Residential Capital LLC Looking at Bankruptcy

Story first appeared in Reuters.

Ally Financial Inc, the U.S. government-owned lender, said its mortgage unit could file for bankruptcy, in the company's most direct statement so far about its plans for the struggling business.

The Ally Chief Executive said its Residential Capital LLC unit has been examining options that range from "staying the course" to bankruptcy. The single most important thing that the companby can do to preserve and enhance shareholder value is to distance Ally from the mortgage business.

Sources have told Reuters that bankruptcy was an option for ResCap, possibly as early as mid-May, but the company had previously only hinted at the possibility. An executive said Ally failed a recent test from regulators for soundness in distressed economic situations, known as the Federal Reserve's "stress test," in large part because of liabilities linked to the mortgage business.

Ally, which was originally the lending arm of General Motors, said it learned on Wednesday that Chrysler Group LLC was not renewing a preferred lending agreement that will now expire next year, but executives downplayed the importance of that loss on the call.

Ally is 73.8 percent owned by the U.S. Treasury after a series of bailouts spurred by its ballooning mortgage losses. The lender hoped to repay taxpayers through an initial public stock offering, but last year it shelved those plans as problems mounted at ResCap and market conditions deteriorated during the European debt crisis.

Sources familiar with the matter said Ally is preparing for a possible bankruptcy filing for ResCap, and that there is pressure to get the filing completed before mid-May, when unsecured notes come due for the unit.

On the conference call Ally's finance and corporate planning executive, said the bank would offer a new capital plan to the Federal Reserve in the next 90 days, after failing the stress test.

Ally has two secured lending facilities with ResCap that had $1.2 billion outstanding at the end of 2011, but the parent company feels confident about getting repaid, Brown said. This month, Ally did not renew a $500 million unsecured credit line with ResCap as part of its efforts to reduce mortgage risk, he said.

HIGHER FIRST-QUARTER PROFIT

Even as executives faced ResCap bankruptcy questions, Ally said on Thursday gains linked to the company's ability to collect mortgage payments from borrowers helped boost first-quarter profits.

Ally reported net income of $310 million for the first quarter, compared with $146 million a year earlier.

Operating earnings from its mortgage business were $191 million, up from $43 million. The improvement resulted from higher values for mortgage servicing rights, as well as additional lending tied to government refinancing programs, the company said.

Accounting charges related to those rights to collect mortgage payments can fluctuate wildly. Ally remains committed to diminishing the importance of the mortgage business to the overall company.

Profits from auto finance, which the company said is key to its future, declined 15 percent to $442 million. The company said lease profit margins in North America were down.

Ally said Chrysler's decision to allow a lending relationship to lapse had been expected and did not preclude the two companies from doing business together in the future.

The pact covered retail auto lending made with manufacturer incentives. That accounted for 5 percent of Ally's $9.7 billion of U.S. consumer loans made in the first quarter, compared to 11 percent for other business done with Chrysler dealers, Ally said.

The agreement with Chrysler, which is majority-owned by Italian automaker Fiat SpA, runs through April 2013. Without Chrysler's notice, it would have been automatically extended through April 2014.

In Chrysler's earnings conference call on Thursday, the Chief Executive said that the automaker plans to talk to a number of financial institutions, including Ally, about future lending agreements.

According to debt analyst Kathleen Shanley of Gimme Credit, the end of the Chrysler agreement will not be material to Ally financially but underscores the intense competition the company faces in auto lending.

The government injected more than $17 billion into Ally, then known as GMAC, in 2008 and 2009. Ally said it has since repaid $5.4 billion.

Ally has made progress in shrinking its portfolio of troubled mortgage loans, reducing total assets to $10.5 billion at the end of March from about $19 billion at the end of 2009. But it still faces a slew of lawsuits and other claims related to mortgage-backed securities sold to investors during the housing boom, making it difficult to quantify potential losses.

