A place for eminent domain?

Posted on July 2, 2007 by grim

From the Press of Atlantic City:

Don’t go too far on eminent-domain reform in New Jersey

The recent state Supreme Court decision limiting a New Jersey municipality’s power to seize a vacant tract of land for redevelopment has been hailed as a major victory in the battle against eminent domain — but is it?
Not according to redevelopment lawyers familiar with the case, who insist that the June 13 ruling merely showed the borough of Paulsboro needed to make a stronger factual case when it argued that George Gallenthin’s land was “not fully productive.” The state Supreme Court said Paulsboro needed to provide evidence of “deterioration or stagnation.”

The ruling was heralded by property-rights advocates who want to overhaul the current redevelopment law, which includes the clause about underutilization to encourage “smart growth” planning. A chief supporter of such reform is Public Advocate Ronald Chen, who contends the current law gives towns overly broad power to seize “virtually every property” in the state.

The Regional Planning Partnership and other land-use advocates are heartened that the Gallenthin ruling won’t necessarily stop eminent domain from being used to promote smart growth, but we are concerned that other efforts under way in the Public Advocate’s Office and the Legislature will.

If that happens, there is no question our future is at risk. New Jersey is on track to becoming the first state in the union to be completely built out, if our current growth patterns continue unchecked. One of the best ways to stop sprawl is to revitalize our many struggling cities and towns.

If redevelopment were easy, developers would be doing it by themselves. But land assembly is a major obstacle to redevelopment — whether in urban areas or the suburbs. Any reforms regarding the use of eminent domain need to recognize the value of smart-growth redevelopment. Otherwise, our economy and our environment are doomed.

Posted in New Development, New Jersey Real Estate | 1 Comment

Weekend Open Discussion

Posted on July 1, 2007 by grim

This is the time and place to post observations about your local areas, comments on news stories or the New Jersey housing market, open house reports, etc. If you have any questions you wanted to ask earlier in the week but never posted them up, let’s have them. Also a good place to post suggestions, requests for information, criticism, and praise.

For readers that have never commented, there is a link at the top of each message that is typically labelled “[#] Comments“. Go ahead and give that a click, you might be missing out on a world of information you didn’t know about. While you are there, introduce yourselves to everyone.

For new readers that have only read the messages displayed on the main page, take a look through the archives, a substantial amount of information has been put online in the past year. The archives can be accessed by using the links found in the menus on the right hand side of the page.

Posted in General | 257 Comments

Erosion of Owner’s Equity

Posted on July 1, 2007 by grim

From the New York Times:

A False Sense of Security? You Must Own a Home

THE wonderful world of leverage has lifted homeownership to near-record levels, and we thump our chests with pride at the prosperity and middle-class life that possessing a home implies. Hovering in the background, however, is a glaring statistic: Never before have homeowners actually had such a small ownership stake in the houses they occupy.

The reason is debt. Home prices have gone up a lot, but borrowing against homes has gone up even more in almost all of the last 20 years. “Owners’ equity,” as the Federal Reserve calls the difference, is gradually eroding — a detail that millions of families ignore, focusing instead, perversely, on the rising dollar value of their homes.

“People believe their homes will continue to appreciate in value,” said Mark Zandi, chief economist of Moody’s Economy.com, “so that even if they take out money and reduce their equity, it will all come back very quickly.”

When they sell, most still pocket a tidy sum after paying off their loans. But millions of middle-income families don’t sell; they take out another loan, which they often spend, surveys show. And then, as the margin of potential profit — a k a owners’ equity — shrinks, it becomes a little harder for a family to weather an unexpected hardship: an illness, a layoff, a wage cut or a forced early retirement.

There is less market value to borrow against in the event of such setbacks and less cash from a forced sale, particularly if the sale comes as home prices are falling, squeezing owners’ equity from the other end.

