Dollars And Nonsense

April 14 (Bloomberg) — the biggest U.S. commercial bankswill take their fight against disclosure of Federal Reservelending in 2008 to the Supreme Court if necessary, the toplawyer for an industry-owned group said.

Continued legal appeals will delay or block the firstpublic look at details of the central bank’s $2 trillion inemergency lending during the 2008 financial crisis. The ClearingHouse Association LLC, a group that includes Bank of AmericaCorp. and JPMorgan Chase & co., joined the Fed in defense of alawsuit brought by Bloomberg LP, the parent company of BloombergNews, seeking release of records related to four Fed lendingprograms.

The U.S. Court of Appeals in Manhattan ruled March 19 thatthe central bank must release the documents. A three-judge panelof the appellate court rejected the Fed’s argument thatdisclosure would stigmatize borrowers and discourage banks fromseeking emergency help.

“Our member banks are very concerned about real-timedisclosure of information that could cause a run on the banks,”said Paul Saltzman, the group’s general counsel, in an interviewyesterday. “We’re not going to let the second Circuit opinionstand without seeking a review.”

Regardless of whether the Fed appeals, the Clearing Housewill take the next legal step by asking for a review by the fullappellate court, Saltzman, 49, said at his office in new York.if the ruling is unfavorable, the bank group will petition theSupreme Court, he said.

The 157-year-old, new York-based Clearing House PaymentsCo., which processes transactions among banks, is owned by its20 members. They include Citigroup inc., Bank of new York MellonCorp., Deutsche Bank AG, HSBC Holdings Plc, PNC FinancialServices Group inc., UBS AG, U.S. Bancorp and Wells Fargo & co.

The Clearing House Association, a lobbying group with thesame members, joined the lawsuit in September 2009, after aninitial ruling against the central bank in federal court inManhattan.

The Fed is “reviewing the decision and considering ouroptions,” said Fed spokesman David Skidmore in Washington. Hehad no comment on Saltzman’s plans.

Attorneys face a May 3 deadline to file their appeals.

“We’ll wait to see the motion papers,” said ThomasGolden, attorney for Bloomberg who is a partner at new York-based Willkie Farr & Gallagher LLP. “The judges’ decision waswell-reasoned, and we doubt further appeals will yield adifferent result.”

Bloomberg sued in November 2008 under the U.S. Freedom ofInformation Act, after the Fed denied access to records of fourFed lending programs and a loan the central bank made inconnection with new York-based JPMorgan Chase’s acquisition ofBear Stearns Cos. in March 2008.

The central bank contends that 231 pages of daily reportssummarizing lending activity, which were prepared by the FederalReserve Bank of new York for the Fed Board of Governors inWashington, aren’t covered by the FOIA. the statute obligesfederal agencies to make government documents available to thepress and the public. the suit doesn’t seek money damages.

The Fed released lists on March 31 of assets it acquired inthe 2008 bailout of Bear Stearns.

The new York Times co., the associated Press and Dow Jones& co., publisher of the Wall Street Journal, are among mediacompanies that have signed up as friends of the court in supportof Bloomberg.

The Fed Board of Governors’ “refusal to disclose the namesof borrowers renders public oversight of its actions impossible– it prevents any assessment of the effectiveness of theBoard’s actions and conceals any collusion, corruption, fraud orabuse that might have occurred,” the news organizations said ina letter to the appeals panel.

The case is Bloomberg LP v. Board of Governors of theFederal Reserve System, 09-04083, U.S. Court of Appeals for theSecond Circuit (New York).

To contact the reporter on this story:Bob Ivry in new York at bivry@bloomberg.net.

Last Updated: April 14, 2010 00:01 EDT

Fed Shouldn't Reveal Loans, Banks Vow to tell High Court

Image : http://www.flickr.com

Discover the “Forgotten” SBA Program Worthy of another Look

Much has been written on these pages in the past two years about a little understood and even less used commercial real estate loan program called the 504. As our lending firm was the first and is still the only nationwide commercial lender to exclusively focus on only this loan product, I’d like to succinctly put to rest some of the more common misconceptions about this terrific loan product. rather than waste anymore ink, let’s get right to issue at hand . . .

