Condo Crash : Low financing and an idyllic location lured buyers to an Azusa redevelopment project that turned out to be riddled with problems. Many lost their money and their dreams.
Retty Crocchi, a 57-year-old teacher, said she thought the price of $170,000 was high when she bought her condominium at the Rainbow Angling Club in Asuza five years ago, but she fell in love with the idyllic location: a secluded setting in woods beside a lake.
Her misgivings about the price were overcome by a mortgage loan well below the going rate because of special financing provided by the city Redevelopment Agency. And she was reassured about the value of the property by the mortgage lenderâs willingness to finance up to 95% of the purchase price, even though she decided to put $40,000 down.
When she and her husband moved in, she said, âwe thought we were moving into a lovely, peaceful place. This was going to be the good life.â
But their peace of mind was soon shattered. The air conditioning system broke, and the company that installed it would not honor the warranty because it the company had not been paid by the builder.
Change to Rentals
Then, after selling only 14 of the 56 units in the complex, the builder went into bankruptcy. The remaining units became rentals and, Crocchi said, she finally learned that the price she had paid for her condominium had little relationship to its worth.
Two months ago, Crocchi, now a widow, gave up on her $40,000 investment and bought a home in Santa Ana.
She had stopped making mortgage payments more than a year ago. She said she chose to lose her property through foreclosure rather than pour more money into a home that turned out to be vastly overpriced and riddled with construction defects and could not be resold. She moved when eviction seemed imminent.
Crocchi was not alone. A dozen of her neighbors also stopped making mortgage payments last year, and nearly all have moved from the complex, losing their investments, she said.
âItâs been kind of a long siege for all of us,â Crocchi said.
The Azusa Redevelopment Agency is gaining title to the condominiums through foreclosure.
Sold Bonds
The agency, in an effort to stimulate home construction, sold $38 million in tax-exempt bonds in 1979 to raise money for low-interest loans to home buyers in four housing developments, including the Rainbow Angling Club condominiums. City officials estimate that defaults by Rainbow Angling Club buyers will cost the agency between $1 million and $3 million, endangering its ability to meet its bond obligations and risking its credit standing.
Crocchi blames the city for luring her and other buyers into a bad investment with the discount mortgage loans and for allowing shoddy construction through failure to enforce building standards.
âIt needs to be pointed out to the public,â she said, âthat you can come with hard-earned money and invest in what you consider to be a home that you are going to spend the rest of your life in, and the whole thing can just go down the drain.
âThis is a redevelopment project that has gone sour.â
City Finance Director Geoff Craig said it is not yet clear who is to blame for the blunders that went into the Rainbow Angling Club project.
âThe legal people are going to have to decide whoâs responsible for this mess,â he said.
Craig said the ingredients include:
Mortgage loans amounting to more than the property was worth.
A mistake that allowed a lapse in mortgage insurance on the loans, leaving the Redevelopment Agency without coverage when owners stopped making their mortgage payments.
A string of construction defects that became apparent after the builder went bankrupt, leaving no one to pay for repairs.
The condominiums were built on an eight-acre site that once housed a popular, picturesque dining spot called the Rainbow Angling Club. The club was nestled in the foothills above Azusa beside a tiny, man-made lake. The club stocked the lake with trout and invited patrons to catch their own dinner, providing rods and reels for those who came unequipped.
The club closed in the mid-1960s after a devastating fire. A decade later, Jack Fleming acquired the property and formed the Rainbow Angling Club Corp. to build condominiums around the restored lake.
Bank Foreclosed
âIt was a beautiful project,â Fleming said. âNothing should have gone wrong.â
He said many sales were in escrow when the bank that loaned money to his corporation to build the condominiums foreclosed, and contended that if he had been allowed to complete the sales, the project would have been a success.
Buyers were offered mortgage loans at an interest rate of 9.1% for 30 years through Crocker Bank, which administered funds from the Redevelopment Agency. âThe 9.1% was a big attraction because in 1982, mortgage interest rates were up around 15% to 16%,â Crocchi recalled.
Buyers also were given the option of putting only 5% down.
Crocchi said she and her husband decided that they would make a larger down payment because he was ill with cancer.
âWe talked it over and decided that if anything happened to him, in order for me to be able to make the payments without his salary, we would have to put a big chunk down,â she said.
