This toxic house

An afternoon at midweek, Lakeridge Shores East is a quiet street, though one suspects that’s always the case. This is a gated community of fantastically expensive, beautiful and well-tended homes. No one would dare make much noise. This is where the ruling class lives and the denizens would likely call the police more readily—and with greater expectation of response—than most citizens. A passing car bears bumper stickers (the rich have bumper stickers on their cars?) reading, Reject Reid and Taxed Enough Already, the latter printed up by George Wallace’s old political party.

While the street is well tended, it’s not quite as well tended as it was in, say, 2006. Some of these homes fit the term we have all come to know so well since last summer—toxic properties.

The house at 2550, for instance, now has a yellow lawn. And that’s not all. This house previously belonged to John Cavanaugh. He used to be an owner of Gold Dust West, a Reno casino that caters to locals. He purchased 2550 Lakeridge Shores East in August 2005 with a $1,100,000 loan. The lender: Washington Mutual, a savings and loan which last year became the largest failed bank in U.S. history.

When last year’s meltdown came, Cavanaugh was seriously damaged. He tried to sell his home, but there wasn’t much of a market, and in March 2009 he defaulted—surrendered the property back to Washington Mutual. Therein lies a tale.

The property went first to Washington Mutual’s toxic properties division, called its Loss Mitigation/Default Alternatives office.

While that office still held the property, Cavanaugh’s sister and brother-in-law, Barbara and Bill Thornton, made an effort to keep the house in the family. They live just down the street from 2550. They were, perhaps, not the best people to try to buy the property, but it is by no means clear that they should be disqualified, either. An “arms-length” relationship is supposed to exist between a defaulted owner and the new purchaser, though how the line is determined is not an exact science. In addition, not all transactions are born equal. One online real estate forum recently had a discussion of this question: “Are bank-owned properties arms-length transactions?” The person who posted the question added, “I seem to think they are not, due to their motivation. The lender is telling me to provide ‘my’ definition and where it is referenced.”

The Real Estate Dictionary defines an arms-length transaction this way:

“A transaction among parties, each of whom acts in his or her own best interest. Examples: Transactions between the following parties would, in most cases, NOT be considered arm’s length:

“• a husband and wife

“• a father and son

“• a corporation and one of its subsidiaries.”

On Dec. 19, 2008, the Thorntons sent a formal purchase offer of $500,000 for the note on the house to the Washington Mutual Loss Mitigation office in Jacksonville, Fla. For whatever reason, the sale did not happen—the bank did not respond—so the Thorntons never got a chance to raise their offer. Thornton says that in a foreclosure sale, Bank of America acquired the property from Washington Mutual for $807,000, just over its county-assessed valuation of $798,010.

During the Wall Street meltdown last year, Congress justified its bailout by saying that financial institutions like Bank of America were too big to be allowed to fail. Those companies then were permitted to get bigger, in BOA’s case by merging with Merrill Lynch, making BOA the world’s largest financial services firm, and by two infusions of bailout capital from the U.S. Treasury totaling $45 billion, plus $118 billion in federal guarantees. The public now owns about 6 percent of Bank of America. Earlier this year BOA informed Congress it was profitable again, but last weekend it posted a billion dollars in third quarter losses.

Last week a federal inspector general issued a report finding that Bank of America seemed to receive preferred treatment from bailout officials during the panicky late months of 2008, qualifying for more aid earlier. The New York Times reported, “That assertion adds another element of intrigue to continuing investigations of the bank’s merger with Merrill Lynch and the role that regulators played in the deal, even as Merrill’s condition deteriorated.”

A good property

Time passed, but the Thorntons kept alert to what was happening on the house.

While it may not have been the best time in human history to try to sell a home, the property was certainly desirable. It is, in fact, stunning. Lakeridge homes are built in a small area around a human-made lake. The 2550 property is one of the elite few that sit right on the lakeshore. The lake is visible as soon as someone steps inside the front door. There are eight skylights in the house. The entire place was remodeled last year before Cavanaugh tried to sell it. The asking price then was $1,875,000.

