006, the Webbs were facing foreclosure.

So when two real-estate investors offered to purchase their house, rent it to them and then help them buy it back -- using a long-established practice known as a sale-leaseback -- the Webbs say they jumped at the opportunity. In doing so, the elderly couple waded into the murky world of "foreclosure rescue," a business that targets the growing numbers of distressed homeowners seeking help.

In some cases, according to recent warnings by authorities, homeowners can dig themselves into an even deeper hole by dealing with purported rescuers, while doing little to ward off eviction. Instead of saving homes, federal officials have warned, distressed homeowners can sometimes lose them -- along with any savings they had.

"People are desperate and willing to consider things they were never willing to consider before," says Bradley Elbein, national coordinator of the Federal Trade Commission's Foreclosure Rescue Fraud Project. "It is a real problem." Many rescuers use sale-leaseback arrangements, while others charge homeowners a one-time fee to help them negotiate with creditors.

Sale-leasebacks are a common and legal practice in real estate. To raise cash for short-term needs or to secure tax benefits, a company can sell a building it owns, and then pay rent to the buyer to stay in it. The strategy was particularly attractive before the economic crisis, when credit was easy to obtain and investors believed real-estate prices would keep climbing.

Some leaseback agreements allow sellers the option to repurchase the property at a later date. In residential real estate, a sale-leaseback can allow homeowners in financial trouble to remain in their homes and pay off their debts. But investigators say the strategy is susceptible to fraud when investors don't give homeowners the promised money. Some investors pocket the mortgages they obtain from banks or strip equity from the homes they buy instead of helping former owners get back on their feet, investigators say.

Charges of Fraud
The Webbs allege in a civil lawsuit filed in New Jersey Superior Court that they were defrauded into giving up title to their home, and lost $400,000 in home equity and tens of thousands of dollars in fees paid to the two investors, Ronald Losner and Alyssa Azran. The home, now owned by Ms. Azran, is in danger of being foreclosed on, and the Webbs, who have been paying rent to her, could get thrown out by a new owner.

Through an attorney, Mr. Losner and Ms. Azran denied any wrongdoing and said they prevented the Webbs from being evicted when they were in trouble in 2006. The attorney declined to discuss specifics of the Webbs' allegations. The case is currently awaiting trial.

A number of cases of alleged sale-leaseback fraud have recently surfaced in Florida and California, affecting hundreds of homeowners in these hard-hit real-estate markets.

In October, federal prosecutors in Tampa, Fla., charged Mario Quiroz and Jose Oliveri with wire fraud and money laundering, stemming from sale-leasebacks to 290 homeowners facing foreclosure. Most of the homeowners ended up being evicted and lost any equity they held, investigators say. Messrs. Quiroz and Oliveri, who are accused of defrauding banks of $33 million in the alleged scheme, are believed to have fled to Peru, the Treasury Department says. An attorney for Mr. Oliveri says his client denies wrongdoing. An attorney for Mr. Quiroz couldn't be reached for comment.

On Feb. 2, a grand jury in San Diego indicted William Hutchings and nine others on charges of allegedly defrauding some 400 homeowners. According to the indictment, the homeowners, mostly Hispanic, were told their properties could be protected because they were part of a land grant Mexico made to the U.S. in the 1850s, and that somehow made them immune from foreclosure.

William and Daphne Webb, of Montclair, N.J., are suing investors who bought their house and leased it back to them.
The consultants falsely claimed the homeowners could take advantage of the immunity by turning over their property deeds to trusts controlled by the consultants that were connected to the grant, the indictment states. Most of the homeowners who turned over their deeds and paid fees to the consultants were later evicted, prosecutors say.

Gregory Turner, an attorney for Mr. Hutchings, says his client was going to help the property owners save their homes, but that prosecutors intervened. "There was never an opportunity to demonstrate the veracity of this program," Mr. Turner says.

