Real Estate Investing Coaching - Brian Gibbons

Countrywide, ACORN partner for foreclosure prevention - Countrywide Financial Corp. announced today it's partnering with the community group ACORN to engage in workouts with subprime borrowers

-- even if they are already in default, and regardless of whether they have fixed- or adjustable-rate mortgages. Survey suggests  lenders still playing catch up Monday, February 11, 2008 By Matt Carter Inman News

ACORN, or the Association of Community Organizations for Reform Now, held demonstrations outside of Countrywide offices last fall, complaining that its foreclosure prevention initiatives were inadequate.

The collaborative  agreement announced today goes beyond Countrywide's previous efforts, which were primarily targeted at borrowers with adjustable-rate mortgages (ARMs) who were still current on their loans and faced potential payment shock with an interest-rate reset.

The agreement calls for ACORN counselors and Countrywide loan servicers to use a "streamlined approach" to help delinquent subprime borrowers with fixed- or adjustable-rate mortgages stay in their homes, through short-term repayment plans or loan modifications including capitalization of arrearages, interest-rate freezes or rollbacks, and interest-rate reductions.

Borrowers are advised to call Countrywide's Home Retention Division directly at 800-669-6650, or the ACORN Housing call center at 866-672-2676.

The agreement fills gaps in Countrywide's previously announced foreclosure prevention initiatives by providing assistance to borrowers who fell outside of their scope, said ACORN president Maude Hurd in a statement. Hurd said she hoped other mortgage servicers would adopt similar practices.

Saying Countrywide was not doing enough to prevent foreclosures, ACORN last fall organized protests at the lender's offices in major U.S. cities. At the time, Hurd said Countrywide was offering "unaffordable payment plans and short-term modifications that will do nothing but force homeowners to limp along, hoping for a quick recovery in the housing market."

The new agreement calls for Countrywide to take a "systematic approach" to helping subprime ARM borrowers who face interest-rate resets by freezing their rates for five years or helping them refinance into a prime loan.

Michael Gross, managing director of loan administration for Countrywide, said in a statement that the new initiative offers investors in securities backed by the loans "a more attractive alternative than foreclosure."

Countrywide is a founding member of the HOPE NOW coalition of lenders and loan servicers who have agreed to streamline the process of loan modifications. A survey of some of the group's members found they were able to initiate repayment plans or modify the loan terms of two out of three delinquent subprime borrowers in the second half of 2007 (see Inman News story).

But state bank regulators who have formed their own foreclosure prevention group recently released another survey that suggests loan servicers were helping a much smaller percentage of troubled borrowers.

That survey, of 13 of the top 20 subprime loan servicers, concluded that seven in 10 seriously delinquent borrowers were not on track for any loss mitigation in October. Furthermore, 73 percent of successful loss mitigation efforts closed during the month involved borrowers bringing their account current.

"This demonstrates that it is mostly the homeowners themselves that are resolving their financial difficulties," the survey, published by the State Foreclosure Prevention Working Group, concluded. "We are concerned this reliance on homeowners to solve most of these loan problems is not sustainable at its current level."

Of the 205,270 successful loss mitigations tracked by the working group's survey in October, only 4 percent involved a delinquent borrower refinancing. About 10 percent involved lenders drawing up a repayment plan, and 9.3 percent were the result of loan modifications.

The option of refinancing had "nearly evaporated" for borrowers, and while servicers were increasing their use of loan modifications and other long-term solutions, the survey found "a large gap between the number of homeowners needing loss mitigation and the number currently receiving assistance."

Although more than 150,000 delinquent loans were in the process of receiving a loan modification or another long-term accommodation to prevent foreclosure at the end of October, the survey suggested that loss mitigation efforts were being attempted on only 24 percent of seriously delinquent subprime loans.

For its part, Countrywide says it completed more than 81,000 workouts in 2007, and is working with more than 100,000 other borrowers on alternatives to foreclosure -- although that's only a fraction of borrowers who are already -- or may soon become -- delinquent. Of the 9.03 million loans Countrywide was servicing at the end of the 2007, nearly 630,000 were delinquent and about 94,000 were pending foreclosure.

Although most of the loans Countrywide made during the housing boom were not to subprime borrowers, those loans are defaulting at a much higher rate than prime loans. Last month, Countrywide said that about one in three subprime loans in its $1.5 trillion servicing portfolio were delinquent by 30 days or more, compared with less than one in 10 for the portfolio as a whole.

Countrywide lost $704 million in 2007, with a $1.2 billion third-quarter and $422 million fourth-quarter loss more than wiping out profits made in the first half of the year. After the seizure of secondary mortgage markets in August, the Calabasas, Calif.-based lender was forced to scale back its loan originations and concentrate on mortgages eligible for purchase by government-chartered loan financiers Fannie Mae and Freddie Mac.

