Lost and Alone in a Sea of Senior Agencies

Area Agency On Aging
Christy Cantrell
(800) 510-2020

Hello Christy,
It was wonderful speaking with you yesterday on behalf of Sara. You and your organization do wonderful work for folks like Sara.

As you know, Sara is 76 years old and living alone in a rented apartment in Ventura. She is frustrated, desperate, despondent and scared to death. She has high blood pressure, osteoporosis, cataracts in both her eyes (which she says her medical insurance refuses to cover) and she took a bad fall this last year. Oh, she is going deaf as well.

Until now, her rent has been $850/month, but new property owners have raised her rent to $1,150/month. Her Master Card reset her card limit to $200 without her immediate knowledge and she used this card to make up the difference for her rent. As a result, the new owners charged her a $50 bounced check fee on top of her increase in rent. She says she has less than 2 months before she will be evicted from her home.

I’m told rent control does not exist in Ventura County except for mobile homes in Thousand Oaks, so she has no recourse to the $300/month increase in her rent. That’s a 35% hike in her housing expenses and she doesn’t even have a mortgage!

One of my co-workers and I received a request for help from Sara. Sara knows we are both Realtors and she was hoping we knew of properties she could afford. In the spirit of the season, we have did a county-wide MLS search for anything renting for less than $1,000/month but had no luck. There may be something in the classified’s, but with her fixed income at just over $900/mo, it is unlikely we can improve her situation even if we do find something. She will still need food, clothing, utilities and medical care.

We have been making phone calls to local agencies and charities, but we haven’t had a great deal of success. Admittedly, we are not experienced at finding people like her the most appropriate help, but we have tried to do our best.

Christy, you indicated you have had prior contact with Sara, that she has made some unfortunate choices in health care providers, and in not applying for all the assistance she could be receiving. I’m sure that could be true, but from what Sara has told me, she has always tried to be self-sufficient until now. She’s been proud to take care of herself and slow to ask for public aid. Now that her housing expenses have jumped, she has little time left to change her situation, mostly because she has tried so hard to be independent.

The more I investigate what resources are available to her this time of the year, the more I understand her emotional distress. Many state and county agencies I contacted during this last week, have exhausted their annual budgets. Next year’s budgets are probably going to be much smaller for elderly assistance. Many of the larger agencies such as the Area Housing Authority of the County of Ventura are on holiday until 5 January 2009. Others, such as Section 8 Housing have a 2 to 4 year waiting period after application is made for Elderly Housing Assistance. These folks are without funding or on holiday.

This is evidently a very bad time of the year for finding financial assistance, or guidance. Yet this is typically a time of the year when rents are raised.

I’ve been told by numerous agencies that Sara is not unusual in her plight. Agencies have told me there are literally thousands of seniors asking for help. Evidently, more than a few elderly folks live out their final days on the street. This is euthanasia by default. I find it really hard to understand how this could be, in an area of Southern California that is home to so much individual wealth.

My co-worker and I have heard Sara say she might feel compelled to take her own life. She has said that she doesn’t want to do that, “because she wouldn’t get to see her son in heaven if she did.” But she told me today that the ocean is so near, she might just go there and end her troubles. She has also mentioned that she wishes she could just die in her sleep, that “she is angry at God because he won’t let her end her life that way.”

I’m not a mental health professional but I feel confident in saying that Sara’s stress is probably preventing her from making the right choices for herself.

I’m a member of the giant Baby Boomer generation, and I can foresee a time in the not too distant future, when people like myself will be approaching Sara’s age and mental competence. Obviously, we are going to need to be much better prepared than she. I think my generation’s retirement pardigm needs some major shifting. I’m sure we all need to contribute a bit more of our individual energy and earnings to that future time. We shouldn’t rely on the charity of others to survive, but perhaps we could develop a more efficient, effective and dignified response to elderly care than Sara has received.

In any case, you were extremely helpful today Christy. I appreciate your continued efforts at the “Area Agency on Aging” to help Sara. I also received some very useful and heartfelt guidance from Regina Fitzgerald at “Project Understanding.” My co-worker and I made calls to more than 20 departments and agencies today.

You and Regina and a very nice lady (who’s name I didn’t catch) at the after hours information desk of “Adult Protective Services” offered us very constructive advice and guidance. Your organizations don’t seem to draw much public attention or anything near the appreciation that I’m sure your efforts deserve, but you have thoroughly impressed us. You folks truly are leading the charge on one of our nation’s most unrecognized, immediate challenges.

I’m convinced from what I have seen, that we in America are not at our best when providing for the elderly. I served 23 years in the military and I love my country, but I’m embarrassed at how poorly we treat our seniors.

On behalf of Sara - Thank you Christy
Mark Thorngren

More trouble for home refinancing?

Thanks to the Federal Reserve, interest rates are lower than ever. That would normally lead to home owners refinancing home mortgages in order to lock in lower rates, lower payments and (for some) to keep their homes. A good thing for a troubled economy with some homeowners in trouble. But, as Jason Kilborn has warned us, not so quick (see Refi No Good --- A Lesson in "LTValuation"). Home prices in twenty American cities dropped 18% in October from the last year according to the S&P/Case-Shiller index . Unfortunately, the twenty city index has been dropping since January 2007. All of this means bad news for homeowners who are seeing the value of their home drop each and every month.

So, what does this really mean? Well, we are considering refinancing our home in Boston where the new October 2008 index is 159.17. The last time the Boston index was about the same level was February 2004. As it turns out, this was when we purchased our home. In September 2005, the highest index was reached in the Boston Metro area at 182.45. The current level is almost 13% off the highest point reached on the index. But, we might also expect the numbers will continue to decline for some additional time, representing further erosion of home values. How bad the news is depends on where you live and when you bought your home. Some cities like Miami, Phoenix and Las Vegas have suffered the largest declines on the index, whereas cities like Charlotte, Dallas, Cleveland and others have only felt modest changes.

For us, who knows? Our Boston home is not worth what it was in 2005, but the drop is not as bad as some cities. Like Jason's refi gone wrong, the discretion of appraisers will dictate whether refinancing makes sense. The problem for homeowners is that they may not be able to take advantage of lower rates. For more on this, Urban Deveopment Secretary Steve Preston recently spoke on the Future of the Housing Market.

— JSM

21 Dumbest Business Moments of 2008

Well, I am sure that we all can add to this list, but Fortune just came out with its "21 Dumbest Business Moments of 2008." You betcha' . . . those auto execs are leading the way with the first and second picks. Only surprise is that those crazy execs from AIG with their $440,000 resort trip did not make the list at all (see Greed is good . . . well maybe not always).

