Sunday June 7 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

California Cities Face Bankruptcy Curbs - (online.wsj.com) As California seeks more funds from its cash-strapped cities and counties to close a $21 billion budget deficit, some state legislators are pushing a plan that could compound municipalities' pain by making it tougher for them to file for bankruptcy. The bill would require a California municipality seeking Chapter 9 bankruptcy protection to first obtain approval from a state commission. That contrasts with the state's current bankruptcy process, which allows municipalities to speedily declare bankruptcy without any state oversight so that they can quickly restructure their finances. The bill, introduced in January, has passed one committee vote and could reach a final vote by mid-July. The bill was sparked by the bankruptcy filing last year of Vallejo, Calif., just north of San Francisco. Vallejo's city leaders partly blamed work contracts with police and firefighters for pushing the city into bankruptcy, and won permission from a bankruptcy court in March to scrap its contract with the firefighters' union. A firefighters union backed state efforts to vet cities' bankruptcy plans after Vallejo, Calif., scrapped its contract. That spurred the California Professional Firefighters to push for statewide legislation to curtail bankruptcy, said Carroll Willis, the group's communications director. "What we don't want is for cities to use bankruptcy as a negotiating tactic rather than a legit response to fiscal issues," he said, adding that he worries cities may work in concert to rid themselves of union contracts by declaring bankruptcy. If the bill passes, it could hurt cities and counties by lengthening the time before they can declare bankruptcy. That creates a legal limbo during which a municipality is more vulnerable to creditors. The proposed state bankruptcy commission would be staffed by four state legislators, which some critics worry could politicize the bankruptcy process. "This bill is impractical," said John Moorlach, a supervisor in Orange County, Calif., which filed for bankruptcy in 1994. "In many instances, haste is important. If you can't meet payroll but have to delay seeking protection, what do you do?" California towns and counties face a catalog of troubles. Earlier this month, voters rejected five budget measures, sending the state deficit to $21 billion. To overcome the gap, Gov. Arnold Schwarzenegger has proposed borrowing $2 billion from municipalities, using a 2004 state law that lets California demand loans of 8% of property-tax revenue from cities, counties and special districts. But that proposal lands as California municipalities are already facing steep declines in tax revenue because of the recession. Dozens are staring at huge deficits, including Pacific Grove and Stockton, which have publicly said they are exploring bankruptcy. Assemblyman Tony Mendoza, a Democrat who introduced the bankruptcy bill, said the initiative is needed to protect the credit rating of California and its ability to borrow and sell bonds. Mr. Mendoza added that he wants to avoid bankruptcy's repercussions on surrounding communities by offering a system that examines all of a municipality's options before filing for bankruptcy. "Municipalities should have a checks and balance system in place based on the fact that all economies are interconnected," he said.

Mortgage Market Locks Up - (Mish at http://globaleconomicanalysis.blogspot.com) Yesterday 10 year treasury yields went soaring and the mortgage market literally seized up. Mark Hanson at the Field Check Group has this report that I can share. As Bad As You Can Imagine: With respect to yesterday’s episode in the mortgage market -- yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day. A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle...pretty obvious from the start but kind of scary to live through it ... today felt like LTCM with respect to liquidity”. The negative consequences of 5.5% rates are enormous. Because of capacity issues and the long timeline to actually fund a loan very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lender without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-15 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s timeline. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund. Furthermore, many of these ‘applicants’ with loans in process were awaiting the magical 4.5% rate before they lock -- a large percentage of these suddenly died yesterday. To make matters worse, after 90-days much of the paperwork (much taken at the date of application) within the file becomes stale-dated and has to be re-done with new dates -- if rates don’t come down quickly many will have to be cancelled out of the lender’s system. To add insult to mortal injury, unless this spike in rates corrects quickly, a large percentage of unlocked purchases and refis will have to be denied because at the higher interest rate level, borrowers do not qualify any longer. For the final groin kicker, a 5.5% rate just does not benefit nearly as many people as a 4.5%-5% rate does. Millions already have 5.25% to 5.75% fixed rates left over from 2002-2006. This is a perfect example of why the weekly Mortgage Applications Index is an unreliable indicator of future loan fundings and has been for a year and a half. As a matter of fact you will see this index crumble over the next few weeks at the same disproportional rate as it increased over the past several months if rates don’t settle lower quickly. With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop. Lastly, consider sentiment -- this is a real killer. This massive rate spike may have invalidated hundreds of billions spent to rig the mortgage market literally overnight. This leaves the mortgage and housing market very vulnerable. Mortgage loan officers around the country are having a very bad day today explaining to their clients why their rate was not locked and how rates are going to come right back down. They will not feel like getting too aggressive taking new loan applications at least for the next month unless this corrects quickly. We have to see where all this settles over the next few days before making a near to mid-term call on the outright damage because at this point, Fed or Treasury shock and awe is almost certain. Another common theme has been ‘if it doesn’t work throw much more money at it’. Obviously they have been following this closely for the past few weeks, as conditions started to deteriorate, and have likely been waiting to see where the upper range was before shocking in order to get maximum benefit…that would be a humongous short squeeze in Bonds. The problem is…if they do shock her and it is sold into with the same fury that we have been seeing, there may not be an act two.

