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Borrowing Costs Fall for Italy and Spain in Debt Auctions

January 13, 2012 by Leave a Comment

In Madrid, the Treasury said it sold €10 billion, or $12.7 billion, of bonds in total — twice the targeted amount — with yields falling about 1 full percentage point from previous auctions.

The Italian Treasury allotted all of the €8.5 billion of the 12-month bills it had targeted for sale, with its yields falling by half or more.

Both Spain and Italy are under intense pressure from investors because of their public finances, with recently installed governments scrambling to push through additional austerity packages to rein in deficits and debt levels.

The European Central Bank’s decision last month to aid struggling euro zone banks with longer-term refinancing operations has taken some of the heat off in recent weeks.

The E.C.B. is providing unlimited three-year credit on easy terms to banks, against a wide range of collateral. That has helped to reduce stress in the credit markets, and some say, could ease the so-called “refinancing hump” that euro zone governments face this year, under which they must roll over hundreds of billions of euros of maturing debt.

Harvinder Sian, a bond strategist at Royal Bank of Scotland in London, said the Spanish sale “went very well” and should cover about one-tenth of Spain’s borrowing needs for 2012.

Considering that the initial target of €5 billion was already a significant amount, he said, the fact of a €10 billion total issue “is almost unprecedented, to my mind.” Still, he said, there is a question about how much to read into the results, as “it’s hard not to see it as being a bit stage-managed.”

The solid showing by both countries on Thursday pushed down yields for 10-year bonds on secondary markets, although they remained at levels considered unsustainable by analysts in the medium and longer term.

The yield on Spanish 10-year bonds dropped to 5.1 percent, while Italy’s slid to 6.5 percent. German Bunds, the euro zone benchmark, were relatively unchanged at 1.8 percent.

In the auction Thursday in Madrid, the three-year bonds, which accounted for €4.3 billion, were sold at an average yield of 3.75 percent, compared with 4.87 percent at the previous auction of such bonds in July. Another €4.3 billion of a new three-year bond sold at a yield of 3.38 percent.

The Spanish Treasury also sold €3.2 billion worth of a bond maturing Oct. 31, 2016 for 3.91 percent, compared with 4.85 percent last November.

The 12-month bills sold by the Italian government were priced to yield 2.79 percent — down sharply from the 5.95 percent it paid to sell similar securities on Dec. 12.

Italy also sold €3.5 billion of three-month bills priced to yield 1.64 percent, down from 3.25 percent at the last auction.

Italy was hoping to sell another €4.75 billion of debt Friday.

David Jolly reported from Paris.

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Five Businesses That Did Not Survive 2011

December 29, 2011 by Leave a Comment

Inevitably there are businesses, like the Elizabeth Anne Bed Breakfast in Crested Butte, Colo., that struggled. And inevitably, there are owners, like Kevin and Denise Reinert of Elizabeth Anne, who held on as long as they could. “We kept thinking we could turn it around,” Ms. Reinert said. “We rented out rooms until the day we moved out.”

Here are the stories of five small businesses that were not able to survive 2011.

A Poorly Timed Refinancing

The Elizabeth Anne Bed Breakfast was bought in 2003 for $650,000 and closed last August.

AT ITS PEAK After buying the Elizabeth Anne, the Reinerts steadily increased revenue, from $78,000 in 2004 to $104,000 in 2007. “We got to know the guests,” Mr. Reinert said, “and they got to know each other.”

WHAT WENT WRONG In 2007, the couple refinanced, taking out some equity to renovate the kitchen. They wound up with a 10-year, interest-only loan that increased their mortgage payment by $1,700 a month. But with people taking fewer vacations, Mr. Reinert said, revenue declined 21 percent in 2009. In 2010, they fell behind on their mortgage payments and were not able to modify the loan. The bank foreclosed in June.

LOOKING BACK Ms. Reinert blames the refinancing: “It’s what did us in. Back then, we didn’t anticipate things slowing down.” Today, the Reinerts run KR Construction, which does handyman jobs. Ms. Reinert also works at a local restaurant, and Mr. Reinert plays bass in a Beatles tribute band, Dr. Robert.

‘We Did Everything Right’

Just Moulding, based in Gaithersburg, Md., sold and installed decorative molding. It opened in 2004 and closed last April.

