Is it Over

Nearly one year after the collapse of Lehman Brothers sent shock waves across the globe, the world is a different place.

The investment bank's messy death intensified the deepest recession since the Great Depression. It helped open the way to a bigger role for government in managing the economy. It cast doubts in the public's mind about the wisdom of relying on markets to correct themselves.

But to a surprising degree, there are some big things that Lehman's demise hasn't changed.

On the regulatory front, Democrats' efforts to rework the rules for finance have bogged down amid infighting between federal regulators, fury among bankers and opposition from many lawmakers who believe that further expanding the government's reach will only create new problems. The all-consuming debate over health care has damped enthusiasm for tackling such complex legislation.

Meanwhile, major U.S. banks have regained their footing, and some of their swagger. Profits are off their lows. Large compensation packages are back. And so is risky business.

Companies are selling exotic financial products similar to those that felled markets and the world economy last fall. And banks' appetite for risk has grown: The nation's top five banks collectively stood to lose more than $1 billion on an average day in the second quarter of 2009 should their trading bets go sour, a record level.

Now, the federal government is locked in a kind of regulatory limbo. U.S. officials say they are committed to preventing history from repeating and have pleaded for fresh powers to do so. But today, they have few new options -- excepting another bailout -- should financial markets seize up again or a large institution totter.

"There's no fundamental change in the way the banks are run or regulated," said Peter J. Solomon, a former Lehman vice chairman who runs an eponymous investment bank in New York. "There's just fewer of them."

Washington officials say they are encouraged that financial markets and the economy appear to be healing after the turmoil. But they also say they feel an urgent need to establish new rules.

"We are under no illusion that things left to their own devices will evolve back to a healthy normal," said White House National Economic Council Director Lawrence Summers in an interview. "The concern...is that a resumption of confidence, which is a good thing, not become a return to hubris, which would be a very bad thing."

Wall Street's rebound presents a mixed bag for consumers. These banks' clients are demonstrating a renewed appetite for risk, a sign that confidence is returning to markets. But credit remains scarce for all but the healthiest borrowers and lenders are imposing new fees and higher interest rates on credit cards and other products. Corporations, too, are likely to have trouble getting credit if they can't access the capital markets or have less-than-pristine debt ratings.

Big Changes

The financial world has been on a wild ride since Sept. 14, 2008, the Sunday that Lehman toppled toward bankruptcy.

The Dow Jones Industrial Average dropped from 11,422 on Sept. 12 to 6,547 on March 9. More than 100 banks have failed. The federal government has pumped more than $200 billion in taxpayer money into banks, and the government temporarily deemed the country's 19 largest as too big to fail in a disorderly fashion.

Some of Wall Street's most notorious practices are unlikely to reappear. Banks say they've permanently abandoned housing risky assets in off-balance-sheet vehicles. Top banks have also stockpiled capital to raise their reserves to the highest levels in recent memory, providing a bigger cushion against market downturns.

Last December, at a black-tie gala in New York's Plaza Hotel, Bank of America Corp. CEO Kenneth Lewis told a crowd of bankers to expect a humbler industry to emerge from the wreckage. "We play a supporting role in the economy, not a leading role. Financial services are a means, not an end," Mr. Lewis said. "There should be some humility in that." The audience applauded.

But the mood has shifted as the Dow strengthened this year. Some of the government's rescue programs are coming to an end, and big banks are paying back funds they borrowed under the Troubled Asset Relief Program, releasing them from Washington's control.

The top five Wall Street firms -- Bank of America, Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley -- made $23.3 billion in profits in the first six months of 2009. That compared with a $6.7 billion loss a year earlier at those banks and the companies they acquired, but it fell short of the $49.8 billion they earned in the first half of 2007, the peak of Wall Street's boom.

These banks' biggest profit engines remain their trading arms, which place short-term wagers -- much of it with the firms' own money -- on stocks, bonds, commodities, currencies and other financial products and markets.

