KeNo's Housing and Economic Portal: Tuesday August 18 Housing and Economic stories

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TOP STORIES:

California Budget plan withholds more taxes, demands taxes sooner: State wants your money sooner to get a no-interest loan from citizens – (www.mercurynews.com) You won't have to look at potholed roads, crowded classrooms, closed parks or uninsured children to see the state budget fiasco's fallout — all you'll have to do is look at your own paycheck. One of the accounting tricks used to close the state's $26 billion budget deficit is increasing income tax withholding schedules by 10 percent. That is, whatever is withheld for state income tax from your paycheck today will increase by 10 percent come January; you'll get back any excess payments when you file your tax return in early 2011. H.D. Palmer, spokesman for the state Finance Department, noted that this "in no way changes any working Californian's tax liability or taxes owed." "If they don't want to have more withheld because they think they'll be getting a refund, they can increase their allowances to compensate — so long as they do not underpay overall," Palmer said. "Many taxpayers already are routinely receiving a refund and yet don't adjust their withholding, perhaps because they don't want to risk the budget pressure of coming up with a lot of cash in April or they value having a lump sum in the spring to spend or invest." If everybody adjusted their withholding as Palmer suggests, however, that would defeat the purpose of increasing the withholding schedules — to shoehorn an extra $1.7 billion of personal income tax receipts into the current 2009-10 fiscal year. Essentially, the state is looking for an interest-free loan from working Californians. "I think that's what you get when you need a two-thirds vote for raising taxes," said Jean Ross, California Budget Project executive director. "The two-thirds vote for real tax increases is what leads lawmakers to adopt policies such as this." "It has some flavor of raising taxes without actually raising taxes," agreed David Gamage, a tax law expert and associate professor at University of California-Berkeley's Boalt Hall School of Law. "It may be the most obvious impact for some taxpayers because you actually see the money coming out of your paycheck, but in the context where there are only bad (state budget) options, I don't think this is going to strike anybody as the worst option." "It's well-known that most taxpayers pick the default option, whatever it is; even if they have the ability to readjust, very few taxpayers actually do so," he said, and it's also well known that taxpayers like to get refunds, which means they don't mind "lending" that extra money to the government in the meantime. Budget fixes approved earlier this year increased the personal income tax rate by 0.25 percent, but the withholding tables already had been adjusted for that in April. Certain low-income workers are exempt from having to withhold state income taxes; for everyone else, the minimum allowed by law and the guidelines for each income bracket will go up by 10 percent. Another part of the budget deal calls for accelerating the schedule for estimated tax payments made by businesses, the self-employed and those who came up short in withholding last year. Right now, individuals and corporations must pay 30 percent with each of the first two estimated payments, and 20 percent each for the last two estimated payments; under the new proposal, which would start with the 2010 tax year, the first quarterly estimated payment would stay at 30 percent, the second would increase to 40 percent, the third would be eliminated and the fourth quarter would increase to 30 percent. That will speed an extra $610 million into the state's coffers in 2009-10, officials say — $250 million in personal income tax receipts and $360 million in corporate tax receipts. "I put this question to my friends who said there should be no tax side to the budget solution: What's this?" said Republican gubernatorial candidate and former state Finance Director Tom Campbell, who said businesses will be harmed by the accelerated estimated payments as they'll have to rejigger their fiscal calendars to pay more sooner

