Report: 18% of Puerto Rico’s Housing Inventory Vacant
Editor’s note: This article was originally published in the July 5 – 11 issue of Caribbean Business.
The real-estate market crisis in Puerto Rico, which for a decade has turned the island into the U.S. jurisdiction with the highest amount of vacant housing stock, was exacerbated after Hurricane Maria struck, according to a report by the Center for Puerto Rican Studies at Hunter College in New York and University of Puerto Rico’s Planning School.
According to Hunter College’s policy brief, the U.S. Census Bureau established in 2016 that there were some 1.5 million households in Puerto Rico. Of these, 257,798, or 18 percent, are uninhabited residences. Among the municipalities with the largest number of uninhabited homes were San Juan, Carolina, Caguas and Arecibo. However, the island’s inland mountainous region reflects a lower number.
The publication also concludes the high supply of residences, amid a decrease in demand, created a 10 percent drop in median home values since 2005. Municipalities such as San Juan and Lares, however, showed drops of up to 20.2 percent in the price of certain residential properties.
Experts argue the island market’s crisis began in early 2000, when the so-called real-estate bubble began to develop, which in large part was due to an excessive increase in the granting of mortgage loans of all kinds.
Speculation on sale prices of newly built homes and lax criteria contributed to the fact that most banking institutions granted mortgage loans to people who did not have sufficient income sources for repayment.
Furthermore, in the first half of 2017, before the emergency caused by hurricanes Irma and María, Puerto Rico already topped the list of nine countries with the greatest drop in property-sales prices, according to Global Property Guide, which analyzed the property-price performance of the largest economies.
According to the analysis, the price of homes in Puerto Rico fell 9.59 percent year-over-year in the second quarter of 2017, after registering a 3.26 percent increase the previous year, making the island “the weakest housing market in our global house price survey,” the report said.
However, Puerto Rico “made a surprise comeback with the seasonally adjusted purchase-only house-price index rising 12.55 percent in [first quarter] 2018 from a year earlier….”
Last year, the Financial Institutions Commissioner’s Office (OCIF by its Spanish acronym) said the number of foreclosures in 2017 reached 6,214, which was a considerable difference compared with 5,424 in 2016 and 4,459 in 2015.
In addition, OCIF indicated that more than 20,000 mortgage borrowers are in the process of being foreclosed.
After the September 2017 hurricanes struck the island, the local property crisis seems to have substantially increased, with hundreds of monthly foreclosures nine months after the storms.
For this reason, a class-action lawsuit was recently filed in federal court by a group of 300 homeowners in Puerto Rico, who have been affected by alleged irregularities in the granting of mortgage loans, and are represented by a team of Consumer Defense Alliance Foundation (Codea) lawyers.
Codea board member Joseph Gierbolini, who represents the plaintiffs, denounced the foreclosure problem after Hurricane Maria, which has left the island with a humanitarian crisis because there are now hundreds of families without homes after the banking institutions executed on their properties. This development, Gierbolini assured, was done without due process of law.
“The creditors [financial institutions listed in the lawsuit] were lax in the criteria for granting the mortgage loans. We have seen cases where, beyond being lax, they committed fraud, in the sense that if someone did not qualify for a house because of their income, they suggested their customers submit a false letter indicating they [the borrower] had an additional part-time job, and with that, they [the financial institutions] approved it. They qualified a lot of people and they could do it for a product that was called subprime, or nonconforming, loans, which are toxic loans,” explained the lawyer, who specializes in these types of loans, which do not meet banking criteria for financing.
“The creditors filled up with many loans, and the one who originates it, packages it, sells it in the secondary market—called securitization—goes to Wall Street, sells it to the bond [markets]; there’s Fannie Mae [formerly the Federal National Mortgage Association], Freddie Mac [formerly the Federal Home Loan Mortgage Corp.], FHA [Federal Housing Administration], etc. If I lend money to a person who does not have the ability to repay, in the long run, I will execute it. That was later coined as ‘predatory lending’ and U.S. Congress enacted numerous laws against this [practice].
“We are in the federal forum and we are currently producing another class-action for the state forum simply because the large number of laws that regulate mortgages are federal,” he added.
With the lawsuit, plaintiffs are seeking that the federal court allow for restitution of the foreclosed property, compensation for damages, an order declaring the alleged acts and practices of the defendants constitute a breach of contract, and of the agreement in good faith and fair treatment, an order for the specific performance of the defendants’ contractual obligations, along with other relief required by the contract and the payment of attorneys’ fees and the costs of the action, in addition to compensation for damages to the plaintiffs, jointly and severally, in an amount no less than $3.5 million, and any other reparation the court deems necessary.
As explained by the legal representative, the allegations in the lawsuit involve misconduct in the origination and qualification of the loan process, predatory lending, robo-signing [the robotic process of the mass production of false and forged execution of mortgage assignments…], faulty paperwork, dual tracking, illegal mortgage servicing and illegal foreclosure.