Here they are (from Fortune):

1) Detroit execs flying to D.C.: The chief executives of General Motors (GM,Fortune 500), Chrysler and Ford spark outrage when they fly their corporate jets to Washington D.C. to beg Congress for a multi-billion dollar bailout. More

2) Detroit execs driving to D.C.: Given a second chance after the private-jet fiasco to plead their case before Congress, the Detroit 3 take to the road. More

3) Henry Paulson's initial $700 bailout proposal: All of three pages, the Treasury Secretary seeks carte-blanche access to government funding with scant details on how or where the money will be spent. More

4) The final bailout: When Congress is done with it, the measure balloons to 451 pages and is loaded with pork barrel spending - including, unbelievably, a cut in taxes on toy arrows and an extended tax break on "wool products." More

5) The Mozilo e-mail: The now former Countrywide CEO mistakenly broadcasts his thoughts on a customer's plea for help with a home loan. More

6) The iPhone 'I am rich' app: Eight people download a $999.99 screen-saver for Apple's (AAPL, Fortune 500) iPhone. More

7) Paulson's 'bazooka': The Treasury Secretary tells Congress in July he thinks he
won't actually need to use the funds he's requesting to support Fannie Mae and Freddie Mac. More

8) Tough talk from Fannie Mae: In May, CEO Daniel Mudd says his company will "feast" on weakened competition in the mortgage market. More

9) Scandal at the Department of Interior: The agency's Inspector General finds that staffers were taking gifts, having sex and engaging in illegal drug use with employees of some of the oil companies they oversee. More

10) GM's Lutz on global warming: The General Motors exec behind the Chevrolet Volt electric car hands environmentalists another twig to beat GM with when he reportedly calls global warming "a crock of sh-t." More

11) Hope
for Homeowners - er, not really: Congress passes bill to keep hundreds of thousands of troubled borrowers in their homes. A whopping 321 applications get filed. More

12) Ban the short-sellers: To head off a market onslaught,the SEC outlaws short-selling on 799 financial stocks. Remarkably, investors find other ways to punish the group and the sector sinks another 25 percent. More

13) McCain on economics: On the morning of Sept. 15, as Lehman Brothers declares bankruptcy, Republican presidential candidate John McCain declares "the fundamentals of this economy are strong." More

14) Obama's tough talk on Nafta: A top economic adviser privately assures Canadian officials in February that his candidate didn't really mean it when he threatened to
renegotiate the North American Free Trade Agreement. More

15) Microsoft bids for Yahoo: The $31-per-share offer represents a 61% premium over Yahoo's YHOO, Fortune 500) price at the time of the February overture. More

16)Yahoo turns down Microsoft's offer: If Microsoft's (MSFT, Fortune 500) offer for
Yahoo was wrong-headed, Yahoo's opposition to it was downright bone-headed. More

17) The Madoff miss: As news reports reveal that the Securities and Exchange Commission had probed Madoff and his New York City investment firm over the years, chief Christopher Cox cops to the embarrassing screw-up. More

18) Oil speculator scapegoats: Are speculators to blame for $37 oil too? More

19) Steve Jobs' obit: In August, Bloomberg News accidentally releases an obit for Apple CEO Steve Jobs, who - despite a well-publicized brush with pancreatic cancer - is still alive and kicking. More

20) Phil Gramm and the "nation of whiners": In early July, as the financial crisis spreads to Main Street, McCain campaign co-chair and former senator Phil Gramm appeals to voters and their economic anxieties by calling them a "nation of whiners" and dismisses a troubled economy as a "mental recession." More

21) Bill Miller comes up short: The fund manager's contrarian bets on Bear Stearns, AIG and Freddie Mac cost his investors plenty. More

— JSM

More on University Endowments

The financial condition of university endowments is continuing its downturn. About a month ago, I blogged about the troubles that many universities were facing (University Endowments and the Financial Crisis). Things have gotten worse. As one of our commenters mentioned, Vanderbilt University, which had reported a positive return, may be in the same condition as other universities financially. At the very least, universities are cancelling bigger projects widely. Over at Harvard, this are equally grim (see Pushkin Comes to Shove for Harvard Faculty as Endowment Plunges). Yeshiva University anticipates that its losses from the Bernard Madoff scandal alone will top $140 million.

Endowments provide scholarship aid to students, fund faculty salaries and projects, support research and facilities. Like all investments, university administrators must exercise due diligence in the use of endowments funds. Should universities be in a better situation in this time of crisis than investors in general? Vanderbilt seems to think so according to its "Giving to the Future" endowment brochure. In it, Vanderbilt emphasizes that with "careful investment and adherence to sound financial principles, the endowment will continue to grow and support Vanderbilt, now and in the future." My suspicion is that that most universities ascribe to the same standards.

Have universities met this standard? It seems not. Over at Yeshiva, university trustee and chair of the investment committee J. Ezra Merkin resigned in the fall out from the Madoff hedge fund losses. Jim Chen wrote earlier this week criticized the "cowboy philanthropy" approach to charitable gifts that does not seriously consider duties of stewardship (see Curtains on Cowboy Philanthropy: a Cruel Lesson From the Maddoff Scandal). While we reflect on the changes that must be made to the financial industry as a whole, we must also take a closer look at university investment practices that allowed them to sustain the level of losses that have occurred. Sure, even careful investors took heavy losses during this severe downturn. But, universities must also ask whether in their hurry for new buildings, research projects and greater prestige, they also sacrificed sound financial principles that would have seen them better through this crisis. Years of healthy returns on investments may have lured ordinarily careful universities into more risky investments. Recovery will be slow, but will we make better decisions in the future?

— JSM

Renters vs Foreclosures

December 15, 2008
Fannie Mae Lets Renters Stay Despite Foreclosures
By CHARLES DUHIGG

In a move that provides relief to thousands of renters who face eviction but draws the federal government even deeper into the housing market, the loan giant Fannie Mae said Sunday that it would sign new leases with renters living in foreclosed properties owned by the company.

It is the first nationwide effort to provide widespread relief to renters ensnared by the unfolding mortgage crisis, and it will effectively transform Fannie Mae — a government-controlled mortgage finance company — into a national landlord.

It may also increase pressure on private lenders to establish similar programs and on lawmakers to pass renter relief. “There are renters all around the country who have been holding up their end of the bargain and paying their rent faithfully, but the landlord got into trouble, and so the renter is now unfairly facing eviction,” said John Taylor, president of the National Community Reinvestment Coalition, a consumer advocacy group. “It’s really good news that Fannie Mae is doing this. Now the question is whether private sector will follow suit.”

In recent months, skyrocketing foreclosure rates have exposed as many as 70,000 renters to evictions, even though many never missed rent payments, according to analysts who track housing data. In many cities and states, renters can be evicted after their home goes into foreclosure, regardless of how long their lease stretches into thefuture.

Many financial institutions — including JPMorgan Chase and Bank of America — have policies to evict renters after foreclosure, company representatives said. Fannie Mae’s initiative is expected to initially benefit as many as 4,000 renters living in foreclosed homes owned by the company. Fannie Mae has traditionally only bought and sold mortgages. But when a loan held by the company goes into foreclosure, Fannie Mae gains ownership of the underlying property until it is resold to new investors.

Fannie Mae owned 67,500 properties in foreclosure at the end of September, according to the company’s most recent filings. Most of those were owner-occupied. Under the new policy, former owners will most likely not be eligible to rent homes they lost in foreclosure.

Last month, both Fannie Mae and Freddie Mac, the other government-controlled mortgage giant, temporarily suspended foreclosures and evictions until early January. Fannie Mae will now offer renters in foreclosed properties month-to-month leases until the property is resold.

A company representative said program details were still being worked out. “While it may be sometimes tougher for us to sell a property when people are in it, we understand that lots of people are in tough situations right now,” said Chuck Greener, a Fannie Mae spokesman. “If a renter wants to stay in their home, we’ll make that happen. And if they want to move out, in many cases we’ll help them pay for the move.”