âMy husband died after we bought the place, and my income is down by two-thirds. I teach part time. There is no way I can ever recoup the loss.â
âSob Storyâ
Leslie Tait, 71, said she put $28,000 down on her $158,000 condominium and lost it all.
âThis is a sob story,â Tait said. âI have no way of earning the money back. Iâm on Social Security.â
Kenneth Greger, a 34-year-old certified public accountant, said he put only 5% down on his $171,000 unit but still walked away from it $10,000 poorer.
Greger said he and other buyers mistakenly believed that they were being offered condominiums at fair prices because Crocker Bank had obtained appraisals. Greger said he assumed that a bank willing to lend 95% of the value of a property must have confidence in its appraisal.
But what he failed to take into account, Greger said, was that the bank was lending funds from the Redevelopment Agency, not its own money.
And it was not until much later, Greger said, that buyers learned that the bank did not base its loans on what the property was worth on the open market. Instead, the loans were based on the value of the property plus the value of the special financing that was being offered.
The bankâs appraiser figured out how much a buyer would save by getting a mortgage loan at 9.1% interest instead of the prevailing rate of 16.5% over a 12-year period, the time the bank assumed an average homeowner would keep the condominium.
For example, a condominium that the bankâs appraiser thought was worth $117,200 on the open market was assigned a value of $160,000 by adding $42,800 to represent the value of discount financing.
According to this analysis, the buyer was justified in paying extra for a property that had discount financing, and higher loans also were justified.
But the analysis failed to take into account the fact that market interest rates might fall, as they did, reducing the value of the special financing.
Saddled With Mortgages
Greger said buyers thought they were paying a price based entirely on fair market value, but they were being saddled with mortgages that exceeded the propertyâs worth.
Efforts to obtain comment on the loans from Wells Fargo Bank, which absorbed Crocker Bank, were unsuccessful, but city officials confirmed Gregerâs description of the way the loans were made.
Before the city sold bonds in 1979 to finance mortgage loans, it commissioned a study that found there was a market for the proposed housing. But the study was based on projected sales prices at the Rainbow Angling Club of $98,500 to $120,900. By the time the condominiums were built and ready for sale in 1982, they were being advertised at $162,000 to $270,000.
Rainbow Angling Club Corp. sold only 14 of the 56 condominiums in the project before entering bankruptcy. Soon thereafter, the City Council, which oversees the Redevelopment Agency, fired the consulting firm that had recommended the mortgage bond issue. Councilman Bruce Latta said the city should have foreseen the folly of the project.
$200,000 Condo in Asuza
In a written statement in February, 1983, he declared:
âAnyone with any common sense would know that no one who could afford a $200,000 condo would want to buy one in Azusa. They could buy one cheaper and in a nicer neighborhood at the beach.â
The Bank of America, which had loaned the Rainbow Angling Club Corp. more than $6 million for construction, foreclosed and acquired title to the 42 unsold units in March, 1983. A few months later, the bank sold the units to Pacific Union Properties, a San Francisco partnership, for $5,135,236, or about $122,000 each, and loaned the partnership nearly $400,000 to make needed improvements.
The sale confirmed the fact that the 14 individual buyers, who had paid an average of $165,000 for their units, had paid too much.
Pacific Union Properties converted the units that had not been sold into apartment rentals.
Tait said people who thought they had bought into a condominium community found themselves living in âa glorified motel.â
Units Unsaleable
In addition, she said, the conversion made the remaining units unsaleable. As a rule, people will not buy condominiums in projects where their neighbors are renters, she said, and major financial institutions will not make mortgage loans on such property.
In addition, the renters are living there for as little as $950 a month, while buyers had monthly payments of $1,500 or more.
The bulk sale gave Pacific Union Properties control over expenditure of the dues collected from condominium owners for maintenance of the grounds and buildings. The condominium owners complained that most of their dues were being used to benefit Pacific Union Properties, and many stopped paying the assessments of $167 a month.
Meanwhile, owners, including Pacific Union Properties, began discovering construction flaws. According to two lawsuits, the plumbing system developed widespread leaks, the electrical system did not meet code requirements, and rain poured in through roofs and decks. The suits have not been settled.
Ted Villaluz, 42, who paid $155,500 for his condominium, said: âThe structural defects were just horrible, milking me out to the point where I spent $1,500 on just leaks.â Villaluz plans to move in December.