Employer's gold, silver payroll standard may bring hard time – (www.lvrj.com) 'This is a case about money, greed and fraud'. Robert Kahre, a 1980 graduate of Rancho High, unsuccessfully sued the Internal Revenue Service in 2002. Now he is on trial in federal court in Las Vegas, charged with tax evasion. Robert Kahre, who owns numerous construction businesses in Las Vegas, is standing trial on 57 counts of income tax evasion, tax fraud and criminal conspiracy. If convicted on most counts, he could live out his life in prison. But attorney William Cohan paints Kahre as an American "hero" who believes his payroll system helped keep the U.S. monetary system sound, and was also a form of legal tax avoidance. A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins' face value -- rather than the much higher market value of their precious metal content -- for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses. Judge David Ezra is presiding over the criminal trial, which began May 19 in U.S. District Court. Joining Kahre as defendants are his longtime girlfriend, a sister who works in his businesses, and a former business assistant. Three of the four present defendants were among the nine people tried on similar charges two years ago, but no convictions resulted. In the 2007 trial, four others of the nine defendants, including Kahre's mother, were entirely acquitted. Two individuals were only partially acquitted, but dropped from the indictment that forms the basis for the trial before Ezra. This time around, the only new defendant is Danille Cline, Kahre's girlfriend of 19 years, and the stay-at-home mother of his four children. The government claims she obstructed the Internal Revenue Service by allowing Kahre to place several homes in her name, thus attempting to conceal his assets. Cline's former brother-in-law, Thomas Browne, also was indicted this time, for his role as broker in some of the real estate transactions, but has since reached a plea bargain. He is expected to testify against the defendants. "This is a case about money, greed and fraud." The line appeared on screen in court during the government's opening statement by Christopher Maietta, a trial lawyer from the Washington, D.C., office of the Department of Justice. According to the government, Kahre and others concocted a fraudulent cash payroll "scheme" and then peddled it to other Las Vegas contractors. Defendants did not report to the IRS any payments made to workers, "either at the true amount or at the bogus amount, ... being the face value of the coin or coins," according to the indictment. The now-suspended payroll service handled about $114 million over six years, according to court records. Between 17 and 25 percent of that went to Kahre or his workers; the rest went to the 35 client businesses to pay their workers, court records show. The government did not indict most of the outside businesses or their personnel as co-conspirators with Kahre; although on May 6, Daniel McCartan of Action Concrete, which was one of Kahre's payroll clients, was finally sentenced in connection with a plea agreement reached in December 2006. McCartan received five months in prison and five months of home detention for one count of tax evasion. Kahre contends his workers had agreed to be independent contractors, so he did not have to withhold taxes for them. His six businesses are in the trades of painting, drywall, tiling, plumbing, heating-cooling and electrical work. Further, the $50 gold coins and the silver dollars Kahre used for payroll are designated by Congress as legal tender, so people are entitled to value them at their stamped denominations, he also contends. Taken at face value, each defendant's annual coin income placed him below the threshold for filing a federal tax return. Earlier cases on the question of how to value gold or silver coins have focused on collectible coins that had been pulled from circulation but still have value as property, according to the defense. Kahre used coins minted after 1985, which are allowed to circulate.