A spokesman for Freddie Mac said that the company was looking at a number of options, including a program similar to Fannie Mae’s, but that no decisions had been made. The companies’ regulator, James B. Lockhart of the Federal Housing Finance Agency, issued a statement on Sunday saying that he expected both companies to update their policies shortly regarding renters living in foreclosed properties.

Both Fannie Mae and Freddie Mac were taken over by Mr. Lockhart’s agency this year and now operate in aconservatorship. Representatives of some major banks said it was unclear if Fannie Mae’s new policy would prompt their institutions to change theirs. “We’re not in the business of managing rental properties, and we’re not in the business of being a landlord,” said Thomas Kelly, a spokesman for JP Morgan Chase, which owns about two million loans. “Clearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.”

Some lawmakers and housing advocates say such policies are unjust. “If your loan is owned by Fannie Mae, you get to stay in your home. If your loan is owned by someone else, you’re on the street,” said Mr. Taylor of the National Community Reinvestment Coalition. “These banks need to realize they’re in the property management business now, whether they like it or not.”

Some lawmakers have complained that evicting renters is unfair. In November, the Los Angeles City Council voted to draft a law that would bar financial institutions from evicting renters living in foreclosed homes.

Last year, the House passed a measure that would require the new owner of a foreclosed property to inform renters at least 90 days before an eviction. That bill failed to pass the Senate.

Law enforcement officers in some states have refused to evict residents of foreclosed properties. But Yadilka Torres, who rents a home in New Haven, Conn., for $775 a month, had no such protection. Fannie Mae took possession of her house in September, when it went into foreclosure.

Even though she was current on her rent, she received an eviction notice saying that she and her two young children would have to leave. She looked for another apartment but could not find anything affordable. Under Fannie Mae’s new policy, she will now be allowed to stay.

“I was feeling so nervous,” Ms. Torres said. “I’ve tried very hard to pay the rent and to pay all my bills, and it seemed unfair this was happening. I’m very grateful we won’t have to move.”

Why Are Credit Card Issuers Undermining the Economy?

Photo by SqueakyMarmot

More evidence that the financial sector is squandering the hard-won rescue funds from Congress: Not only are banks not lending to rejuvenate business, especially to the small-business backbone of the American economy, they're making existing loans rapaciously expensive for good borrowers. This can have no other effect than to drag down our struggling economy further. The story linked above observes that the banks' lame excuse for raising rates on small businesses and individuals is a vague reference to "economic reasons." What reasons? That the banks need more money from good risks because they've so messed up their investments in bad risks? I can't believe Congress hasn't jumped on this kind of thing more aggressively . . . yet.

The idea of nationalizing the banking sector is sounding better and better. The W$J reported yesterday that regulators have become more involved in internal strategy for struggling Citigroup. Perhaps this (and the FDIC's role in managing IndyMac's troubled mortgage portfolio) will be a model for the future. Even if you believe that "Socialism" is bad, some form of level-headed government oversight HAS to be better than the foolishness we're seeing from these banks.

AALS Workshop on Transactional Law

You may want to mark your calendars for next June's AALS Workshop on Transactional Law, June 10-12, in scenic Long Beach, California. If you go, keep your eyes open for flying buses and '67 Shelby GTs. (Both scenes are set in or entering Long Beach; and yes, the dialogue in the second one is in Espanol.) The workshop is part of the AALS Mid-Year Meeting. Program details are not yet available on the AALS web site. However, the November AALS News provides the following description, as well as a list of topic and speakers and registration information that you can access by clicking this link.

“Transactional law” refers to the various substantive legal rules that influence or constrain planning, negotiating, and document drafting in connection with business transactions, as well as the “law of the deal” (i.e., the negotiated contracts) produced by the parties to those transactions. Traditionally, the law school curriculum has emphasized litigation over transactional law. However, many modern lawyers serve corporate clients, and a significant percentage of lawyers engage in some form of transactional practice. Hence, law schools must place greater emphasis on training law students to be transactional lawyers, and should support law faculty engaged in scholarship focused on transactional law. To this end, in 1994, the AALS held a workshop on the transactional approach to law, which sparked experimentation and innovation in teaching and scholarship related to transactional law. Since that time, there have been significant developments in transactional law. This Workshop not only will take stock of those developments, but also will enable participants to gain some in-depth perspective regarding the relative benefits and drawbacks of those developments.

Law schools have attempted to respond to the demand for increased transactional training in a variety of ways, from integrating transactional law into traditional law school courses to developing stand alone “Deals” or “Business Planning” courses. A number of law schools have developed innovative programs in transactional law. This Workshop will enable participants to discuss specific methods of teaching transactional skills with an eye towards ferreting out best practices. Should professors interested in teaching transactional law focus on substantive law, “transactional skills,” (i.e., planning, negotiating, and drafting), economic or other theories of business transactions, or all of the above? Should transactional skills be taught in separate courses or integrated into substantive courses? If taught in separate courses, should such courses be part of the first-year curriculum, integrated throughout the three years, or focused on the upper-level curriculum? How do you modify or supplement the traditional case method to teach students useful transactional skills? The Workshop also will explore the challenges and benefits that arise for those who write or would like to write transactional scholarship. And as initial matter, the Workshop will address how best to define “transactional scholarship” in a way that accurately captures the potential breadth and depth of transactional law, and how transactional scholarship differs from traditional legal scholarship.

The Workshop also will explore best practices for writing scholarship in this area, including methodologies for researching the legal, financial and practical effects of various corporate transactions. The Workshop will feature concurrent works-in-progress sessions, enabling participants to exchange ideas and insights regarding new scholarship related to transactional law.

One important goal of the Workshop is to bring together faculty from different doctrinal areas of law, including faculty who teach in the clinical setting. Transactional law touches many substantive areas of law, and it is closely identified with bankruptcy, business associations, contracts, commercial law, intellectual property, labor and employment law, securities regulation, and taxation. The Workshop will provide a unique opportunity for faculty members to make connections between their primary fields and transactional law, and thus should appeal to a broad spectrum of scholars and teachers.

Dick Speidel Tribute at AALS Annual Meeting

Northwestern University School of Law and the University of San Diego School of Law are hosting a reception at the AALS Annual Meeting in San Diego on Friday, January 9, from 6:30 to 8:30 p.m. in the Warner Center Room, 4th floor, south tower of the San Diego Marriott Hotel & Marina, honoring the career of Richard Speidel, who passed away this past semester. Dick was a major figure in contracts, commercial law, and international arbitration.

A short program, featuring remarks by Professors Jim White (Michigan) and Bob Summers (Cornell), Dick's long-time collaborators, and Deans Kevin Cole (San Diego) and David Van Zandt (Northwestern), will begin at 7:00 p.m. The organizers will also videotape remarks from those who knew Dick or his work and will provide a copy to Dick's family.

Hurray for Fannie!

Fannie Mae has announced that tenants will be permitted to stay in foreclosed homes. A nice touch during the holiday season for sure. Imagine being a paying tenant who gets an eviction notice at the holidays. The hassles of moving makes me shudder. Moving also adds moving costs, new security deposits and perhaps increased rent to the budgets of many families in low-income apartment complexes that are foreclosed.