Bank of America, which provided Countrywide with $2 billion in emergency funding in August, announced in January that it would buy the lender in an all-stock transaction valued at more than $4 billion.

Countrywide had previously announced it was nearing an agreement with ACORN in December on a foreclosure prevention initiative (see Inman  News story).

***

Fired worker sues KB Home, Countrywide

       

Back to Story - Help

By ALEX VEIGA, AP Business WriterWed Jan 30,  8:53 PM ET

A former employee of Countrywide KB Home Loans has filed a lawsuit claiming he was wrongly fired after he reported fraudulent lending practices to superiors and refused to approve mortgages for unqualified applicants.

The federal lawsuit was brought by Mark Zachary, a regional vice president and manager of the Countrywide KB Home Loans division in Houston.

He seeks unspecified compensatory and punitive damages against the joint venture of mortgage lender Countrywide Financial Corp. and builder KB Home.

The lending practices of Countrywide Financial and other mortgage companies have come under scrutiny amid a surge in home loan defaults among borrowers with poor credit histories. On Tuesday, Countrywide reported a fourth-quarter loss of $422 million after losing $1.2 billion in 2007's third quarter.

In the suit, Zachary contended he was given an excellent performance review last February then fired three months later after he blew the whistle on fellow employees and outlined instances in which appraisers were "being strongly encouraged to inflate homes' appraised value by as much as 6 percent."

That resulted in buyers owing more than their home was worth, Zachary claimed in the lawsuit filed Jan. 17 in U.S. District Court in the Southern District of Texas.

Los Angeles-based KB Home declined to comment because the litigation is pending.

Calabasas based Countrywide Financial said in a statement that it investigated each of Zachary's claims and found them to be meritless.

"Countrywide has policies and procedures in place that aim to prevent the type of activities Mr. Zachary is alleging," the company said.

The lender also denied that Zachary was fired due to the allegations he made in his lawsuit.

Among other allegations, Zachary claims Countrywide loan officers would advise applicants who were denied a prime-rate loan about what income level they should report so they could be approved for no-documentation or stated-income subprime loans.

Zachary said he was fired after he failed to meet a quota for new loan approvals because he refused to clear unqualified applicants, according to the complaint.

Countrywide shares rose 16 cents, or 2.5 percent, to $6.47 Wednesday. Shares of KB fell $1, or 3.8 percent, to $25.18.

Advisers brace clients to ride out real estate slump - 50% of advisers surveyed by InvestmentNews don't see improvement until 2009

By Charles Paikert
October 15, 2007

SLIDING PRICES - Hang in there — it may be a long wait.

That's what financial planners, advisers and brokers are telling their clients about the slumping real estate market.

About 50% of the planners and advisers who responded to an InvestmentNews online survey said the downturn wouldn't end until 2009, and more than 55% said they were advising clients interested in buying a residential investment property to sit tight.

"I had a client who was talking about buying a house in Charleston, S.C.," said Mike Roney, vice president of investments in Columbus, Ohio, for St. Petersburg, Fla.-based Raymond James & Associates Inc. "I said, 'If you're thinking of living there one day, that's fine. But if you're buying it solely as an investment property, I would avoid it right now.'"

Nearly 500 financial professionals re-spond-ed to our online survey, conducted Oct. 9-16.

"Until recently, people were buying anything, and real estate became a game of musical chairs," said P.J. DiNuzzo, president of Beaver, Pa.-based DiNuzzo Investment Advisors Inc.

"Well, the music has stopped, and a lot of people don't have a chair," he said. "I'm advising clients to let the dust settle. If they were thinking of buying, look to rent. Discretion is the better part of valor, especially in a market that could still drop 10% to 20%."

Such recommendations were bolstered by recent activity on the Chicago Mercantile Exchange, where traders bet on further declines in housing prices. The traders expect home prices in 10 major cities to drop an average of about 10% from mid-2007 to November 2011, according to an analysis of prices for housing futures done by New York-based Tradition Financial Services Inc.

Concern about the falling real estate market has intensified since recently released reports from the Commerce Department and the Washington-based National Association of Realtors showed sales of new and existing homes falling to seven- and five-year lows, respectively, in August.

REITS TO THE RESCUE?

The slide in prices is hitting home: Nearly 25% of respondents to the survey said they had more than 15 clients who had been adversely affected by the downturn in the housing market.

One 59-year-old wo- man in the San Francisco Bay Area had been planning to retire and live on the proceeds from the sale of real estate properties she bought as an investment, according to her adviser, Steven Blake, a registered investment adviser for Next Financial Group in Foster City, Calif.