Arena Football League suspends operations - (www.google.com/hostednews/ap) The Arena Football League has shut down, this time indefinitely. The league, which previously called off play for the 2009 season but had said it planned to return in 2010, sent a terse, one-paragraph statement to its teams late Tuesday announcing it had suspended operations. The statement said the AFL's board had been "unable to reach any consensus on restructuring the league over the past eight months." The 22-year-old indoor league had lost its commissioner and two teams since the end of last season. It reached a new agreement with its players this year, but that wasn't sufficient to persuade enough AFL owners that the league could return to profitability. The AFL's board said "there are no other viable options available to the league right now." The league is likely to file for Chapter 7 bankruptcy. "I've always thought the game was an attractive game, but we all know when you get the kind of pressure we're in, in these economic times, and then you have an economic model that really doesn't work, then it's not surprising to see it stop play," said Dallas Cowboys owner Jerry Jones, who also owned the AFL's Dallas Desperadoes. Jones, Super Bowl winner John Elway and rock star Jon Bon Jovi were among the marquee names with a financial stake in AFL teams. Former NFL MVP Kurt Warner threw touchdown passes on the AFL's 50-yard fields before throwing them in Super Bowls. And the high-scoring games helped the league find a niche in small markets like Grand Rapids, Mich., to major ones like Philadelphia. The Philadelphia Soul, co-owned by Bon Jovi, were the last ArenaBowl champions in 2008. Craig Spencer, another Soul co-owner, said on Wednesday the team stands by the league statement. David Baker abruptly resigned as league commissioner two days before the 2008 ArenaBowl championship game. Owners did not look for a replacement. ESPN, which owns a small equity share in the league, said it is not involved in management of the AFL. The network said Tuesday its broadcast agreement with the league had been terminated. Some AFL owners remain optimistic that the league can return in some form in 2010, perhaps in conjunction with the af2 league, an AFL offshoot that remains in business. "We're hopeful things will work out here in San Jose," SaberCats vice president Hank Stern said. The league still faces numerous legal issues. The owners could file for bankruptcy, but most players and coaches who were not paid salaries or roster bonus money in 2009 are looking to recoup that cash, according to Richard Berthelsen of the NFL Players Association.

PGA Tour, Buick Part Ways – (www.golfersguide.com) After rampant speculation that the economy and government intervention would cause Buick to end its remaining sponsorship agreements with the PGA Tour, the split has been made official. In a statement released today, Buick and the PGA Tour cited the recent court-supervised restructuring of General Motors as the main reason behind withdrawing all agreements between Buick and the Tour, effectively ending the Buick Open and Buick Invitational. The Buick Open, which was played for the last time over the weekend in Grand Blanc, Michigan and won by Tiger Woods, has been a fixture on the PGA Tour for 51 years. Last week, Golfweek reported that The Greenbrier Resort in White Sulphur Springs, West Virginia would likely take the Buick's place on the schedule, sponsoring and hosting an event. The split also puts an end to the Buick Invitational at Torrey Pines in La Jolla, Calif., although the PGA Tour and the Century Club of San Diego, which runs the tournament, said they are pursuing other avenues regarding sponsorship. Buick and the PGA Tour have shared a strong five-decade long mutually beneficial relationship that has seen phenomenal growth in professional golf through the years," the joint release from the PGA Tour and Buick read. "Buick would like to express its appreciation to the Tour, which has been a fantastic partner and good friend."

Honest Appraisals Stymie Industry, House Buyers - (www.washingtonindependent.com) Anyone who’s ever purchased a home knows that the appraisal is a key component. Buyers rely on the appraisal to ensure that they’re not overpaying for their prospective home, while lenders need to make sure they’re not lending more than the home is worth. But these days, getting an appraisal can be trickier than ever. As of May 1, new legislation called the Home Valuation Code of Conduct makes getting an appraisal costlier and more time-consuming for would-be buyers to procure — and the added time can even prevent purchasers from getting the best possible mortgage on their new home. This creates a stumbling block for home buyers at a time when the market can ill-afford to discourage buyers. And that’s not even the worst problem. Advocates for the appraisal industry say that a move towards less-qualified appraisers prompted largely by the requirements of the new regulations mean that already depressed home prices are being undervalued even further. The problem has gotten so severe that even real estate trade groups that called for enhanced oversight in the first place are now working to dismantle its key provisions. And the controversy, some say, also shows how difficult it can be to reform even some of the most egregious practices blamed for creating the housing bubble in the first place. “Initially we were in full support of the concept because we have for several years now been trying to get the powers that be to recognize that there were significant pressures placed on appraisers to meet certain values,” said Leslie Sellers, president-elect of the Appraisal Institute, a voluntary membership organization that certifies appraisers. Sellers added, “The unintended consequences have created havoc.” Reforming the appraisal process goes back to earlier this decade, as home prices around the country inflated to what turned out to be unsustainable levels. Appraisers complained on blogs and industry message boards of being pressured by mortgage brokers, lenders and even builders to “hit a number,” in industry parlance, meaning the other party wanted them to appraise the home at a certain amount regardless of what it was actually worth. Appraisers risked being blacklisted if they stuck to their guns. “We know that it went on and we know just about everybody was involved to some extent,” said Marc Savitt, the National Association of Mortgage Banker’s immediate past president and chief point person during the first half of 2009 as the industry geared up for the rollout of the legislation. Critics of the new regulations say problems started right at the beginning. Instead of being developed at the behest of and in collaboration with appraisers, HVCC was borne out of a settlement deal between the New York Attorney General’s office and Fannie Mae and Freddie Mac, the two giant government-sponsored entities that together make up the engine of the mortgage business. Why the GSEs were targeted by the state of New York is still unclear. The Center for Public Integrity has filed FOIA requests for correspondence between the two entities and the Attorney General to try and find out. Most players in the industry assume that Fannie and Freddie came under fire for buying and selling loans backed by inflated appraisals without verifying if the values were legitimate. Prior to May 1, many appraisals were ordered by mortgage brokers. It was a convenient, if sometimes overly cozy, relationship. Brokers would go to local appraisers in the hopes of getting a valuation that would reflect a deep knowledge of the town, neighborhood and even street on which the property was located. Some lenders ordered appraisals directly, often through middlemen called appraisal management companies. The HVCC shook up the status quo by forbidding brokers to order appraisals; instead, that task now falls to lenders. Lenders, many of them big, national banks, have turned to appraisal management companies to manage the ordering process rather than try to forge individual relationships with literally thousands of individual appraisers across the country.