Here enters Fannie Mae the landlord. Fannie Mae will execute new leases with the paying tenants in foreclosed properties, who would otherwise face eviction. Perhaps I am missing something here, but in light of the current market, this is long overdue. Normally, the government having all the headaches of a landlord (maintenance, rent collection, etc.) of these properties would not be ideal. Let's hope this isn't a long term solution. With plenty of vacant properties around, however, evicting paying tenants would seem to increase the losses that Fannie Mae would face. In many cases, these properties will be worth more with paying tenants than sitting vacant.

For now, at least the government should collect rent. Now I just wonder what kind of landlord will Fannie Mae be? Now, a bit of humor during these hard times is a good thing. Will Farrell's short on the "Landlord" comes to mind. For those of you with sensitive ears, don't push play.

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— JSM

Madoff's Ponzi Scheme

There is no end to bad financial news. The latest is a good old-fashioned ponzi scheme resulting in losses of about $50 billion that took place over decades. Basically a ponzi scheme is just a high rate of regular return given in order to entice new investors whose money in turn is used to pay existing investors without creating any underlying earnings for the payout. This time run by Bernard Madoff, an investment banker who formerly served as chairman of the board of directors of NASDAQ. Madoff was turned in by his own sons to the F.B.I. and charged with fraud.

The timing of Madoff's undoing could not be worse, but not surprising. Madoff's classic ponzi scheme depended on continued new investments. With the markets in turmoil, those new investors must have been impossible to bring into his venture. Today marks continued trouble for the stock market and manufacturing shows an even worsening economy. Even Apple has been downgraded to "neutral" by Goldman Sachs Group Inc. from a previous "buy" status. Add to all of this the lack of resolution concerning the prospects for the U.S. auto manufacturers.

Madoff's scheme is set to further erode investor confidence. Although we might call for increased investor due diligence, many thought that Madoff was a safe player. Many large banking institutions from around the world have announced billions in losses on the Madoff scheme already. What's to come? For starters, I suspect we will see more calls for Congressional hearings and even more calls for greater regulation of the investment community.

— JSM

Kids are Entrepreneurs Too!

I saw this article in the WSJ about children selling their toys on Ebay, Craigslist and other sites in order to raise money for new toys that their parents cannot afford this year due to the troubled economy. Other kids are selling toys just to be able to buy gifts for others or to help with family finances because a parent is out of work. Yikes! It's a tough world out there right now.

Having just written the examination for my first year Contracts I students, thoughts of contracts avoidable by minors comes to mind. My little boys would hardly part with their toys to share with each other (being just 1 and 3), let alone to sell to a stranger. And, does a child that becomes a little entrepreneur selling a whole host of toys on Ebay make them a merchant for purposes of UCC 2-314? Let's hope not.

Thankfully for my students, its too late for me to wrap this one into the examination.

— JSM

Good news for less debt?

The government announced today that American's household debt fell for the first time ever during the third quarter. Unfortunately, net worth also fell due to declining home and stock prices. Good news? It doesn't seem so. A big part of the reduction in debt is apparently the foreclosed homes which are moved out of the debt numbers. So, we have less debt because less people now own their homes. And, then there's that darn credit crunch keeping lending rates for consumers higher which in turn keeps them from spending. Others may not even be able to obtain loans for common consumer purchases like cars.

I like the idea of less debt in general. In this case, though, it is not a good sign for the economy.

— JSM

Executive Compensation and the power of $1

The new trend in executive compensation seems to be $1. AIG and the auto CEOs have all agreed to salary cuts to just $1. Of course, the compensation will not really amount to $1, as there is also equity compensation. This $1 compensation news is followed by a new Corporate Library report finding CEO compensation being up 7.5% for 2007. Should we expect any difference for 2008? Not likely. Even John Thain of Merrill Lynch only folded in his request for a $10 million bonus under outside pressure. Apparently, Thain had not been independently dissuaded from his request by the billions in losses Merrill sufferred in 2008.

But now AIG is under new complaints for "retention payments" made to key personnel. AIG has announced payments ranging from $92,500 to $4million to 168 AIG employees. While AIG has agreed to no 2008 bonus payments and no salary increases for 2009 for the top seven officers and no salary increases for the next fifty highest paid execs. Apparently, thirteen of those getting "retention" payments are executive officers of AIG who have agreed to defer payment to them until April 2009, but not to waive this additional compensation. Not surprisingly, some in Congress have complained.

The long-standing problem with executive compensation is that there are so many ways to pay corporate executives. That is, $1 is not really just $1. Compensation comes in so many other ways, from retention payments, bonuses, and perks like corporate jets. My biggest concern with paying these executives just $1 in salary is that their desire for some salary will now correspond to their ability to trigger equity payments. Short terms equity gains for these companies may not be the same thing as long term stability and growth. It would be much better to pay the executives a reasonable salary and forgo the equity. That raises the separate issue of loyalty to company prospects that might arise if executives don't have enough incentives to do their jobs well. Never mind the idea of doing a good job in order to keep one's job. There has been little mention on Capital Hill of the equity compensation that companies getting substantial federal bailouts have promised to senior management. While the stock of these companies may be worth little now, that might not always be the case. A little more talk about continuation of equity programs for these companies should be next.

— JSM

Fraud Prevention for Internet Purchases

This evening, I did a whirlwind trip through Target to purchase the collection of toys, hats, mittens and other gifts I've promised to donate to charity. Since I am woefully behind on my holiday shopping and short on time as a whole, I will be doing much of my remaining shopping on the Internet. Amazon.com is one of my favorite sites for easy shopping and will bail me out for my lateness this year. Of course, I will be using my credit/debit cards to make these purchases.

USA Today recently cautioned that big on-line deals could open customers up to scams and thievery. The Truth-in-Lending Act (TILA) Section 1643 protect individual cardholders from unauthorized use of credit cards with a liability not to exceed $50 and the customer does not have to pay the credit card bill for unauthorized use. See Koerner v. American Express Company for a good discussion of issues under TILA generally, especially with company credit cards). Debit cards, though, are altogether a different matter not governed by TILA. Instead, the Electronic Funds Transfer Act (EFTA) applies. While the EFTA would allow greater losses for cardholders, Mastercard/Visa have erased the liability differential for consumer cards. The primary problem with the debit card, however, is that the money comes directly out of your checking account, with the potential for returned items and overdrafts in the event of theft. While a bank sorts out the problems and gets you the money back, you may find yourself short on cash.

Surely, banks are getting a whole lot of bad press here and elsewhere of late. So, here's something to warm the pocket book of those who like to shop on the Internet this time of year. Bank of America is now promoting two products designed to prevent fraud. The first, ShopSafe is a free service that allows users to have a temporary card number each time they make an online purchase.The second, SafePass, gives you a 6-digit, one time passcode sent as a text message to your phone or created from a wallet sized card. The extra card costs $19.99. Of course, the code expires once you use it so that a hacker/thief could not use it for later transactions. The SafePass can be used for Bill Pay transactions to keep others from creating unauthorized transactions on your account.