“The bulk of the allegations are for noncompliance with the federal banking reform of 2010, the Dodd-Frank [Wall Street Reform & Consumer Protection Act]…which states that when compulsory mediation is determined, the creditor cannot initiate a lawsuit for enforcement. The creditors did both things at the same time. On the one hand, a division of the bank was in loss-mitigation with the customer, and on the other hand, the legal division of the same creditor was executing the property. This is called dual tracking,” Gierbolini explained.
The expert said statistics indicate that 95 percent of foreclosures in Puerto Rico are carried out without the person sued having responded to the lawsuit.
“This is important because Mandatory Mediation Act 184 of 2012, authored by Sen. Carmelo Ríos [New Progressive Party-Bayamón] under the [former NPP Gov. Luis] Fortuño administration, includes a clause that states that…to be eligible for mandatory mediation, the lawsuit had to be responded to; that is, they could not be in default. This statistic means foreclosures in Puerto Rico are being carried out by default, and that…indicates Act 184 did not apply to them,” he said.
“And we have found…95 percent of defendants…many of them did not even know they had been sued. That is, the plaintiff who submitted a sworn statement that was false, and that is perjury,” he added.
Other irregularities pointed out by the lawyer were the “irresponsible and reckless” handling of mortgage-loan customers’ sensitive personal documentation, as well as failure to properly process applications for loan modifications, including failing to account for documents submitted, denying acceptance of partial payments, failing to respond to requests for information and assistance, failing to respond to written requests and misrepresenting that loss-mitigation programs would not provide relief, including a reduction in the principal amount of the loan to fair market value.
“That means I’m overwhelmed because I’m losing my home, where my family lives, and I’m submitting all the papers the bank asks for and they get lost and I have to submit them again and then it happens again, and time passes and I’m in crisis. That creates indescribable emotional damage, and that is why we classify this situation as a humanitarian crisis,” Gierbolini said.
Greater federal regulation
Caribbean Business asked the lawyer about the reasons for filing the lawsuit in federal court and not locally. He said there are more and specific federal regulations for the real-estate market and mortgage loans than there are in Puerto Rico.
However, he said a filing to be submitted for consideration by the state court is currently being written.
“We are also initiating a lawsuit to also demand compliance with state laws. Among them are Act 184 on mediation; Act 169 to aid the mortgagor; Rule 4 of Civil Procedure, which is the one that regulates summons; Rule 57, which is the one that regulates that the mortgagee has to prove ownership to be able to carry out an execution; as well as Article 107 of the Mortgage & Real Estate Act 210 of 2015. Among them, are the articles that talk about contracts: 1054, 1077, which are articles of the Civil Code. All those articles on contracts—because if there is a mortgage contract, and the law regulates that I have to provide mandatory mediation, and then I don’t comply with the mediation, then I’m simply not complying with the contract,” he stressed. Gierbolini also explained that the class-action lawsuit is addressed to all banking institutions on the island, including cooperatives.
“The state and federal lawsuits are directed at all financial institutions on the island. All banks authorized to do business in Puerto Rico and all the vultures [investors], which are the hedge funds or institutions that buy the toxic mortgages, nonconforming [mortgages], at liquidation prices, and then they go against the debtor and want to charge 100 percent. Then they execute them to put them on the market. And you don’t have to look at the statistics to realize that the situation is pressing, and that one in five homes in Puerto Rico is abandoned. Just go to any urbanization in Puerto Rico; you’ll see countless empty, abandoned houses,” he said.
Gierbolini expressed concern about the recent trend in the increase in high-net-worth investors, who have come to the island to buy properties at bargain prices to resell them at inflated prices. Therefore, the lawyer, said, not only were the island’s banking institutions included, but also more than 20 “vulture” companies, such as Roosevelt Cayman and Apex, among others.
However, the lawyer categorically stated the idea is not to negatively affect the local banking and real-estate markets, but to find middle ground, where the banking institution can recover its investment without having to throw people out on the streets.
“We’re not interested in harming the banking sector and much less local banking. What we want is to prevent people from being thrown out on the street. So, what we want is to reach a happy medium. That the creditor collects, but not at the expense of throwing families out on the street,” he concluded.
In the lawsuit, which was obtained by Caribbean Business, Héctor Ferrer Ríos, president of the minority Popular Democratic Party, and former PDP Sen. Ramón Luis Nieves Pérez, are listed as legal representatives of Scotia Bank. Although Caribbean Business was told a reply to a request for comment would be sent, as of presstime, the company had yet to provide a response on the lawsuit.
Similarly, attempts to receive a reaction from Banco Popular of Puerto Rico via its press office were also unsuccessful, although the institution also said a written response would be sent.