Just such a squeeze appears to be under way as home prices level off and begin to drop. The stake that families have in their homes fell faster in the 12 months through March than at any time since the early 1990s, the Fed reports. At the end of the first quarter, the nation’s homeowners owned, free of debt, only 52.7 percent of their dwellings, down from 54.1 percent a year earlier and 57.5 percent at the start of the century. The decline occurred even though owners’ equity, measured in dollars, rose by an astonishing $4.3 trillion since 2000. Unfortunately, mortgage debt rose by $5 trillion.

“Basically people are gradually consuming their capital,” said Edward N. Wolff, an economist at New York University who studies household wealth. “It makes the middle class in particular more vulnerable. Their homes are still their biggest saving, and that is the bottom line.”

Even now, the illusion of rising equity obscures its erosion. For a family with a $50,000 mortgage and a house valued at $100,000, for example, the owner’s equity is 50 percent. Two years pass. The family borrows an additional $60,000, raising debt secured by the house to $110,000. The expected selling price, however, has risen to $200,000. True, the ratio of equity to value has fallen to 45 percent, but in a sale, the family would pocket $90,000, after paying off debt. That is nearly double the cash it would have collected two years earlier.

Home prices, however, must continue to climb for this merry process to continue. Indeed, millions of homeowners seem confident that they will do exactly that over the long run, despite the drop in recent months. After all, home prices have risen in most of the country for most of the last 30 years, the exceptions being the late 1980s through the early 1990s — and, perhaps, now.

Posted in Economics, National Real Estate | 4 Comments

“It’s absolutely unfair.”

Posted on July 1, 2007 by grim

From the Philly Inquirer:

Tax hike enrages Haddon Heights

Imagine a town where almost all of the homes have “for sale” signs in their front yards, where the mayor and Borough Council are being recalled, and where petitions from angry residents are reaching the highest levels of state government.
In Haddon Heights, a leafy South Jersey town of 7,500, residents say that’s the future.

As New Jersey simmers with highest-in-America property taxes, Haddon Heights has exploded into full-blown tax rage, with bills landing in mailboxes in the last few weeks that show annual property-tax increases of $2,000, $5,000, even $11,000.
…
Donald Praiss, who moved into his 150-year-old house on First Avenue more than 40 years ago, said it was assessed at $348,600 in 2006. The latest bill, he said, showed the assessment jumped to more than $1 million. His taxes would soar from last year’s $17,000 to more than $28,000, he said.

He called the increase “ludicrous” and said paying was beyond his means.

Posted in General | 4 Comments

New guidelines for subprime

Posted on June 30, 2007 by grim

From the Philadelphia Inquirer:

A move to ensure people can repay

Banking regulators completed guidelines yesterday that call on lenders to strictly evaluate borrowers’ ability to repay home loans.
The guidance, issued by the Federal Reserve and the four other federal agencies that regulate banks, thrifts and credit unions, is a response to an increasingly troubled housing market and pressure from Congress. Home prices have been falling and interest rates have been climbing – two factors that are causing a sharp increase in defaults, especially on so-called subprime mortgages given to buyers with shaky credit.

The new standards, which apply only to federally regulated lenders, call for verification of borrowers’ incomes in most cases. They also say consumers should be given clear disclosure of their mortgage terms and at least 60 days without penalty to refinance a loan that is about to jump up to a higher rate. Noncompliance could result in warnings and financial penalties for the lenders.

Trade groups representing mortgage lenders said the guidelines come with a downside – they will reduce the availability of credit for borrowers – and they urged Congress not to pass legislation that would put similar standards into law.

Lawmakers, some of whom accuse the Fed of having been lax in its oversight of the mortgage market for many years, have been urging the central bank to strengthen the guidelines. Although the guidelines would not affect state-regulated mortgage companies, many state banking regulators are expected to follow suit.

In addition to the Fed, the agencies issuing the new guidance are the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision.