The 504 loan is for commercial property owner-users. It is not an investment real estate loan product per se. Borrowers of 504 loans must occupy at least a simple majority (or no less than 51%) of the commercial property within the next year in order to qualify. two operating companies can come together to form an Eligible Passive Concern (EPC) (otherwise known as a Real Estate Holding Company, typically as an LLC or LP), however, to take title to the commercial property. in other words, a 504 loan doesn’t have to be just one small business owner purchasing his commercial property. It could be a physician and an accountant each utilizing 3,000 square feet in a 10,000 square feet office building (at 6,000 total square feet in their LLC, they would occupy 60% and be eligible) for example. Additionally, at least 51% of the total ownership of the Operating company(ies) and EPC must be comprised of U.S. citizens or resident legal aliens (those considered to be Legal Permanent Residents) to qualify.

There are no revenue restrictions or ceilings for 504 loans, but there are three financial eligibility standards unique to them: operating company(ies’) tangible business net worth cannot exceed $7 million; operating company(ies’) net income cannot average more than $2.5 million during the previous two calendar years; and the guarantors/principals’ personal, non-retirement, unencumbered liquid assets cannot exceed the proposed project size. These three criteria usually do not disqualify the typical, privately-held small to mid-sized business owner; only the absolute largest ones get tripped-up on these. last fiscal year (October 1, 2004 to September 30, 2005), nearly 8,000 business owners used 504 loans for over $11 billion in total project costs representing a recent five-year growth rate in the program of 22% year-over-year.

These loans are structured with a conventional mortgage (or first trust-deed) for 50 percent of the total project costs (inclusive of: land and existing building; hard construction/renovation costs; furniture, fixtures and equipment [FF&E]; soft costs; and closing costs) combined with a government-guaranteed bond for 40 percent. The remaining 10 percent is the borrowers’ equity and is usually a third to half as much as traditional lenders require. this lower equity requirement lowers the risk for small business owners as opposed to lowering a lender’s risk profile with more capital injected into the project like with ordinary commercial lending. It also allows the small business owner to better utilize their hard-earned capital, while still getting all of the wealth-creating benefits commercial property ownership provides.

Unlike most commercial bank deals, these loans are meant to finance total project costs as opposed to a percentage of the appraised value or purchase price, whichever is less. The first mortgage (or trust-deed) is typically a fully amortizing, 25-year term at market rates, while the second mortgage (or trust-deed) is a 20-year term, but with the interest rate fixed for the entire time at below-market rates. The second mortgage (trust-deed) on 504 loans is guaranteed by the U.S. Small Business Administration (SBA) and is, contrary to popular belief about SBA loan programs, the cheapest money available for typical small business owners. for most of the past two years, the SBA bond rate hovered near six percent fixed for 20 years, which is an incredible deal for any small to mid-sized business owner and very tough to beat. Not only do these loans provide better cash flow for borrowers (by borrowing at better rates and terms), but they also provide the highest cash-on-cash return available in the commercial-mortgage industry which is a financial metric used by most successful real estate investors. furthermore, these loans are assumable should borrowers decide to sell their property in the future, but a better strategy for most small business owners would be to sell their operating company while keeping their EPC and cashing rent checks long into their retirement.

Why you May Not Know much about These Loans?

Many bankers and brokers don’t like to offer 504′s because they fundamentally are smaller loan amounts for the bank (typically only 50% first mortgages or trust-deeds versus the common 80%), which means a banker has to work that much harder to bring in more assets and the smaller loan amounts also hit the typical commercial loan officer right in the pocketbook. They would rather discuss the SBA’s more notorious 7(a) loan program, which has a well-established, if not egregiously well-paying secondary market (due to Prime-based, floating rate pricing) already in place, when the issue of low down-payment commercial loans comes up. When you couple those two reasons with the fact that these 504 loans take more effort and skill only on the part of the lender, it’s no wonder this loan product has only recently started to catch fire in the marketplace.

So what are Some Common questions about These Loans?

Isn’t there Tons of Paperwork Involved?

This was certainly the case years ago, but it is no more. with the advent of more and more specialty lenders and the recent focus on streamlining the SBA application process, 504 loans are no more involved than most ordinary commercial loans. While the documentation is specific and detailed, most small business owners are ably organized and prepared when the alternative is to pay two to three points higher in interest rates with no documentation or stated income commercial loans.

