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August 24, 2007
Mortgage
Lending
name='1'>States Move to Limit Damage from Subprime
Lending
Gov. Michael F. Easley
of
size='3'>North Carolina
size='3'>signed legislation last week that would limit the ability of
mortgage brokers to charge customers above-market rates and prepayment
penalties and would protect subprime borrowers from highly risky
adjustable-rate mortgages, the New York Times reported today.
But amid his call for action was regret that if only officials in his
and other states had acted a couple of years sooner, some of the
mortgage problems that have roiled the financial markets and hurt
homeowners might have been avoided.
w:st='on'>
size='3'>North Carolina
one of about a dozen states that are beginning to make legislative and
regulatory changes to protect people who resort to subprime financing.
However, economists and housing specialists say the actions come too
late to benefit most of those at risk of losing their homes. With
foreclosures expected to rise as adjustable-rate mortgages are reset and
the borrowers face higher monthly payments, economists said the steps
that states like
face='Times New Roman' size='3'>North
Carolina
do more to protect future borrowers than help people already in
trouble.
href='http://www.nytimes.com/2007/08/24/business/24states.html?ref=business&pagewanted=print'>Read
more.
name='2'>Commentary: Congresstional Action Need on Foreclosure and
Taxes
The taxability of
forgiven debt is set to become a pressing issue as more homeowners fall
behind on their mortgages and face foreclosure, according to an
editorial in today’s
size='3'>New York Times. In principle, there
is nothing wrong with taxing defaulted debtors on the part of their
mortgage that goes uncollected. The law rightly provides that when a
borrower fails to repay, the unpaid balance becomes taxable income.
However, problems can arise when lenders misreport forgiven-debt data to
the I.R.S. In general, a lender must report the difference between the
mortgage balance and the house’s fair market value at the time of
foreclosure. Some lenders fail to keep track of recent home appraisals
or the ultimate sales prices of foreclosed properties. Instead, they may
compute the forgiven debt using an interim distress price that’s
slapped on a foreclosed house before it’s resold, resulting in an
erroneous and large amount of tax liability.
href='http://www.nytimes.com/2007/08/24/opinion/24fri2.html?pagewanted=print'>Read
more.
name='3'>Lenders Still Heavily Advertising Risky
Loans
Though reports show that
lenders are tightening their standards in response to a rise in
foreclosures, loan companies continue to heavily advertise no-money-down
and subprime loans on the Internet and in newspapers, the
Washington Post
reported today. 'They offer their products not around
interest rates but among monthly payments, ease of access, among 'you're
more likely to get a yes with us than with others,'” said Allen
Fishbein, director of housing and credit policy at the Consumer
Federation of America. Even though dozens of lenders have shut down
their mortgage operations or laid off employees, many others are trying
to generate interest among potential borrowers even if the companies
ultimately cannot qualify them for loans. 'There's nothing necessarily
wrong about lending money to people with bad credit,' said David
Nahmias,
face='Times New Roman'
size='3'>U.S.
size='3'>attorney for the northern district of Georgia, who has worked
on mortgage fraud cases. 'Our concern is more the independent mortgage
brokers who will try either to trick people into purchasing properties
they really can't afford, solicit those people to lie, let them use
their identity or credit so they can perpetrate mortgage fraud.'
href='http://www.washingtonpost.com/wp-dyn/content/article/2007/08/23/AR2007082302101_pf.html'>Read
more.
name='4'>Countrywide CEO Sees Recession Ahead
Countrywide Financial
Corp Chief Executive Angelo Mozilo said yesterday that the
size='3'>U.S.
downturn is likely to lead the country into recession, but that the
largest
face='Times New Roman'
size='3'>U.S.
size='3'>mortgage lender will survive, Reuters reported yesterday.