Other than the $19.99 price tag for the extra card on the SafePass, the BOA products seem like pretty good ideas. If you have a generous text-messaging allowance on your cell phone, it would seem to be free to use. With the large amount of purchasing moving to the Internet it seems logical for banks to move to greater security measures to counter fraud. The biggest impediment here seems to be the cost of such programs and getting consumers to use them. While I have an account with BOA, I learned about these new programs from a news piece. Again, getting customers to use the programs is a problem as even the text messaging for the SafeShop will require the customer to take an extra step to get the special number before making each and every purchase. With consumers desiring products that have easy use, this extra step could pose a hurdle selling the product to cardholders.

In the meantime, my credit cards are looking good here for Internet purchases.

— JSM

Rise In First Time Home Buyers

Buyers, Long-Term Plans NAR Home Buyer and Seller Survey Shows Rise in First-Time Buyers

ORLANDO, November 08, 2008

The latest consumer survey of home buyers and sellers shows first-time buyers have risen in market share and plan to own their homes longer than buyers in the past. The study was released here today at the 2008 REALTORS® Conference & Expo.

The 2008 National Association of Realtors® Profile of Home Buyers and Sellers is the latest in a series of large national NAR surveys evaluating demographics, marketing, preferences and experiences of home buyers and sellers.

Lawrence Yun, NAR chief economist, said a higher share of first-time buyers makes perfect sense, and it’s a trend he expects to grow. “First-time buyers are much more flexible in entering the market because they aren’t concerned about selling an existing home,” he said. “Given low home prices, plentiful supply and affordable interest rates, it’s been an optimal time for entry-level buyers with a long-term view.

“Considering the temporary first-time buyer tax credit and improvements to the FHA loan program, we expect stronger entry-level activity as the flow of credit improves – that, in turn, should free more existing owners to make a trade in 2009.”

The number of first-time buyers rose to 41 percent from 39 percent of transactions in last year’s survey and 36 percent in 2006. “Although modest, this is a meaningful gain for the 12-month period ending at the close of June, and more recent independent data show a stronger uptrend in first-time buyers who are helping to reduce excess inventory,” Yun said.*

According to the NAR study, the median age of first-time buyers was 30, down from 31 in 2007, and the median income was $60,600. The typical first-time buyer purchased a home costing $165,000 and plans to stay in that home for 10 years, up from seven years in 2007.
The median downpayment by first-time buyers was 4 percent, up from 2 percent in 2007; the number purchasing with no money down fell from 45 percent in 2007 to 34 percent in the current survey.

“The study covers transactions through the middle of 2008, so we can assume the downpayment numbers have shifted recently because credit tightened and no-downpayment loans all but disappeared around the close of the survey,” Yun explained.

Of first-time buyers who made a downpayment, 69 percent used savings and 26 percent received a gift from a friend or relative, typically from their parents. Another 7 percent received a loan from a relative or friend, while 16 percent tapped into a 401(k) fund, stocks or bonds. Ninety-two percent chose a fixed-rate mortgage.

NAR 2008 President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said consumers rely heavily on the expertise of real estate agents to navigate the market. “This is the biggest transaction most people are ever involved in, so the qualities they’re looking for in a real estate agent include reputation, honesty, integrity and knowledge of the market,” he said. “Both buyers and sellers want agents to provide context, advice and know-how. The vast majority would use their agent again or recommend their agent to others.”

Only 1 percent of sellers chose an agent based on his or her commission. Forty-six percent report the real estate agent initiated a discussion of compensation, while 24 percent of sellers brought up the topic and the agent was willing to negotiate the commission or fee. Thirteen percent of sellers did not know commissions and fees are negotiable.

Nearly nine out of 10 home buyers and sellers would definitely or probably use the same agent again or recommend him or her to others, consistent with the 2007 findings. The survey shows that 81 percent of home buyers and 84 percent sellers used a real estate professional, comparable to 2007.

Thirty-eight percent of sellers found their agent as a result of a referral, while 26 percent used the agent in a previous home purchase. Similarly, 43 percent of buyers relied on referrals to find an agent, while 18 percent of repeat buyers used an agent from a previous transaction.

The percentage of buyers who purchased a home in foreclosure jumped to 6 percent of transactions in the 2008 survey from 1 percent in 2007. Another 38 percent of buyers considered purchasing of a home in foreclosure but did not, primarily because they could not find the right home.

Commuting costs factored greatly in neighborhood selection, with 41 percent of buyers saying they were very important and another 39 percent saying transportation costs were somewhat important. “Since fuel costs began rising in the latter part of the survey period, it’s reasonable to assume they’ve become even more important to home buyers since,” Yun said. “We’ve heard from our members that commuting costs are playing a bigger role in buyers’ decisions.”

Environmentally friendly features also were important, cited by 90 percent of buyers. Heating and cooling costs were of primary importance, followed by energy efficient appliances and energy efficient lighting.

Buyers searched a median of 10 weeks and viewed 10 homes. Of buyers who used an agent, 61 percent chose a buyer’s representative. Nearly nine out of 10 consider their home a good investment, and almost half see it as a better investment than stocks. Fifteen percent of buyers own two or more homes.

The typical repeat buyer was 47 years old, earned $88,200, purchased a home costing $236,000 and plans to stay in that home for 10 years. Repeat buyers made a median downpayment of 15 percent, but 10 percent paid cash for their property.

The median age of home sellers was 47; income was $91,000. Three-quarters were married couples, had been in their home for six years and moved a median distance of 19 miles. Their home was on the market for eight weeks; 5 percent of sellers who also purchased a home reported selling their home in a short sale.

Forty-two percent of sellers offered incentives to attract buyers, such as assistance with closing costs or home warranty policies. The typical home sold for 96 percent of the listing price, and 86 percent of sellers were satisfied with the selling process. Fifty-two percent of sellers were trading up to a larger home, while 22 percent were downsizing.

The study found that 81 percent of sellers used full-service brokerage, in which real estate agents provide a range of services that include managing most of the process of selling a home from listing to closing. Nine percent chose limited services, which may include discount brokerage, and 9 percent used minimal service, such as simply listing a property on a multiple listing service. All of these types of services are provided by Realtors® as well as non-member agents and brokers. The results are identical to findings in 2007 and comparable to findings in 2006.

Primarily, sellers want agents to price their home competitively, market the property, find a buyer and sell within a specific timeframe.

Home buyers are consistent in their expectations of real estate agents. Buyers thought the most important agent services are helping find the right house, and negotiating sales terms and price. Because agents often are chosen based on a referral, or were used in a previous transaction, two-thirds of buyers contacted only one real estate agent in the search process.

Buyers used a variety of resources in searching for a home: 87 percent used the Internet, 85 percent used a real estate agent, 62 percent yard signs, 48 percent attended open houses and 47 percent looked at print or newspaper ads. Fewer buyers rely on a home book or magazine, home builders, television, billboards and relocation companies. Buyers most commonly start their search process online and then contact a real estate agent.

When asked where they first learned about the home purchased, 34 percent of buyers said a real estate agent; 32 percent the Internet; 15 percent from yard signs; 7 percent from a friend, neighbor or relative; 7 percent home builders; 3 percent a print or newspaper ad; 2 percent directly from the seller; and 1 percent a home book or magazine.

Eighty-seven percent of home buyers who used the Internet to search for a home purchased through a real estate agent, in contrast with 72 percent of non-Internet users who were more likely to purchase directly from a builder or from an owner they already knew in a private transaction.

