Bail-out blues

We have all read about the billions that our government keeps showering on failing banks, mortgage bankers, and GSE's (such as Fannie Mae).

The official explanation is that they "are too big to fail".

And, meanwhile, it's business as usual. Government "discovering" from time to time that CEO's and high-level executives are still pocketing bonuses and buying Lear Jets, while their troubled bank use the bailout money to buy out other more troubled financial companies and banks.

My opinion is that Federal Government should just let them fail, and take over their assets and liabilities, establish a Federal Trust fund, in the manner of the 1980's famous Resolution Trust, to market the thousands (or may be millions) of these properties, mortgages and securities.

It is a big tangle, for sure, and the Feds might not be completely up to the task. But it is surely a better solution than bailing out the predators while they continue to feast on the corpse of a broken economy, eventually giving them the power to recover and come back to haunt us with another bubble of a new kind and invention.

A Federal Trust would try to put some order in the massive amount of borrowers' failures, organize and streamline some restructuring of these loans, decide on eventual foreclosures, short sales, and perhaps even the renting of troubled properties to their present bankrupt owners, avoiding unnecessary foreclosures and evictions.

A few months ago, I wrote about an obnoxious case of aborted short sale. I couldn't understand the outcome, and I thought of stupidity, or fraud. I have read an article today that might clarify this case. It might not be fraud or stupidity. It might just be another case of greed.

Let me tell the story one more time:

I had sent an offer to a listing real estate broker, regarding a property that was offered at $ 239,000. My offer was $ 199,000. The broker indicated that the lending bank had previously refused much larger offers. The last one refused was $ 239,000. But that was months ago, and he thought that, in view of the continuous market deterioration, the bank would probably accept it. I so informed my customer and here started the long wait. After a few months of periodically contacting the listing broker who didn't manage to get a response from the Bank, one day something happened. I called the broker and he was very upset. He told me that the bank has canceled his listing, foreclosed on the property, put it up for sale with another broker, and sold it in a couple of days for $ 155,000, a lot less that what my client had offered. The broker was on the brink of crying in desperation and swore not to get involved in any more short sales.

You can imagine my indignation. That's how I started suspecting fraud or plain stupidity.
I even thought of writing to newspapers and agencies. I informed my Realtor association and they told me to write to my congressmen, which I did. There was, of course, no further news, and it was another buried case.

I am reading now in an article from The Bradenton Herald, on February 2nd, 2009, an article, written by a Florida West Coast attorney, that had enlightened me, or at least provoked some thoughts. Here it is:

Why the lender may not OK your short sale

By Cynthia Ridell

At Riddell Law Group, we focus on real estate matters primarily. Thus most of my time is spent negotiating workouts, shorts sales and defending foreclosures. In the course of my practice we have had many success stories. Many short sale transactions are being approved and closed these days in Sarasota and Manatee counties. In fact NAR (the National Association of Realtors) stated that “Pending home sales activity surged as buyers took advantage of low home prices and affordable interest rates.”

Much of these sales are short sales. But what about the short sale offers presented to lenders that do not get approved. Many of these offers are substantially more than what the lender may see a year from now when they receive a property back in foreclosure.

Thus when a short sale approval does not occur, the question posed by many borrowers, real estate agents and the like is: “Are the lenders just crazy?”

Well, it may not be the soundest fiscal response when a lender rejects a short sale offer at first glance. Or it may just be that the offer is an insufficient offer. But what about the offers that are substantial and can be corroborated through comparables? One must look further for the answer to this question; one must look to the Pooling and Servicing Agreement (PSA) that a particular loan is part of.

As many of us know, most mortgages were sold on the secondary market the “day after” closing and pooled with a group of mortgages held in trust as collateral for the issuance of a mortgage-backed security. Some mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae are known as “pools” themselves. These are the simplest form of mortgage-backed security. These assets were pooled together so that Wall Street could package them as Mortgage Backed Securities. Each of the pools of mortgages are governed by this pooling and servicing agreement.

Most of the agreements have provisions for when an asset goes into default. The servicier, must elect to identify the asset as non performing and place it into the foreclosure process. Once this is done the servicer is now entitled to receive two times its servicing fees. It also opens up a multimillion dollar escrow fund that the servicer can reach to for payment of foreclosure attorney fees upfront. This may very well be the reason that borrowers that attempt a workout via short sale or a deed in lieu of foreclosure never get anywhere but foreclosure.

Another reason that the short sale process for approval stagnates is because of competing interests and private mortgage insurance at the investor level. Many of the securities sold have different terms for different beneficial interests or Tranche as they are known. Some are high risk with possible great returns and others are low risk conservative returns.

Investopedia defines a certain type of Tranche by writing: “A special type of bond class in a sequential pay collateralized mortgage obligation. This class of bond does not receive any interest or principal payments until all other Tranches have been completely paid off. In a Z-tranche, the interest that is not paid is accrued and added to the principal for future interest calculation purposes.”

Moreover, many of the more senior beneficial interests, or Tranches, may have mortgage insurance to look to for payment in the event of foreclosure. Thus for them a workout seems a moot point if they can look to insurance to make them whole. Whereas the lesser beneficial interests may not be able to look to insurance but rather a pro rata share of the proceeds from a sale. Thus within the pool there is conflict among the beneficial interests as to how to proceed: workout or foreclosure?

Cynthia A. Riddell, an attorney whose practice primarily focuses on real estate foreclosure, short sale and bankruptcy issues. is a member of the Florida bar and admitted to practice in the U.S. District Court for the Middle District of Florida. She practices in Sarasota, Manatee, Pinellas and Lee counties.

