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Large bank sues to shut-up top notch analyst who correctly reports bank’s problems: BankAtlantic Bankcorp v. Richard X. Bove. Result: Analyst “litle guy” wins against bank, but ultimately “loses” because of punishing legal costs fighting the wealthy

This article turned my stomach.

The highly regarded bank analyst Richard X. Bove created a list of twenty banking related companies with problems. The analyst was ultimately correct the article seems to say; the bank holding company was approaching insolvency if I understand the Martin/Story 9/12/2010 NY Times article. Nevertheless, the bank sued the "little guy" independent bank analyst (who works from home!) and I note gleefully that the bank ultimately had to back off because the "little guy" seems to have been proven correct according to Martin/Story. I glumly note, however, that the "little guy" analyst is the ultimate "loser"; the "little guy" analyst is now sadled by $800,000 in legal defense costs and fees.

This is a chilling account of a seemingly retaliatory crusade of a wealthy bank owner and C.E.O.’s against an honest and straightforward "little guy". The players are "work from home" bank analyst Richard X. Bove and rich-guy big-shot BankAtlantic Bancorp C.E.O. Alan B. Levan. Mr. Levan is a Florida banker.

So much for freedom of speech. BankAtlantic’s C.E.O Alan B. Levan’s actions may be capable of the following interpretation: "You can speak freely and honestly about my company and its mistakes and mis-deeds, but we the wealthy and advantaged will destroy your life for having done so…."

Click on the link to the September 12, 2010 NY Times article authored by Andrew Martin and Lousie Story and grab the watebasket…you may need to vomit before you finish the article…

Note that if this blog post disappears, it may well be because one of Mr. Levan’s attorneys threatens me.

Why isn’t the Federal stimulus working? Colmnist analyzes that the 2009/2010 Federal stimulus cash infusion effects are neutralized (and the Federal stimulus is failing) because of budget cuts in state and local government spending; but there is a gl

NY Times columnist Robert H. Frank supports the Obama administrations $50 billion 9/5/2010 proposal for an "Infastructure Renewal Bank" in which local and state governments could borrow money from the Federal government to repair and rebuild roads, sewers and other infastructure.

Mr. Frank reports that the large Federal stimulus spending is being undercut and eroded by cuts in jobs and improvements by cash-strapped cities, towns, counties and states. (Recently, Harrisburg, Pennsylvania, the state capital, announced that it was bust and would need millions from the state coffers just to provide ongoing basic services – see earlier posts in this blog for posts about this event).

Insomuch as the Federal government might spend, the cities, towns, counties and states contract in their spending so that there is essentially little or no net positive extra spending, says Mr. Frank.

Mr. Franks writes: "Europe spends about 5 percent of its annual gross domestic product on infastructure, while China spends about 9 percent, according to (information from the) American Society of Civil Engineers. In the United States, which spends less than 2.5%, chronically deferred maintenance has left the infastructure in dangerously substandard condition. More than 25% of the nation’s bridges, for example, were structurally deficient or obsolete in 2007, according to the Federal Highway Administration. … 4,404 dams were unsafe or deficient in 2008 That was up from 4,095 in 2007 and 3,500 in 2005."

Mr. Frank suggest that we spend the money to build/repair infastructure for the future, and thus stimulate the economy at the same time.

IDEAS FOR ACTION: Find out if your local dam is structually insufficient. If so, then consider moving to a safer location if you are in the path of the potential floodwaters! Second, perhaps seek training and education in the concrete and ironwork industries if you are looking for a career change or boost. Thoughts are cement truck driver, surveyor, concrete cutting, demolition, excavation and general concrete and construction laborer. If you have construction/transportation skills in these areas, do not become discouraged. If you have construction labor experience consider joining a gym to keep yourself in good physical condition; your skills may be in demand once again if the Obama "Infastructure Renewal Bank" becomes a reality and you want to offer the strength and stamina to keep up with the job demands when you are called back to work.

I enclose a link here to Mr. Frank’s 9/12/10 article:

Buying a spanking new home or a recently built used home in a housing development? CAUTION! Beware of developer 99 year “resale fees” hidden in the covenants.

The NY Times reported on September 12, 2010 that "re-sale" fees creeping into the fine print development covenants, as reported by Janet Morrissey. See Business Section 9/12/10, front page NY Times.

A WHAT????

A "re-sale fee" is a 1.0% fee that must be paid to the developer for 99 years at any time the home changes hands after the original sale to homeowner #1. They are terms that are now being quietly and sneakily drafted into the Homeowners’ Association covenants and/or sales contracts all over America.