But after consulting with him, she abandoned that plan and decided to look for work so she could have an income while she waited for real estate prices to pick up. She may have to wait a while.

"I don't think that's going to happen until next year at the earliest," Mr. Blake said.

Clients who have recently built expensive new homes only to find those homes to be worth less than their mortgages have been particularly hard hit, said one Minneapolis financial planner who participated in the survey.

"They're facing a tough decision — do they try to ride it out, and if so, how long will it take? Or do they foreclose and take the loss?" said the adviser, who asked not to be identified.

"Refinancing is harder now," added Roger Desai, a registered investment adviser for R.S.D. Financial in Columbia, Md. "One of my clients was approved for a no-document loan a couple of months ago, but now the bank is asking for documents and more money down."

And in Punta Gorda, Fla., Bradley Teets, president of KDT Investments, said he helped a client restructure portfolio assets to provide income to help cover housing costs until they could sell their home.

"For [non-individual retirement account] investments, the client didn't realize they could borrow on margin to help make current payments to carry the real estate," Mr. Teets said.

The pain in the residential-home market, however, may be beneficial for a portfolio with a real estate allocation, according to advisers and planners.

To that point, 80% of all respondents to the InvestmentNews survey said they would advise their clients to maintain a target allocation if they had real estate investment trusts in their investment portfolios, and nearly 15% said they would advise clients to increase their REIT allocation.

"I'm a big believer in real estate investment trusts," said Gregory Bersch, vice president of Premier Financial Partners LLC in St. Louis.

"What's bad for the housing sector is probably good news for apartment owners as rentals go up. It might be a good time for that kind of investment."

Bernard Kiely, president of Kiely Capital Management Inc. in Morristown, N.J., said, "My advice has been to stay the course and go back to your desired allocation. We recommend re-balancing at least once a year, and if your allocation is out of whack by 3% or more, to either bring it back or build it up."

While he continues to recommend real estate as an asset class, Sherman Doll, managing partner of Walnut Creek, Calif.-based Capital Performance Advisors LLP, also urges clients to be disciplined.

"They shouldn't be swayed by market timing," he said. "This may be a good time to buy real estate, but I don't believe in overweighting. It's the same as being underweighted. Real estate should be re-balanced to meet target allocations like any other asset class."

Appreciating prices globally have prompted some advisers to advise clients to invest more heavily in international REITs.

"I believe in the fundamental value of REITs as part of a diversified portfolio," said Joel Framson, president of Silver Oak Wealth Advisors LLC in Westwood, Calif. "I would still maintain a core position in REITs, but I would have more in international and less in domestic."

For clients willing — and able — to invest in commercial real estate, the current state of the market may be a buying opportunity, according to Brent McQuiston, vice president for Scottsdale-based WealthTrust Arizona.

He cautioned, however, that investing in commercial properties is "very, very different [from residential homes or REITs]. It's like [comparing] apples and oranges."

Clients willing to make direct private investments through vehicles such as limited partnerships need to have long-term investment horizons and accept less liquidity than with a publicly traded investment, Mr. McQuiston said.

But for those who can, the market has created "lots of opportunities" in office, retail, multifamily and industrial properties, he said.

No matter what kind of real estate decision a client makes, the recent market turmoil underscores the need for careful planning, said Barry Glassman, senior vice president at Cassady & Co. Inc. in McLean, Va.

"We're advising clients to map out a decision tree," he said. "Most people haven't mapped out their various options. The national housing numbers are virtually meaningless. What is meaningful is the impact of a decision in a client's specific circumstance. The key is to map out a plan so that decisions are understood in advance. It's the essence of planning."

Most advisers and planners agree, and many apparently have already laid out solid planning fundamentals for their clients: More than 80% of respondents to the InvestmentNews survey said that in spite of the current real estate slump, they did not have any clients who were being forced to delay their retirement because they were counting on their homes as a major source of retirement income.

Charles Paikert can be reached at cpaikert@crain.com.

US Fed considers new consumer protections for mortgages

AFX News Limited
12.18.07, 9:55 AM ET

WASHINGTON (Thomson Financial) - Consumers would get a host of new protections from unscrupulous or abusive mortgage lenders under a set of consumer-protection rules the Federal Reserve Board is considering today.

Fed Chairman Ben Bernanke said in his opening statement that in recent years, 'as the mortgage market has become more segmented and as risk has been become more dispersed, market discipline has in some cases broken down and the incentives to follow prudent lending practices have at times eroded.'