Foreclosure Proceedings
According to the Webbs' lawsuit, Mr. Losner and Ms. Azram approached them after the couple had sought and failed to obtain federal bankruptcy protection, and the bank that held their mortgage began foreclosure proceedings. They offered the sale-leaseback arrangement for the house, which Mrs. Webb had owned since 1983, says the lawsuit. In a posting on Foreclosures.com, a Web site geared toward real-estate investors, Mr. Losner and Ms. Azran describe efforts by people to save their homes via bankruptcy filings and advise tapping into "this distressed source of people" by approaching them with an offer after they fail to get bankruptcy protection.

The Webbs sold their home to Ms. Azran for $820,000 in March 2006, but received no money in the sale, according to the lawsuit. They also signed a $2,600-a-month lease agreement that stated they could buy the house back if they paid a $45,000 option price after 18 months of paying rent, the lawsuit states.

Mr. Webb says he and his wife didn't fully understand what they were signing. Tom Farinella, an attorney who represents Mr. Losner and Ms. Azran, says the Webbs were told to consult an attorney about the paperwork, but they didn't. "For the Webbs to now claim they are victims of some large-scale scheme begs to differ with the fact that they were adequately advised to retain counsel," says Mr. Farinella.

He declined to make his clients available for comment. New York State court records show that Mr. Losner, a former attorney, was disbarred in 1995 for allegedly unethical conduct in representing clients in real-estate transactions.

According to the Webbs' lawsuit, Ms. Azran obtained a $533,000 mortgage from Credit Suisse through a mortgage broker in Brooklyn, N.Y. The lawsuit alleges Credit Suisse, which is named as a defendant, approved the mortgage even though Ms. Azran didn't list a job on her application and stated her liquid assets totaled just $100. She also listed 11 other heavily mortgaged rental properties, the lawsuit states.

A spokesman for Credit Suisse said "we are investigating the matter." He confirmed that some of the loans it sourced through the Brooklyn broker -- "less than 20%" -- required only a Social Security number, a good credit score and an appraised value of the property.

After obtaining the mortgage, Ms. Azran paid off the Webbs' delinquent mortgage, on which they owed about $400,000. Between April 2006 and June 2008, the Webbs paid about $36,000 in rent to Ms. Azran and Mr. Losner, according to the lawsuit.

The Webbs say they made several inquiries about buying their house back for $45,000 in 2007 and 2008. Their lawsuit says Mr. Losner sent appraisers to the house, which cost them at least $700. He also told them at some point they would need to pay $120,000 to buy their house back, according to the lawsuit.

Meanwhile, Ms. Azran fell behind in her mortgage payments and in December 2007, Wells Fargo, which serviced the mortgage, filed for foreclosure on the house. A New Jersey Superior Court judge has effectively stayed the foreclosure, and the Webbs remain in the house and are paying their rent to an escrow account.

The Hamptons Half-Price Sale

Bridgehampton, N.Y. - Prices for opulent weekend homes are slashed, but still fail to attract bidders

By LUCETTE LAGNADO - Wall Street Journal

At first glance it's a gated mansion worthy of a Gilded Age: more than 14,000 square feet with eight bedrooms, 9½ bathrooms, five fireplaces, a pool, a pond, a tennis court and ocean views all nestled amid fields perfect for lavish summer parties.

Built on spec, this property was offered for sale in 2006 for $24.95 million. Today? Try $12.95 million -- and even that lower price hasn't yet lured a buyer. The mansion is now being sold at auction as part of a bankruptcy plan by the developer's firm. The manse stands unfinished, forlorn and uninhabited.

"Tragic," says Andrew Saunders, owner of real-estate agency Saunders & Associates, who adds the house would have sold in 2006 if it had been finished or priced less aggressively. "It was not overpriced. He got caught in economic times," counters A. Mitchell Greene, an attorney for the developer.