Losses at these arms in recent years crippled firms such as Merrill Lynch & Co. and Citigroup. This year, trading has generated windfalls. In the first half of 2009, the top five firms generated $56 billion in trading revenue, compared with $22 billion in the first half of 2008 for those banks and the firms they acquired, and $58 billion at the boom's peak. On 46 separate days in the second quarter, Goldman's traders pocketed at least $100 million in revenue, while losing money on two days.

Overall, the top firms are assuming greater trading risks than they were a year ago, based on a standard measure called value at risk. The $1 billion that the top five banks stood to lose on an average day in the second quarter represents an 18% increase from a year earlier and is up 75% from the $592 million in the first half of 2007, according to regulatory filings.

Wall Street "has been tiptoeing back into the pond," said Robert Glauber, who ran the National Association of Securities Dealers, Wall Street's self-regulatory arm, until 2006. "They have short memories."

Bankers' Pay

Despite a continuing outcry over bankers' compensation, large pay packages are still the norm at some companies as they lure talent and try to keep competitors from poaching employees.

In the first half of 2009, the top five firms set aside about $61 billion to cover compensation and benefits for their employees. A year earlier, the total for those firms, plus the big banks they subsequently acquired, was about $65 billion; in the first half of 2007, the figure was $77 billion. Per employee, the payouts may exceed previous years since the firms have collectively eliminated tens of thousands of jobs.

Congress earlier this year imposed restrictions on bonus payments. So instead, several companies, including Bank of America and Citigroup, opted to pay larger salaries. J.P. Morgan is planning a similar move.

The trend has caught the attention of world leaders.

"The abatement of financial tensions has led some financial institutions to imagine they can return to the same modes of action prevalent before the crisis," British Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel wrote in a letter to other world leaders on Sept. 3. The three leaders advocate strict new limits on bonus payments.

Regulators have told banks to avoid excessive risk, but haven't been specific, executives say. In fact, federal officials are pushing banks to quickly return to profitability, which Wall Street executives have interpreted as a blessing of vigorous trading.

Goldman and Morgan Stanley were expected to face tougher oversight after they converted last fall into bank holding companies overseen by the Federal Reserve, a move to gain access to government funding and ease concerns about their stability.

Both have dialed back their bets with borrowed money. For every dollar of trading assets on their books, the firms are holding roughly twice as much capital as they did in prior years, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co. This deleveraging makes their businesses safer but less lucrative.

But much remains the same. Both firms were expected to sell power plants and oil rigs they own in their commodities-trading businesses, because commercial banks generally aren't allowed to hold such physical assets. But the banks, after a discussion with the Fed, believe they're allowed to keep them because of a provision in federal law that allows newly formed bank holding companies to retain certain long-held assets, according to people familiar with the matter.

Exotic Vehicles

Perhaps the best indicator of Wall Street's revived exuberance is its continued pursuit of exotic financial engineering. The market for credit derivatives, widely blamed for helping destabilize markets, remains vast.

As of March 31, the notional value of credit derivatives outstanding in the U.S. banking system, a widely used measure, stood at $14.6 trillion, according to the Office of the Comptroller of the Currency. That was down 8% from three months earlier, but still almost triple the $5.5 trillion level of three years ago.

Total return swaps -- a type of derivative that lost favor during the crisis -- are among the instruments regaining popularity, bankers and investors say. Banks use the swaps to provide hedge funds with low-cost financing, which the hedge funds in turn use to purchase leveraged loans or other assets from the bank. The hedge funds pledge the purchased assets as collateral for the loan. During the crisis, the swaps burned banks that seized collateral from hedge funds, only to find that the assets' values had plunged along with the overall markets.

Even collateralized debt obligations, perhaps the biggest money-loser in Wall Street history, are staging a comeback of sorts. Banks are disassembling securities produced by bundling home and commercial mortgages and repackaging them into what market experts describe as mini-CDOs. The goal is to cobble the mortgage-backed securities, seen as high-risk, into instruments more palatable to investors.