Ally in the first quarter moved to resolve one of its mortgage-related problems by joining four other lenders in a $25 billion settlement over foreclosure abuses. As part of the pact, Ally paid $110 million in penalties and agreed to provide $200 million in loan modifications to struggling borrowers. Ally took a $270 million charge for the settlement in the fourth quarter.


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Housing Market Still in Limbo

Story first appeared in The Wall Street Journal.

Nearly six years after home prices started falling, more U.S. housing markets appear to be nearing a new phase: a prolonged bottom.

Hitting a bottom, of course, isn't the same as a full-fledged recovery, which is still years off for many housing markets—as well as for millions of people who purchased homes or took cash out during the bubble.

The good news is that housing construction and home sales appear to have hit a floor. Home builders cut back heavily in the past four years and began construction on just 434,000 single-family homes last year, the lowest level on record. Research firm Zelman & Associates estimates builders will start construction on 540,000 homes this year, a 24% increase.

New-home sales during the first quarter posted double-digit gains from the previous-year period. A rebound here is likely simply because the market for new-home construction has been starved.

Sales of previously owned homes, meanwhile, are up 32% from their low point of mid-2010, when sales plunged following the expiration of home-buyer tax credits.

That leaves prices as the last measure that hasn't yet stopped falling. But there are signs of progress on that front, too, as the pace of declines is slowing.

In February, home prices fell by 2% from their level of a year earlier, according to CoreLogic Inc., a real-estate-data firm. But after excluding foreclosures and other distressed sales, prices were down by just 0.8%, the smallest year-over-year decline since May 2010.

The problem, of course, is that foreclosures are still a very high share of sales in many of the hardest-hit markets.

One of the biggest headwinds today is the "shadow inventory" of potential foreclosures. Banks owned about 450,000 properties at the end of March, but there were an additional two million loans in some stage of foreclosure and around 1.7 million more where mortgage payments hadn't been made in more than 90 days.

Housing economists are debating whether that shadow inventory will spoil any housing recovery. It won't prevent a recovery, but it could drag it out over several years.

Housing is getting a lift from reduced supply and stronger demand. Mortgage-interest rates at near-record lows and prices at their 2002 levels have made homes more affordable than at any point in the past decade. The number of homes for sale has fallen over the past year. A top complaint of some real-estate agents today is that there aren't enough homes to show potential buyers.

The shadow inventory is not going to result in the double dip that people always talk about. There is still evidence of a burgeoning appetite for housing from investors, who are scooping up homes that can be converted to rentals, and six years of pent-up demand from traditional buyers who feel better about their financial prospects.

While the foreclosure overhang is serious, some economists say there is a less-noticed tailwind that could balance things out: the sharp decline in new construction over the past four years. A lot of the people who talk about 'shadow inventory' don't talk about how slow the overall housing stock has been growing.

There's more that will keep home prices from rising, once they do hit bottom. First, many Americans don't have the required down payment or can't qualify for a mortgage. Banks are making borrowers jump through more hoops in order to produce loans that can't be subjected to a costly "buy-back" demand from Fannie Mae, Freddie Mac or other investors if the loan defaults. That is keeping credit very tight.

More than one-third of all homeowners have less than 25% equity, including 15% that are underwater, meaning their homes are worth less than what they owe.

Second, inventory declines may be less of a sign of health than they would suggest and instead reflect one of the structural problems holding back housing: Sellers are frozen, either unwilling or unable to sell at current values. Markets above the entry level, where demand from investors and first-time buyers isn't as strong, face a particularly steep climb because of that equity hole.

For-sale inventories may also be lean because banks sharply decelerated the foreclosure process over the past 18 months after courts found that they were routinely passing off forged paperwork to take back homes. If prices are stabilizing because of that temporary drop in foreclosures, some recent gains will prove artificial. Ultimately, because that shadow inventory is concentrated in certain markets, price drops also will be concentrated there.

Markets that are more quickly absorbing the stock of foreclosures amid an improving economy, such as Phoenix, and in those where the overhang wasn't as severe, such as Denver and Washington, D.C., have probably hit bottom. Others face a longer haul, particularly in overbuilt cities such as Atlanta and Las Vegas.