California cities, counties vow to fight state over budget tactics – (www.sacbee.com) Arguing that the state is nickel and diming them to oblivion, leaders of California's financially beleaguered counties and cities say they plan to fight back. Soon after the May special election, in which voters rejected the state's deficit stopgap measures, the Bay Area Council and several other groups launched a drive for a constitutional overhaul to address the state's governmental dysfunction. Multiyear labor agreements also are placing a burden on both cities and counties. Local jurisdictions statewide have been negotiating with unions to win labor concessions to reduce cost of personnel, which consumes a major portion of general funds. But Roger Dickinson, Sacramento County supervisor, cautioned about putting too much emphasis on labor costs. "Even if we had significant concessions by our employees, we still have a very serious budget gap," Dickinson said. "It's truly an illusion when you consider the reality of the numbers. That is, this is a very deep hole." Both cities and counties are watching legislation that would require them to get state approval before filing for bankruptcy. The measure carried by Assemblyman Tony Mendoza, D-Artesia, is backed by state firefighters unions and the nonprofit AARP whose members' benefits could be jeopardized in bankruptcy. Cities' and counties' associations are strongly opposed. "It's absurd to me that the state of California believes it's appropriate to provide financial advice to local agencies," said CSAC's Hurst. "The state doesn't have a great track record with managing its own finances."

Schwarzenegger Vows Drastic Budget Cuts - (Mish at http://globaleconomicanalysis.blogspot.com) In the wake of voters overwhelmingly turning down tax hikes to balance the budget, governor Schwarzenegger's Latest proposal eliminates CalWORKs, lets out inmates early. In California's latest doom-and-gloom announcement, Gov. Arnold Schwarzenegger's Department of Finance on Tuesday proposed closing the state's main welfare program, releasing nonviolent prisoners one year early and shuttering up to 80 percent of state parks to shrink the state's $24.3 billion budget deficit. Schwarzenegger wants $5.6 billion in new cuts to replace a like amount of borrowing he proposed in his budget plan earlier this month. The Republican governor previously asked for more than $15 billion in other savings by slashing schools and Medi-Cal, laying off 5,000 state workers and borrowing money from local governments. Several of the latest cuts were eye-openers, but the largest was the wholesale elimination of the California Work Opportunity and Responsibility to Kids Program, which provides grants to parents that people commonly refer to as "welfare." Nearly 1.3 million Californians received CalWORKs payments in February, almost 1 million of whom were children. The state would save $1.3 billion next year by eliminating CalWORKs but lose three times as much in federal funds. "It boggles the mind that California would be the only state in the Union without a CalWORKs-type program," said Frank Mecca, executive director of the County Welfare Directors Association. "In fact, we'd be, to our knowledge, the only state in a country in the entire First World not to have subsistence benefits for children." Schwarzenegger envisions phasing out Cal Grants for low-income college students. He would save $10 million by giving only $7,000 to the University of California's Hastings College of the Law, the bare minimum so as not to upset the state's 19th-century compact with the Hastings family. And he wants to defund state parks, forcing them to rely on user fees. "It could be upwards of 80 percent of parks not having sufficient fee revenues to continue to operate," Matosantos said. A Schwarzenegger proposal to close parks last year didn't go anywhere, but the state's fiscal condition has worsened considerably since then. The governor's plan would release a year early about 19,000 nonviolent, non-serious prisoners not convicted of sex offenses, saving $120 million. He also would seek $790 million in savings by reducing inmate services such as substance abuse counseling and vocational education. The governor proposes saving $150 million by retaining a two-day furlough for state workers. Schwarzenegger would cut Medi-Cal services such as dialysis, breast cancer treatment for women over 65 and non-emergency care for undocumented immigrants. Assemblywoman Noreen Evans, D-Santa Rosa, chairwoman of the Assembly Budget Committee, said it would be more responsible to seek additional taxes. "With this proposal, the governor's made it very clear he'd rather throw women and children out of the lifeboat before he raises taxes," she said. Voters Chose Wisely: Schwarzenegger did not make these decisions, voters did. Raising taxes is not the answer, spending money wisely is. Evans clearly does not know the difference. Voters made a wise decision. People like Evans will spend every cent and come back for more. Hopefully voters will show Evans the door.
The $4 trillion housing headache - (money.cnn.com) House prices have returned to 2002 levels, but mortgage debt hasn't deflated from its bubbly highs. House prices are taking a long ride in the wayback machine. Unfortunately, Americans' housing-related debt isn't going anywhere fast. Prices in big U.S. cities posted their biggest-ever decline in the first quarter, according to the most recent S&P/Case-Shiller National Home Price index. After nearly three years of declines, house prices nationwide are back at 2002 levels -- and still falling. Yet as bad as that is for overburdened homeowners and their bankers, the mighty mountain of mortgage debt Americans have taken on is an even bigger concern - especially for those who believe an economic recovery is in sight. Even though the amount of home mortgage debt outstanding declined in 2008 for the first time since the Federal Reserve started keeping track in 1945, mortgage debt levels remain distressingly high. Home mortgage debt outstanding was 73% of gross domestic product last year, according to government data. That's the third-highest reading on record, after the 75%-plus bubble years of 2006 and 2007. Getting that ratio down to a more manageable number will mean more lean years ahead, as Americans further cut spending to rebuild their savings and banks struggle to boost their capital amid heavy loan losses. How long this process might take is a key question for those trying to gauge the prospects for an economic recovery. To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data. We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy - a course of action that will do little to solve the problem of too much debt. Of course, these figures reflect only back-of-the-envelope estimates. Depending on the level of interest rates and how successful officials are in restoring the vigor of the lending markets, mortgage debt may or may not need to drop that far to relieve some of the stress on consumers.