Mozilo also said that to promote liquidity, the U.S. Federal Reserve
should cut the rate it charges banks to borrow. Countrywide faced a
credit shortage this month as mortgage defaults rose and capital markets
tightened. On Aug. 16, it announced an unexpected drawdown of an entire
$11.5 billion credit line because it had trouble selling short-term
debt. But on Wednesday, Bank of America Corp said it would invest $2
billion in Countrywide, buying preferred securities convertible into
common stock.
href='http://www.nytimes.com/reuters/business/business-countrywide-interview.html?pagewanted=print'>Read
more.
name='5'>Judge to Rule Soon on Abuse Cases for
w:st='on'>
Diego
size='3'>Diocese
Bankruptcy Judge
Louise DeCarl Adler
said yesterday that she would decide by Monday whether to
allow as many as 42 sex-abuse cases against the Roman Catholic Diocese
of San Diego to go to trial immediately, the Associated Press reported
yesterday. Judge Adler issued a preliminary ruling late Wednesday night
tentatively granting the plaintiffs' request to send the cases to state
court but said she needed to weigh additional issues brought up in oral
arguments before making a final decision. San Diego Superior Court
trials already scheduled for five cases were suspended automatically
when the diocese abruptly filed for bankruptcy in February, the night
before the first trial was slated to begin. Lawyers representing about
150 people who claim they were sexually abused as children by priests
told Adler that reactivating those trials was the only way to force the
diocese into a settlement after fruitless negotiations in court.
The
size='3'>San Diego diocese
has offered about $94 million to settle the claims as part of its
bankruptcy reorganization plan. Plaintiffs' attorneys are seeking a
settlement of about $200 million.
href='http://news.rgj.com/apps/pbcs.dll/article?AID=/20070824/NEWS/708240491'>Read
more.
Private
Equity
name='6'>Study: Private Equity Tax Hike Likely to Cause Firms to
Restructure, Not Generate Additional Tax Revenue
A new study found that
efforts in Congress to more than double taxes on managers of private
equity firms would generate little or no extra revenue to help pay for
middle-class tax cuts that many lawmakers are seeking, the New York
Times reported yesterday. Buyout and venture capital firms would
restructure their affairs to sidestep new tax laws, according to the
study by Michael Knoll, a law professor at the
w:st='on'>
size='3'>University
size='3'>Pennsylvania
At most, lawmakers may generate $3.2 billion a year in added revenue by
raising taxes on the share of profit, or so-called carried interest,
that executives receive as compensation for managing funds, Knoll said
in the study. The study may be the first comprehensive, nonpartisan
mathematical analysis of the fiscal effects of increasing taxes on
carried interest. It signals an uphill battle for lawmakers trying to
raise the money needed to pay for eliminating the alternative minimum
tax for about 23 million mostly middle-income households.
href='http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1007774_code711466.pdf?abstractid=1007774&mirid=1'>Click
here to read the study.
name='7'>Quantitative Hedge Funds Report Big Losses in
August
A number of
'quantitative' hedge funds, which use statistical models to find trading
strategies, reported heavy losses this month as many of them owned the
same stocks and their models told them all to sell at the same time,
driving down the share prices, the
size='3'>Wall Street Journal reported today.
Filings with the Securities and Exchange Commission show that as of the
end of June, quantitative hedge funds often shared large positions in
the same stocks. Renaissance held 1.1 percent of the shares outstanding
of NVR Inc., a
face='Times New Roman' size='3'>Virginia
construction and home-building company. AQR Capital
Management, another quant fund, held 0.9 percent of the company's shares
and quant fund Numeric Investors had a 1.6 percent stake. The overlap in
quant funds' positions wasn't limited to NVR. Satya Pradhuman, director
of research at Cirrus Research, which analyzes small and midsize stocks,
found 148 other companies with market capitalizations between $2 billion
and $10 billion where large quant funds owned 5 percent or more of the
shares outstanding.
href='http://online.wsj.com/article/SB118791448211107333.html?mod=hpp_us_whats_news'>Read
more. (Registration required.)
Air
Conditioner Maker Fedders Files for Chapter 11
Heating and air
conditioning company Fedders Corp. filed for chapter 11 protection for
16 of its North American affiliates on Wednesday,
face='Times New Roman' size='3'>Bankruptcy Law360
size='3'>reported yesterday. As part of its restructuring activities,
Fedders said it is looking to sell off some of the company's business
units. In case the proceeds from a sale of business units are
insufficient, the company said it will also develop a new business plan,
and retain an investment bank to help analyze options. With
approximately 1,600 employees, Fedders produces a wide range of
residential and commercial heating and cooling equipment, air cleaners
and humidifiers. In its bankruptcy petition,
Fedders listed total assets of $186.3 million and total debts of $322
million.
href='http://bankruptcy.law360.com/Secure/ViewArticle.aspx?id=33203'>Read
more. (Registration required.)
name='9'>Trustee Appointed in Sentinel Bankruptcy
Bankruptcy Judge
John H. Squires
granted bankrupt money manager Sentinel Management Group
Inc. its request yesterday to appoint a trustee to oversee the
firm’s operations,
size='3'>Bankruptcy Law360 reported yesterday.