Posted in National Real Estate, Risky Lending | 13 Comments

Auction Fever

Posted on June 30, 2007 by grim

From the Wall Street Journal:

Homes Going Once, Going . . .
Auctions Are Bustling for Houses,
Including Some Historic Gems;
How to Keep From Getting Burned
By RUTH SIMON and JONATHAN KARP
June 30, 2007; Page B1

With the real-estate market cooling, many homes are being hawked by auctioneers.

The selection of houses for sale — often foreclosures or properties that can be tough to value — can run the gamut from shotgun shacks to McMansions. And buyers need to do their homework or risk getting stuck with nasty surprises.

Still, there can be some deals hiding in the weeds. Consider Damon Malicoat, 37 years old, who bought a bank-owned house near Warrensburg, Mo., at auction in November after it had been vacant for nearly two years. The front-yard “grass” reached up to his knees, and the basement contained a dead snake.

He feels like he got a good buy, though, paying $100,000 for the property, which had been appraised at $139,000. He spent about $26,000 to upgrade the electrical and plumbing systems and make other repairs.

Sales like these are on the increase. Chicago-based Sheldon Good & Co. says it expects to run 44 residential auctions this year, twice as many as in 2004. Among the recent sales: 21 condominiums in the New York City area and fractional shares in a Jackson Hole, Wyo., resort.

Dallas-based Hudson & Marshall of Texas Inc., which specializes in selling foreclosed single-family homes, auctioned 300 properties in Texas and 300 others in California during June. In July, the company plans to auction 400 bank-owned properties in northern California and 400 others in Ohio and Pennsylvania.
…
Bidders need to do homework or risk overpaying for a property — or being saddled with unexpected repairs. “Are there gems you’ll be able to pick up out of the dirt? Yes, there are, but not at every sale and not with great volume,” says Stephen Martin, president of Gwent Group Inc., a Bloomington, Ind., consulting firm that works with the auction industry.

Unlike in a traditional real-estate transaction, auction buyers need to do all their due diligence before bidding. That’s because properties are sold at auction “as is.” “There are no contingencies,” says Craig King of J.P. King Auction Co., based in Gadsden, Ala. That means you can’t back out of a deal if you later discover the roof leaks.
…
Overpaying is another risk. Buyers need to determine ahead of time what similar homes in the area are selling for, though that can be tricky in a cooling market where there’s plenty of inventory and few sales.

“The best advice I can give [buyers] is to get a qualified real-estate person who…definitely understands market value and how to determine it,” says Mr. Martin, the auction consultant. He suggests bidders hire an agent who specializes in representing buyers. Some auction houses will pay a real-estate agent a commission out of the proceeds of the sale. Bidders can also get information about recent sales from sources such as Zillow.com.
…
In some cases, “auction fever” can produce a higher-than-expected sales price. About 11% of the bank-owned properties auctioned off by Williams & Williams, Tulsa, Okla., go for more than the bank’s previous asking price, says Dean Williams, the company’s president.

Posted in Housing Bubble, National Real Estate | 2 Comments

Quick housing recovery seems unlikely

Posted on June 29, 2007 by grim

From Kiplinger:

More Woes For Housing

Forget about a housing recovery later this year. In fact, odds are that the residential property slump will extend into 2008, as beleaguered homebuilders slowly unload a mountain of unsold houses and prospective buyers continue to face affordability challenges.

Those dismal home sales figures for May weren’t an aberration — the housing market’s fundamentals clearly stink. On the supply side, the amount of unsold residences in May was equal to a hefty nine months’ worth of sales at the current pace, and seven months for new homes, forcing builders to slash prices or offer lucrative freebies if they want to move any property.

Surveys of homebuilders show them as pessimistic as they were in 1991, during the last big housing slump. They will break ground on approximately 1.35 million new homes this year, 100,000 fewer than what was previously expected before the mortgage rates jumped. The pullback is bad news for a variety of housing-dependent industries, such as plumbers, drywall hangers, landscapers and insulators. Next year, housing starts should creep up to 1.5 million or so. Nicholas Retsinas, the director of the Joint Center for Housing Studies at Harvard University, says, “It’s going to take into 2008 to work out the oversupply. It will be a while before there’s a rebound.”