Local metropolitan multiple listing service Web sites were the most popular Internet resource, used by 60 percent of buyers, followed by Realtor.com, 48 percent; real estate company sites, 46 percent; real estate agent Web sites, 43 percent; for-sale-by-owner sites, 19 percent; and local newspaper sites, 11 percent; other categories were smaller.

Sixty-one percent of buyers are married couples, 20 percent are single women, 10 percent single men, 7 percent unmarried couples and 2 percent other. Twenty-six percent are non-white, 9 percent were born outside of the United States, and 4 percent primarily speak a language other than English.

Seventy-eight percent of all respondents purchased a detached single-family home, 9 percent a condo, 8 percent a townhouse or rowhouse, and 5 percent some other kind of housing.
Fifty-five percent of all homes purchased were in a suburb or subdivision, 17 percent were in an urban area, 16 percent in a small town, 10 percent in a rural area and 2 percent in a resort or recreation area. The median distance from the previous residence was 12 miles.

The level of for-sale-by-owner transactions was 13 percent, up slightly from a record-low market share of 12 percent in both 2007 and 2006. The level of homes sold without professional representation has trended lower since reaching a cyclical peak of 18 percent in 1997.
A large number of these properties were not placed on the open market – 45 percent were “closely held” between parties who knew each other in advance, such as family or acquaintances.
Factoring out properties that were not placed on the open market, the actual number of homes sold without professional assistance is 7 percent – the rest are unrepresented sellers in private transactions. This matches the results in the 2007 study and marks a downtrend from 10 percent sold on the open market in 2004.

The median home price for sellers who used an agent was $211,000 vs. $153,000 for a home sold directly by an owner, but there were important differences between the two. Unassisted sellers were more likely to be in a rural area or small town where sellers are more likely to know potential buyers. In addition, the home was more likely to be a mobile or manufactured home, and the owner’s income was lower than that of sellers using agents.

The most difficult tasks reported by unrepresented sellers are selling within the planned length of time, getting the right price, preparing the home for sale, and understanding and performing paperwork.

NAR mailed an eight-page questionnaire in August 2008 to a national sample of 133,000 home buyers and sellers who purchased their homes between July 2007 and June 2008, according to county records. It generated 10,053 usable responses; the adjusted response rate was 7.9 percent. All information is characteristic of the 12-month period ending in June 2008 with the exception of income data, which are for 2007. Because of rounding and omissions for space, percentage distributions for some findings may not add up to 100 percent.

# # #

*A separate report by HouseHunt, Inc., based on a survey of 2,000 real estate agents, shows 50 percent of homes purchased in the third quarter of 2008 were by first-time buyers.

© Copyright NATIONAL ASSOCIATION of REALTORS® Headquarters: 430 North Michigan Avenue, Chicago, IL 60611

DC Office: 500 New Jersey Avenue, NW, Washington, DC 20001-2020 I 1-800-874-6500

YOUR MONEY
It May Be Time to Think About Buying a House


By RON LIEBER
Published: December 5, 2008
Five or 10 years from now, when the financial crisis has ended and housing prices are up smartly once more, we will look in the rearview mirror and realize that we missed a golden age for first-time home buyers.

Then, everyone who sat on their down payment savings accounts for a few years too long will kick themselves for not taking advantage of what may turn out to be the buying opportunity of a lifetime for those who can qualify for a mortgage.

Unfortunately, we do not know when this golden age will begin, because we will be able to identify a bottom to the housing market only with the benefit of hindsight. But as it does with the stock market, the moment will probably arrive when everyone is feeling the most pessimistic.

That moment is certainly getting closer. Housing prices have fallen drastically from their peak levels in many areas of the country. Rates on 30-year fixed-rate mortgages are already close to 5.5 percent, and this week there were suggestions that the federal government might try to drive them down to 4.5 percent, a truly incredible figure to be able to lock in for three decades.

Meanwhile, first-time home buyers have the same advantage they have always had, which is that they do not have to sell their old place before buying a new one. That is an added advantage in areas where many available houses simply are not moving, because the people trying to sell them will not be bidding against you.

If you’re hoping for a recovery in the housing market, you ought to be cheering on the first-time home buyers. When they purchase homes, their sellers are free to move on or move up, stimulating further sales.

But if you are a potential first-time buyer yourself, or lending or giving the down payment to one, you are probably as frightened as you are tempted by all the “For Sale” signs that have become “On Sale” signs. So let’s quickly review some of the still-grim pricing data in certain areas — and consider the reasoning offered up by first-time buyers who have forged ahead anyhow.

As is always the case with real estate, much depends on location. One study, “The Changing Prospects for Building Home Equity,” tries to predict where today’s first-time buyers in the 100 biggest metropolitan areas may actually have less home equity by 2012 as a result of continued price declines. The verdict was that buyers in 33 of the markets could see a decline by 2012, including potential six-figure drops on an average home in the New York City, Los Angeles, San Francisco and Seattle metropolitan areas.

This is obviously scary. (I’ve linked to the study, a joint effort of the Center for Economic and Policy Research and the National Low Income Housing Coalition, from the version of this article at nytimes.com/yourmoney.) It’s worth noting, however, that these predictions came before the government made its most recent move to reduce borrowing costs.

Also, the price projections in the study are based, in part, on the fact that the ratio of purchase prices to annual rents is still higher in many areas than the historical average, which is roughly 15 times rents. While past figures may well have some predictive value, I have never been convinced that first-time buyers compare a home that they could own and one that they would rent in purely or even primarily economic terms.

When Jaime and Michael Proman moved this fall to Minneapolis, his hometown, from New York City, they craved a different sort of life after two years together in a 450-square-foot studio apartment. “We didn’t want a sterile apartment feel,” said Mr. Proman, who is 28 (his wife is 26). “We wanted something that was permanent and very much a reflection of us.”

The fact is, in many parts of the country there are few if any attractive rentals for people looking to put down roots and enjoy the sort of amenities they may spot on cable television home improvement shows. Comparing a rental with a place that you may own seems almost pointless in these situations, especially for those who are now grown up enough to want to make their own decisions about décor without consulting the landlord.

Still, for anyone feeling the urge to buy, a number of practical considerations have changed in the last year or two. The basics are back, like spending no more than 28 percent of your pretax income on mortgage payments, taxes and insurance. Even if a lender does not hold you to this when you go in for preapproval, you should hold yourself to it.

You will also want to start now on any project to improve your credit score because it may take several months to get it above the 720 level that qualifies you for many of the best mortgage rates.

John Ulzheimer, president of consumer education for credit.com, a consumer credit information and application site, suggests starting to pay down and put away credit cards months before you apply for a loan. That is because the credit scoring system could penalize you if you use a lot of credit each month, even if you always pay in full. Also, check your three credit reports (it’s free) at annualcreditreport.com and dispute errors.

While no one can easily predict the likelihood of losing a job, Friday’s startling unemployment figures suggest the need for caution if you think you might be vulnerable. A. C. Panella, who teaches communications at Pasadena City College in California, waited until she had a tenure-track job before buying a home in the Highland Park section of Los Angeles with her partner, Amy Goldman, a lawyer for a nonprofit organization. “We could afford the mortgage payment on one salary, were something to come up,” Ms. Panella, 31, said. “It’s really about being able to stay within our means.”