San Francisco lawyer eyes new defendants in Madoff case - (www.nypost.com) MADOFF LITIGATOR CHASING JPMORGAN FOR CLAWBACK. Joseph Cotchett, the San Francisco trial lawyer who last week made a splash when he sat down with convicted Ponzi schemer Bernie Madoff, is using the fruits of that interview to take aim at Wall Street, The Post has learned. Since emerging from his 4½-hour sit-down with Madoff at a federal prison in Butner, NC, where the fallen financier is serving a 150-year sentence, Cotchett and his legal team have been furiously amending their lawsuits to name new defendants. Among those new targets may be big financial firms, sources close to the legal team told The Post. Cotchett and his army of lawyers "are investigating the investment banks -- the people who had knowledge that this wasn't a good investment, so to speak," said a person familiar with the litigator's plan. "If they had done the due diligence, the fraud could have been caught. I think those that had the responsibility to do the due diligence didn't do what they should have done." A likely target could be JPMorgan Chase, which has been accused of pulling its money from Madoff ahead of the breaking scandal, leaving its clients behind. JPMorgan gave its clients access to Madoff through a product that let them lever their returns on funds that invested with the fraudster. The bank invested $250 million of its own money in the product, known as levered notes, but pulled out months before Madoff was arrested in December. A lawsuit filed in April by a Madoff investor claims JPMorgan Chase "unequivocally knew that Madoff's investment returns were false" as far back as September 2008. A JPMorgan spokesman declined to comment, citing the lack of a formal complaint against the firm. The bank has previously cited "a wide-ranging review" of the firm's overall hedge-fund exposure, as well as concerns about "the lack of transparency" as reasons it pulled its money from Madoff investments last year. Cotchett declined to comment on which firms he may be going after, but suggested the list of victims' claims offers some clues, as it names investment banking executives. "If you have executives . . . investing in Madoff, you might want to see what their hedge funds are controlling," he said, in an effort to offer a clue to his thinking.