Ms. Morrissey reports that "A growing number of developers and builders have been quietly slipping "re-sale fee" covenants into sales agreements of newly built homes in some subdivisions. In one case detailed by Ms. Morrissey concerning a family of seven (five children) who purchased in Utah, the "re-sale fee" language was ina aseparate 13-page document – called the declaration of covenants, conditions and restrictions – that wasn’t even included in the closing papers and did not require a signature by the buyers.

Sometimes the "re-sale fee" is labeled in a difficult to understand nomenclature and is then called a "capital recovery fee" or a private transfer fee".

Ms. Morrissey presents the scenario: "Someone selling a home for $500,000, for example, would have to pay the original developer $5,000. If the home sold again two years later for $750,000, the second seller would have to pony up $7,500 to the developer, and so on." Even if a home declines in value, the seller still must pay the 1.0% fee to the original developer, even years and years later.

Ms. Morrissey reports that the Federal Housing Finance Agency (FHA) is considering a proposal to prohibit the transfer fees on all mortgages financed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. 17 states have already placed limitations or bans on such "re-sale fees". However, even should such practices be eventually curtailed by a rule or law, the rule/law is unlikely to apply retroactively to older "re-sale fee" terms.

As a lawyer, I would comment wrly how ironic it is that it is often so difficult for homeowner #2 or #3 to sue a builder/developer for shoddy construction and defects in the home, yet that same shoddy contractor/developer may be able to reap rewards for 99 years from each and every homeowner that comes to own and sell the shoddily constructed residence.

See link to NY Times article:

IDEAS FOR ACTION: Whenever you purchase a home: (1) secure a written acknowledgement and written representations from the selling homeowner that there is no such "re-sale fee" tassociated with the residence or condominium. (2) ensure that you closely review the "exceptions page" of the title insurance policy and all of the homeowners’ association covenants to carefully look for such "re-sale fee" language. or documents. I(3) if you are going to be the 3rd, homeowner, ask the 2nd homeowner (from whom you are purchasing) to produce a copy of the settlement statement from the prior transaction between 1st homeonwer and 2nd homeowner which should disclose any such fee paid to a developer. (4) ensure that you obtain a written representation from the seller that you have been provided with a copy of any and all documents which govern and affect your purchase, use, enjoyment, future/ongoing fees to be paid with respect to the parcel and sale of the parcel.

Landlords: Good times or bad ahead? Housing prices likely to dive, but rents may increase or even rise, if renters can afford to pay.

USA Today reported on September 29, 2010 that home values will continue to take a dive in value well into 2011, because the "home buying season" is ending after a dismal summer.

Most experts predict about 5 million homes will be sold this year in line with 2009 and just above 2008, the worst since 1997. House values nationally stand at 28% below their July 2006 peak. Some markets like Las Vegas are 57% off of peak values.

Seattle home values are down 1.6% in the July 2009 – July 2010 time period. Las Vegas saw a drop of 4.9% in the same period.

Nationally, another 2.2% drop in home prices is expected in the last half of 2010, reports USA Today in a reprinted Associated Press article of September 29, 2010.

Paul DAvidson and Barbara Hansen of USA Today report that more renters struggled to pay the rent in 2010. The share of renters spending 30% or more of their household income on housing costs – the threshold set by the government to determine if housing is unaffordable – rose to 51.5% in 2009 from 50% of renters in 2008.

The number of homeonwers has fallen by 500,000 while the number of renters has increased by 1,000,000, and the percentage of homeowners dipped from 66.6% to 65.9%.

Renters are more likely to be severely burdened. In 2009, 26.4% of renters spent more than one-half of their incomes on housing, up from 25.1% of renters spending more than one-half of their incomes on housing in 2008. Thus 9.5 million households now fall into the "severely burdened" renter catagory, up from 8.8% in 2008.

IDEAS FOR ACTION: (1) If you are a renter, consider a longer term lease such as a two year lease at a lower monthly rental cost, but negotiate for a "buyout term" which allows you to cancel the remainder of the lease after six months by paying a flat "re-let fee" of perhaps $1,000.00 in the event you must leave because of a job change or relocation. This will offer some protection against rent increases caused by more renters entering your local market. (2) If you are a landlord, look carefully at your new prospective tenants’ finances and ensure that the new tenant can afford the rent you are asking. Since there seem to be plenty of renters according to statistics, don’t be in too much of a hurry to rent to the first tenant that comes along. (3) If you are a landlord working with existing tenants, or an existing tenant, consider negotiating for a new lease for an additional lease extension of a year or two which "locks in" the rent, as although there are more tenants who may be willing to pay a higher rent, a financially stable and committed tenant may be a good long term investment for a landlord, and for the tenant insulation from rent increases may be advisable if a new rush of tenants in the form of recently foreclosed homeowners enters the market and drives up rents.

