As many as 60,000 apartments for poor and working-class tenants in New York City are in danger of falling into disrepair and bankruptcy because of “shoddy lending practices” by major financial institutions in recent years, according to a report released on Monday by Senator Charles E. Schumer and advocates for low-cost housing.

Mr. Schumer said that real estate investors and speculators, who borrowed hundreds of millions of dollars to buy apartment complexes like Stuyvesant Town based on unrealistic projections of rising rents, are now having difficulty paying “sky-high mortgage costs.”

As a result, Mr. Schumer said, the new owners have come under pressure to oust residents of rent-regulated housing in favor of tenants paying market rents, to cut services or to default on the loans.

Mr. Schumer, a member of the Senate Committee on Banking, Housing and Urban Affairs, called on the Securities and Exchange Commission to investigate whether the loans were based on false or misleading financial assumptions before being sold to investors as securities. He also asked state and federal regulators to issue lending guidelines intended to ensure that certain apartment complexes remain affordable for low- and middle-income people.

“The entire predatory equity enterprise is a house of cards built on a foundation of fantasy and greed,” Mr. Schumer said on Monday. “The whole thing collapses when there is any depreciation, or even a leveling, in the property’s value, which is the reality we now face. You would think these deals would’ve stopped a year ago, but they are still going forward.”

The estimate of 60,000 apartments came from a review of property records, filings at the Securities and Exchange Commission and financial documents related to mortgage-backed securities by housing advocates and aides to Mr. Schumer.

Executives at the private investment firms involved in these deals angrily reject Mr. Schumer’s “predatory equity” characterization, and insist that they have improved management and invested millions of dollars to spruce up aging buildings.

The financing deals described by Mr. Schumer and the Partnership to Preserve Affordable Housing, a coalition of housing advocates and tenant leaders, occurred mostly during the housing boom in 2006-7. These deals were largely unique to New York.

Private equity firms spent millions buying large and small apartment complexes in working-class neighborhoods, many of them with rent-regulated tenants. The financing for those purchases were based not on existing rents but on what the new owners claimed rents would be in five years. The developers borrowed money for the projects in the belief that they could profit by replacing existing residents with higher-paying ones.

But turnover at the complexes has often been much slower than many developers anticipated, leaving a huge gap between their rent roll and monthly mortgage payments. So far, there has been only one default: Riverton Houses, a seven-building complex in Harlem with 1,232 apartments. But many other projects are in jeopardy because the owners are quickly burning through the reserve funds set aside for mortgage payments, said Manus Clancy, a senior managing director of Trepp, a firm that gathers data on real estate markets.

Tenant advocates and Mr. Schumer want the government to help restructure the unstable loans and protect buildings that face default.

“The people responsible for getting us into this mess can’t be solely responsible for getting us out of it without some kind of government oversight,” said Dina Levy, the director of policy for the Urban Homestead Assistance Board, a housing advocacy group working with Mr. Schumer.

Riverton tenants have been on “pins and needles” ever since the developer, Stellar Management, notified lenders this summer that it was in imminent danger of default, said Cynthia Allen, president of the tenants association.

Stellar bought the moderate-income complex in 2005 for $131 million, with a $105 million secured loan. The company refinanced a year later, taking a $225 million mortgage and a $25 million loan, enabling the developer and its partner to repay the old loans and take out tens of millions of dollars in profit.

Since then, the company has spent most if not all of $53 million in reserve funds. And few apartments have turned over. The rent roll covers less than half the mortgage payment. Real estate executives say Riverton Houses is worth about $180 million today.

Stellar worked out a tentative deal with its primary lender to extend the mortgage. But, CBRE Realty Finance, which provided the $25 million loan, balked. Kathleen Cudahy, a spokeswoman for Stellar, confirmed Monday that CBRE Realty recently notified Stellar that it planned to sell Stellar’s partnership interest, which serves as collateral for the loan, in February.

Tenants worry that Stellar, or a new owner, would cut back on maintenance and services.

Ms. Cudahy said her company “is reinvesting all the money that it received plus more into making improvements” at the complex.

Source: NY Times