Several of the midstate’s best-known banks could lose millions of dollars as a result of extending credit to a Cumberland County construction loan provider.Government documents and bankruptcy filings indicate the company, Yorktown Funding Inc., was involved in financing house construction in Lee County, Fla., in the mid-2000s, just as the region was becoming the epicenter of Florida’s epochal housing bubble.
Yorktown, with offices at 1104 Fernwood Ave. in Lower Allen Township, filed for Chapter 11 bankruptcy Feb. 9 in federal court for the Middle District of Pennsylvania, listing assets of $31.6 million and liabilities of $40.8 million.
The company listed seven midstate banks among its 20 creditors with the largest unsecured claims. Those claims range from Orrstown Bank’s $8.39 million to Centric Bank’s $1.27 million. Graystone Tower Bank, Integrity Bank, Mid Penn Bank, Metro Bank and Susquehanna Bank also are listed.
Yorktown’s two owners, according to the bankruptcy filing, are its president, Gerald R. Kensinger of Lower Paxton Township, with 25 percent equity, and its vice president, William C. Kollas of Lemoyne, with 75 percent equity.
Kollas has been a prominent attorney in the area for many years. The office of his firm, Kollas & Kennedy, also is at 1104 Fernwood Ave. He is on Penn State’s Dickinson School of Law board, whose membership includes former Gov. Tom Ridge and Pennsylvania Supreme Court Justice J. Michael Eakin.
Neither Kollas nor Kensinger replied to calls seeking comment for this article. A woman at Yorktown’s office March 26 who identified herself as an underwriter said the company was conducting “business as usual.”
Midstate banks extended lines of credit to Yorktown to finance construction loans, according to a statement Orrstown filed March 19 with the U.S. Securities and Exchange Commission. The loans were to be secured by mortgages on the houses that were built, but Yorktown is alleging the banks’ claims were “unperfected,” Orrstown said.
An unperfected legal claim is one for which no public notice has been recorded. If a third party buys a property, and a claim on the property is not in the public record, the claim can’t be exercised against the buyer.
“It’s not a position that surprises me,” said attorney Eric L. Brossman of Saul Ewing law firm, who is representing Orrstown. It’s normal for a debt to be listed as unsecured if there’s any doubt as to its status, he said.
According to Orrstown, Yorktown has promised to pay its creditors in full. However, it is not servicing its debt during the bankruptcy case, and “the amounts that will be available for payment of claims cannot, at this time, be determined with any reasonable certainty,” Orrstown said.
Therefore, Orrstown plans to list its loan to Yorktown as nonperforming on its upcoming quarterly report.
“The bank is unable, at this time, to determine with any reasonable certainty whether it will incur a loss and the amount of any loss it may incur,” Orrstown said.
Yorktown creditors that cannot document perfected claims to their collateral will receive a prorated percentage of Yorktown’s assets after those with priority claims and secured assets are paid, according to Orrstown.
Orrstown declined to comment further. The other banks contacted for this article either did not respond or declined to comment.
Yorktown listed real estate assets of $20.3 million in its bankruptcy filing. An attachment detailing those assets lists 130 properties Yorktown owned as of Feb. 9. More than 80 are houses in Lehigh Acres, Fort Myers or Cape Coral in Lee County, in southwest Florida.
Lee County was the site of a huge speculative real estate boom between 2004 and 2007, when the value of taxable property doubled, according to county records. In Lehigh Acres, nearly 14,000 building permits were issued from 2004 to 2006. Median single-family house prices in the Fort Myers metropolitan area shot up to $322,300 by December 2005, according to Florida Realtors, a trade association.
The boom was followed by an equally spectacular bust. Just four building permits were issued for Lehigh Acres in all of 2009. This January, the median Fort Myers-area single-family home price was $91,000.
A review of Lee County online records indicated Yorktown had extended construction loans for dozens of properties that it subsequently acquired through foreclosures.
Many companies in Lee County funded speculative building, according to Joan D. LaGuardia, spokeswoman for the Lee County Department of Community Development.
Individuals would receive construction loans that they could convert into mortgages, she said. The assumption was that housing prices would rise enough for the newly built houses to be resold rapidly and the mortgages paid off, with plenty of profit left over.
Once housing prices began falling, however, the speculators were left with unaffordable mortgage payments on houses worth much less than the loan value, forcing them into default and foreclosure.
Yorktown’s Web site includes a link to a “frequently asked questions” document that includes the question, “How much of a down payment will I need when purchasing the land and home?” The answer: “In many cases little or no down payment is necessary.”
Lee County’s housing market is active, but properties are selling at pennies on the dollar, LaGuardia said, so it’s not clear what Yorktown’s real estate holdings there are worth.
For the banks that extended credit to Yorktown, their exposures appear to be fairly small components of their overall portfolios.
Even if Metro Bank lost its entire claim of $4.2 million, that would only increase its nonperforming assets from 2.1 to 2.3 percent of total assets, said stock analyst Joe Fenech, a managing director at Sandler O’Neill + Partners in New York City. The bank also has a substantial capital cushion, he said.
Metro and other banks also may have sold the mortgages to other banks, giving them lower exposure than Yorktown’s filing indicates, Fenech said.
Similar mortgages often ended up as components of “mortgage-backed securities,” the instruments sold to Wall Street that sent markets reeling when the underlying mortgages proved to be significantly riskier than purchasers had realized.