Aren’t there Extra Fees Involved?

When all closing costs are considered, 504 loans usually average about 25 to 50 basis points more in total loan fees on an average sized transaction. with stronger borrowers (i.e. better debt service coverage ratios [DSCR], higher personal liquidity, and/or better personal credit scores), these fees can usually be negotiated lower. Most small business owners utilizing 504 loans are willing to pay slightly higher fees, however, in order to receive longer-term, below-market fixed interest rates on nearly half of their deal, while receiving the highest cash-on-cash return from their property. this is exactly the reason my business partner and I chose a 504 loan when plenty of alternatives were available to us. That’s right – we actually have a 504 loan and have been in the shoes of 504 loan borrowers, so I have first-hand experience of using the loan product that we offer.

Don’t These Loans take 3 or 4 Months to Close?

This is another old relic of the past regarding these SBA loans. Our quickest 504 loan to date took only 35 days from the first phone call to the closing table, and the commercial appraiser ate-up most of those days while we waited. We’ve done countless others in much less than the typical 60 day commercial real estate contract. if a lender claims they need nearly four months to fund a 504 loan, then perhaps you should look elsewhere. Twenty-four to forty-eight hour pre-approvals and four or five-day commitments are becoming the norm with most specialized SBA lenders.

Aren’t These Loans for Start-ups or Low DSCR Borrowers?

Plenty of 504 loans are approved with start-up borrowers and/or borrowers that don’t have DSCR’s greater than 1.25 times. While it is true that most 504 loans are for more credit-worthy (usually bankable) borrowers, this is not a necessary condition. Frequently, 504 loan borrowers with lots of experience in a given industry, but no actual ownership experience, will have an easier time securing a 504 loan than a conventional bank loan. Projections-based deals and franchised deals are often great candidates for 504 loans when the project involves commercial property. there are other SBA loan programs that may be a better fit for pure start-ups, as 504 loans do not allow for the financing of working capital, but those other SBA loans can often be used in conjunction with SBA 504 loans.

Doesn’t a Borrower have to Pledge their House as Collateral?

Only some lenders require this for 504 loans, and it is increasingly rare. Other SBA loans, on the other hand, must be “fully collateralized” in order to maintain their government-guarantee which is where this generalization comes from. Most 504 loans only secure the commercial property and/or equipment that are financed as part of the 504 loan project.

What if a Borrower has a “Checkered Past”?

Misdemeanors and/or felonies are not in and of themselves, reasons to disqualify someone from getting a 504 loan. there is an added process that often lengthens the time to closing, but the SBA usually approves borrowers with misdemeanors or borrowers with felonies that occurred in the distant past. Defaulting on previous government-guaranteed financing, however, will preclude someone from securing a 504 loan or any other SBA loan. Personal bankruptcies that occurred more than seven years ago usually will not prevent a 504 loan approval, assuming the present-day underwriting variables look promising, but more current bankruptcies are examined subjectively and frequently won’t be approved.

How do you determine who to Call for a 504 Loan?

If you visit a lender’s website to do some due diligence on them, make sure they at least list and/or mention 504 loans, as a means by which you might gauge their competency with these loans. any lender can say they do 504 loans, but it is far better to work with those that can demonstrate their past experiences with the product, as well as detail their commitment to it on a go-forward basis. Like most things delivered better by specialists, it isn’t usually a question of if a regular lender can provide a 504 loan; it is a question of how well they can provide it. choose wisely.

Christopher Hurn is President of Mercantile Commercial Capital (MCC), the nation’s leading 90-percent loan-to-cost commercial loan provider. He was recently named 2006 Banker of the Year by his industry’s only trade association, the Marketing Guru of the Year by Coleman Publishing, and the SBA’s Financial Services Champion of the Year for Florida and for the twelve-state Southeast region.

Visit http://www.504Experts.com or call 1-866-622-4504. Hurn is expanding MCC nationwide with an area-exclusive correspondent-marketing program; visit www.Ace-Report.com

Thanks To : Michigandebtconsolidation.Buvadone.Com Girokonto Stuidenten Immigration http://sandrapointer.ontastech.com/

Tags: Business, Commercial, Owners

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This month, the Federal Home Loan Bank of San Francisco sued a throng of Wall Street companies that sold the agency $5.4 billion in residential mortgage-backed securities during the height of the mortgage melee. The suit, filed March 15 in state court in California, seeks the return of the $5.4 billion as well as broader financial damages.

