The saga has it all: irrationally exuberant home owners, hedge funds, subprime-mortgage-backed CDOs, irresponsible developers, and crocked politicians. In the end, this saga may define the housing bubble in South Florida.
The ordeal begins with subprime mortgages. Wikipedia provides some background on these mortgages:
“As with subprime lending in general, subprime mortgages are often defined by the type of consumer to which they are made available. According U.S. Department of Treasury guidelines issued in 2001, ‘Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories.’”
Basically, these were loans that were provided to consumers that were traditionally unable to qualify for mortgages. These individual subprime loans were bundled by mortgage bankers into debt instruments know as collateralized debt instruments (CDOs). In turn, the CDOs were sold off to investors. The following chart illustrates the complexity of turning subprime mortgages into securities (the source is the best primer on the subprime meltdown I’ve seen – it's worth the time it takes for the free registration):
So, what does this have to do with Briny Breezes? The connection starts with Key Biscayne-based hedge fund manager, John Devaney, principal of the investment firm, United Capital Market. United Capital Markets ran Horizon Funds, a $619 million-dollar hedge fund that primarily invested in CDOs purchased on margin. This in turn was used to finance the Briny Breezes purchase. The Palm Beach Post reports:
“In January, two days after Briny Breezes residents voted to sell, Devaney put out a news release calling United Capital Markets underwriter of the project. The company ‘will set up working capital facilities and ultimately structure and distribute commercial mortgage-backed securities or set up a bank facility to finance the project's construction costs,’ the announcement said.”
Soon afterwards, it was revealed that Briny Breezes politicians stood to gain as well. Again, The Palm Beach Post reports:
“Based on the shares each official has in the corporation that owns the town, the mayor and aldermen would earn a combined $7.9 million from the sale. Mayor Roger Bennett stands to make $2.1 million. Four aldermen would make $1 million-plus each. The fifth alderman would get $876,902. Given those paydays, opponents suspect that the board will do whatever developer Ocean Properties asks. So far, the Briny board has done just that.”
But then, the house of cards began to rapidly crumble. On July 3, 2007, Briny Breeze’s primary investor admitted to trouble:
“United Capital Markets Holdings Inc. has stopped honoring refunds to investors in some of the firm's Horizon Strategy group hedge funds that invested in subprime-mortgage bonds, Bloomberg reported on its Web site.”
On July 7, 2007, United Capital Markets tried to calm concerns about the connection with the troubled hedge fund and the Briny Breezes project:
“Devaney's company, Key Biscayne-based United Capital Markets Holdings, acknowledged this week that it has suffered ‘significant losses’ on its risky subprime mortgage trades. The company has taken the unusual step of not allowing investors to cash out of four of its hedge funds.”
“United Capital spokesman Michael Gregory on Friday said there was no cause for concern. He said United Real Estate Ventures, the company investing in Briny Breezes, is separate from United Capital Markets, although both are owned by Devaney.”
“’It's a totally different company,’ Gregory said. ‘Briny Breezes and the asset manager have nothing to do with each other.’”
“While the company now is trying to distance the hedge fund from the Briny proposal, in the past the names have been used interchangeably.”
Early yesterday, news came out about Devaney’s asset liquidation. The New York Post reports:
“In the latest sign that circumstances are rapidly changing for one of Wall Street's most colorful characters, United Capital Markets founder John Devaney has put ‘Positive Carry’ on the market in Fort Lauderdale, Fla. He is seeking $23.5 million for it, according to the yacht broker's Web site.”
“The Post has learned that Devaney is also trying to unload a 16-bedroom Aspen, Colo., property he bought in November. He is trying to get $16.5 million for that asset; he paid $16.25 million, according to reports.”
“The $40 million he might get for his properties would help offset some of his personal losses. Devaney had $100 million in the troubled fund prior to the collapse in the asset-backed securities markets that his Horizon ABS funds specialize in.”
Soon afterwards, the Briny Breezes deal was called off.
While it might seem that the saga is over, based on a Sun-Sentinel article a vicious circle might be developing:
“Marge Dwyer was in ‘total shock’ when she heard she wouldn't be getting the money to pay off her mortgages. The Maryland native, who lives here seven months out of the year, was to receive more than $1 million for her two mobile homes in the seaside community.”
“She planned to pay off about $1 million she owed on three properties in Delaware, three in Maryland and a condo in Delray Beach.”
“’I'm mortgaged up to my eyeballs,’ Dwyer said. ‘I'm going to have to start selling [my properties] off just to survive.’”
“Dwyer, who's been unable to work for months because of a knee surgery, said she recently refinanced all her holdings, leaving herself just enough money to live on until the Briny Breezes sale in 2009.”
Based on this information, Marge Dwyer probably used subprime loans to finance her nine properties – properties that now seem destined for foreclosure. In turn, these foreclosed loans will further devalue the CDOs in which they were bundled. As a result, more hedge funds will become worthless, more developments will be abandoned, more yachts will be sold, and more “Marge’s” will be unable to pay off mortgages – the vicious cycle complete.
The Ponzi scheme is coming to roost.
The ordeal begins with subprime mortgages. Wikipedia provides some background on these mortgages:
“As with subprime lending in general, subprime mortgages are often defined by the type of consumer to which they are made available. According U.S. Department of Treasury guidelines issued in 2001, ‘Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories.’”