The new mortgage lending rules the Fed is considering would apply to all mortgage lenders, not just the banks supervised by the Federal Reserve. Governor Randall Kroszner, who has taken the lead on the Fed's response to the subprime crisis said in his statement that 'we strive to protect borrowers from practices that are unfair or deceptive, but to do so without unintentionally causing responsible lending to shrink.'

What the Fed board is actually considering is a set of recommendations from its staff. It is expected to approve the suggested regulations as an official proposed rulemaking today. Then, after a period of public comment, they would be finalized and put into effect early next year.

The recommended rules would establish a new category called 'higher-priced mortgages,' that would include virtually all subprime loans.

For that category, the rules would require lenders to consider the borrower's long-term ability to repay without refinancing to escape interest rate resets and higher payments. Many buyers have been doing that until the crisis hit.

    Lenders would have to verify the borrower's income and assets -- in other words, no more 'liar loans.'

    The lender would have to set up an escrow account for taxes and insurance.

In its research, Kroszner said, the Fed found a pattern of mortgage sales practices that went well beyond the subprime market. 'The troubles in the mortgage market generally arise not from a single practice in isolation but instead from the complex ways that risk factors and underwriting practices can affect each other.

Therefore, the Fed is considering several more regulations that would apply to all mortgages, not just the 'higher-priced' loans.

    Lenders would be prohibited from paying mortgage brokers a premium for higher-rate loans.

    Creditors or mortgage brokers could not coerce or encourage appraisers to inflate home values.

Various misleading or deceptive advertising practices would be banned, including misrepresenting an interest rate as 'fixed'. All advertising would have to describe possible higher interest rate resets as well as promoting the lower, opening 'teaser' rate.

Truth-in-lending rules would mean disclosing all possible fees to mortgage shoppers up front, rather than adding them in late in the sale process.

    Kroszner said 'we have worked carefully to craft clear, bright-line rules with which market participants can easily comply.'

dennis.moore@thomson.com

dem/wash/ra

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America's Hardest-Hit Foreclosure Spots - What could be worse than getting behind on mortgage payments? Owing your lender more than your home is worth.

Matt Woolsey, 01.28.08, 6:20 PM ET

That's what's happening to homeowners across the country, many of whom just a couple of years ago opted for interest-only or adjustable-rate mortgages. For them, just as their loans reset and interest rates rose, home values began to plummet, leaving them with negative equity; this is where their mortgage is greater than the value of their home.

Of course, some homeowners started off walking a shakier tightrope than others. Many subprime borrowers acquired piggyback mortgages, where a second mortgage covered the downpayment, leaving them with negative equity from the beginning. Indeed, 79% more U.S. homes entered foreclosure last year than in 2006, according to data from RealtyTrac, an Irvine, Calif.-based real estate research firm. Congress's Joint Economic Committee estimates that 2 million Americans will lose their home over the next two years, a figure in line with most research firms and rating agencies.

Who is most feeling the crunch? Using data from RealtyTrac, which tracks foreclosures using data from multiple listing services, bank-owned property records, bankruptcy records, loan histories, tax liens and lender information, we evaluated which of the nation's counties had the most negative equity loans, by examining all loans currently in foreclosure.

In Pictures: America's Hardest-Hit Foreclosure Spots

The usual suspects top the list.  Wayne County, Mich., home to Detroit, is first, with 10,622 homes in foreclosure with negative equity, 176 of which have more than $100,000 of negative equity. Clark County, Nev., where you'll find Las Vegas, has 4,278 homes in foreclosure with negative equity and lands at No. 2.

Rounding out the top five are  Maricopa County in Arizona, and  Riverside and  Los Angeles counties in California.

Related Stories Presidential Candidates' Subprime Solutions Best and Worst Cities For Renters

Of course, not all foreclosures in a given area fit the same profile. In Wayne County, for example, almost 40% of all current foreclosures are on properties with negative equity. By contrast, of foreclosures in Miami-Dade, another area hard hit by the subprime crisis, only 11.6% have negative equity.

What does that mean? If an area has a high rate of foreclosures with positive equity, there are two likely explanations. Either it's an area where resetting adjustable-rate mortgages are pushing homeowners into delinquency, or the current appraised value of the home (which is the basis for calculating positive equity) is higher than the home's current market value. For an area such as Miami, where both are true, it's a sign that more foreclosures are looming as ARMs reset and appraised values drop to the level of current market values.

"The market in Detroit has been softer for much longer so there's more potential for price declines," says Kermit Baker, an economist at the Harvard University Joint Center for Housing Studies. "Miami is just starting to get to that point, but the writing is on the wall."

Who is to blame for the subprime crisis? Weigh in. Add your thoughts in the Reader Comments section below.