Average home prices are likely to fall about 4% to 5% this year, and will probably give up another 1% next year before they stabilize. In principle, this should spur demand. But the recent spike in mortgage interest rates has instead pushed many potential customers to the sidelines. The average rate on the popular 30-year fixed mortgage will probably stay close to its current 6.7% for the remainder of the year, which is up about a half percentage point from May.

Posted in Housing Bubble, National Real Estate | 7 Comments

The Ratings Game

Posted on June 29, 2007 by grim

From Bloomberg:

S&P, Moody’s Hide Rising Risk on $200 Billion of Mortgage Bonds

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don’t meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.

That may just be the beginning. Downgrades by S&P, Moody’s and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.

“You’ll see massive losses from banks, insurance companies and pension managers,” said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody’s and Fitch understate the risks of subprime mortgage bonds. “The longer they wait, the worse it’s going to be.”
…
Rosner estimates that collateralized debt obligations, which have packaged thousands of bonds and derivatives into new securities, will lose $125 billion. Institutional Risk Analytics, a Hawthorne, California-based company that writes computer programs for the four biggest accounting firms, says 25 percent of the face value of CDOs is in jeopardy, or $250 billion.

Losses may rival the savings and loan crisis of the 1980s and 1990s. The Resolution Trust Corp., formed by the U.S. government to resolve the thrift crisis, sold $452 billion of assets at a cost to taxpayers of about $140 billion.

The current debacle threatens the growth of asset-backed bonds, securities that use consumer, commercial and other loans and receivables as collateral. That market, which includes mortgage securities, has doubled to about $10 trillion since 2000, according to the Securities Industry Financial Markets Association, a New York-based trade group.

Executives at New York-based S&P, Moody’s and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.
…
“Don’t misunderstand me: I’m not saying these others are performing great,” Robert Pollsen, a director in S&P’s residential mortgage surveillance in New York, said in an interview last month. “And they certainly might warrant our attention several months from now, which obviously we’re going to do.”

Some investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them. They noted that S&P and Moody’s maintained their investment-grade ranking on Enron Corp. until days before the Houston-based energy trader filed for bankruptcy.
…
“A lot of these should be downgraded sooner rather than later,” said Jeff Given at John Hancock Advisors LLC in Boston, who oversees $3.5 billion of mortgage bonds. The ratings companies may be embarrassed to downgrade the bonds, he said. “It’s easier to say two years from now that you were wrong on a rating than it is to say you were wrong five months after you rated it.”
…
The ratings companies point out they have downgraded bonds less than a year after they were sold, the first time that has ever happened. S&P has lowered a total of 15 subprime bonds sold in 2005, or 0.31 percent of the total, and 32 sold in 2006, or 0.68 percent.

“People are surprised there haven’t been more downgrades,” Claire Robinson, a managing director at Moody’s, said during an investor conference sponsored by the firm in New York on June 5. “What they don’t understand about the rating process is that we don’t change our ratings on speculation about what’s going to happen.”
…
“That’s like saying these trees are just fine as there’s a forest fire on the other side of the hill,” said James Melcher, president of money-management firm Balestra Capital Ltd. in New York, who runs a $105 million hedge fund.

Posted in Risky Lending | 4 Comments

Corzine signs $33.5B budget

Posted on June 29, 2007 by grim

From NorthJersey.com:

Corzine signs $33.5B budget, looks to future

Governor Corzine signed a $33.5 billion budget Thursday, trimming just over $10 million in legislative requests, and then turned his attention resolutely toward the fiscal future.

The budget calls for no new taxes or fees for the first time since 2001 and features a $2.2 billion property tax rebate program, to be paid for with last year’s sales tax increase.

