KeNo's Housing and Economic Portal: Wednesday May 13 Housing and Economic stories

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Fed and the rating agencies: Wages of sin are pretty good - (www.economist.com) BY MISREADING the risk in mortgage-backed securities and other “structured” products, the rating agencies Standard & Poor’s, Moody’s and Fitch played starring roles in the failure of finance. Their punishment? Oddly, the further entrenchment of their dominance, thanks to the Federal Reserve. The Fed’s lending programmes, such as its commercial-paper facility and the Term Asset-Backed Securities Loan Facility (TALF), accept only collateral that has been appraised by a “major” rating agency, ie, one of the big three. This marks a setback for the seven rating firms that have been recognised by the Securities and Exchange Commission (SEC) more recently, including DBRS and Egan-Jones. It also sets the Fed in conflict with the SEC, which introduced reforms in 2006 to promote competition by speeding up the approval process for rating agencies. The Fed has promised to consider expanding the list of eligible raters, but Ben Bernanke, its chairman, recently said he was “comfortable” with the big three’s revamped ratings models. Their rewards could be handsome: up to $400m in TALF-related fees alone, reckons Richard Blumenthal, Connecticut’s attorney-general. He has launched an antitrust probe and accuses the Fed of “rewarding the same companies that helped burn down the house”. Keen to restore securitisation’s credibility, Wall Street’s main trade groups, too, want the TALF opened up to smaller rating agencies. Dan Curry, head of DBRS’s American business, notes that the Resolution Trust Corporation, which cleaned up the savings-and-loan mess in the 1990s, insisted on using firms of all sizes to rate the mortgage securities it issued. That gave a lift to upstarts, including Fitch. “Public agencies have tremendous power to influence the industry’s structure in times of crisis,” he argues.

Sell in May and Go Away - (www.frontlinethoughts.com) Investors, businessmen, and entrepreneurs need to be as nimble as possible. A free market will figure out what paths to take, and I am still optimistic about the long term. But we have some very dangerous times in front of us, and we need to be realistic. And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law. If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits? Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all "predatory hedge funds." They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors. Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed. Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don't create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive.

Rep. Barney Frank in 2005: What Housing Bubble? - (www.youtube.com)

7-Eleven parent looks for lower rents at all its sites - (www.dallasnews.com) Some of 7-Eleven Inc.'s landlords may be taking a big gulp. The iconic convenience store chain said Wednesday that it has hired international real estate service firm CB Richard Ellis to make a "comprehensive review" of all of its U.S. store locations. CB Richard Ellis said the task will "include analyzing fair-market values for 7-Eleven's retail sites and negotiating lease terms, when appropriate, in line with current commercial rental rates." That means lower rents. It's something other big retailers have pressed upon landlords because of the tough economy. "This is prudent business practice for any retailer during these unusual economic times, particularly with the footprint that 7-Eleven has nationwide," Mike Friedman, a CB Richard Ellis senior vice president in Dallas, said Wednesday in an announcement that effectively puts the retailer's landlords on notice. "Through our analysis, we believe we will discover solutions that will assist 7-Eleven in reducing its overall operating expense." The company operates about 5,700 stores in the U.S., including 263 in the Dallas-Fort Worth area. Real estate brokers say there's a lot of buzz in their business about retailers getting rent cuts, but they question just how much is going on.

Realtors Spent $12M Lobbying in Past Two Quarters - (www.chartingtheeconomy.com) The National Association of Realtors (NAR) has dramatically increased its lobbying expenditures (and influence) in Washington in the wake of the bursting of the housing bubble. The first chart shows the lobbying expenditures of the NAR over the past five quarters. As you can see the NAR has greatly ramped up its lobbying expenditures in the past couple of quarters. The Q1′09 expenditures represent an increase of more than 82% over Q1′08 expenditures. In the past two quarters the NAR has spent $12.25 million on lobbying in Washington. The purpose of the next two charts is to give some perspective on the amount of money the NAR is spending on lobbying. The second chart shows how much the NAR spent per business day on lobbying during each of the past five quarters. During the past couple of quarters on average the NAR has spent roughly $100,000 per business day on lobbying expenditures. This is a mind numbing number. The third chart shows how much the NAR spent per member of Congress (the U.S. Congress has 535 voting members) during each of the past five quarters. Since the beginning of 2008, the NAR has spent almost $43,000 per member of Congress on lobbying. The NAR has spent some of this money lobbying other government agencies and officials, however, this chart gives an interesting perspective on just how much money the NAR is throwing around Washington. I would assume the NAR would justify their expenditures by saying it was (is) necessary to help educate public officals on the complex issues facing the nation during the housing crisis. This is a ridiculous argument. Having educational meetings with policy makers is important, but it doesn’t need to be an expensive process. How do I know this? Because I was a corporate lobbyist in Washington years ago. I had many meetings on Capitol Hill, and it just doesn’t cost much. How much does it cost to meet over a cup of coffee and exchange some ideas? My expenses were always small (a few bucks). As a former lobbyist it blows my mind to think of spending $100,000 every business day on expenses. It would be work just trying to spend the money. As far as having the NAR educating our public officals, that scares me too. The forth chart (below) shows what the NAR was saying about housing during the past few years as the housing market was collapsing. I took the quotes directly from the titles of NAR press releases. Is this the organization that we want educating our public officals on how to fix the housing crisis?