AT ITS PEAK Mark Rubin and Kevin Wales started with a single workshop that handled small jobs larger installers did not want. In 2007 things were going so well they decided to sell franchises in the business and raised $700,000 from 21 investors. After Mr. Wales left the company in 2010, Mr. Rubin’s father-in-law, Richard Hayman, took over as president. Soon after, sales increased by 20 percent and the company became profitable.

WHAT WENT WRONG The recession. The company, Mr. Hayman said, sold a product that people wanted but did not need: “It was crown molding, not a furnace or a roof.” And while the business had the high legal and accounting costs associated with selling franchises, it had sold only three by the end of 2009. Potential franchisees had trouble raising the $100,000 to $250,000 needed to get started.

LOOKING BACK “We did everything right,” said Mr. Hayman, who sank $470,000 into the company. “We hired the best people and had a great product. We could not overcome the bad economy.” He and Mr. Rubin declined to discuss what they are doing now.

When 1% Is a Lot of Money

P H Capital, a commercial mortgage company in Brooklyn that specialized in finding loans for small businesses, opened in 2009 and closed last March.

AT ITS PEAK Shawn Porat and Ismail Humet started P H Capital with $4,000 while Mr. Humet was working as a Wall Street analyst and Mr. Porat was running Recovery of Judgment, which helps clients collect legal judgments. The friends saw the subprime crisis and tightening of credit as an opportunity, believing they could match small businesses with lenders offering alternative financing. In January 2010, Mr. Humet and Mr. Porat were piecing together a $500 million deal that they believed had a good chance of working. “Our commission was 1 percent,” Mr. Humet said, “and 1 percent of $500 million is a lot of money.”

WHAT WENT WRONG For one thing, the big deal fell apart. Lenders were skittish because the money would be used to build a factory in Asia, Mr. Humet said, and they were wary of dealing with a foreign government. In addition, lenders wound up imposing stricter parameters for alternative loans. He also said that P H clients often had unrealistic expectations about how much money they could get. “We had a restaurant owner that needed $300,000 to open another location, but we could only get him $150,000,” Mr. Humet said. “He didn’t go through with it.”

LOOKING BACK Mr. Humet said he and Mr. Porat did not anticipate how difficult it would be to place even their best applicant’s loans. Since closing P H, Mr. Humet has helped start MyFreebeez.com, which promotes small businesses online using free giveaways. Mr. Porat operates Recovery of Judgment and Judgment Marketplace, an online marketplace where monetary judgments can be bought, sold and traded.

Poor Cost Projections

ScooterFood, a maker of all-natural dog food based in Brooklyn, opened in 2006 and closed last August.

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U.S. Mortgage Relief Program Widens Its Scope

November 30, 2011 by Leave a Comment

Although he would appear to be a good candidate, Mr. Compton, 57, has been turned down twice for a federal refinancing program aimed at homeowners like him.

Still, he has renewed hope. That’s because the government is expanding the Home Affordable Refinance Program, which was meant to help homeowners whose mortgages are backed by the government and whose home values have declined sharply, even below what the borrowers owe. Mr. Compton is one of those underwater homeowners.

When the Treasury Department announced the program, referred to as HARP, two years ago, it said it could help four million to five million homeowners whose home values had plunged. Yet just 900,000 borrowers — whose loans are owned by Fannie Mae and Freddie Mac, the government-sponsored housing finance companies — have successfully refinanced through the program. Starting early next month, though, banks will begin using new criteria intended to make more borrowers eligible: raising the ceiling on how much owners can borrow over the value of their home as well as relaxing rules that might force banks to take back bad loans from the government. In announcing the change, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, carefully eased expectations, suggesting about 900,000 more homeowners would be helped, roughly doubling the size of the program to date.

Analysts welcomed the change, but some criticized it for still not capturing nearly enough of the people who could benefit from lower interest rates.

Of the 22 million borrowers who could be eligible for the government refinancing program, nearly 70 percent of them are paying interest rates of 5 percent or more, according to CoreLogic, a research firm. Conventional mortgage rates are currently closer to 4 percent.

Greater participation could help the beleaguered housing market, which showed renewed signs of decline in data released on Tuesday, as well as help shore up the broader economy.