“It affirms our commitment to provide substantial property tax relief in the context of sound fiscal principles, spends only what we can pay for, provides new efficiencies and savings, eschews the tricks and gimmicks of budgets past, and upholds our commitments to the most vulnerable in our state and society,” Corzine said.

Corzine thanked lawmakers for allowing him to sign the earliest budget in recent history. And he joked that he didn’t miss the cot he slept on during the protracted budget debate last year that resulted in a weeklong state government shutdown. The state constitution requires the budget to be signed by midnight on June 30 – a deadline that was broken last year.
…
Democratic lawmakers lauded the budget, pointing again and again to the property tax relief it offers.

“This budget will give residents record amounts of property tax relief and the clearest picture ever of how their money is being spent to support state services,” said Sen. Bernard F. Kenny Jr. of Hoboken.

New Jersey has the highest property taxes in the nation, averaging $6,330. In North Jersey, homeowners earning less than $100,000 a year can expect checks averaging $1,080. Those earning up to $250,000 are expected to receive checks for up to 15 percent of the first $10,000 of their property tax bills. Seniors will receive checks for 20 percent or $1,200, whichever is greater. Renters will also receive higher credits than before.

But Republicans called the budget an example of reckless spending and misplaced priorities.Republicans said Democrats have increased state spending by nearly 50 percent since 2002 and tripled the state debt. They pointed out that the budget does not include a new funding formula for schools, a long-promised element of property tax reform.

“We had an opportunity this year to really rein in this wasteful spending and to restore some fiscal sanity to this budget, but instead this will make matters worse,” said Assemblyman Joseph Malone, R-Burlington. “This budget is short on property tax relief, short on school funding and short on any realization that the bill for this excessive spending spree of the past six years will soon come due.”

Corzine exercised his line-item veto to trim 66 items from the budget, totaling just over $10 million. Many of the items were not considered statewide or regional in scope; others were considered areas that could receive funding through other avenues.

Legislative additions to the budget — particularly local pork benefiting a particular district – fell under unprecedented scrutiny this year, in light of the ongoing federal investigation into lawmakers who may have personally benefited from institutions to which they directed public funding.

Posted in Politics | 2 Comments

Kara emerges, Karagjozi ousted

Posted on June 29, 2007 by grim

From the APP:

PLAN OFFERS HOPE TO BUYERS

Kara Homes Inc. plans to emerge from bankruptcy within the next several months with a new name, a new owner and fewer developments, according to documents filed Thursday with U.S. Bankruptcy Court.

The plan, if approved, paves the way for the builder, renamed Maplewood Homebuilders LLC, to complete 471 homes in 13 of Kara’s projects. Of those homes, 129 were already under contract when Kara filed for bankruptcy last fall.

It also calls for the ouster of Zuhdi Karagjozi, the Rumson resident who took the home builder to dizzying heights before a sudden crash.
…
East Brunswick-based Kara filed for Chapter 11 bankruptcy in October with assets of $350 million and liabilities of $227 million. The builder said it was devastated by the downturn in the residential real-estate market.

It left the deposits of home buyers and the money owed to subcontractors in jeopardy. Since then, Kara has reached agreements with lenders to complete some projects with the help of outside investors, while selling other projects.

The disclosure plan gave insight into how the company plans to emerge from bankruptcy. It calls for Maplewood Homebuilders to be owned by Glen Fishman, a Lakewood developer who has been instrumental in Asbury Park’s redevelopment, and Plainfield Specialty Holdings II Inc., a hedge fund based in Greenwich, Conn.
…
Since April, Kara has sold 10 uncompleted developments and has plans to sell three more. In some projects, buyers are in limbo. For example, Amboy National Bank is trying to find a buyer for Kara’s Horizons at Birch Hill in Old Bridge. Otherwise, it will foreclose on the project.

