Begging the Banks

Treasury Secretary Henry Paulson today called on the banks that the federal government has just given $250 billion dollars to make that money available to others in the economy.

“We must restore confidence in our financial system,” Paulson said. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

The “needs of our economy” might require that the banks not hoard the money that the government has given them, but the Bush administration isn’t requiring much of anything.

I agree with Paulson that the economy will not begin to recover until there is liquidity in the credit markets.  That, indeed, was the rationale behind the government’s massive and unprecedented bailout of the financial industry.

Why, then, is Paulson asking the banks to do the only thing that justified giving them those billions of taxpayer dollars?

If, as is apparent to just about everyone, the economy will not recover until liquidity is restored to financial markets, why doesn’t the federal government require that the banks not hoard the billions that the government is giving them?

The answer is that, despite the acuteness of the financial crisis, and despite the government’s belated decision to take large scale action, the basic approach of the Bush administration has not changed.

In fact, for the past year, the Bush administration has taken a consistent, and faulty, two pronged approach to dealing with the expanding economic crisis, and this approach has not changed with the latest bailout.

This two pronged approach is

• (1) make capital available at extremely low rates to banks and financial institutions with the goal of restoring liquidity, and then
• (2) beg and plead with these same banks and financial institutions to move this capital into the economy.

As the housing and mortgage crisis worsened, Federal Reserve Chairman Ben Bernanke announced a series of cuts in interest rates.  Each time, Bernanke repeated his call for lenders to voluntarily reduce the principal on delinquent loans to adjust them for the drop in home prices, rejecting the far more more forceful action proposed by Democrats favoring legislation that would require the refinancing of hundreds of thousands of mortgages.

Of course, the banks did not voluntarily do what Bernanke requested.

Now Treasury Secretary Paulson is following the same dead end path in asking the banks to voluntarily take the actions that are needed for the restoration of the market.

The Bush adminstration’s beg and plead approach did not work in the past, and it will not work now.

Of course, no one, except the apocalypticals of the far Left and Right, and Libertarians driven crazy by ideology or alcoholism, want to see the global economy collapse.  Sane people don’t want to see bread lines or live with their guns at the ready in a bunker in the woods.

But we can now longer expect that capitalists, driven by personal gain, will voluntarily act to save the system that sustains them.

What is needed is a comprehensive and mandatory overhaul of the entire banking and financial system and the credit markets on the order of the Securities and Exchange Act of 1934.

And for that, we’ll have to wait at least until a new Congress, a new administration, and a new political and economic philosophy take over in January 2009.

I hope we last that long.

Foreclosure Activity Up 53% Over June 2007

Default notices, auction sale notices and bank repossessions were reported on 252,363 U.S. properties during June 2008, a 3 percent decrease from the previous month but still a 53 percent increase from June 2007, according to the latest RealtyTrac Foreclosure Market Report.

The report also shows that one in every 501 U.S. households received a foreclosure filing during the month.

“June was the second straight month with more than a quarter million properties nationwide receiving foreclosure filings,” said James J. Saccacio, chief executive officer of RealtyTrac. “Foreclosure activity slipped 3 percent lower from the previous month, but the year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle. Bank repossessions, or REOs, continue to increase at a much faster pace than default notices or auction notices. REOs in June were up 171 percent from a year ago, while default notices were up 38 percent and auction notices were up 22 percent over the same time period.”

Nevada, California and Arizona continued to document the three highest state foreclosure rates in June.  Florida, Michigan, Ohio, Colorado, Georgia, Indiana and Utah were other states that made the top ten.

For the third month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the report.

RealtyTrac noted that “Foreclosure filings were reported on 8,713 Nevada properties during the month, up nearly 85 percent from June 2007, and one in every 122 Nevada households received a foreclosure filing — more than four times the national average.”

“One in every 192 California properties received a foreclosure filing in June, the nation’s second highest state foreclosure rate and 2.6 times the national average.”

“One in every 201 Arizona properties received a foreclosure filing during the month, the nation’s third highest state foreclosure rate and nearly 2.5 times the national average. Foreclosure filings were reported on 12,950 Arizona properties, down less than 1 percent from the previous month but still up nearly 127 percent from June 2007.”