When an assessment of 2550 was run on the online Zestimate service, it came up with a figure very close to that of the Washoe County assessor—$790,000. The assessor has it at $798,010.

Once Bank of America had the house, it moved very quickly to sell it.

On Aug. 14 this year, the house was listed, but did not appear on the local multiple listings service until Aug. 16, just 25 minutes before 5 p.m. and then the listing was changed in some way on Aug. 17. The property was listed for sale by Karen Greathouse of Dickson Realty for $371,000, which real estate people say is a remarkably low price. That price became known around the Lakeridge neighborhood with the speed of a shot, and it distressed many property owners who worried that it would become a virus affecting the value of all properties in the development.

The next day, the Thorntons made a $400,000 offer for the property. To their surprise, they were told the property had already sold at the asking price. On Aug. 20, they increased their offer to $500,000, this time cutting a check for $10,000 in earnest money. Again the offer was rejected. Greathouse said BOA rejected the offer because Cavanaugh’s sister and brother-in-law were too close to him in the family line.

“If Mr. Cavanaugh’s relatives were allowed to buy that home in a short sale or a foreclosure, that would be bank fraud. … They tried to buy it as a short sale. They couldn’t. It was listed for $900,000 and they tried to buy it for $500,000 as a short sale, and the bank refused that.”

Bill Thornton says Washington Mutual never refused the offer, just didn’t respond. Greathouse went on:

“Mr. Thornton, had he been able to secure a contract on this home, that would have been bank fraud, as well, because Mr. Thornton is a blood relative of Mr. Cavanaugh [this is incorrect, but Greathouse later corrected herself] that lost the property. … Mr. Thornton’s wife is a blood relative of John Cavanaugh. That would be bank fraud. Then everybody across the county would be doing that, and our market would be tanked.”

However, that is not the reason cited for rejection of the Thornton offer later given in a letter written by Dickson president Fennell to the Bank of America asset manager. That letter said the offer was rejected because “you [Bank of America] do not accept ‘back up’ offers” (see below).

Spelling it out

At that point, Bill Thornton gave up trying to force more money on BOA and decided to make sure the bank knew of his offers to their agents. He insisted that Bank of America be informed. So on Aug. 28—10 days after Thornton’s first offer was made—a letter went out from Dickson president Nancy Fennell. Who it was sent to at Bank of America is unknown—Dickson did not identify the person. The letter carried something of a condescending tone toward the Thorntons:

“I am very sorry to bother you with this issue; however I want to head off any future problems. You accepted an offer on 8/17/09 for the property listed at 2550 Lakeridge Shores East in Reno, Nevada, listed by Karen Greathouse in our office. On 8/18/09 we received another offer from Barbara and William Thornton, the sister and brother-in-law of the owner that was foreclosed on, John Cavanaugh. Mr. and Mrs. Thornton are very visible and wealthy people in our community, who own a casino in downtown Reno. We have the impression, although not the confirmation, that Mr. Thornton has spoken to the bank.

“Mr. Thornton insisted that we present this offer to you the asset manager, even though we explained another offer had been accepted. In Nevada, there is a state law requiring all offers be submitted to the seller, even though another offer has been accepted.”

This last sentence seems to indicate that BOA was not informed of the offer until Thornton brought about this letter. But a later sentence suggests BOA was informed. The letter goes on:

“On 8/20/09, Mr. Thornton presented another offer, raising his original offer to $500,000, sure this would convince you, the asset manager, to throw out the original offer and accept his. We have explained you do not accept ‘back up’ offers.

“Finally he is insisting we approach you and ask you reveal the accepted offer price currently in escrow. Although we have explained this is not what we expect to happen, I need to pose the question to you.”

“If you would be so kind to confirm the following:

“• You are aware another offer was received both on 8/18/09 and 1/20/09 for possibly a higher price, and you have reviewed it, another offer had already been accepted.”

“• You do not accept back up offers and you cannot nullify your accepted contract with the original buyer.

“• You do not disclose the selling price during the escrow period.”

The News & Review asked for the name of the person to whom the letter was addressed because that person is entitled to comment for this story. Fennell and Greathouse would not identify him or her. We asked that the person be contacted and asked to call us. Fennell agreed to forward a message on behalf of the News & Review to the BOA asset manager who received this letter. No response from the asset manager to RN&R resulted.