Basically, these were loans that were provided to consumers that were traditionally unable to qualify for mortgages. These individual subprime loans were bundled by mortgage bankers into debt instruments know as collateralized debt instruments (CDOs). In turn, the CDOs were sold off to investors. The following chart illustrates the complexity of turning subprime mortgages into securities (the source is the best primer on the subprime meltdown I’ve seen – it's worth the time it takes for the free registration):
So, what does this have to do with Briny Breezes? The connection starts with Key Biscayne-based hedge fund manager, John Devaney, principal of the investment firm, United Capital Market. United Capital Markets ran Horizon Funds, a $619 million-dollar hedge fund that primarily invested in CDOs purchased on margin. This in turn was used to finance the Briny Breezes purchase. The Palm Beach Post reports:
“In January, two days after Briny Breezes residents voted to sell, Devaney put out a news release calling United Capital Markets underwriter of the project. The company ‘will set up working capital facilities and ultimately structure and distribute commercial mortgage-backed securities or set up a bank facility to finance the project's construction costs,’ the announcement said.”
Soon afterwards, it was revealed that Briny Breezes politicians stood to gain as well. Again, The Palm Beach Post reports:
“Based on the shares each official has in the corporation that owns the town, the mayor and aldermen would earn a combined $7.9 million from the sale. Mayor Roger Bennett stands to make $2.1 million. Four aldermen would make $1 million-plus each. The fifth alderman would get $876,902. Given those paydays, opponents suspect that the board will do whatever developer Ocean Properties asks. So far, the Briny board has done just that.”
But then, the house of cards began to rapidly crumble. On July 3, 2007, Briny Breeze’s primary investor admitted to trouble:
“United Capital Markets Holdings Inc. has stopped honoring refunds to investors in some of the firm's Horizon Strategy group hedge funds that invested in subprime-mortgage bonds, Bloomberg reported on its Web site.”
On July 7, 2007, United Capital Markets tried to calm concerns about the connection with the troubled hedge fund and the Briny Breezes project:
“Devaney's company, Key Biscayne-based United Capital Markets Holdings, acknowledged this week that it has suffered ‘significant losses’ on its risky subprime mortgage trades. The company has taken the unusual step of not allowing investors to cash out of four of its hedge funds.”
“United Capital spokesman Michael Gregory on Friday said there was no cause for concern. He said United Real Estate Ventures, the company investing in Briny Breezes, is separate from United Capital Markets, although both are owned by Devaney.”
“’It's a totally different company,’ Gregory said. ‘Briny Breezes and the asset manager have nothing to do with each other.’”
“While the company now is trying to distance the hedge fund from the Briny proposal, in the past the names have been used interchangeably.”
Early yesterday, news came out about Devaney’s asset liquidation. The New York Post reports:
“In the latest sign that circumstances are rapidly changing for one of Wall Street's most colorful characters, United Capital Markets founder John Devaney has put ‘Positive Carry’ on the market in Fort Lauderdale, Fla. He is seeking $23.5 million for it, according to the yacht broker's Web site.”
“The Post has learned that Devaney is also trying to unload a 16-bedroom Aspen, Colo., property he bought in November. He is trying to get $16.5 million for that asset; he paid $16.25 million, according to reports.”
“The $40 million he might get for his properties would help offset some of his personal losses. Devaney had $100 million in the troubled fund prior to the collapse in the asset-backed securities markets that his Horizon ABS funds specialize in.”
Soon afterwards, the Briny Breezes deal was called off.
While it might seem that the saga is over, based on a Sun-Sentinel article a vicious circle might be developing:
“Marge Dwyer was in ‘total shock’ when she heard she wouldn't be getting the money to pay off her mortgages. The Maryland native, who lives here seven months out of the year, was to receive more than $1 million for her two mobile homes in the seaside community.”
“She planned to pay off about $1 million she owed on three properties in Delaware, three in Maryland and a condo in Delray Beach.”
“’I'm mortgaged up to my eyeballs,’ Dwyer said. ‘I'm going to have to start selling [my properties] off just to survive.’”
“Dwyer, who's been unable to work for months because of a knee surgery, said she recently refinanced all her holdings, leaving herself just enough money to live on until the Briny Breezes sale in 2009.”
Based on this information, Marge Dwyer probably used subprime loans to finance her nine properties – properties that now seem destined for foreclosure. In turn, these foreclosed loans will further devalue the CDOs in which they were bundled. As a result, more hedge funds will become worthless, more developments will be abandoned, more yachts will be sold, and more “Marge’s” will be unable to pay off mortgages – the vicious cycle complete.
The Ponzi scheme is coming to roost.
Stumble It!
4 comments:
I just don't feel sorry for Marge Dwyer. She spent her money before she got it. Looks like she went on a drunken spree to buy property with unrealized profits. Idiots and pigs don't get rewarded. She will lose everything including her trailer.
“’I'm mortgaged up to my eyeballs,’ Dwyer said.
Hey, Marge, by the sounds of it, theres lots more than just mortgages up to your eyeballs.
Oh greed! While those old folks stood to get a lot of money, they stood to gain a lot less than the rest of the greedy grubs
Great analysis. I knew the day this deal was signed that it would never happen. The market was already going down the toilet at that point.
I figured, at best, Briny would get to keep the $5mil deposit. Turns out the deal went south even before the extra deposit.
The deal went bad so quickly because of the lending mess you talked about, the daily worsening of the South Florida real estate market, and the troubles with Briny's neighbors and envorinmental concerns.
I doubt Briny will see an offer like this one come along for a long time--maybe 15+ years.
I doubt any other developers will be able to secure money to develop it, either.
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