Many cities in Florida and the Northeast, where banks have been unable to satisfy court-administered foreclosure processes, have a glut of foreclosures that has yet to be digested.

A housing "recovery" has already had false starts. Two years ago, government stimulus gave a short-lived boost, and today, cheap mortgages and foreclosure delays could be doing the same.

There is plenty that can still go wrong—especially a sudden rise in mortgages rates or slowdown in job growth—and a lot that needs to go right for housing to recover. But there are more signs than there were a year ago that housing isn't getting worse, and that it may slowly be getting better.


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Solar Panels Spark A Debate

Story first appeared in the Detroit News.

The government wants you to install solar panels at your house, and will even give you a tax break to do it. But your neighbors? Maybe not.

It's a lesson homeowners discovered when their homeowners association north of Atlanta denied their request to install solar panels on their roof. Neighborhood officials said the panels would look out of place and might lower home values in a community that regulates details as fine as the coloring of roof tiles, the planting of trees and the storage of trash cans.

Homeowners associations around the country have banned or severely restricted the installation of solar panels, and the solar industry has pushed back to halt the practice. A recent attempt in Georgia to expand the right to go solar had support from environmentalists and some Republican lawmakers concerned about private property rights but it succumbed to opposition from developers and real estate agents.

Roughly two dozen states now forbid or limit homeowners associations or local governments from banning solar panels, according to a database run by North Carolina State University. Similar disputes have prompted lawsuits in Nebraska and California.

Leaders of the Vickery Lake Homeowners Association in Cumming say the dispute is about architecture and aesthetics, not the merits of solar power. Homeowners automatically accept the community rules when they purchase a home there.

These debates are likely to keep flaring as more people install solar energy systems because the equipment is getting cheaper and governments subsidize the cost. Taxpayers can now deduct 30 percent of the cost of installing solar panels from their federal tax bill, this includes Solar Carports. Other states and local governments offer additional incentives.

The fight is not new. Some solar rights laws date back to the 1970s, while other states have added similar measures more recently.

California's law, first enacted in 1978, prevents homeowners associations from forcing residents to make aesthetic changes to photovoltaic panels that raise the cost by more than $2,000 or decrease a system's efficiency more than 20 percent.

Most disputes in California are worked out privately, but a few have reached the court system. Last year, a California appellate court upheld a decision forcing a couple to remove solar panels that were installed in their yard without the approval of their homeowners association. They were allowed to keep other panels on their roof.

An attorney for the homeowners association said neighborhood leaders were concerned the ground-level panels were not set back far enough from the street, were inadequately protected from damage and might cause erosion.

Texas adopted a law last year preventing homeowners associations from totally blocking solar panels. The law makes clear that residents can install them on roofs or in fenced-in yards or patios, subject to some limits.

In Georgia, the fight between the homeowners and their homeowners association started in 2010. The rules required that the homeowner seek permission to build solar panels.

He proposed installing 30 panels on two areas parallel to the slope of his roof. People could have seen sections of the three-by-five-feet panels as they walked or drove along the street. The homeowners association rejected that request and three others.

Board member of the homeowners association said that to win approval, the panels would probably need to be out of view, perhaps mounted in a backyard and obscured by a fence — though fences too are subject to association approval.

Lawmakers in Georgia tried to resolve the problem with legislation giving homeowners associations the rest of the year to decide whether to ban solar panels. Any neighborhood that did not set a ban by next year would be unable to stop a homeowner from installing solar panels in the future.

There were limits. Homeowners associations could restrict the panels to roofs or fenced-in backyards and patios. They could require that panels be installed parallel to the slope of a roof and ban any backyard solar equipment that rose higher than the surrounding fence.

Even in states that give homeowners the right to install solar panels, homeowners associations still ban them.

