Even North Jersey Wealthy Hit By Foreclosures

The Record ( — Sunday, December 1, 2013

The Record

Nine years after spending millions to build their dream home in Franklin Lakes, Kevin and Cheri Schmidt lost it recently to foreclosure.

The Schmidts have sued their bank, saying it's to blame for their trouble. The bank declined to comment, saying it doesn't discuss pending litigation.

Although foreclosures mostly affect lower- and middle-income households, the Schmidts' story shows that families in upscale towns have also felt the pain of losing a home as the economy and housing market cratered. A check of upcoming foreclosure auctions in Bergen County found properties in Saddle River, Old Tappan and Ridgewood, among other more affluent towns.

According to RealtyTrac, a California company that tracks the foreclosure market, about 4 percent of Bergen County's current foreclosure cases involve properties valued at over $1 million.

Kevin Schmidt, now 63, has had a long career as a builder and inventor. He and his wife were able to build their sprawling home — which included a pool, home theater, home gym and three-car garage — without a mortgage because he had just sold an invention, the cleaning product Dishwasher Magic, to another company for more than $5 million. They spent $800,000 to buy the lot, and an estimated $3 million to knock down the house on the property and build the new home.

What followed was a run of business setbacks and bad timing, as Kevin Schmidt embarked on several real estate ventures just before the housing market collapsed in the worst crash since the Depression.

In 2007, the couple borrowed against their property, taking out two loans totaling $2.9 million from Oak Ridge-based Lakeland Bank Corp., to get tax write-offs and cash to finance construction projects. The Schmidts say one of the loans had only a three-year term, and when it came due, the Schmidts asked the bank to combine it with their mortgage to lengthen the loan term, and lower the interest rate. They say a bank employee agreed to do so, if the Schmidts sold an investment property in Wyckoff.

According to the Schmidts, they sold the property, even though they would have preferred to wait until the real estate market improved. But, they say, the bank then refused to modify the loan. When the Schmidts failed to make payments on the loan, Lakeland began foreclosure proceedings in late 2010, and the Schmidts lost the house in a sheriff's sale in August.

"They were not willing to work with us," said Cheri Schmidt, 45. "They were just brutal." The couple and their three children are now living in a rental home.

The Schmidts have sued Lakeland, saying that the bank engaged in "predatory" lending by refusing to modify the loan and by giving the Schmidts the loans in the first place, because the suit says they did not have the "financial capability or income strength to make payments."

Kevin Schmidt thinks the bank believed the couple actually had the money to make their loan payments; he says they didn't.

"I don't think the bank truly believed I didn't have a million dollars lying around," he said. "They'd ask, 'Where's the money?' "

The bank's general counsel, Timothy J. Matteson, said the bank's policy is not to comment on pending lawsuits. But in court filings, which are open to the public, Lakeland called the Schmidts' lawsuit "frivolous" and said their claims had already been rejected in earlier court decisions related to the foreclosure. The court papers said a judge had ruled that, aside from the question of whether the bank had promised to modify the loans, the bank was justified in foreclosing because the Schmidts had not paid their property taxes.

Kevin Schmidt began his career as a developer building single-family subdivisions in Sussex County in the 1980s. He later turned to redevelopment projects in Bergen County after construction was restricted in the New Jersey Highlands.

But he was hit hard by the 2007-09 recession and the long housing downturn, the most severe since the Depression. Working with a partner, he had bought a 40-unit garden apartment complex in Ridgewood around 2007, planning to renovate the units and convert the building into condos. But the timing was unlucky, because the housing market soon began to slide.

"Right after we bought it, the market just fell off a cliff," he recalled. "To this day, there's no condo market." The demand for condos has weakened because tighter mortgage standards made it more difficult for potential buyers to get a loan.

Schmidt's attempt to build 362 riverfront condos in Hackensack also fell apart after the 2008 financial crisis. Schmidt says he and his partners in that venture spent more than $20 million to buy and improve the property, and ended up selling at a $7 million loss.

These setbacks left the Schmidts in a cash crunch, they said. After they were unable to make their loan payment, the bank began foreclosure proceedings and sent an appraiser who set the home's value at $2.85 million — a value the Schmidts say is much too low. They paid for their own appraisal, which put the value at more than $4 million.

Trying to dig out of the situation, the couple put their house on the market in January 2012. It was painful, because they and their three children had built years' worth of memories in the home; they had worked to make it the kind of place where all their kids' friends would gather.

They asked $4.5 million, then cut the price to just under $4 million. But there were no offers. They say the market for luxury homes was dead.

"Anything over $2 million, that market disappeared," Kevin Schmidt said. "The $3-, $4-, $5-million market doesn't exist right now."

And they say it didn't help that real estate websites such as Zillow and Trulia noted the foreclosure proceedings on their listings.

"Buyers either didn't want to get involved in a mess, or they were bottom-fishers seeing where it was going to shake out," said Kevin Schmidt.

The couple have moved to a rental and started a new business venture, IceBoxx, machines that create and bag ice cubes in supermarkets.

The state's largest housing counseling organization, New Jersey Citizen Action, says that it has seen a number of homeowners like the Schmidts, dealing with foreclosures of high-priced homes.

"These were people who never would have imagined themselves in a situation like this," said Phyllis Salowe-Kaye, head of Citizen Action. "But there's no equity left in the house, and they can't understand what they did wrong."

Top Top | NJCA in the News | NJCA Homepage