KeNo's Housing and Economic Portal: Tuesday September 22 Housing and Economic stories

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They Left Fannie Mae, but We Got the Legal Bills - (www.nytimes.com) PRECISELY one year ago, we lucky taxpayers took over Fannie Maeand Freddie Mac, the mortgage finance giants that contributed mightily to the wild and crazy home-loan-boom-turned-bust. In that rescue operation, the Treasury agreed to pony up as much as $200 billion to keep Fannie in the black, coughing up cash whenever its liabilities exceed its assets. According to the company’s most recent quarterly financial statement, the Treasury will, by Sept. 30, have handed over $45 billion to shore up the company’s net worth. It is still unclear what the ultimate cost of this bailout will be. But thanks to inquiries by Representative Alan Grayson, a Florida Democrat, we do know of another, simply outrageous cost. As a result of the Fannie takeover, taxpayers are paying millions of dollars in legal defense bills for three top former executives, including Franklin D. Raines, who left the company in late 2004 under accusations of accounting improprieties. From Sept. 6, 2008, to July 21, these legal payments totaled $6.3 million. With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and generate $115 million in bonus compensation. Fannie had to restate its financial results by $6.3 billion. Almost two years later, in 2006, Fannie’s regulator concluded an investigation of the accounting with a scathing report. “The conduct of Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity,” it said. That year, the government sued Mr. Raines, Mr. Howard and Leanne Spencer, Fannie’s former controller, seeking $100 million in fines and $115 million in restitution from bonuses the government contended were not earned. Without admitting wrongdoing, Mr. Raines, Mr. Howard and Ms. Spencer paid $31.4 million in 2008 to settle the litigation. When these top executives left Fannie, the company was obligated to cover the legal costs associated with shareholder suits brought against them in the wake of the accounting scandal. Now those costs are ours. Between Sept. 6, 2008, and July 21, we taxpayers spent $2.43 million to defend Mr. Raines, $1.35 million for Mr. Howard, and $2.52 million to defend Ms. Spencer. “I cannot see the justification of people who led these organizations into insolvency getting a free ride,” Mr. Grayson said. “It goes right to the heart of what people find most disturbing in this situation — the absolute lack of justice.” Lawyers for the three executives did not returns calls seeking comment. An additional $16.8 million was paid in the period to cover legal expenses of workers at theOffice of Federal Housing Enterprise Oversight, Fannie’s former regulator. These costs are associated with defending the regulator in litigation against former Fannie executives. This tally of taxpayer legal costs took several months for Mr. Grayson to extract. On June 4, after Congressional hearings on the current and future status of Fannie and Freddie, he requested the information from the Federal Housing Finance Agency, now their regulator. He got its response on Aug. 26. A spokeswoman for the agency said it would not comment for this article. THE lawyers’ billable hours, meanwhile, keep piling up. As the F.H.F.A. explained to Mr. Grayson, the $6.3 million in costs generated by 10 months of legal defense work for Mr. Raines, Mr. Howard and Ms. Spencer includes not a single deposition for any of them. Instead, those bills covered 33 depositions of “other parties” relating to the shareholder suits and requiring the presence of the three executives’ counsel.

Las Vegas Condo Buyers Lose Big On The Strip - (www.businessweek.com) I’ve written before about the sorry state of the condo/hotel market in Las Vegas. Bill Lerner of Union Gaming just came out with a report with some more analysis. He says sales have slowed to just a trickle—four per month. Prices in buildings such as the Trump International Hotel are down about 18% but that’s only because the developer still owns them and isn’t willing to take a huge hit. Re-sale prices, in projects like MGM’s three Signature towers are down 70%. Local Realtor Rob Jenson tells me many of the units are priced well under $200,000. Some of these sold for $600,000 and up. Condos on the Strip in general are down about 50%. All this is bad news for CityCenter, the $9 billion hotel and casino complex that is supposed to open in December. Lerner figures it will have to cut prices about 50% from what it is asking now. MGM has already sold about half of the 2,400 condo it plans to sell for the project. But acccording to the Las Vegas Sun, condo buyers—who have paid an average of $1 million per unit—are now asking for price reductions and threatening law suits. They have even started a condo buyer blog to share info and commiserate with each other.

Ill-fated real estate deal costs Florida $266 million - (www.miamiherald.com) The Florida board that invests public money for current and future retirees bet on a Manhattan real estate deal -- and lost every penny of a $250 million investment. This is the story of how the Florida board that invests public money bet $250 million on a huge Manhattan real estate deal and lost every last penny of it. On top of the money lost, Florida paid $16 million in fees to real estate developers, bankers and Wall Street money managers who persuaded the state to make the deal. State elected leaders with potential influence over the pension funds' investments received campaign contributions from some of those same corporate giants. And state pension managers in the real estate unit got performance bonuses. The big loser was the State Board of Administration, which invests more than $105 billion for 1 million current and future retirees. On the Manhattan real estate deal, its $266 million is now worth a grand total of $0.00. How the Florida agency wound up in the ill-fated real estate deal is also a story of lessons learned, as the pension agency's executive director, Ash Williams, put it when he informed the state's top officials of the loss. ``We will identify mistakes made, learn our lessons and move on,'' Williams said. Between 2000 and early 2007, four SBA internal reports and a watchdog group identified problems with the real estate investment process -- including a lack of risk control. Nonetheless, the managers shifted assets into higher-risk real estate deals, often by joining private partnerships that used borrowed money. Investing borrowed money, known as leverage, boosts returns in boom times but amplifies losses in bust times. In August 2006, at the height of the real estate bubble, a senior acquisitions manager in the SBA's real estate unit, Steve Spook, received two overtures to join investment firms bidding for adjoining apartment complexes in Manhattan. The complexes -- Peter Cooper Village and Stuyvesant Town -- were iconic housing communities, a ``city within a city'' on 80 prime acres overlooking the East River. Metropolitan Life built the apartments for returning WWII veterans in the 1940s. They became an oasis for teachers, nurses and retirees on small pensions, one of the last refuges for the middle class in Manhattan. In 2006, an average rent-controlled apartment in Peter Cooper Village went for about $1,340 a month, about 40 percent of the average rent in the surrounding area. New York's rent-control rules limited increases to 7.25 percent over two years, with some exceptions. Tenants could be ousted if their primary residences were elsewhere or if they illegally sublet their unit at market rates. About a quarter of the apartments paid market rates when MetLife put the complex up for sale in August 2006. The insurer's whopping asking price -- $5 billion -- made clear that to make a profit, the buyer would have to convert most remaining rent-stabilized apartments into market-rate units. That October, MetLife announced the winning bid, an eye-popping $5.4 billion by Tishman Speyer Properties and BlackRock Realty. The buyers put in $225 million of their own money, then passed much of the risk to others.

