March 29, 2020

In a Shift, Eminent Domain Saves Homes

Traditionally, eminent domain, or the compulsory sale of private property to governments for a public purpose, works against homeowners — as when houses are bought up to make room for a highway or a commercial development. But in this case, the use of eminent domain is meant to help people stay right where they are.

The results will be closely watched by both Wall Street banks, which have vigorously opposed the use of eminent domain to buy mortgages and reduce homeowner debt, and a host of cities across the country that are considering emulating Richmond.

The banks have warned that such a move will bring on a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it.

But local officials, frustrated at the lack of large-scale relief from the Obama administration, relatively free of the influence that Wall Street wields in Washington, and faced with fraying neighborhoods and a depleted middle class, are beginning to shrug off those threats.

“We’re not willing to back down on this,” said Gayle McLaughlin, the former schoolteacher who is serving her second term as Richmond’s mayor. “They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods.”

Despite rising home prices in many parts of the country, including California, roughly half of all homeowners with mortgages in Richmond are underwater, meaning they owe more — in some cases three or four times as much more — than their home is currently worth. On Monday, the city sent a round of letters to homeowners, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at high risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to Richmond’s. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.

But the cities face an uphill battle. Some have already backed off, and those who proceed will be challenged in court. After San Bernardino County dropped the idea earlier this year, a network of housing groups and unions began to win community support and develop nonprofit alternatives to Mortgage Resolution Partners, the firm that is managing the Richmond program.

“Our local electeds can’t do this alone, they need the backup support from their constituents,” said Amy Schur, a campaign director for the national Home Defenders League. “That’s what’s been the game changer in this effort.”

Richmond is offering to buy both current and delinquent loans. To simplify matters — and to defend against the charge that irresponsible homeowners are being helped at the expense of investors — the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.

The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference is divided among the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

Alan Blinder contributed reporting.

Article source: http://www.nytimes.com/2013/07/30/business/in-a-shift-eminent-domain-saves-homes.html?partner=rss&emc=rss

A City Invokes Seizure Laws to Save Homes

Scarcely touched by the nation’s housing recovery and tired of waiting for federal help, Richmond is about to become the first city in the nation to try eminent domain as a way to stop foreclosures.

The results will be closely watched by both Wall Street banks, which have vigorously opposed the use of eminent domain to buy mortgages and reduce homeowner debt, and a host of cities across the country that are considering emulating Richmond.

The banks have warned that such a move will bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it.

But local officials, frustrated at the lack of large-scale relief from the Obama administration, relatively free of the influence that Wall Street wields in Washington, and faced with fraying neighborhoods and a depleted middle class, are beginning to shrug off those threats.

“We’re not willing to back down on this,” said Gayle McLaughlin, the former schoolteacher who is serving her second term as Richmond’s mayor. “They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods.”

Despite rising home prices in many parts of the country, including California, roughly half of all homeowners with mortgages in Richmond are underwater, meaning they owe more — in some cases three or four times as much more — than their home is currently worth. On Monday, the city sent a round of letters to the owners and servicers of the loans, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to that in Richmond, which is largely black and Hispanic. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.

But the cities face an uphill battle. Some have already backed off, and those that proceed will be challenged in court. After San Bernardino County dropped the idea earlier this year, a network of housing groups and unions began working to win community support and develop nonprofit alternatives to Mortgage Resolution Partners, the firm that is managing the Richmond program.

“Our local electeds can’t do this alone, they need the backup support from their constituents,” said Amy Schur, a campaign director for the national Home Defenders League. “That’s what’s been the game changer in this effort.”

Richmond is offering to buy both current and delinquent loans. To defend against the charge that irresponsible homeowners who used their homes as A.T.M.’s are being helped at the expense of investors, the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.

The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

Alan Blinder contributed reporting.

Article source: http://www.nytimes.com/2013/07/30/business/in-a-shift-eminent-domain-saves-homes.html?partner=rss&emc=rss

DealBook: Chinese Companies Head for the Exit

HONG KONG–Fed up with slumping share prices, prickly regulators and aggressive short sellers, Chinese companies listed on American stock exchanges are increasingly heading for the exits.

The most recent case is also the biggest yet. On Wednesday, the directors of Focus Media Holdings, a display advertising company based in Shanghai, whose shares had come under attack by short-sellers, said they had accepted a sweetened $3.7 billion privatization bid from a buyout group that included the American private equity giant Carlyle Group, several Chinese private equity firms and the company’s chairman.