For many first-time home buyers, that philosophy stretches to the down payment, too. Ms. Panella and her partner put down 20 percent when they bought their home in September, as did the Promans when they bought their home in the Lowry Hill neighborhood of Minneapolis.

Alison Nowak, 29, put just 3 percent down on a Federal Housing Administration-backed loan last month when she and her partner, Lacey Mamak, bought a $149,900, 800-square-foot home several miles south of where the Promans live. “Anything that is an opportunity also has a bit of risk,” she said. Her house was in foreclosure before a plumber bought it and fixed it up. “One way we mitigated it was that we bought a really tiny house in a very good neighborhood.”

One other strategy might be to buy new instead of used. Ian Shepherdson, chief United States economist for the research firm High Frequency Economics, says he believes that a steep drop-off in inventory of new homes is coming soon, thanks to a rapid decrease in home builder activity.

Since prices generally soften in the winter, it may make sense to start looking seriously once the mercury bottoms out. “If you look at new developments next spring, you may not have the choice you thought you would have or be in the bargaining position you thought you would be,” Mr. Shepherdson said. Also, if you wait after June 30, you will miss out on a $7,500 federal tax credit for income-eligible first-time home buyers that works like an interest-free loan.

Finally, allow yourself to consider how it would feel if you bought and then prices dropped another 10 or 15 percent. It might not bother you if you plan to stick around. Plenty of people seem to be making a longer commitment to their homes. According to a survey that the National Association of Realtors released last month, typical first-time buyers plan to stay in their home 10 years, up from 7 last year.

Perhaps people are more aware that they will not be able to build equity as rapidly as others did in the real estate boom. Or they simply have more confidence in hard, hometown assets now than in other markets.

“We wouldn’t let another decline bother us,” said Michael Proman. “You can never time a bottom. This is a long-term investment for us, and it truly is the best investment we have in our portfolio right now.”

Ready to buy, or waiting it out? Post a comment at nytimes.com/yourmoney or write to rlieber@nytimes.com.

More Articles in Business » A version of this article appeared in print on December 6, 2008, on page B1 of the New York edition.

GM, Chrysler & Tribune Creditors Go to "The Barbershop"

Photo by Elaron

As predicted, at least two of the Big Three auto makers are headed into an out-of-court workout orchestrated and likely financed by the U.S. government. My new favorite quote is from Nancy Pelosi: "We call this the barbershop. Everybody's getting a haircut here . . . ." She included management in the list of parties who will be called on to make concessions--including dumping those fancy corporate jets (talk about bad PR!)--in exchange for government financing of the workout (let's just call it DIP financing, shall we). The W$J story aptly compares the workout procedure to bankruptcy, which is, of course, exactly what's going on here, though the informal process will lack both the psychological stigma of "bankruptcy" and the muscle that the Bankruptcy Code would provide in dealing with leases and intransigent holdout creditors. The primary purpose of Chapter 11, in my view, is to allow a majority-approved workout plan to be forced--"crammed down," as we say--on dissidents. I guess the gravitas of the U.S. government will be the 800-pound gorilla in this deal.

I'm getting closer to figuring out who will be sitting in the barber's chair in the Tribune Company bankruptcy, too, especially in terms of employee retirement and other claims. It seems that we have good news and bad news.

The good news is that, while 100% of the company's stock is held by an Employee Stock Ownership Plan (ESOP), very little time has passed since that plan took over the compay's equity, so employees apparently have made no concessions or contributions to the plan, which will now likely be wiped out in the bankruptcy. While the employees are technically the beneficiaries of the stock held by the ESOP, the trust obtained the stock through a $250 million loan from the company, so employee rights in the stock would have vested only over time as the the company reduced the ESOP trust's debt by making annual contributions to the ESOP. Since this hasn't happened yet, the employees will really lose next to nothing in terms of retirement assets--thank goodness. Most of this is explained in a wonderful note by Corey Rosen, executive director of the National Center for Employee Ownership. Ironically, from the employee retirement assets perspective, it's probably actually a rather good thing that the company sought bankruptcy earlier rather than later (before it put lots of employee retirement contributions into the ESOP black hole). The compay's "pension plan," which closed last year, seems to be safely outside the bankruptcy case in a fully-funded $1.8 billion trust (beneficiaries with "frozen" pension rights should be safe). The same is true of the 401(k) plan set up by the company, but to which the company discontinued making employer contributions when the ESOP was set up.

The bad news seems to be that the the primary part of the three-part Tribune employees' future retirement plan seems to be up in the air now. The first, a "cash balance," low-risk money fund that will hold planned 3% annual cash contributions (the first to be made in 2009), will apparently be unaffected (though one wonders what future contributions will be). As for the second part of the plan, employees can continue to contribute themselves to a 401(k) account (though employer contributions were suspended last year). The cornerstone of the company's post-2008 retirement plan, however--the ESOP--will in all likelihood be gutted in the bankruptcy. In addition, as described in this fantastic New York Times summary of the situation, the "little guys" with the most to lose are those who recently accepted buy-outs and severance deals. This includes folks like a reporter mentioned in the NYT story who just sent in his paperwork to accept a buy-out equal to 49 weeks' pay (severance for more than 24 years of work)--a deal that is now in jeopardy as these types of people join the ranks of unsecured creditors. Luckily for these folks, up to $10,950 per person of such claims, earned within 180 days of yesterday (the filing date), will be § 507(a)(4) "priority" unsecured claims, which get to budge in line ahead of the general unsecured creditors (probably including the banks and bondholders).

It's a sad, rainy day in Chicago today. One of the most beloved institutions in town is in bankruptcy, and our governer was arrested by the FBI this morning, charged with corruption (more "pay-to-play" allegations leveled at yet another Illinois governer). I, for one, am looking forward to a brighter 2009!

Tribune Company List of Creditors--Where's Zell?

The plot thickens? The Tribune Company's bankruptcy petition and related statements are online, courtesy of the L.A. Times. As I mentioned in my earlier post, Zell's stake in the company is reportedly represented primarily by a $225 million 11-year subordinated note. I went hunting for this obligation in the "Consolidated List of Creditors Holding the Thirty Largest Unsecured Claims Against the Debtors," and I couldn't find it. The range of claim amounts is quite broad, from the $8.57 billion owed on the senior bank facility all the way down to a $1.69 million claim by Paramount Pictures Corp. for "trade debt" (maybe licensing fees or something?). Where's Zell's $225 million note? I wouldn't expect to find Zell's name on the list--doubtless, he made the loan through one (or more) of his companies. But of the several mentions of "subordinated promissory notes due 2018" (which would precisely describe the notes I would expect to find reflecting Zell's stake), all five are listed as much smaller amounts ($3.3 million, $2.8 million, down to $2.16 million). These notes are held by companies named "Tower XX, LLC" (where XX is a two-letter combination that differs for each company), c/o Equity Group Investments (which I believe is Zell's company). The five notes add up to only $13.4 million--a far cry from the $225 that the reports I had seen suggested for Zell's position. Is the remainder broken into dozens of notes for less than $1.691 million (the smallest claim on the list)? Curious.