Neither Plainfield nor Fishman are new to the story. Plainfield, part of Plainfield Asset Management LLC, has loaned Kara $7 million to keep the home builder’s operations going, which helped Kara avoid liquidation.
…
Left out is Karagjozi, who as recently as April appeared to have an ownership stake in the restructured company. But the plan said Karagjozi’s shares in the company will be terminated, and he won’t receive an interest in the new company.

It marked a sudden end for Karagjozi, who started Kara in 1999 and within three years turned it into what a trade publication said was the nation’s fastest-growing builder — a remarkable feat given New Jersey’s reputation for slow growth.
…
One expert said Karagjozi’s departure isn’t a surprise. A hedge fund might replace management of a home builder to restore credibility with lenders.

Posted in New Development, New Jersey Real Estate | 1 Comment

“The subprime market is a total unmitigated disaster “

Posted on June 28, 2007 by grim

From Dow Jones:

Subprime Mortgage Woes Just Beginning, Fund Manager Warns

An end isn’t anywhere in sight to the meltdown in subprime mortgage markets, the chief investment officer at Los Angeles-based TCW Group Inc. warned a gathering of investment professionals on Wednesday.

In his keynote address and an interview to kickoff the 19th annual Morningstar Investment Conference here, Jeffrey Gundlach pointed to continued pressure on subprime lenders.

“The subprime market is a total unmitigated disaster and it’s going to get worse,” Gundlach told money managers and financial advisers.

“The delinquency rate is still climbing,” he added. “At the same time, the ability of people to refinance is also going down. It’s just not a very attractive situation.”

Until a definite change occurs, Gundlach cautioned, subprime mortgages remains a place to avoid for investors.

“At some point you’ll be able to see past the valley,” he said. “But until then, you’re going to see continued downward pressure. And nobody knows when it’s going to end.”

He noted that delinquency rates aren’t all that high by historical standards. The problem, says Gundlach, is that “a perfect storm of conflicting factors” came together in February to push bond markets out of whack.

“Poor underwriting practices and mismatched loans were hidden by a robust real estate market,” Gundlach said.

Finally, the real estate market ran out of gas last year. “That was the underpinning of a meltdown in subprime in February,” Gundlach said.

Once markets turned down, early payment defaults rose rapidly. Gundlach pointed out that some 40 lenders went under in a six-week period earlier this year. Now, he says it’s up to about 80 defunct lenders in total.

Gundlach added that he sees strong correlations to some parts of today’s mortgage markets and real estate’s collapse in 1994. “But it’s on a smaller scale and limited to a narrower slice of the real estate market,” he said.

Posted in National Real Estate, Risky Lending | 177 Comments

Sluggish population growth in NJ

Posted on June 28, 2007 by grim

From NJ.com:

Census: NJ population still growing slowly

Only one municipality in New Jersey saw double-digit growth last year, and only about half the towns in the state showed any growth at all, according to U.S. Census Bureau updates that will be released today.

Woolwich in Gloucester County — once mostly farmland, now a Philadelphia bedroom community — led the state with an estimated 1,094 new residents for a nearly 15 percent increase. Second was Mount Arlington, a small resort town on Lake Hopatcong that saw an increase of 382 people or 7.2 percent.

Overall however, New Jersey continued a trend of sluggish growth, lagging seriously behind the national population growth rate of about 1 percent a year. Despite a construction boom in cities such as Newark, most of the new building replaced deteriorated existing housing, with little net increase in population, according to the census figures.

The population slowdown in New Jersey mirrors that for the entire Northeast, one of the most expensive housing markets in the country. It also makes it increasingly likely New Jersey will lose one of its 13 Congressional seats in the 2010 Census.

Posted in Economics, New Jersey Real Estate | 2 Comments

Good times

Posted on June 28, 2007 by grim

From the Wall Street Journal:

Ranks of Rich in U.S. Grow at Faster Pace
By DAISY MAXEY
June 28, 2007; Page D6

The ranks of the richest Americans expanded last year at an increased pace, driven by a strong economy, but that growth is expected to moderate in coming years, according to a new study.