“Foreclosure filings were reported on 68,666 California properties in June, down nearly 5 percent from the previous month but still up nearly 77 percent from June 2007. California’s total was highest among the states for the 18th consecutive month.”

“Florida continued to register the nation’s second highest foreclosure total, with foreclosure filings reported on 40,351 properties in June — an increase of nearly 8 percent from the previous month and an increase of nearly 92 percent from June 2007. One in every 211 Florida properties received a foreclosure filing during the month, the nation’s fourth highest state foreclosure rate and 2.4 times the national average.”

“Foreclosure filings were reported on 13,194 Ohio properties in June, the nation’s third highest state foreclosure total. Ohio’s foreclosure activity increased 7 percent from the previous month and 11 percent from June 2007. The state’s foreclosure rate ranked No. 6 among the 50 states. Other states in the top 10 for total properties with filings were Arizona, Michigan, Texas, Georgia, Nevada, Illinois and New York.”

“Seven California metro areas were in the top 10, and the top three rates were in California: Stockton, with one in every 72 households receiving a foreclosure filing; Merced, withone in every 77 households receiving a foreclosure filing; and Modesto, with one in every 86 households receiving a foreclosure filing. Other California metro areas in the top 10 were Riverside-San Bernardino at No. 5; Vallejo-Fairfield at No. 7; Bakersfield at No. 8; and Salinas-Monterey at No. 10.”

“The top metro foreclosure rate in Florida was once again posted by Cape Coral-Fort Myers, where one in every 91 households received a foreclosure filing — fourth highest among the nation’s metro foreclosure rates. The foreclosure rate in Fort Lauderdale, Fla., ranked No. 9. LasVegas continued to be the only city outside of California and Florida with a foreclosure rate ranking among the top 10. One in every 99 Las Vegas households received a foreclosure filing in June, more than five times the national average and No. 6 among the metro areas.”

“Metro areas with foreclosure rates among the top 20 included Phoenix at No. 12, Detroit at No. 13, Miami at No. 15 and San Diego at No. 17”

RealtyTrac does not expect foreclosure activity to ease up until 2009.

Real Estate Values Per Square Foot Down More than 20% in Six Major Markets

Real estate prices continue to fall in most markets, according to Radar Logic Incorporated, a real estate data and analytics company that calculates per-square-foot valuations.

Among the key findings of the latest report from Radar Logic:

• The broad housing slump continued as consumers showed persistent lack of confidence and difficulty in financing home purchases.
• April 2008 continued to exhibit price per square foot (PPSF) weakness compared to last year in almost all markets. One MSA showed net year-over-year PPSF appreciation, one was neutral, and 23 declined.
• The Manhattan Condo market showed a 3.6% increase in PPSF year-over-year coupled with an increase in recent transactions despite a modest decline of 0.7% in month-over-month prices.
• Charlotte’s increase of 1.5% in year-over-year PPSF moved its rank among the 25 MSAs to number 1. This represents an increase over the 0.1% year-over-year PPSF appreciation last month.
• Columbus showed year-over-year PPSF appreciation of 0.2% for April 2008, which is an increase from last month’s year-over-year decline of 4.3%.
• New York declined 3.0% year-over-year in April 2008, its second decline in Radar Logic’s published history (beginning in 2000).
• Sacramento, the lowest-ranking MSA, showed a 31.7% decline from April 2007, which is consistent with last month’s decline of 30.6%.

 The ten biggest declines in per-square-foot values from last year were in these markets:

Sacramento (-31.7%)

Las Vegas (-29.9%),

San Diego (-28.1%)

Phoenix (-25.6%).

Los Angeles/Orange County (-23.4%).

Miami (-22.4%).

St. Louis (-19.8%).

San Francisco (-19.7%).

Tampa (-16.6%).

Detroit (-16.1%).

You can read the full Radar Logic report here.