Tribune Bankruptcy and Absolute Priority

Photo by matt1125

The Tribune Company, owner of the flagship Chicago Tribune, as well as the L.A. Times, Baltimore Sun, WGN News, and other assets (including the Chicago Cubs) has finally entered Chapter 11 bankruptcy--a destination toward which it has been slouching for months. It thus seems to have become the latest victim of private equity's debt-fueled LBO rampage, joining Mervyn's and perhaps Bally. Tribune Company Chairman and CEO (and architect of the recent ill-fated going-private deal) real estate tycoon Sam Zell said that he expects creditors to take a significant haircut: "[s]ome elements (of the credit structure) will have no recovery."

As mad as the creditors are likely to be about this, the shareholders--especially the employees--are likely to be hopping mad when the facts emerge about how this company will restructure. Tribune Company is "America’s largest employee-owned media company," and many employees were unhappy about Zell's takeover/privatization of the company, as well as his capitalism-heavy-journalism-lite management refocus, and now they'll have reason to be really upset. While Chapter 11 may well not mean the demise of the company, it will almost surely mean the complete or near complete destruction of whatever value the employee's ownership stake (equity) might have had before the filing. The reorganization will almost certainly result in a debt-for-equity exchange, where current equity gets squeezed out (at least for the most part) and big debtholders take over that equity in exchange for discharge of debt. The absolute priority rule will almost certainly prevent equity (shareholders) from retaining any significant stake if some significant group of creditors will have "no recovery." Unless every creditor class can be convinced to vote in favor of a plan that leaves some value for equity, the company will be unable to confirm a Chapter 11 plan. Indeed, one wonders what Zell plans to do about his own equity stake.

Maybe there are more surprises waiting in the wings here, but this is yet another sad day in a long string of sad days for the Tribune Company's employees, who seem to have been largely involuntary passengers on Zell's pirate ship to Chapter 11.

Update: A little surfing answered my question about Zell's personal stake and added an interesting twist to the case. Zell's $315 million (!) investment in the going-private deal was structured as a $225 million subordinated 11-year note and a $90 million warrant to purchase up to 40% of the company's shares within 15 years from the Employee Stock Ownership Plan that now owns 100% of the Tribune Company's equity. Thus, Zell's $90 million warrant is likely worthless (or nearly so) after the bankruptcy filing (for the reasons discussed above), but his $225 million note is debt, which will likely be promised some distribution in a Chapter 11 plan. I intend to follow this (for me, local) case in the days ahead, focusing on the word "subordinated." While Zell's note now is likely subordinated only to the other company debt (both public bonds and bank loans), it might well ultimately be equitably subordinated under Bankruptcy Code § 510(c)(1) to the ESOP's share interest, which Zell's going-private transaction has now all but completely destroyed. Stay tuned!

Refi No Good--A Lesson in "LTValuation"

Photo by jurek d.

Following up on my refi post, I share a lesson I learned today (when my own refi deal tanked) that suggests one reason why efforts to stabilize the housing market are foundering.

I still recall the point in my first home purchase deal when I looked at the contract and asked my realtor what it meant that a condition of the deal was my ability to obtain financing at [blank], and she had filled in the blank with "80% LTV." She couldn't explain it to me--she just always put that in the blank (!). I now know all too well what that means, and it killed my refi attempt. LTV stands for "loan to value," and it represents the ratio of the loan amount to the value of the property; e.g., an $80,000 loan secured by a mortgage on a $100,000 home is "80% LTV," while a $90,000 loan on that same home is 90% LTV, the wrong direction if you're the mortgage banker considering making the loan. The bank (mortgagee) wants an "equity cushion" (value in excess of the mortgage-secured loan) to protect the bank in the event that the loan defaults and the bank decides to enforce the mortgage ("foreclosure"). Indeed, borrowers who need to borrow more than 80% of the home's value (that is, can't afford a 20% down-payment) often have to pay "private mortgage insurance" (or "PMI") to protect the bank in case a foreclosure sale's proceeds don't cover the defaulted "more than 80% LTV" outstanding loan.

As in many other aspects of commercial law and practice, valuation thus becomes the key to the deal. Entire courses (probably series of courses) in business departments are dedicated to the variety of methods of valuing things, including real (immovable) property. The appraiser who tried to value my home for the refi (to establish at least 80% LTV) decided that the identical townhome behind mine that sold a few months ago for a depressed price represented an inflated comparable value for my home--since it sat on the market for a few months, he decided that the purchase price should be further depressed by more than 10% to represent its true "value." Good grief! I can imagine discounting a recent sale price if there were evidence that the local market had softened in the intervening period (my appraisal didn't suggest anything like this). But otherwise, if someone just paid $X for an identical home a few months ago, I would think $X would be a pretty good comparable for the value of my home, regardless of how long that other home sat on the market. Indeed, it's perfectly obvious that the other place sat on the market so long because the original asking price (which was nearly $30,000 over $X!) was too high, and when the right price was asked, it sold. That's how the market works. Now two townhomes in my association have sold for exactly $X, but the appraiser thinks my place is worth $X minus 10% because it took so long to sell one of the other places? Please!

JPMorganChase (and other banks whose appraisers operate in this foolish way) are losing good business and failing to embrace the economic stimulus that federal authorties are bending over backwards to offer. Banks and especially mortgage servicers seem to be stubbornly struggling against the stream of federal efforts to solve the housing/financial/economic crisis.

I'm now convinced that throwing more money at banks is not the solution--they have proven that they lack the resolve, willpower, or whatever to deal responsibly with this crisis. I hereby nominate Sheila Bair (FDIC Chairperson) as the new tsar of a nationalized housing lending industry. O.K., I'm kidding . . . but only a little.

Bally's Yo-Yo Bankruptcy Diet

Photo by Boso

I just can't resist the pun opportunities presented by Bally's second bankruptcy filing in 14 months. Apparently, Bally has not internalized its own core message to its customers: you have to burn more calories than you take in (in other words, burn off more debt than you take on). With $1.4 billion in assets and only $479.5 million in net revenue for the 9 months ended September 30, 2008, Bally's $1.5 billion in debt leaves its balance sheet looking almost as flabby as it did when the company went on its first crash bankruptcy diet in 2007. Bally's personal trainer--Bankruptcy Judge Burton Lifland in the Southern District of New York--now has the second case, even before he had finished up the final details on the last one! Rather than focusing on toning up its balance sheet, Bally appears ready to throw in the towel and pursue a negotiated sale. One hopes the new owners will impose a stricter nutrition/workout regime on Bally, unlike the bloated hedge-fund firm that now owns it (these hedge funds are becoming infamous for their force-feeding of other formerly fit companies like Mervyn's).

Time to Refinance?

Photo by woodleywonderworks

Exams have me sidelined recently, but I wanted to be sure to point out one very nice effect of the Fed's most recent efforts at loosening up lending markets. Mortgage rates have fallen precipitously in the past two weeks. My lender, JPMorgan Chase, is offering 5.25% today, though this lowest rate requires payment of a point. Even for no points, many qualified borrowers can likely reduce their interest rates and monthly payments substantially in this new mortgage climate. Caveat: "qualified borrower" is a much more restrictive term today than in recent years. High credit ratings, substantial equity (at least 80% LTV), and documentable income are back in vogue. Indeed, the W$J reported this morning that self-employed professionals, even those with substantial equity, liquid assets, and reported incomes are having a hard time obtaining loans due to difficulty in documenting their pre-income-tax-deduction incomes.

If you qualify, look into refinancing. At current rates, it may well be worth it.