OTHER STORIES:

The Big Inflation Scare - (www.nytimes.com)
Is a commercial real estate bust inevitable? - (money.cnn.com)
U.S. Home Sales Remain Sluggish as Supply Soars - (www.nytimes.com)
N.J. home prices haven't hit bottom yet - (www.nj.com)
Yield Curve Steepens to Record as Debt Sales Surge - (www.bloomberg.com)
Mortgage-Bond Yields Jump, Jeopardizing Fed’s Housing Effort - (www.bloomberg.com)

Mass. house sales, prices fall in April - (www.boston.com)
More record house price declines - (themessthatgreenspanmade.blogspot.com)
Is the bottom near for housing market? - (marketplace.publicradio.org)
US House Sales Remain Sluggish as Supply Soars - (www.nytimes.com)
Housing Is Not Just Bad, It's Getting Worse - (www.247wallst.com)
The Next Leg Down Will be Worse - (www.marketoracle.co.uk)
High-End Foreclosures Are Next - (www.cnbc.com)
Out of the Ashes Rises ... Another Bubble - (www.business.theatlantic.com)
Vultures in the desert - (www.macleans.ca)
Barney Frank in 2005: What Housing Bubble? - (www.optionarmageddon)
Fannie & Freddie Down a Rabbit Hole - (www.patrick.net)
FDIC Fund Running Dry - (www.finance.yahoo.com)
US Economic Damage Assessment - (www.economist.com)
Inflation/deflation debate - (cij.inspiriting.com)
US Inflation to Approach Zimbabwe Level, Faber Says - (www.bloomberg.com)
Money, Financial Collapse, and Energy - (www.theoildrum.com)
The Case for Working With Your Hands - (www.nytimes.com)
US house prices improve for buyers by record 19.1% - (www.latimes.com)
House prices 20% better - (finance.yahoo.com)
House Prices 32% Cheaper Than Peak - (optionarmageddon.ml-implode.com)
Signs Of Even Better Prices Ahead For Housing Buyers - (www.sfgate.com)
House Prices in 20 US Cities Get More Affordable Than Forecast - (www.bloomberg.com)
House Prices Descend Into The Bargain Basement - (online.wsj.com)
Is Your House A Good Investment? - (online.wsj.com)
Housing Market Being Washed By a New Wave of Foreclosures - (www.cnbc.com)
Financial Advice for Recent Graduates - (www.nytimes.com)
Budget crises swamp state after state - (www.msnbc.msn.com)
How California's Tax Revenue Is Squandered - (www.myprops.org)
China warns Federal Reserve over 'printing money' - (www.telegraph.co.uk)
US bonds sale faces market resistance - (www.telegraph.co.uk)
Posner and Greenspan face off - (meganmcardle.theatlanticcom)
Why We Should Listen to Peter Schiff's Realistic News - (www.time.com)
Neighbors buy, share items to cut costs - (www.baltimoresun.com)
Artificially high house prices benefit Wall Street - (theautomaticearth.blogspot.com)
BEHOLD! Zillow's $89,500 Mobile McMansion! - (www.patrick.net)