Wall Street firms defend their use of the complex products. "A structured or engineered product may be entirely appropriate for the purchaser," said Citigroup spokesman Alex Samuelson, whose bank is among those marketing new types of derivatives to investors. "They're not intrinsically bad."

The Obama administration, financial regulators and many lawmakers believe that more regulation is necessary to protect the U.S. economy from another crisis and to bolster confidence. Certain elements enjoy broad support, such as a proposal to empower government officials to take over and break up large, faltering financial companies whose failure could destabilize the economy. Many policy makers believe that such powers would have allowed the government to mitigate the impact of Lehman's collapse.

Geithner's Push

But many Republicans and some Democrats are skeptical of some elements of the proposal, such as a proposed consumer-protection agency and a plan to expand the Federal Reserve's powers to regulate the country's largest financial institutions.

In Washington on March 26, newly minted Treasury Secretary Timothy Geithner took a rough outline of President Barack Obama's financial rules to Capitol Hill. Administration officials knew it would take months for these proposals to work their way through Congress.

But Mr. Geithner argued that the government urgently needed the power to take over big failing companies. At a congressional hearing, he urged lawmakers to grant that authority "as quickly as you can."

Political support was lukewarm. Rep. Don Manzullo (R., Ill.) called the idea "radical." In June, House Financial Services Committee Chairman Barney Frank (D., Mass.) delayed an immediate vote on the issue, pending a broader review of financial regulation.

In the meantime, regulators have tried to crack down on dozens of banks, slapping hundreds with penalties that restrict their growth and direct them to raise capital. The Fed has centralized more of its supervision of large banks through top officials in Washington.

In July, FDIC Chairman Sheila Bair told a congressional panel that big banks were able to essentially "blackmail" the government because some companies were so large that officials had no way of breaking them apart if they were to falter.

Regulators know it would be difficult to break up Citigroup's complex bank holding company operations, for example, even if they wanted to. Bank of America, J.P. Morgan and Wells Fargo & Co. each controlled more than 10% of the nation's deposits -- once a firm regulatory cap -- because of acquisitions performed during the heat of the financial crisis, sometimes at the government's urging.

The Obama administration is expected to intensify its push for the new regulation regime in the coming weeks.

During a weekend summit, the world's top finance ministers agreed to create higher capital requirements for top global banks once they recover from the financial turmoil, a move that would force them, in effect, to become more conservative.

At the meeting in London, Mr. Geithner implored policy makers to continue fighting for tougher financial regulations in their own countries. "We can't let momentum for reform fade as the crisis recedes," he pleaded.

More Pain Ahead

"In the second half of 2009, home values are going to continue to decline. Foreclosures are going to keep

making up a significant part of the sales, probably about a quarter of all sales in the back half of 2009 nationwide will be foreclosures," says Rascoff, adding, "I think you'll have those homes clear off the market but new foreclosures come on the market right behind them."

Rascoff believes we are a full year away from a true national bottom in housing, but even then, he says, don’t expect to make money fast. "You're not going to see a return to rapid appreciation from a couple of years ago," he opines. "This is probably going to be an L-shaped recovery where home values stay relatively constant once they hit the bottom."

Zillow.com's Chief Operating Officer, Spencer Rascoff, gives his prediction for the housing market:

The Rules are changing

Friday, May 29, 2009

Fannie, Freddie toughening rules for condo buyers to qualify for loans

Business First of Columbus - by Kevin Kemper

A difficult market for condominium sales will become more challenging July 1, and condo developers and sellers aren’t happy about it.

They say Freddie Mac and Fannie Mae are making rule changes that will slow any recovery of the housing market, even if the changes are designed to protect condo purchasers.

“It makes it far more difficult to get people qualified when they adjust the rules and regulations midstream,” said Tré Giller, president of Westerville condo developer Village Communities.