The 11th annual World Wealth Report, compiled by Merrill Lynch & Co. and Capgemini Group, shows that in 2006, the U.S. population of high-net-worth individuals — those with at least $1 million in investible assets, excluding their primary residences — rose 9.4% to 2.92 million. In 2005, the same population increased 6.8% to 2.67 million.

Robert McCann, president of Merrill Lynch Global Private Client Group, attributed the increased pace of wealth generation to gains in economic output and continued growth in the world’s stock markets, two primary drivers of wealth creation.

World-wide, the number of wealthy individuals climbed to 9.5 million in 2006, an 8.3% increase from 2005, according to the report. The combined wealth of high-net-worth individuals world-wide increased to $37.2 trillion, up 11.4% from 2005.

The number of ultra-high-net-worth individuals — those with at least $30 million in investible assets — increased by 11.3% to 94,970, in 2006, according to the report.

However, the report forecasts slower world-wide growth going forward than that seen this year. “Looking ahead, mature markets like the U.S. are expected to act as an anchor on the world economy as moderate growth rates settle in,” the report said. It projects that the wealth of high net-worth individuals will reach $51.6 trillion by 2011, growing at an annual rate of 6.8%.
…
The wealthy shifted their investment strategies in 2006, according to the report. “More money went to real estate at the expense of alternative investments,” such as hedge funds and foreign currencies, says Mr. McCann. That shift was driven primarily by commercial real estate and real-estate investment trusts.

However, the report projects that this is a temporary tactical move rather than a long-term asset allocation shift, and projects a greater allocation to alternative investments in 2008.

Posted in Economics | 1 Comment

The meteoric rise of subprime

Posted on June 27, 2007 by grim

From the Wall Street Journal:

LENDING A HAND
How Wall Street Stoked The Mortgage Meltdown
Lehman and Others Transformed the Market For Riskiest Borrowers
By MICHAEL HUDSON
June 27, 2007; Page A1

Twelve years ago, Lehman Brothers Holdings Inc. sent a vice president to California to check out First Alliance Mortgage Co. Lehman was thinking about tapping into First Alliance’s lucrative business of making “subprime” home loans to consumers with sketchy credit.

The vice president, Eric Hibbert, wrote a memo describing First Alliance as a financial “sweat shop” specializing in “high pressure sales for people who are in a weak state.” At First Alliance, he said, employees leave their “ethics at the door.”

The big Wall Street investment bank decided First Alliance wasn’t breaking any laws. Lehman went on to lend the mortgage company roughly $500 million and helped sell more than $700 million in bonds backed by First Alliance customers’ loans. But First Alliance later collapsed. Lehman landed in court, where a federal jury found the firm helped First Alliance defraud customers.

Today, Lehman is a prime example of how Wall Street’s money and expertise have helped transform subprime lending into a major force in the U.S. financial markets. Lehman says it is proud of its role in helping provide credit to consumers who might otherwise have been unable to buy a home, and proud of the controls it has brought to a sometimes-unruly business.

Now, however, that business is in deep trouble, and some consumer advocates and policy makers are pointing the finger at Wall Street. Roughly 13% of subprime loans stand in or near foreclosure, bringing turmoil and sometimes eviction to tens of thousands of homeowners. Dozens of lenders have gone out of business. Bear Stearns Cos. is trying to bail out a hedge fund it manages that was hurt by subprime mortgage losses.

Critics say Wall Street firms helped create the mess by throwing so much money at the market that lenders had a growing incentive to push through shaky loans and mislead borrowers.

At a hearing in April, Sen. Robert Menendez (D., N.J.), said Wall Street firms “looked the other way” as they profited from questionable loans, “fueling a market that has very little discipline over itself.”