Another problem is the sometimes illusory nature of positive equity. Consider that often the appraised value upon which the positive equity is based does not take in to account the cost of selling the home; this often includes a broker's fee as well as legal fees and other selling costs. A homeowner with low positive equity may see it erased upon the sale of his house.

Should You Short-Sell?
As prices continue to fall in many markets across the country, some owners are considering a short sale. This is when a borrower negotiates with his lender to sell his home at a loss, taking a bet that home prices will further depreciate and that a short sale will bring in more cash for the lender than would a foreclosure and auction.

In Pictures: Five Tips For Short-Sellers

"If the equity in the house is sufficiently negative, there may be an incentive for the household to engage in a short sale," says Anthony Sander, a finance professor at Arizona State University. "But the more negative the equity, the less likely the lender or servicer will be willing to agree since it increases the loss."

The environment for short-sellers is better, thanks to the Mortgage Forgiveness Debt Relief Act, passed last month, and enacted on Jan. 1, 2008. It eliminates the tax liability for short-sellers. Before this bill, if you sold a $250,000 home for $200,000, the IRS considered the $50,000 gap earned income and taxed it as such. Not so today.

That's good news for underwater mortgage holders in expensive markets, who are more likely to see larger spreads. Los Angeles County, Calif., Kings County N.Y., and Riverside County, Calif., have the highest instances of homeowners, with more than $100,000 in negative equity.

Still, those considering a short sell need to do their homework before taking the plunge.

First, understand the gamble. A short sale will serve as a black spot on your credit history. While urgency is important, understand that there will likely be another home buy in your future, and it'll be more difficult to acquire a loan if you have a history of skipping out early and leaving the lender with the bill.

Then judge the market. Do serious research into your market at the neighborhood level. If the homes all around you are headed to foreclosure and prices are falling like a stone, lenders will be eager to cut their losses and agree to a short sale. If this is the case, speed means everything. If your equity falls too far below zero, lenders are less likely to agree to a short sale because it costs them more.

Presidential Candidates' Subprime Solutions - Forbes MAgazine

   

   

Real Estate - Matt Woolsey, 01.23.08, 6:00 PM ET

As voters across the country prepare to head to the polls this week and next, and with a clear-cut favorite yet to emerge from either party, questions about subprime lending and the solutions to our current housing troubles are coming to the forefront of the nation's primary races.

Republicans Mitt Romney, John McCain and Mike Huckabee are mostly mum, deferring to the so-called "Bush-Paulson" plan, which calls for a short-term freeze in interest rates and giving local governments the authority to refinance dodgy loans.

Former New York City Mayor Rudolph Giuliani, who has focused his campaign's efforts on hard-hit Florida, backs the Fed's plan and is making the case for regulation applied with kid gloves, warning that something similar to what he calls "Sarbanes-Oxley fallout" could affect any subprime-related regulation. On Wall Street, Sarbanes-Oxley, a 2002 law enacted in response to a number of accounting and corporate scandals, is affectionately called "no auditor left behind" since it calls for increased corporate oversight. Giuliani says this regulation amounts to a tax, as it increases the cost of business.

Democrats, by contrast, have proposed individual plans, though many are short on details.

Barack Obama wants to create a "universal mortgage credit," which would give homeowners that earn less than $50,000 a year and don't itemize their tax return, and thus don't receive a mortgage interest deduction, a 10% tax credit. He proposes a government fund to help in-debt homeowners avoid foreclosures, and a federal definition of mortgage fraud, as well as a standardized borrower score that would allow borrowers to easily compare their ability to afford differing mortgage products. He also favors allowing bankruptcy judges to rewrite mortgage payments.

                                    

Related Stories             What $1 Million Buys In Homes Worldwide              10 Ways To Solve The Housing Crisis

Hillary Clinton wants to place a 90-day moratorium on individual foreclosure proceedings and a five-year freeze on interest rates, as well as provide a $5 billion government-sponsored fund to help borrowers with negative equity. She also plans to increase the size of the Federal Housing Authority to help solve the problem.

Like the Bush-Paulson plan, John Edwards wants to freeze interest rates to allow markets to recover and to let homeowners with underwater mortgages avoid immediate foreclosure. He wants to halt foreclosures until lenders provide assistance to borrowers, such as reducing interest rates or converting a loan to a fixed-rate mortgage, or forgiving a part of a loan. Like other Democrats, he wants to increase the tracking and oversight of the lending industry.

What do you think of the candidates' plans? Weigh in. Add your thoughts in the Reader Comments section below.

But do these plans make sense? Are they feasible? Who will pay for them? What will be their long-term consequences?

---

Feasibility
Few would argue against an interest rate freeze as a good first step, but it's unlikely to guide us through the mess on its own. Because of the legal challenges inherent in changing payment schedules, the freezes recommended by the Treasury Department are optional. But even if they were mandatory, they wouldn't be a silver bullet.