The case also provides interesting details on what the Federal Home Loan Bank said were misrepresentations made by those companies about the loans underlying the securities it bought.

It is not surprising, given the complexity of the instruments at the heart of this credit crisis, that it will require court battles for us to learn how so many of these loans could have gone so bad. The recent examiner’s report on the Lehman Brothers failure is a fine example of the in-depth investigation required to get to the bottom of this debacle.

The defendants in the Federal Home Loan Bank case were among the biggest sellers of mortgage-backed securities back in the day; among those named are Deutsche Bank; Bear Stearns; Countrywide Securities, a division of Countrywide Financial; Credit Suisse Securities; and Merrill Lynch. The securities at the heart of the lawsuit were sold from mid-2004 into 2008 – a period that certainly encompasses those giddy, anything-goes years in the home loan business.

None of the banks would comment on the litigation.

In the complaint, the Federal Home Loan Bank recites a list of what it calls untrue or misleading statements about the mortgages in 33 securitization trusts it bought. The alleged inaccuracies involve disclosures of the mortgages’ loan-to-value ratios (a measure of a loan’s size compared with the underlying property’s value), as well as the occupancy status of the properties securing the loans.

Finally, the complaint said, the sellers of the securities made inaccurate claims about how closely the loan originators adhered to their underwriting guidelines. For example, the Federal Home Loan Bank asserts that the companies selling these securities failed to disclose that the originators made frequent exceptions to their own standards.

David J. Grais, a partner at Grais & Ellsworth, represents the plaintiff. He said the Federal Home Loan Bank is not alleging that the firms intended to mislead investors. rather, the case is trying to determine if the firms conformed to state laws requiring accurate disclosure to investors.

Time will tell which side will prevail in this suit. But in the meantime, the accusations illustrate a significant unsolved problem with securitization: a lack of transparency regarding the loans that are bundled into mortgage securities. until sunlight shines on these loan pools, the securitization market, a hugely important financing mechanism that augments bank lending, will remain frozen.

After swallowing billions in losses in such securities, investors no longer trust what sellers say is inside them. Investors need detailed information about these loans, and that data needs to be publicly available.

“The goose that lays the golden eggs for Wall Street is in the information gaps created by financial innovation,” said Richard Field, managing director at TYI, which develops transparency, trading and risk management information systems. “Naturally, Wall Street opposes closing these gaps.”

But the elimination of such information gaps is necessary, Field said, if investors are to return to the securitization market and if global regulators can be expected to prevent future crises.

Confidence in the securitization market has been crushed by the credit mess. Only transparency will lure investors back into these securities pools. The sooner that happens, the better.

Mortgage pools need some sunshine

Target Corp. reported Monday that trends in its $7.6 billion credit-card portfolio improved in February, as fewer of its credit-card holders are falling behind on their payments.

Accounts that are 30 or more days late made up 8.57 percent of the company’s receivables in February, compared with 8.9 percent the previous month.

It’s too soon to know whether Target’s credit-card holders overextended themselves during the holiday shopping season. That will become apparent in the next few months.

Retail analysts have said that fewer consumers bought gifts with credit cards this year, both because of their own tighter rein on household budgets and also because companies, including Target, made it harder for them to get credit.

Still, in a sign of how hard its customers have been hit, its annualized net charge-off rate of 15.09 percent is more than double what it was before the recession.

The Minneapolis-based retailer wrote off $97 million in bad credit for the month, in line with what executives projected. Target wrote off about $293 million that quarter, and expected write-offs to continue on that pace in the first quarter.

Target’s tighter credit-card standards, along with fewer consumers using their cards, has resulted in a 13 percent decline in its receivables portfolio. In February, the retailer saw a nearly 11 percent drop in the amount it collected in finance fees, compared with last year.

The retailer’s credit-card operations contributed about 5 percent of pretax profit in 2009.