Major Law Firm Creates “Distressed Real Estate” Section as Crisis Deepens

In what could be a new and significant trend in American legal practice — and a sign that the real estate crisis is expanding — the prestigious Philadelphia-based law firm Ballard Spahr Andrews & Ingersoll LLP has announced that it is establishing a “distressed real estate” section. 

The firm’s “Distressed Real Estate Initiative” will involve at least 16 core lawyers in ten offices throughout the country, including those in Mid-Atlantic and Western locations hardest hit by the housing bust and the mortgage crisis, including Los Angeles and Las Vegas.

The purpose of the section, according to the firm, will be “to provide representation in acquisition, restructuring and bankruptcy matters.”

 “In this period of turmoil in the financial markets and economic uncertainty, new real estate opportunities and challenges present themselves,” said Michael Sklaroff, chair of Ballard’s Real Estate Department. “We stand ready to serve clients with respect to existing positions and also in assisting them in acquisitions and debt and equity investments in troubled projects.”

Ballard Spahr Andrews & Ingersoll was founded in 1886 and now employs more than 550 lawyers in twelve offices located throughout the mid-Atlantic corridor and the western United States.

When there is blood in the water, the sharks will appear.

N.Y. Times Editorial Calls for Foreclosure Prevention Legislation Before the Next Mortgage Meltdown

The New York Times entered into the politics of the foreclosure crisis with an explosive editorial today accusing the Bush administration of failing to protect the economy and instead “sowing confusion and delay” in the face of the mortgage meltdown.

Here’s what the Times said:

“The housing bust is feeding on itself: price declines provoke foreclosures, which provoke more price declines. And the problem is not limited to subprime mortgages. There is an entirely different category of risky loans whose impact has yet to be felt — loans made to creditworthy borrowers but with tricky terms and interest rates that will start climbing next year.”

“Yet the Senate Banking Committee goes on talking. It has failed as yet to produce a bill to aid borrowers at risk of foreclosure, with the panel’s ranking Republican, Richard Shelby of Alabama, raising objections. In the House, a foreclosure aid measure passed recently, but with the support of only 39 Republicans. The White House has yet to articulate a coherent way forward, sowing confusion and delay.”

“[I]f house prices fall more than expected — a peak-to-trough decline of 20 percent to 25 percent is the rough consensus, with the low point in mid-2009 — financial losses and economic pain could extend well into 2011.”

“That is because a category of risky adjustable-rate loans — dubbed Alt-A, for alternative to grade-A prime loans — is scheduled to reset to higher payments starting in 2009, with losses mounting into 2010 and 2011. Distinct from subprime loans, Alt-A loans were made to generally creditworthy borrowers, but often without verification of income or assets and on tricky terms, including the option to pay only the interest due each month. Some loans allow borrowers to pay even less than the interest due monthly, and add the unpaid portion to the loan balance. Every payment increases the amount owed.”

“In coming years, if price declines are in line with expectations, Alt-A losses are projected to total about $150 billion, an amount the financial system could probably absorb. But until investors are sure that price declines will hew to the consensus, the financial system will not regain a sure footing. And if declines are worse than expected, losses will also be worse and the turmoil in the financial system will resume.”

“There’s a way to avert that calamity. It’s called foreclosure prevention. There is no excuse for delay.”

We agree with the Times that effective foreclosure prevention legislation is long overdue.  As the Times pointed out, unless Congress acts fast, it is likely that the economic consequences of the bursting of the housing bubble will be even more serious and widespread.

Even Fed Chair Ben Bernanke — who could not be called an advocate of government intervention in the markets — has stated that “High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy” and that what is at stake is not merely the homes of borrowers, but “the stability of the financial system.” 

We also can not imagine a more self-defeating political strategy than that of the Republicans who have opposed foreclosure prevention legislation. 

We’ve already written about Senator Richard Shelby’s close ties to the apartment owners industry, which has aggressively opposed federal aid to homeowners in, or near, default.

Surely, with the presidential election only months away and their party in trouble, more Republicans — including Senator McCain — should see the need for coming to terms with the economic, and political, realities of the foreclosure crisis, even if it requires ideological compromise.

 

Has the Credit Market Thawed? Is it Freezing Up Again? And Are You Still Out in the Cold?