"If all you're doing is a temporary freeze and continuing to accumulate debt payments, people are still going to end up underwater," says John Vogel, a professor at Dartmouth's Tuck School of Business. "If someone holds a $240,000 loan on a house now valued at $180,000, does lowering the interest rate make people more likely to pay off the loan? The incentives aren't working in the right direction."

The Federal Reserve of Boston agrees and recently released a study suggesting that falling housing prices are the underlying problem, not just the terms of the mortgages. Each of the candidates has introduced the idea of a relief fund to help borrowers who might still walk away from a frozen mortgage rate because they have negative equity in their home. But only Clinton and Obama have put a number on it. Clinton recommends $5 billion be committed at the federal level; Obama proposes $10 billion. Problem is, it may not be enough to make a difference.

"Early on a handful of states proposed bond issues above $100 million each," says Nicholas Retsinas, director of the Harvard Joint Center for Housing Studies. "But they all backed away from it because it turned out to be a much bigger number. If more than $100 million doesn't work for a state, a federal solution will likely require more than is proposed."

Who Pays
The candidates are vague about where the proposed bailout funding will come from, and no one, especially not Republicans, wants to say the T-word. Edwards, for example, suggests government oversight that allows homeowners to halt foreclosures until their lenders offer to convert the loans to fixed-rate mortgages or capitalize delinquent payments. His government fund, he says, would cover some costs, but clearly those invested in the mortgages would pick up much of the bill.

Anthony Sanders, a finance professor at Arizona State University, says that while this "sounds reasonable," the ones who pay for it are investors such as pension funds that purchase the loan pools.

"Democrats argue that the reforms won't cost taxpayers anything," he says. "But the stark reality is that taxpayers will have less money, thanks to the hits taken by the pension funds."

To avoid advocating high taxes, Obama recommends that part of his relief fund come from penalties on lenders who acted irresponsibly and committed fraud. A decent proposal, to be sure, but if funding requires more, and higher, penalties on lenders, it's easy to imagine regulation that goes too far. Also, fraud proceedings and penalties are sorted out over a long period of time.

What kind of long-term effects are in store?

---

Long-Term Effects
Still, it's clear that government action is required and that, moving forward, more transparency in lending and the packaging of collateralized debt obligations would be a good thing. The level of increased regulation and oversight, however, is already being debated. Giuliani points out that regulation amounts to a tax that could hurt future home buyers by limiting the availability of credit. While a valid point, this doesn't address foreclosures, and Vogel points out it might be best to attack that problem "when the smoke clears."

A very simple proposal of Obama's might have the longest positive effect. One of the huge difficulties in stemming predatory lending is that it's very difficult to define. In many ways, attempts at definitions call to mind Justice Potter Stewart's famous line about pornography: I can't define it, but I know it when I see it.

Subprime mortgages made to lower-income Americans with high fees fit the profile of predatory lending but have also allowed many Americans to buy homes. The majority of subprime borrowers haven't defaulted, although, as Sanders points out, "there is a systematic risk problem."

Obama's plan for a standardized borrower metric--similar to the annual percentage rate--would allow buyers to easily evaluate various mortgage products and the full cost of their loans.

Changing bankruptcy laws is another proposal, one put out by both Edwards and Obama in slightly different forms. As it stands now, one of the few things judges can't alter during bankruptcy proceedings are mortgage payments.

But free-market thinkers worry that over-extending amendments to bankruptcy law and an increase in assignee liability could lead to a future that's truly credit-crunched, as no investor or pension fund would buy necessary securities in riskier mortgages if it made them vulnerable to class-action suits based on lenders' mistakes.

Regardless of what goes into the medicinal subprime cocktail, speed and application strategies will most likely be the most important factors.

"The market has broken down, it will eventually correct itself and it will do untold damage while it corrects itself," says Retsinas. "The problem with rescue efforts is the problem of delivery."

In Depth: Presidential Candidates' Subprime Solutions

Stock markets plunge worldwide

By TOBY ANDERSON, AP Business WriterMon Jan 21, 12:45 PM ET

Stocks fell sharply worldwide Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.

U.S. markets were closed for Martin Luther King Jr. Day, but the downbeat mood from last week's market declines there circled through Europe, Asia and the Americas. Britain's benchmark FTSE-100 slumped 5.5 percent to 5,578.20, France's CAC-40 Index tumbled 6.8 percent to 4,744.15, and Germany's blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

In Asia, India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Canadian stocks fell as well, with the S&P/TSX composite index on the Toronto Stock Exchange down 4 percent in early afternoon trading. In Brazil, stocks plunged 6.9 percent on the main index of Sao Paulo's Bovespa exchange.