Seeking Way Out
The condominium owners hired an attorney, Richard E. Posell of Century City, to seek a way out of their plight.
Posell sought relief from the City of Azusa; Wells Fargo Bank; Metmor Financial Inc., which had replaced Crocker Bank as administrator of the mortgage loans, and Ticor Mortgage Insurance Co., which had insured the mortgages.
Posell said no one was willing to help.
âEverybody seemed to be saying it was somebody elseâs problem,â Posell said. âIt was a comedy of errors . . . a classic bureaucratic snafu.â
The homeowners stopped making mortgage payments, hoping to focus attention on their problems, but succeeded only in inviting foreclosure.
Injunction Denied
In February, Posell filed suit on behalf of 13 of the owners against the city, Wells Fargo and Metmor in Los Angeles Superior Court alleging fraud and negligence and asking for a court order to block foreclosures. But Judge Ricardo A. Torres denied a preliminary injunction in April, ruling that âthe plaintiffs have caused the situation they complain about by failing to make their loan payments.â
Even though the judge refused to issue an injunction, the lawsuit is still on file. One part of the complaint charges that building code requirements were not met.
But City Atty. Peter Thorson said state law grants the city absolute immunity for defects that may have been missed by its building inspectors.
Unsuccessful in court, homeowners turned to the City Council.
âWe went to the city several times and asked if there was a way we could reduce our mortgages, but they wouldnât work with us. They wouldnât even listen,â Villaluz said.
âWe tried to approach them with the idea that if we all walk, youâre going to be stuck with these places.â
Live With Consequences
City Councilman James Cook said the condominium buyers made a bad investment and must live with the consequences.
âThey wanted us to bail them out because they paid too much,â he said.
Nearly $2 million was loaned to the 13 Rainbow condominium buyers who stopped making their mortgage payments. Thorson said mortgage insurance normally would cover part of the loan loss, but in this case the insurance coverage lapsed.
Thorson said Metmor, which should have paid the premiums to Ticor, claims that it repeatedly asked Ticor how much to pay but never received an answer. Thorson said Ticor claims that it billed Crocker Bank and has no further obligation.
To complicate matters further, Ticor is operating under the conservatorship of the state Insurance Commission because of financial difficulties. So even if Ticor agreed that the insurance was in force, Thorson said, the Redevelopment Agency would not have its claims paid in full immediately.
âIn Deep Troubleâ
Thorson said the mortgage revenue bond issue was designed to generate a fund for low- and moderate-income housing, but the defaults will deplete that fund and could jeopardize interest payments to bondholders.
He noted that the three other housing projects financed by the 1979 mortgage revenue bond issue have been successful and said there is âa good possibilityâ that investors will be paid.
âWe are in real deep trouble if they donât get paid,â he added, explaining that the Redevelopment Agencyâs credit standing would be damaged.
Thorson said the full impact of the mortgage foreclosures will not be known until the city determines how much it can get when it resells the repossessed units, some of which are in poor shape, with carpeting ripped out and holes in the walls where plumbing was repaired.
He said it will take a lawsuit to sort out financial responsibility.
âI have no doubt there will be litigation,â Thorson said. âI donât know what form it will take.â
Bitterness Over Loss
Meanwhile, most of the buyers who walked away from their condominiums have moved elsewhere to start over, taking their loss with some bitterness.
Tait, who moved out of her condominium Oct. 8 to a new home in San Dimas, said: âIâve never been an angry person my whole life long. But Iâm vengeful. You wouldnât believe how vengeful Iâve become.â
She said she bought her condominium in Azusa with the intent of living there âuntil I went to Forest Lawn.â Instead, she said, she lost her home and the money she put into it and has been forced to dig into the last of her savings to buy a new place.
âI think itâs horrendous to be put in this position,â she said.
Greger said Tait and Crocchi suffered the greatest financial loss because they made large down payments. Some buyers recouped a substantial part of their investment by staying in their units free for more than a year while foreclosure proceedings were under way.
âDisillusioning Processâ
But for everyone, Greger said, âIt has been a very disillusioning process--the kind of thing that creates cynics.â
Greger said the condominium buyers put their faith in reputable financial institutions and the city, tried to work out compromises when things went wrong and were rebuffed at every turn.
âI lost my home. I lost a place to live that I really cared about,â Greger said. âThere is an emotional loss and a financial loss and a loss in belief in the system.â
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