The deal would delist the company from Nasdaq. It includes $1.5 billion in debt financing from a consortium of Wall Street banks and mainly state-owned Chinese lenders and would rank as China’s biggest-ever leveraged buyout. Pending shareholders’ approval, the company expects the transaction to close in the second quarter of next year.

Including the Focus Media deal, which was first announced in August, Chinese companies began a record $5.8 billion worth of privatization bids in the first nine months of the year, according to the data provider Dealogic. That was a 42 percent increase from the same period a year earlier, and proposed Chinese delistings accounted for a record 16 percent of such transactions globally during the period, up from 6 percent a year earlier.

‘‘A lot of Chinese entrepreneurs want out of the U.S. markets. Share prices are depressed, and there are a lot of these deals in the pipeline,’’ said David Brown, greater China private equity practice leader at the auditing firm PricewaterhouseCoopers.

Valuations of companies from China that are listed in the United States have come under pressure in recent years after a wave of allegations of fraud and other accounting scandals. The Securities and Exchange Commission has deregistered the securities of nearly 50 China-based companies and has filed about 40 related fraud cases.

At the same time, a cross-border regulatory dispute over auditing procedures for Chinese companies listed in the United States escalated this month, when the S.E.C. charged the Chinese affiliates of the world’s four biggest accounting companies with violating securities law for failing to turn over documents related to their auditing work on businesses in China.

The standoff between United States and Chinese regulators over the auditing issue has raised concerns among multinational corporations that operate in both countries.

‘‘Failure to reach an agreement will create regulatory dead zones that harm investors and businesses,’’ the United States Chamber of Commerce said last week in a letter to securities regulators in Beijing and Washington. ‘‘The threat of retaliatory actions by regulators, on both sides of the Pacific, may create a regulatory protectionism that will harm both economies.’’

Article source: http://dealbook.nytimes.com/2012/12/20/chinese-companies-head-for-the-exit/?partner=rss&emc=rss

DealBook: More Money Than They Know What to Do With

From left, Henry Kravis of Kohlberg Kravis Roberts, Stephen Schwarzman of the Blackstone Group and David Rubenstein of the Carlyle Group.Shannon Stapleton/Reuters, Mark Lennihan/Associated Press and Fred Prouser/ReutersFrom left, Henry Kravis of Kohlberg Kravis Roberts, Stephen Schwarzman of the Blackstone Group and David Rubenstein of the Carlyle Group.

It is a $1 trillion game: Use It or Lose It.

The private equity world is sitting on that 13-figure sum. It’s what the industry calls dry powder. If they don’t spend their cash pile snapping up acquisitions soon, they may have to return it to their investors.

Nearly $200 million from funds raised in 2007 and 2008 alone needs to be spent in the next 12 months or it must be given back.

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Private equity executives, after spending the last several years largely on the sidelines amid the economic uncertainty — often proclaiming “patience” as an explanation — have begun to be anxious that they may need to go on a shopping spree. At least two major private equity firms, according to two executives involved in the discussions, have held internal strategy sessions in recent weeks about how to approach the looming deadline.

Some private equity firms have put the word out to Wall Street banks that they want to go “elephant hunting” — seeking big deals worth as much as $10 billion — and are willing to pay a special bounty for bringing them acquisition targets.

At least one firm has gone so far as to begin contemplating asking its investors, which include the nation’s largest pension funds, to extend the deadline for the money to be spent in return for certain concessions on fees. (Of course, they don’t return the fees that have been collected thus far).

“The clock is ticking loudly for these funds,” Hugh MacArthur, the head of Bain Company’s private equity practice, wrote as the lead author of a report on the state of the industry.

So the race is on.

But, of course, there is a problem: “Burning off the aging dry powder will likely result in too much capital chasing too few deals throughout 2012,” according to Mr. MacArthur.

That means it is possible we could see a series of bad deals with even worse returns.

Already, private equity firms have been quietly spending lots of cash. In the third quarter alone, private equity firms in the United States burned through $45 billion, up from $17.1 billion in the previous quarter, according to Capital IQ, which tracks deals data. Carlyle Group, which had its initial public offering earlier in May, has been the busiest firm this year: it has done 11 deals worth almost $12 billion.

Acquisition prices are also likely to balloon because of “lots of firms bidding for the same obvious deals,” Alastair Gibbons, a senior partner at Bridgepoint Capital, told Triago, a fund-raising services firm that publishes a widely read quarterly newsletter. “Since there is near record dry powder globally, it’s entirely plausible that we’ll see increasingly overcrowded bidding processes.”