PIMCO Fund financial super-guru William Gross calls for the government to encourage the widespread refinancing of all underwater mortgages – even though his own investments and investors would take a financial hit.

USA Today’s Paul Wiseman and Stephanie Armour reported on September 29, 2010, that William (Bill) Gross, managing director of investment giant PIMCO urged policymakers to "quickly engineer a refinancing opportunity for all mortgages that are current on paymetns" and guaranteed by Fannie Mae or Freddie Mac. Mr. Gross is reported to have analyzed that turning mortgages now at 5%, 6% or 7% into 4% mortgages could pump up to $60 billion into the national economy and lift housing prices by as much as 10%.

Mr. Gross’ idea is remarkable as it is seems odd it is coming from Mr. Gross. If Mr. Gross is anything, he is a "super-guru" of bond, note and mortgage backed securities investing. Mr. Gross’ advice will actually cause Mr. Gross (and those investors he advises) to lose money and value in the short term, and maybe even in the long term.

Morgan Stanley analyst/economist David Greenlaw agreed with super-guru Mr. Gross, calling such a move a "slam dunk stimulus".

Mr. Gross explained his reasoning: "Whether it’s above water or below water, it’s the same house…there would be fewer foreclosures. There would be fewer defaults. There would be fewer empty homes. … You’ll improve the quality of the houses by keeping people in them rather than forcing them to leave."

The mortgage and banking industries are expected to resist Mr. Gross’s advice because many mortgages are packaged into securities and sold to investors and are not hold by the bank/mortgage sales company that originated the mortgage. A massive refinance program pushed by the government is a "non-starter. …. It would involve breaking a contract with the investor who’s holding the existing mortgage." says Mortgage Bankers Association vice president for research and economics Michael Fratantoni.

USA Today reports that the Obama administration has shown little enthusiasm for the widespread solution recommended by Mr. Gross.

Mr. Gross’ proposal is remarkable in that he invests (and advises investors similarly invested) in the bonds and mortgage backed securities that would take a financial hit by such a widespread refinance. Mr. Gross thus seems to believe that even if bond/mortgage investors take a hit in the short run, they will ultimately be better off with a less anemic economy and higher home prices.

The same USA Today article reports that "cash out refinances" are on the decline. Q2 2006 $83.6 billion was pulled out of homes. Q2 2010 a mere $8.3 billion in cash was pulled out of homes in refinances.

See USA Today, Section B, September 29, 2010, Paul Wiseman and Stephanie Armour. (Sorry, USA Today did not offer a link to this article on their website which I was able to locate.)

IDEAS FOR ACTION: Of course resist the idea to use your home as an ATM, even if you have a modest amount of equity. If you are struggling with consumer debt or unpaid taxes, consider consulting with a consumer bankruptcy attorney and learn about Chapter 7 and Chapter 13 before you trot down the "cash out refinance" road. With the HARP refinance program, note that you may be able to refinance your higher interest rate home notwithstanding slightly rocky credit scores and significant unsecured debt. Keep your eyes and ears open for changes and improvements to the HARP Fannie Mae/Freddie Mac refinance programs in case the Obama administration should see fit to partially follow at least some of the advice of Pimco investment giant super-guru William Gross.

Lowest mortgage rates in history fail to help housing market. 11 million houses are worth less than what is owed on them and 15 million are unemployed. HARP refinance program a failure.

USA Today on September 29, 2010 set forth the grim numbers in a report by Paul Wiseman and Stephanie Armour. "Anemic demand continues to hamper real (economic) growth, " says housing analyst Robert Andrews of IBISWorld. "The housing market needs to find its true bottom before things can finally turn around."

Home sales were thought likely to strengthen after a terrible summer. But the housing market was barely registering a pulse even after 30-year, fixed-rate mortgages hit a record low 4.32% earlier in September. This does not bode well for anyone who is hoping that their home equity appreciation may offer a financial rescue.

Nearly one in four homes with mortgages are underwater – more is owed on the houses than they’re worth reports Wiseman and Armour.