Investors dumped shares because they were skeptical that an economic stimulus plan President Bush announced Friday would shore up the economy that has been battered by problems in its housing and credit markets. The plan, which requires approval by Congress, calls for about $145 billion worth of tax relief to encourage consumer spending.

"We've taken our lead from the Asian markets who have not been impressed by the U.S. There's debate if there's going to be a recession in the U.S. I don't think there's much chance of that though," said Richard Hunter an analyst at Hargreaves Lansdown Stockbrokers Ltd. in London.

Concerns about the outlook for the U.S. economy, a major export market for Asian companies, has sent the region's markets sliding in 2008. Just last Wednesday, the Hang Seng index sank 5.4 percent.

"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus (package) is too little, too late and investors feel it won't help the economy recover."

Japan's benchmark Nikkei 225 index slid 3.9 percent to close at 13,325.94 points, its lowest close in more than two years. China's Shanghai Composite index plunged 5.1 percent, partly on worries about mainland Chinese banks' exposure to risky U.S. mortgage investments.

"People are certainly nervous about a potential recession in the U.S. spilling over to the rest of the world," said David Cohen, Director of Asian Economic Forecasting at Action Economics in Singapore.

"Maybe there's still some wariness about politicians are able to come up with a compromise and act sufficiently quickly" on a stimulus package, Cohen said. "I think the impact would be marginal anyway."

Investors took cues from the negative reaction to the president's plan on Wall Street on Friday, when the Dow Jones industrial average slid 0.5 percent to 12,099.30, bringing its loss for the year so far to nearly 9 percent.

Traders also have shrugged off assurances from Federal Reserve Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively — which means a likely big interest rate cut later this month — to help the sagging economy.

Some analysts predict that Asia won't suffer dramatically from a U.S. recession because increased trade and investment within Asia has made the region less reliant on the United States than in the past. Excluding Japan, 43 percent of Asia's exports go to other nations in the region, Lehman Brothers calculates, up from 37 percent in 1995.

But on Monday, uncertainty and pessimism reigned.

In Tokyo trading, exporters got hit hard, partly because of the yen's recent strength against the dollar. Toyota Motor Corp. lost 3.3 percent and Honda Motor Co. sank 3.4 percent.

Shares of Bank of China dropped 6.4 percent in Hong Kong after the South China Morning Post newspaper reported that the bank is expected to announce a "significant write-down" in U.S. subprime mortgage securities, citing unidentified sources. In Shanghai, the bank's stock declined 4.1 percent.

India's the benchmark Sensex index fell 1,353 points, or 7.4 percent — its second-biggest percentage drop ever — to 17,605.35 points. At one point, it was down nearly 11 percent.

The decline hit companies across the board, with power utility Reliance Energy Ltd. falling 16.4 percent. Major software company Tata Consultancy Services Ltd. slid 7.6 percent

"A gloomy U.S. climate has affected the global markets. Even if those markets recover, it will take sometime for the recovery to reach India because today's fall has been so drastic," said Jayant Pai, of the Mumbai investment company IL&FS Ltd.

Still, Pai and others suggested that the declines could lead to a buying opportunity.

"The sell-off today takes us close to the bottom," she said.

Since the start of the year, Japan's Nikkei index has declined 13 percent, while Hong Kong's blue-chip index is down more than 14 percent. Even China's Shanghai index — which nearly doubled last year — has fallen 6.6 percent over the same period and nearly 20 percent from its all-time closing high on Oct. 16.

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Associated Press writers Cassie Biggs in Hong Kong, Ramola Talwar Badam in Mumbai and Elaine Kurtenbach in Shanghai Carl Freire in Tokyo contributed to this report.

Advice for turning around flea-ridden underperformers

   

   

On The Cover/Top Stories

Elizabeth MacDonald 09.03.07

Robert Olstein has plenty of advice for turning around flea-ridden underperformers. Companies won't admit it, but many end up doing what he says.

Now in this summer of market discontent, Robert Olstein is out to find troubled companies that show potential for turning around. And the perennial gadfly has plenty of ideas to help them, if only they would listen. Will they? It appears that plenty of problem-plagued outfits have paid heed to his vociferously expressed nostrums in the past (although many are loath to admit it).

This guy is an accounting sleuth, someone who makes his living delving through footnotes in financial statements and unearthing hidden weaknesses, or strengths. Known for a fiery personality that matches his shock of graying reddish-brown hair, Olstein, 66, makes his opinions very clear in tv appearances and in person. He is eager to call various Wall Street pundits morons, lunatics or stupid.