Banks slow to modify mortgages - (features.csmonitor.com) Two of the nation’s four largest banks, Bank of America and Wells Fargo, rated below average in the pace at which they are modifying loans to prevent defaults, according to the government’s first monthly progress report on its foreclosure prevention campaign. The report, released Tuesday by the Treasury Department, found a wide variation in the help banks are offering to at-risk homeowners. Bank of America has modified 4 percent of its home loans that are eligible for the program as of last week. (Loans must meet criteria for being at risk of foreclosure.) Wells Fargo had modified 6 percent of eligible loans. Among the big four, JPMorgan Chase has modified 20 percent of eligible loans, and Citigroup 15 percent. The report comes after President Obama, faced with record foreclosures and a recession rooted in a housing bust, announced plans in February to spend up to $75 billion on incentives for lenders and borrowers to agree on loan modifications. More than 230,000 loan modifications have begun since February, the Treasury Department said, and the “making home affordable” program is on track to reach a three-year target of aiding 3 million to 4 million homeowners. But the report called on banks and loan servicing firms to move at a faster clip. By releasing data on individual firms, the administration may put pressure on some firms to do just that. The report comes at a time when the public is casting a critical eye on both bankers and federal bailouts. Some Americans wonder what financial firms are doing to help them, after taxpayers paid to rescue those firms last fall. Voters also wonder whether the Obama administration, at a time of soaring federal deficits, should be targeting $75 billion toward an effort to help about 8 percent of American households with mortgages. That’s a matter of debate among policy experts. In one camp, skeptics of government intervention point out that many foreclosures aren’t worth trying to prevent – even if the borrower is living in the home. It’s often better for the borrower and lender alike to cut the mortgage cord and move on. Otherwise, there’s a high risk of re-default, and the borrower may still spend an outsize share of income on housing. Another view is that efforts to prevent loan defaults make sense, given the record number of foreclosures. Foreclosure may be “the economic solution for lenders individually, when it is not for lenders in the aggregate,” said Susan Wachter, a University of Pennsylvania housing expert, at a congressional hearing last week. A glut of houses on the auction block means steeper losses for banks - and downward pressure on home prices that can lead to more borrower defaults. The Obama program could fail to quell foreclosures, Ms. Wachter says, because too few of the loan modifications include a reduced principal balance. Falling home prices mean borrowers often remain deeply “under water,” with loan balances above the value of their homes.

Underwater Mortgages to Hit 48%, Deutsche Bank Says - (www.bloomberg.com) Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said. The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today. As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the securitization analysts said. “Borrowers may also ‘ruthlessly’ or strategically default even without such life events,” they wrote. Seven markets in states with the fastest appreciation during the five-year housing boom -- including Fort Lauderdale and Miami, Florida; Merced and Modesto, California; and Las Vegas -- may find 90 percent of borrowers underwater, according to the report. The share of borrowers owing more than 125 percent of their property’s value will increase to 28 percent from 13 percent, according to Weaver and Shen. Home prices will decline another 14 percent on average, the analysts wrote.

Moody’s Says US May Wind Down Fannie, Freddie - (www.housingwire.com) Two giant players in the US mortgage finance market share a ‘bleak’ near- to immediate-term outlook as losses continue to mount, according toMoody’s Investors Service. Regulators may begin to wind down government-sponsored enterprises (GSEs) Fannie Mae (FNM: 0.74 +29.82%) and Freddie Mac (FRE: 0.80+31.15%) within the next 18 months, Moody’s said Monday in a global banking analysis report. Fannie and Freddie landed in conservatorship under the Federal Housing Finance Administration in September, and since have drawn a respective $35.2bn and $50.7bn from the government under an agreement with the US Treasury Department, which said it would purchase up to $200bn of senior preferred stock. The Moody’s report, authored by Brian Harris, Craig Emrick and Robert Young, noted bondholders will benefit from the government support. But with the GSEs taking heavy losses, a winding down and ultimate resolution by the US government looks likely.

Moody’s noted since Q307, the Fannie and Freddie reported seven consecutive quarterly losses totaling $86.9bn and $63.7bn, respectively. Due to these rising losses, it could take a decade of government ownership before the GSEs can operate as “viable stand-alone entities,” Moody’s said. Instead, the analysts said the government could resolve Fannie and Freddie’s business and then a new organization might be created to take on their role. A replacement entity would likely bear a different organizational structure and would avoid the criticism that would likely arise if Fannie and Freddie were simply resurrected. “This is not bad news for Fannie Mae and Freddie Mac bondholders as the US government has become entwined with these companies and the creation of a new entity to support housing finance likely means the orderly conclusion of Fannie Mae and Freddie Mac,” the report reads, in part.

OTHER STORIES:

Collapse in Luxury Market More Revealing Than It Appears - (www.minyanville.com)

Condo buyers find it tough to get mortgages - (www.sfgate.com)

Are Houses Finally Cheap? - (www.customsites.yahoo.com)

Has the housing market bottomed out? - (www.moneyweek.com)

American Incomes Head Down, Threatening Recovery in Spending - (www.bloomberg.com)

Lost generation? US grads work for free, look abroad - (www.reuters.com)

Buffet's Betrayal - (blogs.reuters.com)

Banking Bonuses Are Bubble Yet to Burst - (www.bloomberg.com)

The other real estate bubble - (www.socialistworker.org)

Fundamental Charts - (www.newobservations.net)

Millions long for immortality - (theautomaticearth.blogspot.com)