Richard Peterson, an analyst for SP Capital IQ’s Global Markets Intelligence group, said that private equity firms are already paying multiples of Ebitda — earnings before interest, taxes, depreciation and amortization — of 10.6 this year, up from 10.3 last year. It’s worth remembering that many of the most successful deals in the private equity industry were bought for six to eight times Ebitda, he said.

He noted, however, that since firms were able to borrow at unheard-of low rates today “it may give them more confidence to pay a little bit more.”

Perhaps in a sign of desperation, many private equity firms have been increasingly engaged in a game of “hot potato” with one firm selling a business to another — known as a secondary deal. Mr. Peterson said that at the current pace, the industry was expected to spend a record-breaking $22.3 billion this year simply buying companies from each other rather than buying businesses from the public markets or from private owners outside the private equity industry.

Mr. Peterson also raised a question that is often being whispered about but rarely said aloud: “A lot of these firms are publicly traded now. So to what degree are the transactions being driven by earnings objectives?”

Many of the big private equity firms — Apollo Group, Kohlberg Kravis Roberts, Blackstone Group and Carlyle Group, among them — are public. And for the first time, it is possible that the interests of the public shareholders could diverge from the interests of the investors in the buyout funds, at least in the short term.

If the private equity firms don’t spend the money that they have already raised, it is unlikely they will be able to raise even more in coming years. And increasingly, the private equity firms have become dependent on the management fees not just to keep the lights on but to expand their businesses into other areas, in part to diversify, which has been part of the pitch to public investors. The biggest firms have become asset gatherers.

“In a nutshell, 95 percent of funds would be affected and see a big drop in fee income based on not investing all of the committed capital,” according to Tim Friedman, director of North America for Preqin, which tracks private equity fund-raising and deals. He said that he did not expect firms to do deals simply “for the sake of it,” but he also cautioned that the firms were “under a lot of pressure.”

So keep an eye out for megadeal headlines — and whether they command the same prices when the companies are sold.

Article source: http://dealbook.nytimes.com/2012/10/01/more-money-than-they-know-what-to-do-with/?partner=rss&emc=rss

The Invisible Hand Behind Wall Street Bonuses

“You know those big paydays on Wall Street?” he says, typically waiting a beat to deliver the punch line. “I have something to do with them.”

Mr. Johnson, a consultant who speaks with a light twang from his native Alabama, has never worked for a bank. Nor will his company, Johnson Associates, pay million-dollar bonuses to any of its 12 employees this year. But as one of the nation’s foremost financial compensation specialists, Mr. Johnson is among a small group of behind-the-scenes information brokers who help determine how Wall Street firms distribute billions of dollars to their workers.

“The misunderstanding many people have about this industry is that pay is whimsical,” Mr. Johnson said in a recent interview at his company’s Manhattan office. “It’s not.”

Compensation consulting is an obscure corner of the management consulting industry, where practitioners operate in the shadows of high finance. Large Wall Street banks, as well as hedge funds and private equity shops, rely on such consultants to help them structure bonus payouts and devise severance packages, and to provide data on what competitors pay.

“You can give them some insights,” Mr. Johnson said of his clients, who have included the boards of Credit Suisse and Lehman Brothers. “You can say to them, ‘You’re being too wimpy this time,’ or, ‘You were being too aggressive last time.’ ”

This year’s bonus season, which began in late December and will continue until February at some companies, is expected to be the worst for industry employees since 2008, as regulatory measures and economic uncertainty have cut deeply into profits and made pay pools smaller.

In his annual compensation survey, a closely watched report that was sent to roughly 800 of the company’s clients in November, Mr. Johnson estimated that bonuses in the industry would fall 20 to 30 percent from last year’s levels.

That would still leave employees at firms like Goldman Sachs, where the average worker took home $430,700 in total compensation in 2010, much better off than workers in other industries. But it would represent further slippage from the sector’s highs before the crisis.

Bonus math in a financial downturn is a delicate art. Because the payments typically make up at least half of an employee’s yearly pay, erring on the low side can mean losing a star performer to a rival firm.

“Someone on Wall Street might go apoplectic when he heard he got $3 million and another guy got $3.5 million,” Mr. Johnson said.

Decades ago, banks determined bonuses according to a relatively simple formula that took into account an employee’s seniority and performance. After the financial crisis, as politicians and regulators began criticizing what they saw as eye-popping pay packages, those all-cash bonuses went out of fashion.

Now, Wall Street pay packages routinely include deferred cash payments and restricted stock awards that can be redeemed only after multiyear waiting periods.