They report that the 2009 Obama HARP program (Home Affordable Refinance Program) has not been effective. Under HARP, homeowners can refinance even if their mortgages are 25% higher than the value of their houses. However, two requirements hold back the success of that program. First, their mortgages must be guaranteed by Fannie Mae or Freddie Mac, and the homeowners must be up to date on their monthly payments. Federal Housing Finance Agency director James Lockhart III predicted in 2009 that HARP could help up to 4 to 5 million homeowners lower their monthly house payemnts. The program has not been effective, as only 380,000 ho
homeowners had refinanced through HARP by the end of June 2010. Note: HARP is different from a loan modification under HAMP. The programs are different.

Wiseman and Armour report that Amhearst Securities analyzed several reasons for the failure of HARP, including (1) homeowners with negative equity are struggling to come up with the funds to pay the closing costs of the new mortgage (2) the mortgage industry laid off many people and cut positions and thus cannot cope with the small surge in HARP refinance requests and (3) mortgage servicing companies are reluctant to handle home loans originally underwrittenby lenders that are now out of business.

As reported in USA Today September 29, 2010. (USA Today publishes selected articles online so I apologize that it seems no link was available to the September 29, 2010 Wiseman/Armour article "Mortgage rates fail to motivate".

IDEAS FOR ACTION: Mortgage rates have already popped up since the 4.32% low earlier this month. DO refinance now and specifically insist on the HARP program, but avoid the temptation to pull home equity out to pay credit cards and other bills if you do have any home equity. If your home equity is less than $125,000 you may be able to refinance to a lower mortgage payment and soon thereafter reduce your credit card burden with a Chapter 13 0% interest repayment plan or a Chapter 7 wipe-out of credit card debt. Do not be afraid to ask relatives and friends to help you pay closing costs associated with an HARP refinance. As cynical as it may seem, consult with a bankruptcy attorney about surrendering your "underwater" home and then buying another one in a year or two that is "right priced" to the market so that you are not paying forever on negative equity.

Your employer is likely to increase your share of healthcare premium contribution by 14%, reports the NY Times, thereby taking about $500.00 out of your household budget.

Your household budget will be even more pinched, especially if you have a family. Reed Abelson of the NY Times reported on September 3, 2010 that workers’ share of the cost of a family policy jumped an average of 14 percent, an increase of about $500 per year.

Whereas the actual total cost of a policy has increased only 3.0% over last year, the employers are shifting all of this 4.0% AND MORE over to employees, thus employees losing ground against their employers. Employees are seeing much of what had been the employer’s share being shifted over to the employee, thus accounting for an are seeing an average of 14% in the amount paid out by employees.

Health care costs continue to eat into the living standard of employees. Since 2005 overall wages have increased by only 18%, but workers’ contributions to premiums have jumped by 47%. The 47% rise in workers’ contributions is almost twice as fast as the rise in the policy’s overall cost. E.g. the employer is paying a lower percentage of the overall cost of the policy than is the employee; the employer is thus shifting the cost of the policy to the employee.

Moreover, workers also are facing larger deductibles than ever before.

According to Mr. Abelson’s article, even greater health insurance premium burdens are headed towards employees. Ms. Helen Darling, president of the National Business Group on Health, an organization representing employers that provide healthcare is quoted, "There’s a sense (among employers) that we can’t keep up….we (employers) can’t afford to continue to subsidize what’s happening."

Mr. Abelson reports that, "Faced with a potential increase int he premiums paid that would bring the cost of family coverage to about$1,000 a month, the executives at a trucking business in Salt Lake City chose to switch to a plan that had a $6,000 annual deductible….to reduce their monthly premiums by nearly $200 to $647 a family…the chief financial officer (of the trucking company) acknowledged that people with chronic conditinos or the need for expensive medicines had felt the impact of the change."

A nonprofit insurance research foundation The Kaiser Family Foundation conducted a study which related that now 27% of employees suffer under a health policy with a deductible of $1,000 or more, up from 22% in 2009.

Some states are authorizing "insurance exchanges" which allows small employers to give employees a fixed amount of money to purchase a policy. The Utah legislature has authorized such an exchange which allows an employee to select between 60 different policies to find a policy which best suits the employee’s needs. In this way, the employee can choose a lesser cost policy if there is no need for a "cadillac" policy.