“The universe is much larger than what has come through the pipeline,” said Paul Ballew, chief economist at Nationwide Insurance. Mr. Ballew said that if 10 million more people refinanced and saved an average of $200 a month, that would work out to be about $240 billion a year of additional spending power in the economy.

Other economists and officials of the Federal Housing Finance Agency say it is unrealistic to expect all those borrowers to refinance. Some people are wary of government programs, while others will be put off by upfront application fees and the paperwork burden. Those who have home equity loans or second mortgages could face tougher approvals.

Since the refinancing program is optional, lenders may impose additional restrictions. What is more, it is costly to devote staff to refinancing applications, so lenders may simply be reluctant to do so.

Mr. Compton has calculated that a refinancing would save him and his wife, Lynne, about $275 on their $1,397 monthly payment. He has not missed a payment, despite being laid off from one job and enduring two pay cuts in the last two years. His salary is now roughly two-thirds what it was when they bought the house five years ago — a house that has since fallen in value.

The loan servicer, JPMorgan Chase, initially turned down the refinancing application because the Comptons had been living in another, smaller property they owned while renting out their main house.

The couple moved back in September and reapplied after changing their drivers’ licenses and utility bills.

This time, a loan officer told Mr. Compton, who works as a public transportation planner, that he did not qualify because his loan had been sold to two different investors. Mr. Compton said he confirmed through a government Web site that his loan was now owned solely by Freddie Mac.

“It angers me quite a bit,” said Mr. Compton, who added that unlike other borrowers, he never took out a home equity loan during the boom and has consistently paid his bills. The refinancing program, he said, should be “a perfect fit for me.”

He suspects that Chase — as well as other lenders — believe “that if you just tell people ‘no’ often enough, eventually they will just say O.K., and move on.”

After being asked about Mr. Compton’s case, a Chase spokesman said the company was investigating his file. “We are reaching out to the customer to see if we could refinance him through HARP 2,” said the spokesman, referring to the expanded government program, “or offer another option.”

Meg Burns, senior associate director for housing and regulatory policy at the Federal Housing Finance Agency, said the agency could not control individual lenders.

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Mortgages: Mortgages

November 14, 2011 by Leave a Comment

But in today’s shaky economy, many financial advisers are suggesting that homeowners wait.

“I think paying off the mortgage would probably be a poor decision financially right now,” said Gibran Nicholas, the chairman and chief executive of the Certified Mortgage Planning Specialist Institute, which trains and certifies financial planners who provide mortgage and real estate equity advice.

The decision, he says, depends upon cash flow and returns.

Debra Shultz, a managing director of the Manhattan Mortgage Company, says that homeowners approaching retirement must ensure that they have enough cash flow to cover daily expenses. Once the mortgage is paid off, she noted, “you can’t take it back unless you refinance and cash out again.”

And refinancing as a retiree could be difficult. “Their qualified income might drop, which might inhibit them from refinancing and qualifying,” she said.

In some cases, homeowners might receive a better return by investing the money they would have used to retire the mortgage. “Why pay off a mortgage and save maybe 3 percent after tax when you could be putting that money into a muni bond earning 4.5 percent after tax right now?” Mr. Nicholas said.

Returns could potentially be even greater if the retiree bought a vacation or retirement home on the cheap. “I think there’s going to be fire sales and they’ll have opportunities to grab assets at fire-sale values,” said DaRayl Davis, a money manager and the author of “Economic Secrets of the New Retirement Environment” (Xlibris, 2009).

Financial advisers also contend that it makes little sense to pay off the mortgage on an asset whose value is still depreciating. Indeed, home prices in the country’s top 20 markets have fallen more than 30 percent, on average, from their peak in June 2006, with those in Las Vegas, for instance, tumbling 60 percent, according to Alex Barron, the founder and president of the Housing Research Center.

Prices in New York City are off 22 percent from their peak, he said, adding that he expected home prices to fall another 5 percent before bottoming out in the next one to two years.

Mr. Davis is even more bearish, predicting that prices could slide another 30 percent. “That bubble has burst,” he said, “and it’s not done deflating yet.”