Starting July 1, McLean, Va.-based Freddie Mac will only buy or guarantee mortgages for condos in new developments that are at least 70 percent presold, a change from its 51 percent requirement. It is a move that follows a March 1 rule change by Washington, D.C.-based Fannie Mae that does the same.

614-220-5460 | kkemper@bizjournals.com

Car pooling in NYC

May 28, 2009, 1:04 PM

Taxi Commission Approves Ride-Sharing Experiments

By WILLIAM NEUMAN

The Taxi and Limousine Commission on Thursday approved two experiments that will make riding in some yellow cabs a bit more like car pooling, a commission spokesman said.

The first experiment, which could be implemented this fall, would establish several pick up spots in Manhattan where taxis can take on more than one paying rider at a time during the morning rush hour. The cabs would then drive along a designated corridor and riders, who will pay a flat fee, could disembark at any point along the corridor.

In one example, officials said that riders could get in a cab at Pennsylvania Station and the taxi would take them up Avenue of the Americas as far as 59th Street, for a $4 charge.

Other possible pickup locations were Grand Central Terminal and the Port Authority Bus Terminal, with cabs from both those spots also heading up Avenue of the Americas. Uptown pickup spots, at 72nd Street and Third Avenue and 72nd Street and Eighth Avenue, would send cabs to a corridor along Park Avenue, to 42nd Street.

A second experiment would equip yellow cabs with meters that could keep track of two fares at once, allowing drivers to stop while carrying one passenger to pick up another street hail.

Up to 1,000 cabs — out of a total of 13,237 — could be equipped with the new meters, as well as electronic signs that would let people on the street know what neighborhood the cab was headed to, which would allow people to hail a cab going in their direction.

Riders in those cabs would be rewarded with a discount on a part of the fare — 50 percent off the mileage or wait time charges — for the part of their trip when the cab was carrying a second fare.

That program may not be ready until late this year or next year because new technology must be developed, officials said.

Both experiments will be run as pilot programs, to be evaluated after several months or a year.

The commission also approved a separate experiment for livery cars. That would allow locations like shopping malls to set up dispatch centers for the cars. That program could also begin in the fall.

Despite housing downturn, renters get no relief

Study shows costs are not going down, lowest-income tenants hurt worst

The Associated Press

updated 7:13 p.m. ET, Tues., April 14, 2009

NEW YORK - Jeffrey Myers can't make the rent — by himself. He works part-time at UPS and as a freelance photographer, but the $2,200 he pulls in a month isn't enough to afford an apartment in Orange County, Calif., without a roommate.

"It's hard to meet people who live by themselves. Most people have roommates," said Myers, 31.

For homebuyers, affordability is the best it's been for decades, but for millions of renters coast to coast affordability is still getting worse, according to a study released Tuesday.

As the recession forces more Americans out of work, working-class tenants are bearing the brunt of the cuts. Record foreclosures, at the same time, mean more people are competing for low-cost rentals. And rents in many expensive cities still haven't budged because so few apartments were built in recent years.

A renter earning the nation's minimum wage of $6.55 could not afford a one-bedroom apartment in any county in the nation.

"It's a very dire situation," said Dean Baker, co-director for the Center for Economic and Policy Research. "And it's likely to get worse in the two years ahead," as unemployment climbs and businesses cut worker hours and pay.

A renter needs to earn $17.84 an hour to cover the monthly rent on the average $928 two-bedroom apartment, if they don't want to spend more than 30 percent of their income on housing. But the median hourly wage for an American renter is $14.69, more than $3 short of what's needed, according to the study by the National Low Income Housing Coalition.

"So what's going to happen is a lot, unfortunately, will be out on the streets," said Edward Wolff, an economist at New York University.

The lowest-income renters stand to get hit hardest. The unemployment rate is at a 25-year high of 8.5 percent, but that percentage was even higher — 12.6 percent — for those without a high school degree. Some of the worst layoffs have come from industries that employ low-income workers like construction, retail and manufacturing.