Welcome to the new Hamptons, where the boom's sunny days and Champagne nights have given way to foreclosure notices and sales at discounts of 25% to 30% and more. Some buyers are making offers of 50 cents on the dollar, and less. Brokers speak of the "Lehman houses" -- homes that used to belong to employees of the fallen Wall Street firm -- or "Madoff homes" -- those owned by clients of the Manhattan financier implicated in a Ponzi scheme. Summer rentals are languishing. "For rent" signs have begun to appear in the windows of some boutiques on Southhampton and East Hampton's tony shopping streets.

The price of this Bridgehampton, N.Y., mansion has been almost halved, to $12.95 million.
While Mr. Saunders remains a staunch optimist -- he opened his agency in Bridgehampton five months ago -- he is in the distinct minority. For many longtime residents, this is more than a recession. "Jay Gatsby is dead," says Dede Gotthelf, owner of the Southampton Inn, referring to F. Scott Fitzgerald's protagonist from another opulent time, also on New York's Long Island, that came to a sudden end. Ms. Gotthelf, many of whose guests spent $400 to $500 a night last summer, had the worst fourth quarter in her 11 years with the hotel, although she says business picked up recently.

Wealth Report: Falling Real-Estate Prices and Hamptons 4.0
A ghostly silence has settled on RVS Fine Arts, the Southampton gallery. Owner Roberta Von Schlossberg says in flush years she could easily sell large paintings in a price range of $5,000 and $25,000. Starting in mid-September as the financial crisis hit, she recalls, Jobs Lane became so quiet "you could roll a bowling ball down the sidewalk. Sales have greatly diminished." In Sag Harbor, Elisca Jeansonne, who owns the Gallery Merz, says business "has flatlined." At the entrance of her gallery stands a large painting of goldfish in a bag by Kevin Berlin. Priced at $35,000, it's on sale for $25,000.

Other famous resort towns are suffering. In Aspen, Colo., sales of single-family homes above $1 million fell 44% in the fourth quarter from a year earlier, according to Morris & Fyrwald Sotheby's International Realty. In the Hamptons, over the past eight years, property values soared to dizzying heights. Once a mecca for artists drawn by the light and natural beauty, the picturesque villages drew wealthy individuals from New York, Los Angeles and Europe. "There were properties that were overvalued more than in your wildest imagination, they were being built and sold for double the price in a couple of years," says Paul Brennan, regional manager for Prudential Douglas Elliman Real Estate. Then last summer, he says, sales stopped. Now, "it is blacker than anyone thought it was going to be." In Southampton, the number of fourth-quarter sales plunged 45%, according to The Real Estate Report Inc.

At Prudential's Bridgehampton office, Broker Lynda Ireland spends much of her time now dealing with offers from individuals she calls "investors." "They are putting $1 million to $1.5 million offers on homes that are $3 million to $4 million," the 25-year Hamptons resident says.

Ms. Ireland herself has been unable to sell a four-bedroom Southampton house she purchased unfinished from a builder in 2006 and put work into it. In 2007, Ms. Ireland put the home on the market for $925,000. The property languished. About four months ago, she rejected an offer of $680,000, sure she could get more. Now, faced with two mortgages and a plummeting market, Ms. Ireland emailed thousands of colleagues and potential customers. "Owner Is Ready to Make a Deal Before They Lose the House," the email read. The note gave a new price: $595,000, which "is still negotiable." She's now entertaining bids at $550,000 -- 41% below her original asking price.

Real-estate broker Enzo Morabito also remembers the good times, when he'd host Champagne parties at the Hamptons' annual polo tournament. He owned as many as three polo horses of his own. Now, Mr. Morabito is running full-page ads in the Southampton Press headlined: "Extraordinary Times Call for Extraordinary Measures." His plan: Hire an auctioneer to sell unwanted properties. He sold his last horse, a pony, last spring.

As for rentals, houses that rented for $350,000 in the summer of 2008 have to be reduced to the $250,000 range to find any takers this year, Prudential's Mr. Brennan says. "People have money. Nobody is spending it," he says, adding hopefully: "They have not canceled summer."