Lakeridge reacts

Meanwhile the neighborhood was being heard. Residents of Lakeridge said they understand if properties have to sell for less than they once did. If the 2550 property had been listed anywhere near what Bank of America paid for it and then salespeople found it just wouldn’t sell at that level—that they could accept. But Bank of America listing it at 46 percent of the bank’s already low purchase price is hard for them to swallow—and that is true no matter the merits of the Thorntons making the purchase. “Listing it at 371 isn’t how you find out that’s all that the market will bear,” said one. “Listing it at 800 and then working down is. … If they listed it at 371, does that mean they would have taken less?” (The italics were in the voice.)

“What I think they did that was improper was they didn’t market it,” Thornton said (emphasis added). “My opinion is that it doesn’t pass the smell test and that they had an inside deal cooking.” Greathouse responded that there was no effort to sell the property to a specific person by timing and tailoring the listing to that buyer or by rejecting other offers. She said she could not say whether she accepted the first bidder.

Thornton said some of the trappings of the listing indicated that there was never any need to make an effort to sell the property, that they were just going through the motions: “They never put a sign up on the property, and in their listing agreement they used the wrong address” (actually an incomplete address).

Petitions have been circulated in Lakeridge, and every resident has received a letter about the 2550 sale. One resident who reportedly wants to sell his home, George Ritter, has filed a complaint against BOA with the U.S. Treasury’s Comptroller of the Currency, who regulates and supervises national banks, as well as with the Nevada attorney general and the state Division of Consumer Affairs.

Whether Dickson Realty did anything wrong or not—and no critic of the deal has cited a specific law or ethical guideline that was violated—it nevertheless has become known in this million dollar enclave as the company that sold 2550 Lakeridge Shores East.

Ritter has written to his neighbors informing them of the 2550 sale and urging them to become “cognizant of the facts which could dramatically affect your property values and earnings. … Case in point is … how can two banks and /or financial institutions like WaMu and BofA take a financial loss exceeding $747,990 in less than two weeks on an initial loan debt of $1,118,990.76. This is unheard of, ridiculous and demonstrates, in my opinion, poor management decisions and business practices. It does, however, illustrate and helps you understand how these banks and institutions can/do continually make fraudulent requests for billions of additional bailout dollars from the federal government and us the taxpayers.”

Ritter’s materials find fault with BOA’s activities, not Dickson Realty. He hopes for broad investigations of the bank, not just of the 2550 house, to see if there’s a pattern.

Bill Thornton argues that Bank of America is showing little gratitude to the taxpayers who saved it.

“Bank of America got the bailout money,” Thornton has written. “Bank of America bought the loan at a discount. Bank of America will get a tax loss on the sale. The State of Nevada and the City of Reno and the Washoe County School District will get reduced taxes on the property. … The new buyer will get a windfall profit of approximately $400,000.”

Many readers, of course, will feel little sympathy for million-dollar homeowners in Lakeridge Shores. But the public does have a stake in how Bank of America sells these properties. For one thing, they are shareholders in about a third of the bank, and whether the public ever gets its money back from BOA will depend very much on how the corporation is conducted. For another, too many sales like this one and the resulting drop in property taxes will do serious injury to local schools and other services. (There is also a smaller loss on the transfer tax. For the difference between $371,000 and $500,000 the lost transfer tax is $528.90.) If rich people pay fewer taxes, it’s not hard to imagine where legislators will turn to make up the difference, so low-income people have an interest in higher home sales prices.

In January, when the 2550 house was still held by Washington Mutual, Market Watch warned against “another big round of writedowns and capital raisings” by Bank of America and Citicorp that could cause more bankruptcies.

Critics in Lakeridge assume—and so does nearly everyone who knows of the sale—that if this happened once in Reno, it is happening other times and places. That suggests an ominous possibility—that Bank of America is sweeping into communities, raising a lot of quick cash by selling low and leaving those communities with a substantially smaller tax base, damaging school districts, police and fire and other functions throughout the nation.