Mr. Nicholas recommends that any homeowner with a mortgage rate above 7 percent try to refinance to a lower rate if the refinancing costs are not too high.

Then there are the tax implications of losing the mortgage deduction. These are only relevant, Ms. Shultz noted, to owners whose principal is less than two-thirds paid off. Once the two-thirds threshold has been reached, the interest deduction, if any, is small and doesn’t justify keeping the mortgage.

Of course, the good feeling of owning a home debt-free should not be minimized. “Trading off a known 4 percent interest rate for an unknown market return may leave some retirees jittery,” said Drew Denning, the vice president for retiree services of the Principal Financial Group.

For those who do opt to pay off a mortgage early — perhaps they want to eliminate debts to pay for their children’s college — the experts suggest that they have at least 12 months of living expenses in cash available outside their retirement accounts after the home is paid off. That is double the amount normally recommended in good times.

Mr. Denning recommends as much as two years’ worth of living costs. “The ability to find another job that pays a comparable amount of money is very challenging in today’s environment,” he said. “And going to your bank to take out a loan when you’re unemployed would not be one of the more friendly visits you’ll have.”

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Wealth Matters: Decoding the Wide Variations in House Appraisals

September 16, 2011 by Leave a Comment

The appraisal for the condo initially came in at exactly the dollar amount we needed to refinance it without putting up any more money — something I found fishy but did not question since it worked to our advantage.

But a week later, the appraisal management company that had sent out the appraiser reviewed his valuation and revised it downward, determining that instead of 20 percent equity in the condo, we had only 10 percent.

That’s when I called up the loan officer at the bank and basically asked the question homeowners everywhere are asking: How are you determining the value of my home? After all, both numbers seemed to me to be rather arbitrary.

I eventually prevailed and got the refinancing.

But around that time, I got the renewal letter for the homeowner’s insurance on our house in Connecticut and was shocked to see that it was being insured for a value 14 percent higher than we paid in 2008. I know homeowner’s insurance is meant to cover the cost of replacing the house, but the price we paid for our home in 2008 was not just for the house but included the yard, the street where we live, the property taxes, the schools and other intangibles. And the price I could get for the house now is less than I paid back then. So why the high appraisal?

The question isn’t a new one. After all, appraisals seemed to be just as subjective when the market was moving up. Why is the process so opaque? I set out to try to figure that out. Here are a few things I’ve found that can improve the outcome, though I can’t promise that you’ll be entirely satisfied.

SELLING AND BUYING One component of selling a home has always been gauging the emotion of a prospective buyer. But several brokers told me that buyers and sellers who need financing for a home should be concentrating instead on the temperament of the bank lending the money.

“Over the past two years, houses are not worth what the owners want or what the buyers will pay for them,” said Peggy Bates, a broker with William Pitt Sotheby’s International Realty in Stamford, Conn. “A house is worth what the appraiser says it is.”

She says she makes prospective clients have their house appraised before she will list it. If they insist on determining their own value, she said, she makes them sign an agreement to drop the price in four weeks if the house does not sell.

Her tough-love approach may be hard for some to swallow but it just reflects banks’ caution in making new mortgages with so many bad ones on their books.

But don’t assume that the appraiser will return with a value for your house that you agree with. First, banks are increasingly bringing in appraisers from other towns, if not other states. While this is done to comply with provisions in the Dodd-Frank Act aimed at establishing objectivity and preventing agents and mortgage brokers from influencing the outcome, it often produces results that fail to fully account for the central tenet of real estate: location.

Joseph C. Magdziarz, president of the Appraisal Institute and an appraiser outside of Chicago, defended his industry’s work but said many appraisers were now pressed to write their reports more quickly and for less money. In cities like Chicago, he said, local knowledge is crucial because prices can vary from block to block and also floor to floor in high-rises.

Even if the appraiser is local, Mr. Magdziarz advises people to review a copy of the report. “The appraiser who did my house talked about my fireplace, but I don’t have one and he got the size of the living area all wrong,” Mr. Magdziarz said.

REFINANCING The lure of incredibly low mortgage rates has piqued interest in refinancing existing mortgages. After all, going from a rate of 6.5 percent to 4.5 percent means significantly lower payments each month.

But lending requirements are strict even for people with an existing mortgage who have no problem making their current payments.

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