Wall Street’s mortgage and credit crisis will have a huge price tag and tenant advocates fear one casualty could be a swath of New York’s affordable housing stock. Call it Wall Street stabilization over rent stabilization.
And the stakes are rising as private equity landlords across the city feverishly move to evict rent-stabilized tenants in favor of higher paying renters to pay staggering mortgages. If these landlords default, tens of thousands of apartments could be in danger.
Tenant lawyers specifically point to Resolution Trust Corporation v. Diamond, a case from the early 1990s that allowed the government-run Resolution Trust Corporation (RTC) to resell defaulted mortgages at a higher rate by overriding tenants’ rent-stabilization protections in foreclosed buildings. Created in 1989 as a response to the savings and loan crisis that saw hundreds of thrifts go under due to reckless lending, the RTC bought up $394 billion of bad assets (mostly commercial leases) and resold them to the private sector before dissolving in 1995.
Now, as Congress moves to clean up after Wall Street’s binge, business interests are already calling for the creation of an entity modeled on the RTC to soak up investors’ bad assets.
“If [Congress] follows the resolution trust model, I believe the [trust] will be able to evict tenants,” says Bob Katz, an attorney at the tenant law firm Collins, Dobkin and Miller. “RTC v. Diamond allows federal preemption; so where the federal government expressly enacts law, it takes precedence over state law.”
More than 2,200 New York City homeowners — in largely African-American and Latino neighborhoods — have already defaulted on their mortgages this year, according to real estate research website propertyshark.com. Yet, an even greater default crisis is lurking in New York City. Highly leveraged corporate landlords that have bought up tens of thousands of rent-stabilized apartments could be the next victims of the housing crisis, leaving tenants in the lurch.
“RTC v. Diamond makes really clear that the federal court doesn’t feel rent stabilization extends protections,” says Jeffrey Brooks, a staff attorney at Gay Men’s Health Crisis, an AIDS advocacy group that represents HIV-positive tenants. “Our clients were forgotten once before, we don’t want them forgotten again.”
The Association for Neighborhood and Housing Development estimates that private equity finance groups have bought approximately 90,000 rent-regulated apartments across the city in the past four years, according to the The Villager. Many private equity firms’ ability to pay their gargantuan mortgages is predicated on substantially increasing rents by evicting rent-stabilized tenants and replacing them with market renters.
In one case, the landlord of the 1,232-unit Riverton Houses, a seven building complex between Fifth Avenue and the Harlem River and 135th and 138th Streets in Harlem, could default on his $225 million mortgage as early as the end of October, according to the New York Times. The landlord, Larry Gluck, purchased the building with backing from the private equity firm, the Rockpoint Group. Almost 90 percent of Riverton tenants are rent-regulated and protected from eviction as long as they pay their rent on time and the apartment is their primary residence. These tenants could face an uneasy future if Gluck defaults and RTC v. Diamond comes into play.
The scale of this decade’s bailout could be more than $1 trillion, and if private equity held buildings begin to default, it could send shock waves through the city’s affordable housing market.
“If the government follows the trust model, it would be attractive to the Bush administration to do away with rent regulations,” tenant attorney Katz says.