We’ve written before about the failure of the Fed’s policy of cutting short-term interest rates — seven times since September 2007 — to spur liquidity in the credit market. 

The good news today is that there is “significant improvement in the credit markets since late March,” according to the Wall St. Journal.

The bad news, also reported by the Wall St. Journal, is that this recent thaw in the credit market is not expected to last:

“‘Most of us are anticipating two steps forward, one step back and carefully watching where the markets can handle deals,’ said Tyler Dickson, who oversees capital raising at Citigroup.”

“‘There’s no question the tone in the market is getting better,’ says Jim Casey, co-head of leveraged finance at J.P. Morgan Chase.  He adds, however, that ‘there is some concern that this might be a short-term window of opportunity for issuers, since investors are still very focused on default rates and the potential severity of a recession.'”

“‘Risk tolerance is still pretty low,’ says Daniel Toscano, a managing director of leveraged and acquisition finance at HSBC Securities in New York.”

“Banks and debt investors are treading carefully,” the article said. “Investment banks, which incurred big losses after selling a lot of buyout debt at heavily discounted prices, are committing only to deals they can underwrite at a profit. And investors don’t want to be caught wrong-footed if corporate defaults spike.”

We think that the report of a credit thaw is premature.  For most businesses and individuals, the credit market is still frozen solid. 

Blackstone Group LP President Tony James appears to agree with us.  James told Bloomberg News that banks are mistaken if they think credit markets have begun a sustained recovery. 

Rather than a real break in the dismal credit forecast, James said that this little patch of sunshine may be “the eye of the hurricane.”

There is clearly no de-icing of the credit market that would significantly impact the housing crisis or allow Fed Chair Ben Bernanke to sleep without getting the chills at night.

 

 

Why Use a 1031 Exchange?

There are many things you can do with your real property – from keeping it to selling it to giving it away to family members or charity.

Each of these choices has predictable financial, legal, and other consequences, and wise real property transactions are made with a full awareness of, and appreciation for, all of these consequences – especially the tax consequences.

The sale of real estate is a taxable event, and all profit from the sale of real estate is taxed as capital gains in the year of the sale. If you sell a property that has appreciated in value, you will be required, in general, to pay capital gains taxes on the difference between what the property cost you and what you get for it now, plus recapture of any depreciation you have previously taken. If your property has substantially appreciated in market value, you will be required to pay a substantial amount of money as capital gains taxes and depreciation recapture to the government.

A Section 1031 exchange allows you to legally avoid paying these taxes.

Section 1031 (a)(1) of the Internal Revenue Code states that “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

What this section means is that Section 1031 exchanges – if done properly – have the special benefit, unlike other forms of real property transactions, of allowing the complete legal avoidance of capital gains taxes and recapture of depreciation.

Technically, a Section 1031 exchange is a tax deferral rather than a tax elimination technique. The new replacement property purchased with the proceeds from the sale of old relinquished property has the same tax basis as the old property, and when the new property is later sold, the deferred capital gain, plus any additional gain realized since the purchase of the new property, is subject to taxation.

But since you can continue to exchange the new properties you obtain through Section 1031 exchanges again and again, you can continue indefinitely to legally defer taxes.

In other words, by taking advantage of the full benefits of the Section 1031 exchange process, you never have to pay taxes on the transfer of real property. Upon death, the basis of property gets “stepped-up” to its fair market value and the accumulated capital gain is never taxed. Even those who inherit the property can sell it at its fair market value at the date of death and not pay tax on that gain.

As Section 1031 exchangers like to say, you can “swap ’till you drop.”

You don’t have to be a financial genius to recognize that avoiding tax liability is always a good investment practice. If you can defer payment of taxes to some indefinite date in the future, you will have more money to invest today.

By putting the money that you save in taxes today to work for you now in sound real estate investments, you will have more equity in the future. By properly using the tax avoidance strategy of Section 1031 exchanges, with the money you save by legally avoiding capital gains taxes and depreciation recapture, you are able to continually step up your real estate portfolio and build substantial wealth from your original investment.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com