Analyst Mark Miller of William Blair & co. said Target’s drop in early delinquencies, which signal the potential write-off pool of the future, is outperforming other credit-card issuers he tracks.

Jackie Crosby • 612-673-7335

More Target customers are staying current on credit cards

Canwest News Service

There’s an old saying that death cancels everything but truth. Nice sentiment, although it’s not quite right. Still owe a chunk on your mortgage when you die? your partner, children or estate have to pay it off. That’s why mortgage life insurance is so popular.

Mortgage life insurance guarantees that your remaining mortgage will be paid off in the event of your untimely demise, but it doesn’t come cheap. it can add more than 10% to your current mortgage payment depending on the size of the mortgage and how old you are. That’s not an insignificant sum to get a little peace of mind, and critics point out that the amount paid declines along with your mortgage even though your rates stay the same.

But Gary Mauris, president of Dominion Lending Services, a national brokerage and leasing company based in Vancouver, believes such coverage is critically important. “The expense far outweighs the devastation most families experience with the untimely death of the primary income earner,” says Mauris. “Many families are forced to quickly move, relocate, downsize or solicit assistance from friends and family when a death occurs without proper coverage.”

Coverage is especially important for single parents, says Mauris, because it allows any children to remain in their existing home with the designated caregiver without anyone having to worry about paying the bank.

the question couples have to ask themselves is whether each spouse can carry the mortgage on their own — or long enough to either sell or make other arrangements – if the other one dies or is disabled. if they can’t, mortgage insurance or term life insurance may be a necessary expense.

While mortgage life insurance is often confused with default insurance, the two are quite different. Default insurance pays off the mortgage lender directly if the borrower defaults. Premiums currently range from 0.5% to 2.9%, depending on the size of your downpayment and coverage is usually mandatory if the downpayment is less than 20% of your home’s purchase price.

Mortgage insurance is more expensive, not mandatory and the borrower’s beneficiary or estate gets the money to pay the bank in the event of death or disability.

Premiums are based on age (must be over 18 but under 65) and the amount covered. for example, a 45-year-old with a $300,000 mortgage being paid off with $800 every two weeks would add $40.15 for life insurance and another $24 for full disability coverage to their payments, according to BMO’s mortgage life insurance calculator. That’s $64.15 or 8% more every two weeks – not an insignificant sum.

A 30-year-old with the same mortgage would add $32.96 or about 4% for the same coverage. Insuring a couple is more expensive, but less than double the coverage for a single person.

Mortgage insurance is often applied for at the same time as the mortgage, but it can be added after the fact. Many people just buy it from whoever is backing their mortgage, but consumers should shop around because there are plenty of companies that offer it. by comparison, default insurance is usually bought from either the Canada Mortgage Housing Corp. or a few private companies such as Genworth Financial Canada, AIG United Guaranty.

While most providers offer fairly similar coverage and costs, buying it at the same time as your mortgage from the same bank is simpler and faster, says Craig Mauchan, vice-president at BMO Insurance. As well, “coverage and insurability last for the life of the mortgage at the same premium rate as at application,” says Mauchan.

But consumers should also consider taking out enough term life insurance to cover their mortgages. the advantages of that strategy are that the amount paid out upon death does not decline over time, the plans can be customized to include living expenses and other debts and it may actually be cheaper.

According to insurance shopping service Kanetix, it is less expensive to get a term life insurance policy than the equivalent amount in mortgage life insurance and there is more flexibility for the benefactor to choose how to spend the money.

Either way, always read and understand the fine print. There are plenty of horror stories about people being denied payouts because insurers found a loophole or started rooting through medical history records to find pre- existing conditions or even mere tests that weren’t stated upfront. the last thing you want your beneficiaries to worry about is dealing with an uncooperative bank or insurer.

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Mortgage insurance provides peace of mind at a price

WARREN BUFFETT THREW COLD WATER LAST week on Kraft Foods’ bid for British candy maker Cadbury. but in doing so, he seems to be saying: “Do as I say, not as I do.”

Buffett’s Berkshire Hathaway (ticker: BRKA), Kraft’s largest shareholder, with a 9% stake, voted against a proposal that would let Kraft (KFT) sharply boost its share count to facilitate a higher bid for Cadbury (CBY) — which has rejected Kraft’s original offer. Buffett views Kraft stock as undervalued, and issuing more shares dilutes existing stockholders’ stakes.