The increased complexity of Wall Street compensation has been a boon for consulting businesses, which can charge hundreds of thousands of dollars a year for advice. Goldman Sachs has used the consultancy Semler Brossy; Morgan Stanley’s directors have relied on the Hay Group; and Bank of America’s board has used the services of Frederic W. Cook Company, according to public filings by those banks. All three consulting companies, and all three banks, declined to comment.

Some consultants are hired by banks merely to provide data on industry compensation trends, or to rubber-stamp the decisions of the banks’ internal compensation teams, while others are more directly involved in setting pay levels.

“Directors don’t want to be embarrassed in the media by a compensation decision,” said Yale D. Tauber, a compensation consultant who works with the board of Citigroup, among other clients. “They’re the guardians of investors’ capital.”

Article source: http://feeds.nytimes.com/click.phdo?i=c6222400f7df20922df72fc09fe0966c

DealBook: F.D.I.C. Proposes Rule to Tie Banks to Mortgage Risk

Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation.Andrew Harrer/Bloomberg News Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation.

8:17 p.m. | Updated

Federal regulators, seeking to outlaw a leading cause of the financial crisis, voted on Tuesday to propose new rules that would prohibit Wall Street banks from selling packages of risky mortgages to investors without holding onto a stake in the loans.

The proposed rule would require banks to retain at least 5 percent of the credit risk on securities backed by mortgages on all but the safest loans, leaving the banks with “skin in the game.” So-called qualified residential mortgages, conservative loans that meet strict underwriting criteria, are eligible for an exemption.

Months of contentious debate, most of it focused on the definition of qualified residential mortgage, led up to the vote. Some banks lobbied hard to broaden the definition, but without much luck. Banks did win leeway for choosing how to retain the risk.

The Federal Deposit Insurance Corporation’s board voted unanimously in favor of the proposal on Tuesday, opening it up to public comment. The proposal was mandated by the Dodd-Frank Act, the financial regulatory law signed by President Obama in July.

“This will encourage better underwriting by assuring that originators and securitizers cannot escape the consequences of their own lending practices,” Sheila C. Bair, the F.D.I.C. chairwoman, said at a public hearing on Tuesday.

But for now, the proposal is unlikely to cause much of a shake-up in the mortgage business. It does not apply to securities carrying a government guarantee, which represent more than 90 percent of the market.

The new proposal “pretty much preserves the status quo in the mortgage market,” Jaret Seiberg, an analyst at MF Global’s Washington Research Group, said in a report on Tuesday.

The rules are not yet complete — and industry lobbyists are only getting started. Banks, home builders and other industry groups argue that the new restrictions will cause the private mortgage market to shrink even further, making it harder for consumers to obtain loans.

Ms. Bair says that will not happen. “The intent of this rule-making is not to kill private mortgage securitization — the financial crisis has already done that,” she said.

Still, banks are sure to push for a more flexible definition of qualified residential mortgages.

“I don’t think they’ll go bananas,” said Jason Kravitt, a partner at the law firm Mayer Brown and founder of its securitization practice. “But the industry will have to work very hard indeed to broaden the definition of qualified mortgages.”

Under the proposal, a bank can securitize a loan without retaining a stake if a borrower puts a 20 percent down payment on a home purchase. Some industry insiders complain that 20 percent is excessive.

“By mandating a 20 percent down payment on qualified residential mortgages, the administration and federal regulators are excluding those without huge cash reserves — which constitutes most first-time home buyers and many middle-class households — from a chance to buy a home,” Bob Nielsen, chairman of the National Association of Home Builders, said in a statement.

The proposal also requires borrowers to be current on other loans and to meet an income threshold if a bank wants the exemption. The proposal would not exempt notoriously risky loans, like interest-only mortgages and adjustable-rate mortgages that feature potentially huge interest rate increases.

Regulators reassured lenders that the government was open to tweaking the requirements or scrapping them in favor of an alternative.

But some banks are at odds on the best approach. And Wall Street, Mr. Kravitt said, is unlikely to force an overhaul of the proposal, which does allow banks to have some choices about how they will keep the 5 percent stake.

The proposal was drafted as a joint effort by the F.D.I.C. and several other federal agencies, including the Securities and Exchange Commission and the Department of Housing and Urban Development.

As the lending industry scrutinized the proposal, some securities experts praised the regulators.

“There’s nothing wrong with securitization, but it won’t work if you don’t have an honest assessment of the risk of the loans,” said D. Anthony Plath, an associate professor of finance at the University of North Carolina, Charlotte. “Without skin in the game, you’re playing musical chairs with mortgages.”

Article source: http://feeds.nytimes.com/click.phdo?i=5dce09f09d15f21328d16fea6c5a255f