Federal Reserve chief Ben Bernanke said in a May speech that some lenders focused more on feeding the marketplace than on the quality of loans, in part because most of the risks that loans would go bad were passed to investors. As a result, “mortgage applications with little documentation were vulnerable to misrepresentation or overestimation of repayment capacity by both lenders and borrowers,” he said.
…
At the sector’s peak in 2005, with the housing market booming, loan defaults remained low. Wall Street pooled a record $508 billion in subprime mortgages in bonds, up from $56 billion in 2000, according to trade publication Inside Mortgage Finance. The figure slid to $483 billion last year as the housing market slumped and subprime defaults picked up.
…
Lehman’s deep involvement in the business has also made the firm a target of criticism. In more than 15 lawsuits and in interviews, borrowers and former employees have claimed that the investment bank’s in-house lending outlets used improper tactics during the recent mortgage boom to put borrowers into loans they couldn’t afford.

Twenty-five former employees said in interviews that front-line workers and managers exaggerated borrowers’ creditworthiness by falsifying tax forms, pay stubs and other information, or by ignoring inaccurate data submitted by independent mortgage brokers. In some instances, several ex-employees said, brokers or in-house employees altered documents with the help of scissors, tape and Wite-Out.

“Anything to make the deal work,” says Coleen Columbo, a former mortgage underwriter in California for Lehman’s BNC unit. She and five other ex-employees are pursuing a lawsuit in state court in Sacramento that claims BNC’s management retaliated against workers who complained about fraud.

Lehman officials say there’s no evidence to support such claims. They say the firm has tough antifraud controls and goes to great lengths to ensure that it works with mortgage brokers and lenders who meet high standards and that loans are based on accurate information.

Posted in Economics, National Real Estate, Risky Lending | 19 Comments

Separating real estate fact from propaganda

Posted on June 27, 2007 by grim

From Forbes:

Don’t Buy That House

The dream of owning your own home is as American as apple pie–and (supposedly) better for you. Over and over, we are told that homeownership will make you happier, healthier and wealthier. Heck, it’s even supposed to make you a better citizen.

Of course, there are times when, depending on your age, your savings and your income, buying a home can be a smart decision and an excellent way to build wealth. But is buying a home really such a universally good idea?

It’s hard to separate fact from propaganda.

Certainly, the virtues of ownership have been preached loudly and from on high. As early as the 1920s, Herbert Hoover extolled home ownership as a pillar of family life. Nearly 80 years later, President Bush reiterated the message, stating “there’s no greater American value than owning something, owning your own home and having the opportunity to do so.”

Homeownership has been touted as civic responsibility, “moral muscle” and a bulwark against communism. A 1922 pamphlet from the National Association of Real Estate Boards even promised that it would put the “MAN back in MANHOOD.” Over the years, it has been claimed that homeowners vote more, join more voluntary associations, take better care of their residences and have better-educated kids.

But to realize that America’s mania for home-buying is out of all proportion to sober reality, one needs to look no further than the current subprime lending mess. In the last decade, riskier lending practices combined with historically low interest rates and federal subsidies have encouraged a wave of low- and moderate-income households to buy homes.
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Those borrowers are much worse off than before they bought. “There’s the loss of the initial investment, ruined credit ratings and the psychological trauma associated with foreclosure and being evicted,” says William Rohe, co-editor of Chasing the American Dream and a professor of urban studies at the University of North Carolina at Chapel Hill.

Worse, foreclosures are often concentrated geographically, meaning that neighborhoods that were already badly off now have even more abandoned properties. Conversely, ownership can trap a family in a declining neighborhood, while renters move on more easily.
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“Some research has suggested that it isn’t whether parents own or rent, but the mobility of the household,” says Rachel Drew, a research analyst at Harvard University’s Joint Center for Housing Studies. In other words, it’s likely that families who stay in one place for a long time (renting or buying) are doing better by their kids than families that move often.

“All of these things we say are benefits of homeownership in the U.S. I think would also be benefits of long-term rental tenancy,” says Bourassa.
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So if something in your gut–or on your bank statement–tells you that now is not the right time to buy, resist the pressure. There may be no place like home, but there’s no reason you can’t rent it.

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