Reuters/Carlos Barria

Berkshire Hathaway is issuing $10 billion in stock for Buffett’s “all-in-wager” on America’s future.

Yet Berkshire is issuing $10 billion in shares of its own stock, which some investors view as quite undervalued, for its $34 billion cash-and-stock acquisition of Burlington Northern Sante Fe railroad (BNI), at $100 a share.

This could be a factor keeping Berkshire stock trailing the market, despite a strong 2010 profit outlook, stemming in part from Buffett’s smart high-yield investments in Goldman Sachs (GS), General Electric (GE) and other companies during the financial crisis. Berkshire made over $20 billion in such investments, and the $2 billion in resulting annual income could help lift its operating profits to a record $6,000 per Class A share this year, from an estimated $4,900 in 2009.

Based on earnings and book value, Berkshire fans consider the Class A very attractive now, at around $100,000 a share. after rising just 3% in 2009, the stock, which is way below its late 2007 peak of $149,000, fetches a mere 1.2 times our estimate of the company’s year-end 2009 book value of $84,500 a share — compared with an average 1.65 times in the past decade. the stock rarely has been cheaper, relative to book value, in 15 years.

Says one longtime Berkshire holder: “Buffett appears to be giving up a piece of a very cheap company to buy one that is fairly priced. he is not so happy when his investment companies do the same thing.”

Book value, moreover, understates what Buffett calls Berkshire’s intrinsic value: the discounted value of its cash flow. Buffett won’t estimate this, but has stated that it “significantly” exceeds book value, because auto insurer Geico and some other businesses are worth more than their carrying value on Berkshire’s balance sheet.

Berkshire’s book value could hit $92,000 to $95,000 a share this year if the financial markets stay strong. thus, Berkshire may be trading below its 1.1 times forward book value. why, then, is Buffett willing to issue equity for Burlington? he declined to comment last week, but he likes the railroad business, having accumulated a 22% stake in Burlington prior to the deal. in the past, he’s called the transaction “an all-in wager on the economic future of the United States.” and he’s said that, while he’s not enthusiastic about issuing more shares, the deal is too large to be all-cash and that he wants to give Burlington shareholders a tax-free option. some think the 79-year-old investor wants to trim Berkshire’s $24 billion in cash to cut the pressure on his successor to make investments.

Still, Berkshire is paying a full price for Burlington — 18 times projected 2010 profits for a capital-intensive business. Other major rail companies are valued at about 15 times estimated 2010 earnings. One saving grace: Berkshire is using cash on its balance sheet and an estimated $8 billion in cheap financing for the deal, which uses a 60/40 mix of cash and stock.

The last time Berkshire did a major all-stock deal — the $22 billion purchase of reinsurer Gen Re in 1998 — its shares were at a lofty three times book value, a far cry from the currently low price/book ratio. If Berkshire’s intrinsic value is $125,000, as some bulls assert, Burlington holders will get about $110 a share in value for their stock, which was trading near 99 late last week.

Berkshire watchers say the stock may be depressed from arbitrage activity ahead of the deal’s closing, expected in the current quarter. the stock may get a lift subsequently, because arbitrage pressure will end and because Berkshire’s Class B shares, now trading around $3,320, will become more accessible to individuals after a 50-for-1 split that will drop the price to about $66.

the bottom Line

Berkshire Hathaway looks undervalued, while Burlington Northern seems fully valued. the railroad’s holders are getting a surprisingly better deal than many realize.

It’s possible that Berkshire could be added to the S&P 500 when Burlington is removed, assuming that the deal clears antitrust hurdles. S&P has kept Berkshire out of the index due to concern about the stock’s liquidity. but the Burlington exit may give S&P an opportunity to reconsider. Joining the S&P 500 probably would boost Berkshire’s share price, as index funds, whose holdings mirror the index, buy the stock.

The Burlington deal doesn’t dent the investment case for Berkshire, which has a stock-market value of $155 billion. but it’s surprising to see Buffett parting with a stock that is at its lowest valuation in a decade to buy an asset that seems fairly valued, at best. Maybe the railroad business has better prospects than most people think.

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The Buffett Paradox