This clarifies somehow my confusion and perplexity. There might be an explanation for my aborted short sale, other than fraud or stupidity. It's all too familar:

GREED

It also make me start to believe that the way it's being done, this mess will be absolutely impossible to untangle. Can you imagine the thousands of package loans sold to foreign or American investors, hedge funds, and banks, serviced by multiple affiliated or non affiliated businesses, swapped, fractured and resold ad nauseam? Can anything but a centralized organization try to unravel and disentangle this disaster? And can we qualify the late and present actions of the creators of this catastrophe, other than plain, good-old, cold-blooded GREED?

Henry B. Nathan is a Florida Real Estate Professional. Please visit my website: http://www.condo-southflorida.com to search for

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Where does your money go? Part Two

Can this affect our property taxes? Of course!

In many previous posts, I have advocated for a scrutiny of our local governments.

Our property taxes have not decreased substantially, and have even increased sometimes, in spite of the crashing reductions of real estate values.

Our cities and counties tenaciously oppose every move in the sense of controlling their budgets. Property values go down? They raise their “millage” (tax percentage applied on the property value to determine the actual tax.) Tax reduction mandates? No problem, they start charging for previously free services, or increase their present fees.

If they were half as diligent in spending our money, as they are charging us, perhaps we could avoid these excesses.

I read this in the South Florida Business Journal – Nov. 11, 2008:

Wackenhut billings come under scrutiny in Broward

Broward County auditors are raising red flags over how county agencies kept tabs on nearly $6 million in billings by Wackenhut Corp. for security services last year.

In a report to be presented to county commissioners on Wednesday, county auditors noted several problems with the way Wackenhut invoices have been processed.

Specifically, the report noted that county personnel were not reviewing and validating daily entries on security logs that document hours worked by guards. The audit also found that there was no evidence that hours billed were hours actually worked.

County Auditor Evan A. Lukic said the decision to review the county’s oversight of Wackenhut grew out of news reports earlier this year that alleged the Palm Beach Gardens-based security company was overbilling Miami-Dade County for services that were not performed.

“We were concerned about the allegations we heard and whether we were possibly experiencing the same thing here,” he said. “We wanted to look at it from how are we controlling the contract and administering it.”

At this point in the auditing process, Lukic said, there was no evidence Wackenhut engaged in any wrongdoing. However, based on the audit’s findings Lukic said his department will take a closer look at payments to “make sure that guards who we are paying for are present.”

In June 2005, Broward County entered into a three-year agreement with Wackenhut to provide security services. Payments for fiscal years 2005, 2006 and 2007 totaled more than $14.8 million.

In fiscal 2007, Broward County’s Aviation Department topped the list with $2.1 million in security services billings by Wackenhut. The county’s facilities maintenance division paid out $1.66 million to Wackenhut, and the county’s library division was billed nearly $633,000.

The report found that during a one-week period, the libraries division paid 233 hours of overtime for security guards and found no evidence that Wackenhut provided the required written notification and payroll documentation to substantiate the overtime payments.

When queried by the South Florida Business Journal about the auditor's findings, Wackenhut issued the following statement: "We've worked closely with facilities management through the audit department to insure compliance and to improve our processes."

Questions also have been raised about matching guard qualifications to pay rates. In some instances, the audit raised concerns about guards with lesser qualifications billing at a higher rate, resulting in overcharges.

In an Aug. 22 letter, Broward’s director of the facilities maintenance division advised Wackenhut President Drew Levine that he would now require the company to provide documentation that links guards’ qualifications with their job classifications.

In the meantime, Lukic is asking the Broward County Commission to direct the county administrator to come up with procedures to ensure that billings are validated, that the guards’ qualifications match their job descriptions and that overtime charges are substantiated.

In May, a Miami-Dade County audit found that Wackenhut overbilled the county by as much as $6 million over three years for services it did not provide to Miami-Dade Transit, and then falsified records to cover up the over charges.

In its response to that audit, which Wackenhut published on its Web site, the company said it has cooperated with the county’s investigation, but “continues to question the audit methodology.”

Wackenhut said a lawsuit by a former guard, who accused the company of padding its bills, has caused the increased scrutiny.

“It is Wackenhut’s belief that county entities … have been placed under undue pressure and influence by unsubstantiated allegations in this ongoing disputed litigation,” it stated.

Miami-Dade continues to review Wackenhut’s response to determine what actions should be taken, county spokeswoman Suzy Trutie said.

***********

My opinion:

Wackenhut has the audacity of "questioning" the “audit methodology”. Am I understanding this? Of course not. Am I agreeing to this? Of course not. Do I believe the hypocritical “findings” of the Miami-Dade and Broward County authorities three years after the facts? No way. Now that the money has been spent, they "discover" that the services they paid for were not even provided. And we are talking millions of dollars. What about all these people we are paying to take care of our money? Good question.

By the way, how many millions will this Marlins stadium cost the tax payer? Was it 800 million, 700, 900, a billion? God knows. And we will know in a few years, after the bills are paid and we find again ourselves in a big hole. But don’t worry, they will find a way of raising money to cover it all. Your money. And my money too; subsidizing a business, which market value will increase exponentially after they get their free stadium.

Henry B. Nathan is a Florida Realtor at United Realty Group Inc.Visit my website: http://www.condo-southflorida.com/where you can search for Aventura Condos, Florida Condos,