Sentinel had claimed that a trustee was appropriate after recent legal
action from the National Futures Association and the U.S. Securities and
Exchange Commission left the company unable to manage operations on its
own. Sentinel found that its operations were hampered by the
regulator’s document requests. The SEC, which filed suit against
Sentinel on Monday, has targeted the company's explanation of its
downfall. In its complaint, the SEC said Sentinel had actually imploded
because it mishandled investors' money in violation of the 1940
Investment Advisor Act.
href='http://bankruptcy.law360.com/secure/ViewArticle.aspx?Id=33276'>Read
more. (Registration required.)
name='10'>Dura Submits Reorganization Plan
Dura Automotive Systems
Inc. on Wednesday filed its disclosure statement
size='3'>and reorganization plan with the auto parts maker looking to
emerge from chapter 11 by the end of the year,
face='Times New Roman' size='3'>Bankruptcy Law360
size='3'>reported yesterday. Under the terms of the proposed plan,
creditors will be entitled to a full cash payout of debtor-in-possession
claims, administrative expenses, priority claims and second-lien secured
claims. The proposed plan will provide for the conversion of senior
notes and general unsecured claims of more than $75,000 into between
57.4 to 60.7 percent of common stock in the reorganized company, and
cash payment in lieu of an equity distribution of all trade claims and
general unsecured claims of $75,000 or less. There will be no recoveries
for subordinated notes’ and convertible preferred
securities’ claims, nor will the company’s common stock
holders receive any recoveries under the proposed plan.
href='http://bankruptcy.law360.com/Secure/ViewArticle.aspx?id=33189'>Read
more. (Registration required.)
w:st='on'>
name='11'>Krispy Kreme Franchisee Great
Circle
size='3'> Files Bankruptcy
Great Circle Family Foods
LLC, once the largest franchisee of Krispy Kreme Doughnuts Inc. stores,
filed for chapter 11 protection, Bloomberg News reported yesterday. The
struggling franchise listed assets and liabilities of as much as $100
million and as many as 199 creditors. Krispy Kreme, which operates about
400 doughnut shops, has been closing unprofitable stores built during an
aggressive four-year expansion following its 2000 initial stock sale.
The company has been hurt by alleged misconduct by former management,
trends for healthier food and bankruptcies among other franchisees.
Great Circle, founded in 1998 to develop Krispy Kreme stores in
California
stores and manages three others. Five associated legal entities, which
operate under one management, also filed for bankruptcy today. The case
is In re Great Circle
Family Foods LLC, 07-12600, U.S. Bankruptcy
Court, Central District of California (
w:st='on'>
size='3'>Santa Ana
size='3'>).
href='http://quote.bloomberg.com/apps/news?pid=20601087&sid=aO95WQruhtSI'>Read
more.
name='12'>Bank of
w:st='on'>
size='3'>America
size='3'>Courted Countrywide for Years
Bank of America Corp.'s
$2 billion investment to shore up Countrywide Financial Corp. was put
together in a few days, but the companies' courtship of the lender dates
back at least six years, the
size='3'>Wall Street Journal reported today.
The agreement, announced late Wednesday, creates an alliance that
analysts say should allow Countrywide to cope with a credit crunch that
has made it hard for Countrywide and other mortgage lenders to raise
short-term funds. It also puts Bank of America in position to draw on
Countrywide's expertise as the nation's biggest mortgage lender, and to
profit from any rebound in that company's battered stock. Countrywide
has been struggling the past few weeks to persuade investors that it can
weather a crisis of confidence in the credit markets that has left it
and other mortgage lenders scrambling for short-term
funding. Bank of America agreed to acquire
20,000 shares of Countrywide's preferred stock that is convertible to
about 111 million common shares at $18 apiece, for a stake of 16 to 17
percent.
href='http://online.wsj.com/article/SB118791190856307271.html?mod=us_business_whats_news'>Read
more. (Registration required.)