Olstein, who once had a newsletter called the Quality of Earnings Report, puts little stock in reported net income. Earnings are too easily manipulated, he warns. And he sticks to financial reports in lieu of interviewing management: "Why talk to the ministers of propaganda when I can get the truth from their financials?"

Now a money manager in Purchase, N.Y., the former analyst runs mutual funds that focus on finding companies whose stocks are at least at a 30% discount to their "intrinsic value"--what he calculates companies would be worth to an acquirer. He eyeballs a host of metrics, looking for strong free cash flows (cash from operations minus capital expenditures) and how surplus cash is used--and the possibility of cleaning up their balance sheets. Based on what the numbers tell him, Olstein then looks for how they deploy capital, which often calls for him to make operational judgments. Thus, he urges limping

Home Depot

, whose stock he owns, to halt store expansion and concentrate on what it already has.

The record at his flagship Olstein All Cap Value fund (assets: $1.8 billion) suggests he's onto something. Since its 1995 founding the fund has scored an annual total return of 15.7%, versus 10.2% for the s&p 500 through June 30. You might think twice about about buying All Cap Value in light of its stiff expenses, 2.2% of assets yearly. Buy its stocks instead.

Olstein loves to fire off indignant letters to executives and directors of errant companies in hopes they will follow his wisdom. One case where this worked was

RadioShack

, which he bought into in 2005, attracted by the electronics chain's well-known brand and its big domestic coverage, with 4,470 company-operated stores. Still, he was incensed that it cluttered shelves with low-margin products like radio-controlled toys and TV antennas. Offerings in MP3 players and flat-screen TVs were meager.

Making matters worse, RadioShack's chief executive, David Edmondson, was forced to resign for lying about his academic record. Olstein, who had invested before this fracas appeared, blasted RadioShack's board in a letter for initially supporting Edmondson. "The board, as constituted, is no longer an effective steward of shareholders' interests," he wrote. He took the company to task for sins ranging from declining margins to frittering away its great geographic distribution.

The company finally listened, and its directors then talked with him several times. A new chief executive, retail veteran Julian Day, proceeded to implement many of Olstein's suggestions, and the stock moved up. Since Day's July 2006 arrival the company has returned to the black and amassed an enviable cash kitty. The turnaround is still a work in progress, with second-quarter sales a letdown, which sent the stock skidding again. Nonetheless, RadioShack shares are still higher than when Day started, and Olstein recently sold two-thirds of his stake for a 47% return.

Some of the newer companies on Olstein's makeover list:

Boston Scientific

, which has taken a beating over its acquisition of Guidant, the cardiac device maker, and is now under regulatory scrutiny for product recalls for its pacemakers and defibrillators. Guidant has recalled or issued warnings for 88,000 heart defibrillators--including its leading seller, the Contak Renewal 3--and 200,000 pacemakers. Boston Scientific also has problems with defective stents. And it just took a $360 million aftertax charge to partly back out of another acquisition.

Meanwhile, Boston Scientific's balance sheet has suffered. Thanks to the Guidant buyout, long-term debt quadrupled from 2005 to $8.3 billion. From $3.4 billion, at the end of 2005, retained earnings (the cumulative total of earnings less dividends) have shrunk to $33 million.

But half of Boston Scientific's business has steady growth products, such as feeding tubes and catheters for endoscopic surgery. The market for coronary stents is also stabilizing. The next step, Olstein says, should be to sell some divisions and use the money to lop debt. The company has considered selling part of its endosurgery unit to the public, although it seems to have backed away from the idea lately.

Similarly, Olstein has hopes for clothing retailer

Gap

, another iconic name, which owns Banana Republic and Old Navy stores, with 3,000 locations worldwide. Its stock has lagged in recent years on the heels of earnings disappointments stemming from product fashion misses, overexpansion and willy-nilly markdowns.

Still, Olstein agitated for Gap to hire a well-regarded chief exec with financial and merchandising experience. The company just hired Glenn Murphy, former head of a Canadian drugstore chain. The biggest change Olstein wants to see is for Gap to halt new store openings and close underperformers. That should allow it to bring fashion ideas quickly to market.

There's a lot of value waiting to be unlocked at Gap, Olstein says. Gap has good brands, high insider ownership and $3 per share in net cash. If a private equity group acquired the retailer, he says, fixing it would be easier--adopting his remedies, of course. Then Gap could be sold back to the public at a nice markup.

As for

Hewitt Associates

, the consulting and outsourcing firm, Olstein calls for a reduction in its loser personnel department outsourcing arm. He calculates this line of business penalizes annual earnings per share by 75 cents. The last four quarters totaled $1.30 EPS. Still, he's encouraged that it is a solid free-cash-flow generator.