2 out of 5 working-age Californians jobless - (www.sfgate.com) On this Labor Day weekend, many Californians find themselves more in need of work than a holiday. A report released Sunday says two of five working-age Californians do not have a job, underscoring the challenges in one of the toughest job markets in decades. A new study has found that the last time employment levels among this group were this low was February 1977. The study was done by the California Budget Project, a Sacramento-based nonprofit research group that advocates for lower- and middle-income families. The report said that California now has about the same number of jobs as it did nine years ago, when the state was home to 3.3 million fewer working-age people. California Budget Project executive director Jean Ross recommended Congress adopt a second extension of unemployment insurance benefits. Those checks pay between $200 and $1,800 a month depending on a worker's previous earnings. On Friday, the U.S. Labor Department reported that the nation's jobless rate had climbed to 9.7 percent, the highest since 1983.

Half of Colorados mortgage-broker licenses deactivated - (denver.bizjournals.com) The Colorado Division of Real Estate on Monday inactivated 4,560 mortgage broker licenses, about half of the licenses in the state, division Director Erin Toll said. A total of 4,252 licensed mortgage brokers remained active in Colorado as of Monday. “We are left with less than half the number we had Friday,” Toll said in an email. The action stems from a state mortgage broker licensing law that went into effect on Jan. 1, 2008. Although all of the state’s brokers were automatically licensed at the time, they had one year to fulfill the same requirements as new applicants, which include completing 40 hours of licensing education and passing a written test. A year and a half later, about half of them hadn’t fulfilled all of the requirements, despite a time extension. The Division of Real Estate stepped up its warnings in late July, emailing brokers twice a week to remind them that they faced inactivation on Aug. 31. It’s unclear how many of those brokers remain active. Some may have left the business; others may be working for banks or other federally regulated institutions, where they aren’t required to have a state license.

The Coming Reset in State Government‎ - (online.wsj.com) My fellow governors and I are likely facing a permanent reduction in tax revenues. State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now. Most governors I've talked to are so busy bailing that they haven't checked the long-range forecast. What the radar tells me is that we ain't seen nothin' yet. What we are being hit by isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand. The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled. For now, my state's situation is far better than most, but it won't stay that way if we fail to act in Indiana. At present, we are meeting our obligations, without raising taxes, and still have over $1 billion in reserve. But the dominant reality is that even assuming the official revenue projections are accurate (and they have been consistently too rosy for the past two years), the state of Indiana will have fewer dollars to work with in 2011 than it did in 2007. Most other states face similar or worse prospects. And, unlike the aftermath of past recessions, odds are that revenues will take a long time to catch back up to their previous trend lines—if they ever do. Tax payments have fallen so far that it would require a rousing economic rally to restore them. This at a time when the Obama administration's policies on taxes, spending and more seem designed to produce the opposite result. From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012. I doubt even that would suffice to rescue most states. Instead, historical forecasting models need to be revised. One-third of state revenues (over half in seven states) come from sales taxes, but it's hard to imagine them snapping all the way back up to where they were just a few years ago. Americans are now saving much more then they used to relative to how much they are spending. This sudden shift will mean that even in good economic times to come consumers will likely spend less and therefore pay less in sales taxes than they did during bubble years. Even if Americans wanted to go back to their high-spending, high-borrowing ways, will anyone lend them the funds to spend like it's 2007 all over again? Consumer credit will remain tighter as a matter of both sound business practice and new government regulation. Home equity appreciation is gone as a huge source of collateral, even if lenders were either willing or permitted to loan freely against it. The "progressive" states that built their enormous public burdens by soaking the wealthy will hit the wall first and hardest. California, which extracts more than half its income taxes from a fraction of 1% of its citizens, is extreme but hardly alone in its overreliance on a few, highly mobile taxpayers. Both individuals and businesses are fleeing soak-the-rich states already. Those who remain in high-tax states will be making few if any capital gains tax payments in the years to come. Even if the stock market comes roaring back to life, the best it could do is speed the deduction of recent losses. Sadly, the political impulse to protect government largess leads many states to aggravate their dilemma. Already more than half have raised taxes, often on businesses, serving only to chase them and their tax payments away and into the open arms of states like Indiana. Our traffic flow of interested investors is as heavy as it was in 2007. Since January we have welcomed the consolidation of more than 30 firms that closed up shop elsewhere and chose us as the low-cost, enterprise-friendly environment among their current locations.