Families displaced by foreclosures are also flooding the apartment market, increasing competition for affordable rentals.

"It's likely they're income-constrained or don't have credit or savings," for costlier apartments, said Rachel Drew, a research analyst at Harvard University's Joint Center for Housing Studies.

And while rents are falling in some individual markets, many cities are showing little signs of softness because demand for apartments remains high. Renters in Seattle, Los Angeles, San Francisco and Portland, Ore., all traditionally strong markets, won't see many rent cuts.

Even renters in beleaguered apartment markets like Phoenix, Atlanta, Las Vegas and Florida likely won't enjoy the deals in their areas because the local economies are reeling.

"Even when rents are dipping slightly, it's because more people are out of work," in that area, Baker said. "Affordability only improves when wages increase in proportion with rent."

The most expensive metropolitan area, according to the report, is Stamford, Conn. A renter must earn $32.75 an hour to afford a two-bedroom apartment there. San Francisco ranked second at $31.88 per hour, followed by Honolulu at $31.37, Westchester County, N.Y., at $30.96 and Santa Cruz, Calif., at $30.58 per hour.

Half of the 10 most costly metros are in California.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

URL: http://www.msnbc.msn.com/id/30216739/

Bring On the Bargains

March 2009

Bring on the bargains

In stalled market, brokers turn to price chops, auctions and low-end sales

By Candace Taylor @ The Real Deal

Six months ago, "luxury" was the all-encompassing buzzword of Manhattan real estate. Buyers happily paid astronomical sums, often sight (and even site) unseen, to live in buildings designed by world-famous architects, with private wine cellars and terrazzo marble as far as the eye could see. In an environment where financing was easy, bonuses were huge and real estate values rose at breathtaking speeds, home prices seemed almost beside the point. 

Now, Manhattan buyers are just as demanding, but their criteria have changed drastically. The new buzzword — and subject of buyers' singlemindedness — is "bargain." With real estate prices falling for the first time in a decade, home seekers are just as intent on price cuts as they once were on floor-to-ceiling windows and Sub-Zero refrigerators. 

"I tell all my sellers, 'You must give them a deal,'" said real estate doyenne Sharon Baum, a senior vice president at the Corcoran Group. "If you're not willing to do that, you shouldn't be in this market." 

The hard part is defining exactly what "a deal" is, at a time when the Standard & Poor's 500 Index has careened to its lowest close since 1997, the number of recipients of unemployment benefits has hit an all-time high of nearly 5 million and the economy seems to be in a general freefall. 

Still, Manhattan real estate agents aren't taking the slump lying down. A number of savvy high-profile brokers have begun fighting back with eyebrow-raising price cuts — in both the stratosphere of the market and the below-$1 million price range. Their new "bargain" listing prices are 20 or 30 percent lower than they would have been just months ago. 

"It's almost at the point where we're calling it Wal-Mart pricing," said Amelia Gewirtz, an executive vice president at Halstead Property. "Right now, closed comps don't even matter." 

In the face of such difficult market conditions, auctions of new condo units — a phenomenon virtually unheard of in New York City for nearly two decades — are likely to gain a toehold in the New York market in the coming months, experts say. 

Co-ops, long overshadowed by higher-priced condos, are also being viewed with increasing desirability. However, by responding to market instability with tougher restrictions, many well-intentioned co-op boards may ironically be harming the value of their own homes. 

The price cutting, meanwhile, has made its way to the rental market as well, and competition between Manhattan landlords is now so intense that for perhaps the first time, better bargains can be found in Manhattan than in many sought-after, outer-borough neighborhoods like Long Island City and Brooklyn Heights. 

Finally, bargain-hunting buyers may have more luck at the lower end of the market, as smaller one-bedrooms and studios outperform the luxury market.

www.cato-at-liberty.org

“Real Regulators” Redux

Posted by Jim Harper

Sunday’s episode of 60 Minutes featured a man named Harry Markopolos who repeatedly reported Bernie Madoff’s scam to the Securities and Exchange Commission. The SEC did not investigate.