Neighborhood leaders in a Salem, Ore., subdivision rejected a homeowner's request to install solar panels on his roof because their rules banned the equipment. He successfully argued that a 1979 solar rights law made that ban illegal, and he and a neighbor helped the association draft guidelines governing the installation of solar panels.

His panels were installed and started producing power in 2010, though he said that he nearly abandoned the effort in frustration during the year it took to write the new guidelines for his homeowners association.


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Housing Bidding Wars Back

Story first appeared in The Wall Street Journal.

A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back.

From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales, today's are a result of supply shortages.

Competitive bidding in the current environment isn't producing huge price increases or leaving sellers with hefty profits, as occurred during the housing boom. Still, the bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump.

An index that measures the number of contracts signed to purchase previously owned homes rose in March to its highest level in nearly two years, up 12.8% from a year ago and 4.1% from February, the National Association of Realtors reported on Thursday.

The Wall Street Journal's quarterly survey found that the inventory of homes listed for sale declined sharply in all 28 markets tracked. Real-estate agents consider a market balanced when there is a six-month supply of homes for sale. At the height of the housing crisis, in 2008, there was an 11.1-months' supply. In March, there was a 6.3-months' supply.

Inventory levels in many markets were at the lowest level in years. At the current pace of sales, it would take just 1.5 months to sell all the homes listed in Sacramento, Calif., and 2.4 months to sell all the homes listed in Phoenix. San Francisco and Washington, D.C., each have 3.4 months of supply, while Miami has 4.1 months of supply. Other markets have plenty of homes. Chicago, for example, has 9.4 months of supply, while New York's Long Island has 16.1 months of supply. Even in those markets, the number of houses for sale is edging down.

Nearly 83% of offers that agents have made on behalf of clients in the San Francisco Bay area this year and 71% in Southern California have had competing bids. Agents represented a buyer that made the winning bid on a Gaithersburg, Md., home earlier this month after agreeing to adopt the dog of the seller, who was relocating and looking to find a new home for "Buddy," a white toy poodle.

Inventories are declining for a number of reasons. Some sellers, unwilling to accept prices that are still down from their peak by one-third, are taking their homes off the market in anticipation of higher prices down the road. Meanwhile, investors have been outmaneuvering consumers for the best properties, often making cash offers that are quickly accepted by sellers.

In addition, some economists say that inventory levels are being held artificially low because Fannie Mae, Freddie Mac and the nation's biggest banks have been slow to list for sale hundreds of thousands of foreclosed homes they currently own. The lenders slowed down foreclosure sales and repossessions after record-keeping abuses surfaced 18 months ago. Banks and other mortgage investors owned nearly 450,000 foreclosed properties at the end of March, and another two million mortgages were in some stage of foreclosure.

Inventories could rise, putting more pressure on prices, if the banks and other lenders step up their efforts to sell their properties. Real-estate agents say they aren't concerned.

The declining inventory of older homes is spurring sales of new homes. New home sales are up 16% so far this year, compared with a year ago, while inventories of new homes fell in March to their lowest level since record keeping began in 1963.

Meritage Homes Corp., a builder based in Scottsdale, Ariz., reported Thursday a 36% increase in orders for the quarter ending in March versus the previous-year period.

Even though bidding wars are pushing prices higher, many homes are still selling for prices far lower than a few years ago. Increased demand is entirely affordability driven, which says that there will be strong resistance to price increases by buyers.

Rents are rising at a time when mortgage rates have fallen to very low levels. The result is that the monthly mortgage payment on a median-priced home is lower than any time since the 1990s. Freddie Mac reported on Thursday that mortgage rates fell to 3.88% for the average 30-year fixed rate mortgage, near its lowest recorded level.

Housing markets face other headwinds. More than 11 million homeowners owe more than their home is worth. It is a big reason that the "trade-up" market has been stalled. These homeowners can't sell their current homes, let alone come up with the down payment for their next home.

Mortgage-lending standards remain tough. Real-estate agents say an unusually high share of deals are falling apart because homes won't appraise at the price that buyers have agreed to pay sellers.