IDEA FOR ACTION: Check with your state Insurance Commissioner’s office to see if an "insurance exchange" program is authorized should you work for a small employer and have modest family healthcare needs. If you have a high family healthcare needs, open a channel of communication with your employer to explain your analysis of the harmful effect of an increasing deductible. You may be able to discuss with your employer some way to avoid a shift of costs to your wallet by perhaps offering to take on some modest additional work duties.

Expert warns of “perfect storm” of looming home value drop. Trust the bank? Banks will determine how much further your home value falls. – reports Nick Timiraos of the WSJ

Thank you American Bankruptcy Institute! (of which I am a member) for pointing me to Nick Timiraos’ Wall Street Jornal article: Here are major sections of his "perfect storm" article about looming home price drops:

"The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans’ appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future.

Unlike home owners, banks often are much quicker to slash prices to unload properties quickly.

The upshot is that, the more homes being sold by lenders, the faster prices tend to fall. That pattern was clear over the past two years: Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital.

Even though mortgage defaults kept mounting, housing markets began to stabilize early last year as low prices and government interventions broke the downward spiral. Policy makers spurred demand for homes by holding down mortgage rates, offering tax credits for buyers, and extending low-down-payment loans through the Federal Housing Administration.

The government also attacked the supply problem. Regulators relaxed mark-to-market accounting rules, giving banks more flexibility in valuing certain real-estate assets and removing some of the impetus for banks to quickly foreclose. Meanwhile, the Obama administration put in place an ambitious program to modify mortgages.

The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a "closet moratorium" on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management.

The result: The share of distressed sales fell by November to 25% of home sales, and prices stabilized. After rising in the winter, the distressed share fell to 22% in June, before bouncing to 30% in July.

The problem is that these measures are wearing off. Demand plunged this summer after tax credits expired, and unsold homes are piling up. More foreclosures could move onto the market as borrowers fall out of the loan-modification program.

"We see the perfect storm brewing with rising supply and falling demand," said Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago. She estimated that distressed sales could account for half of the market by year-end if traditional sales didn’t rebound.

The market does have some tailwinds: Housing starts are at all-time lows. Banks have hired more staff to manage problem loans and government entities such as Fannie Mae and Freddie Mac that own a growing share of foreclosures are less likely to deluge the market.

The next leg down in prices "isn’t going to be the foreclosure-induced freefall where you just had inventory coming out the wazoo, and it was going to be sold one way or the other," said Glenn Kelman, chief executive of Redfin Corp., a real-estate brokerage.

Prices also have come down so much already they have less distance to fall. During the housing boom, prices inflated much faster than incomes rose, thanks to speculation and lax lending. The ratio of home prices to annual incomes reached 1.6 at the end of June, which is below the ratio of 1.88 from 1989 to 2003, according to Moody’s Analytics.

By those metrics, prices are actually undervalued in markets that have already seen huge declines, such as Las Vegas, Phoenix and Los Angeles. But Moody’s data show that prices remain "significantly overvalued" elsewhere, including Boston; New York; Seattle; Orange County, Calif., and Charlotte, N.C. Markets in both camps face supply imbalances that will pressure prices for years.

The fastest cure for housing would be job creation because it would boost demand for homes while putting delinquent borrowers back on solid footing.

But if that doesn’t materialize, policy makers face a thorny question: whether to intervene if price declines accelerate beyond the 5% to 10% that most economists expect. In recent weeks, the White House has been surveying industry analysts on how to manage the inventory overhang.

Analysts at Barclays Capital estimate that some four million loans are in some stage of foreclosure or are at least 90 days past due, down slightly from a January peak.

While more tax credits aren’t likely, policy makers could still attack the supply problem by, for example, taking foreclosed homes off the market and renting them out.

Ultimately, market fundamentals will prevail "and any attempt to get around that will only be short-term," said Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School. But officials should be prepared to intervene anyway, she said, if psychology spurs a downward spiral "where price declines are feeding further price declines."

That leaves few attractive options. Prolonged intervention could backfire by creating uncertainty that keeps buyers on the sidelines. Extending foreclosure timelines also risks inducing more borrowers to default and live rent-free.

Letting the market take its medicine sounds more appealing than it did 18 months ago. But it risks saddling taxpayers and the banking system with billions more in losses and trapping more borrowers in homes on which they owe more than the house is worth."

Special thanks to Nick Timiraos; this post is a "cut and paste" of his work in the September 13, 2010, Wall Street Journal. Additional thanks to the American Bankruptcy Institute (of which I am a member) for pointing me to Mr. Timiraos’ work.