Towering Vacancies: Office Market Hits the Skids - (www.businessweek.com) Manhattan is the epicenter of a sharp, global commercial real estate downturn, with rents sliding 14.6% in the first quarter. When the housing market began collapsing across the developed world, commercial real estate remained a bastion for builders. But now the global recession is dragging it down, too. Central business districts that only a year ago were crowded with construction projects are emptying out as office tenants cut staff and operations. Building values are sinking, while delinquencies on securitized loans have tripled in the past six months. The abrupt downturn in commercial real estate is punishing cities as varied as Detroit, Dallas, and Hartford, where downtown office vacancy rates top 20%. Unoccupied space is piling up quickly in San Antonio, Las Vegas, Charlotte, and San Jose. Outside the U.S., high-profile towers have been halted everywhere from Dubai to Santiago, Chile. New York, though, may be the epicenter of the bust. The world's biggest office market, with roughly 350 million square feet of floor space, New York added 2.9 million square feet of vacant property in 2009's first quarter alone—more than the entire Empire State Building. In that same period, calculates commercial real estate brokerage CB Richard Ellis (CBG), rents slid 14.6% to an average of $57.35 per square foot, the largest quarterly drop on record. At 8.5%, New York's office vacancy rate is still well under the U.S. average of 14.7%. But with virtually no demand for new space, that percentage is likely to hit double digits within months, putting New York's recovery well behind that of cities such as London, where some analysts and investors think the worst may be over.

Phoenix Leads the Way Down in House Prices - (www.nytimes.com) Phoenix has achieved the unwelcome distinction of becoming the first major American city where home prices have fallen in half since the market peaked in the middle of the decade, according to data released Tuesday.Skip to next paragraph Though historical statistics are scant, experts said the precipitous decline probably had few if any equals in modern times. “Even during the Depression, I’m not sure prices fell this quickly,” said Karl Guntermann, a professor of real estate at Arizona State University. Greg Swann, a Phoenix real estate agent, took a moment to marvel at the news. “What happened here will some day be a new chapter in ‘Extraordinary Popular Delusions and the Madness of Crowds,’ ” the classic survey of investing mania, he said. “We were living during the boom like there was no tomorrow. And guess what? Now it’s tomorrow.”Home prices in the Sun Belt city, the 12th-largest metropolitan area in the United States, dropped 4.5 percent in February, according to the Standard & Poor’s Case-Shiller Home Price Index. Prices in Phoenix are now down 50.8 percent since the market peaked in June 2006. For the country as a whole, the Case-Shiller numbers offered the thinnest of silver linings: things are still getting worse, but more slowly.

Recession hits top law firms' profits - (www.chicagotribune.com) Partners at Chicago law firms may look back longingly at 2008. American Lawyer magazine on Wednesday released its annual ranking of the nation's 100 highest-grossing law firms, which offers a picture of the financial health of the legal industry. Amid weak results across the country last year, Chicago firms scored some bragging rights against their New York rivals. But business at the start of 2009 was so dismal that law firm managers and industry consultants have put last year's results in the rear-view mirror. In the first quarter, big firms made unprecedented cuts that put thousands of attorneys and staff on the street. The big story is what are this year's numbers going to look like," said Kay Hoppe, a Chicago-based legal consultant. "This is the first year in my memory that almost every law firm would take last year's numbers." To be sure, the 2008 numbers were a mixed bag for the 11 Chicago firms in the top 100, the same 11 that appeared in last year's ranking. Average profits per partner at six of the 11 either fell or were flat compared with 2007. Sonnenschein Nath & Rosenthal suffered the biggest decline, as profits per partner declined 12 percent, to $805,000, from $915,000. The firm had a 3.2 percent increase in revenue per lawyer, another key metric for judging a firm's health. Sonnenschein declined to comment on the results. Mayer Brown also declined to comment on its 10.5 percent drop in profits per partner, to $1.11 million. Its revenue per lawyer fell 13.3 percent, to $720,000, as the increase in its headcount outstripped revenue growth. The 1,800-lawyer firm had a net increase of more than 350 attorneys, due primarily to a merger in Asia.

Couple Guilty in Loan Scam - (www.mountain-news.com) A couple whose lavish 15-room home was featured on the 2007 Lake Arrowhead Home Tour is facing up to 30 years in prison after pleading guilty to bank fraud in a scheme in which they reportedly preyed on trusting members of their church, The Mountain News has learned. Terrance George Tucker and his wife, Sonya Delores Wodke Tucker, both 64, are currently in custody. They will be sentenced July 13 on two counts apiece of bank fraud, stemming from their operation of what federal prosecutors called a “mill scheme,” a scam that squeezed about $31 million from financial institutions and up to $2 million from individuals. The Tuckers entered their pleas in U.S. District Court in Los Angeles the final week of March. Following a lengthy local and federal investigation of their illicit activities, the Tuckers were arrested by U.S. Secret Service agents last fall, reportedly living in a luxurious motor home on the property of their niece in Stillwater, Okla. Federal prosecutor Mark Aveis said the motor home has since been seized by the government. Under terms of the final count of a 16-count indictment, the couple will forfeit more than $4.5 million in cash and 12 homes they owned, including their local residence, 420 Rainier Road, Lake Arrowhead. ASKING FOR LEADS: A Lake Arrowhead acquaintance of the couple, who asked not to be identified, said the Tuckers had asked the acquaintance to supply names of friends who might want to invest in loan and real-estate deals. Though the call’s recipient provided no names, apparently the couple, known professionally as Terry and Cheri Tucker, had no trouble finding other victims, largely through the membership of the Church of Jesus Christ of Latter-Day Saints in Lake Arrowhead, the acquaintance said.