Meanwhile, locals are grappling with ways to survive the downturn. Steven Gaines, author and chronicler of the Hamptons high-life, says he's eating at home most nights. Broker Nelya Veselaya's strategy: get out of town for a while. She flew to Buenos Aires in December for 2½ weeks and danced the tango every night. "Honestly, I was getting really depressed," she says, "So I decided to go away and dance and be happy."

Bargain-Hunters Descend, Cash in Hand

By NICK TIMIRAOS / Wall Street Journal

Falling home prices are spurring an increase in all-cash home sales in markets that have been hardest hit by the foreclosure crisis, an indication that bargain hunters have descended on the markets looking for deals.

Homes financed with cash comprised one-third of sales in Phoenix last month, up from 19% one year ago, according to a report by Raymond James & Associates Inc. In Sacramento, Calif., all-cash sales accounted for 24% of total home sales last month, up from 8% in January 2008 and 3% in January 2007, according to the Sacramento Association of Realtors. Sacramento and Phoenix have each seen home prices fall by one-third in the past year.
[Chart]

Cash sales are up even more in many Florida markets. In Miami, cash offers accounted for 30% of sales last month, according to a report by Thomas Lawler, a housing economist based in Leesburg, Va. That share more than doubled in Gulf Coast communities such as Punta Gorda and Englewood, Fla., where cash financing accounted for 65% and 60% of sales, respectively.

"It's sort of like, 'Good Lord, prices have fallen so low that even people who are willing to pay all cash are buying,'" says Mr. Lawler, adding that cash financing has increased sharply in every major market "where distressed sales have soared and prices have plunged," he says.

Cash sales are typically higher in Florida than in other markets, in part because the state attracts lots of foreign buyers and retirees who are more likely to plunk down their savings without taking out a mortgage. But a number of cash buyers these days, in Florida and elsewhere, are also investors scooping up distressed properties and affluent families seeking relatively inexpensive vacation homes. "Cash investors have come right out and said, 'We can't make a return on our money in stocks or bonds,'" says Heather Barr, a Realtor based in Gilbert, Ariz., a Phoenix suburb. "They think Phoenix has had such sharp price declines that we've got to be near the bottom and real estate will be a safe place to put their money."

In some cases, cash buyers are finding that they can get a deeper discount by making an all-cash offer. In markets with a glut of foreclosed homes, lenders are becoming more aggressive to sell "simply because there aren't enough first-time home buyers around to sop up the excess supply," Mr. Lawler says.

Brett Barry, a Phoenix Realtor, is selling a bank-owned home in Cave Creek, Ariz., to an Indianapolis couple that is retiring and buying a second home. The property will sell for about $190,000, down from an earlier listing price of $209,000.

"That price was a good deal, and the bank didn't even counter it," says Mr. Barry.

A separate bank-owned home in the same development sold for $133,000 to a cash investor, beating out a $179,000 offer from a first-time home buyer with financing from the Federal Housing Administration. "The bank just didn't want to take the chance with financing," Mr. Barry says. "The lenders I work with will take a substantially lower cash offer as long as they see proof of liquid funds."

In South Florida's condo market, "the all-cash buyer is basically the only one doing deals today because the financing just doesn't exist," said broker Peter Zalewski of Condo Vultures Realty LLC in Bal Harbour. "It's virtually impossible to get a loan."

A glut of condos that eroded home prices has triggered tighter lending standards, including 50% down payments even for individuals with spotless credit. Meanwhile, beginning in April, government-backed mortgage agency Freddie Mac will tack on a delivery fee to mortgages backed by condo units nationwide if the down payment is less than 25%. Fannie Mae is doing the same, a move that follows last month's tightened condo-lending guidelines, with requirements including a majority of units presold and reserve amounts. In Florida, Fannie must now review each new project for stability before it will guarantee financing.

—Dawn Wotapka contributed to this article.