International
name='13'>Bank of
w:st='on'>
size='3'>China
size='3'>Holds $9.7 Billion of Subprime Assets
Bank of China Ltd., the
nation's second-largest bank, said yesterday that it holds almost $9.7
billion of securities backed by U.S. subprime loans, the most of any
Asian company, Bloomberg News reported yesterday. The Beijing-based bank
set aside 1.15 billion yuan ($152 million) against possible losses on
asset-backed securities and collateralized debt obligations backed by
loans to borrowers with poor credit histories, it said in a statement
today. The bank today announced first-half net income of 29.5 billion
yuan. Losses related to subprime loans may damp enthusiasm for Bank of
China on a day when it reported a better-than-expected 51 percent
increase in profit.
href='http://quote.bloomberg.com/apps/news?pid=20601087&sid=awFpzsk0mbz0#'>Read
more.
name='14'>As Foreclosures Mount,
w:st='on'>
size='3'>Britain
size='3'>Acts to Change Mortgage System
While Americans fear an
epidemic of foreclosures brought on by the subprime mortgage meltdown,
Britain is already suffering through one as foreclosures this year have
climbed to an eight-year high, the
size='3'>New York Times reported today.
British lenders have repossessed a record 14,000 properties in 2007, 30
percent more than at the same time last year, according to the Council
of Mortgage Lenders. An additional 125,100 households are behind in
their mortgage payments. Personal
bankruptcies are also at an all-time record, spurred largely by a
crushing increase in mortgage debt. The situation has grown so dire
— as has the threat of desperate homeowners being exploited
— that the newly installed government of Prime Minister Gordon
Brown is attempting to change the fundamentals of the mortgage
system.
href='http://www.nytimes.com/2007/08/24/business/23cnd-home.html?pagewanted=print'>Read
more.
TROUBLED COMPANIES IN THE
NEWS
The business news
articles below are taken from the U.S. Business Journal’s Daily
Summary of Troubled & Fast Growing U.S. Companies which is published
by Bastien Financial Publications.
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37
Amstar Financial Holdings Inc. announced that its Amstar
Mortgage Corp. lending unit reached an agreement to cede control of
about 116 of its branches to The Money Store LP of Texas. Earlier,
Amstar Mortgage, which is based in Houston, Tx., cut most of its
corporate staff in
w:st='on'>Houston
Archer Daniels
Midland Co., the
w:st='on'>Decatur
w:st='on'>Il
consolidated all of its operations into a single unit in a streamlining
move aimed at improving efficiency and lowering expenses. In connection
with the move, ADM offered buyouts to forty of its managers.
Foot Locker
Inc., the Manhattan, N.Y.-based athletic footwear retailer,
reported a second quarter net loss of $18 million, compared to a $14
million profit a year ago, while sales slipped 1.5%–to $1.3
billion. Same-store sales were down more than 7%. The loss, Foot
Locker’s first in six years, stemmed partly from costs related to
clearing out its inventory. The retailer has announced it will shut as
many as 150 stores in the second half of this year.
HSBC
Holdings’ mortgage unit is closing an office in
In. and cutting its payroll by 600 jobs in the move.
Kopin
Corp., a
w:st='on'>Taunton
received another Nasdaq warning saying that the firm could be delisted
because of lateness in filing certain financial reports.
Lehman Brothers
Holdings Inc.,
w:st='on'>Manhattan
is shutting down its
size='3'>BNC Mortgage LLC home-lending unit in
Ca., a move that will result in the loss of 1,200 jobs. Lehman,
which will take a related $52 million charge in its third quarter, said
that the shutdown is necessary to accommodate reduced activity in the
subprime market.
Meridian
Automotive Systems Inc., the
Park, Mi. automotive supplier, is shuttering a
w:st='on'>
w:st='on'>Jack
resulting in the loss of 141 jobs.
Radio One
Inc.,
stations in
w:st='on'>Georgia
Co. Inc. for $3.1 million. Radio lost $7.6 million in its most recent
quarter on revenue of $86 million, including impairment charges of $15.9
million.
Toll Brothers
Inc., the Horsham,
w:st='on'>Pa.
it hasn’t experienced any major difficulties in funding so-called
jumbo mortgages that it has originated. The company said that it
has a new source of funding for such loans if its current sources fall
short. The Toll Brothers announcement seems to suggest to some that
liquidity is returning at least to the luxury-home sector. Toll Brothers
recently reported that its third quarter net income tumbled 85%–to
$26.5 million, including nearly $9 million in goodwill-impairment
charges. Revenue was down 21%–to $1.2 billion, due to more
cancellations and lower buyer traffic.