Still, borrowers with stable jobs are looking to make deals.


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Construction Giant Cheating Clients

Story first appeared in The Wall Street Journal.

Construction giant Lend Lease has admitted to systematically cheating clients out of millions of dollars in an overbilling scheme, including fraudulent fees for work on Grand Central Terminal, Citi Field and the U.S. District Court in Brooklyn.

As part of the largest construction settlement in New York history, the Australian company's American division, Lend Lease (U.S.) Construction, formerly Bovis Lend Lease, agreed to pay a fine of $40.5 million, as well as up to $16 million in restitution to its victims. New York Real Estate Lawyers and Construction Lawyers are outraged at the extent of the damage caused by Lend Lease.

The former head of the company's New York office, also pleaded guilty to conspiracy to commit mail and wire fraud and was released on bail. He faces up to 20 years in prison.

Lend Lease also admitted to making false claims under programs for minority and women-controlled businesses in order to win contracts.

The overbilling scheme saw Lend Lease pay foremen one or two hours extra each day for work that was never done, passing on the expenses to clients without their knowledge, according to court documents. The company also padded its billings by paying foremen for sick days, holidays and vacation time in violation of its labor agreements.

The overpayments benefited a group of 40 to 60 foremen, all of whom are members of Local 79, a building-trades union. The investigation analyzed thousands of time sheets over a 10-year period dating back to 1999, when Bovis was purchased by Lend Lease.

The company engaged in the overbilling on every project over years, defrauding clients of $19 million.

There was one exception: The National September 11 Memorial and Museum, on which Lend Lease is the project manager, was not affected by the fraud.

Lend Lease said in a statement the company had fully and extensively cooperated with the investigations since 2009.

The company stated that they accept responsibility for what happened in the past and have agreed to continue to make restitution to the affected clients. They are satisfied that the investigation is now resolved and are looking forward to continuing our commitment to projects in New York City.

Private projects identified as victims of the fraud include the Time Warner Center, the American Natural History Museum, and two hospitals, according to law-enforcement officials.

Government projects were also affected, including the U.S. Post Office and Bankruptcy Court in Brooklyn, the New York Mets' new stadium in Queens, and Grand Central Terminal.

Lend Lease was responsible for the demolition of the former Deutsche Bank building, which was damaged in the Sept. 11, 2001, terrorist attacks. Investigators determined that the project was affected by phony billings as well.

Two firefighters died in 2007 after they became trapped in the building during demolition. An investigation found that the fire was started by a smoking worker and a water pipe had been cut. A site safety manager working for Lend Lease, was acquitted in 2011 of manslaughter, criminally negligent homicide and reckless endangerment in the case.

In 2008, Lend Lease reached a non-prosecution agreement with the former Manhattan District Attorney in connection with the Deutsche Bank fire. The company could still face charges if the fraud revealed Tuesday violates a good-behavior clause in the earlier agreement. The present Manhattan District Attorney is a party to Tuesday's deal with federal prosecutors, but a spokeswoman declined to comment on whether Lend Lease will be accused of breaking the Deutsche Bank agreement.

Lend Lease also admitted on Tuesday to abusing affirmative-action programs designed to aid small construction firms or companies owned by women and minorities.

In those cases, Lend Lease falsely told authorities that work was being done by two firms that met the selection criteria for affirmative-action contracts. The work was instead done by Lend Lease employees who were transferred to the smaller companies' payrolls.

Both the Dormitory Authority of the State of New York and the New Jersey Schools Development Authority were deceived by the front companies acting in concert with Lend Lease, over projects to build the Bronx Criminal Courthouse and three schools in New Jersey.

As part of its agreement with prosecutors, Lend Lease has removed senior management in charge of its New York operations at the time the frauds were committed.

The former head of the New York branch was uniquely positioned to see both the labor side and the management side of the scheme, and to be aware of the fact the hours that were being billed were not only not being worked but were not being disclosed to the clients. He also took active steps to make sure the clients were not aware of this.


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