Steve Croft: How many times did you send material to the SEC?

Markopolos: May 2000. October 2001. October, November, and December of 2005. Then again, June 2007. And finally, April 2008. So, five separate SEC submissions.

Croft: And in spite of all of the things that you did, it still ended up in disaster.

This is a reminder of what I observed in a recent post here called “A Real Regulator.” CNBC’s Erin Burnett had called for a “real” regulator in the wake of Madoff, to which I replied:

When regulators fail to address a problem ahead of time, when they regulate inefficiently, when they hand their rulemaking organs to the industries they are supposed to oversee, those are all the actions of real regulators. That’s what you get with real regulation.

Markopolos isn’t grinding this same ax against goverment regulation. He says, “. . . [S]elf-regulation on Wall Street doesn’t work.”

So the question is posed: What allowed this to happen?

I don’t think this huge fraud occured in a “self-regulatory” environment. It occured in a regulated environment. Regulators failed to do their jobs, but investors had abandoned their responsibility to look into the people and firms with which they placed their money. They believed that the SEC was taking care of that.

It wasn’t, so nobody was minding the store. Ultimately, the SEC served as a partner to the crime, providing the “confidence” that made a success of Bernie Madoff’s confidence game.

Back to Markopolos:

That’s typically how the SEC does it. They come in after the crime has been committed, they toe-tag the victims, count the bodies, and try to figure out who the crooks were, after the fact, which does none of us any good.

Is “self-regulation” the alternative to government regulation? No. And neither is deregulation. The alternative is market regualtion, where individuals, responsible for the soundness of their purchases and investments, investigate and study who they do business with. Scams like Madoff’s would have shorter duration and do less damage if investors were not under the impression that they were protected by government regulators. Of course, out policymakers are likely to double-down on the bet on governmental regulation, even though we all just witnessed its failure.

The Downside for Condos in a downturn

February 8, 2009

By TERI KARUSH ROGERS

 DURING the recent boom, buyers who coveted condos for their sex appeal could also make the case that condos were a smarter choice than co-ops.

In theory, you didn’t have to prostrate yourself, financially and otherwise, before a board for approval, and you could sell or rent pretty much to whomever you chose, should the need, or whim, arise. You could also put down a lot less money than the 20, 25, or even 50 percent of the purchase price customarily demanded by co-ops.

But as the city’s fortunes buckle and heave, these very differences have potentially rendered some of the city’s condo buildings dangerously exposed to the downturn. Then there is a distinction many condo buyers probably dismissed as a boring legality: If a condo unit is the subject of a foreclosure, the bank gets first dibs on the equity. With real estate prices way off their peak, that means some condo buildings will collect nothing but dust from residents who have also failed to pay their common charges, leaving the remaining owners to shoulder the burden of higher costs or reduced services.

Defaults on common charges began to spike last fall, according to lawyers hired by increasingly jittery boards to file liens (the first step toward foreclosure) against owners in arrears.

“We had maybe four or five before October,” said Adam Leitman Bailey, a Manhattan real estate lawyer, referring to the number of liens his firm filed last year against condo owners in Manhattan and Brooklyn. “It really got going this fall. We had 28 filings here and 17 in Brooklyn. These aren’t in the wealthiest or the poorest buildings. It’s the buildings with the younger 30- or 35-year-old professionals buying a $1 million to $2.5 million apartment, who haven’t been working for 20 or 30 years and are relying on their job to pay for it.” Other lien-filing lawyers said the pace had picked up by at least 10 to 25 percent.

“We’re seeing more, especially in the higher-end buildings where you never heard of foreclosures,” said Adam D. Finkelstein, a real estate lawyer with Kagan Lubic Lepper Lewis Gold & Colbert in Manhattan. Starting last quarter, his firm began filing two or three liens a month, up from two or three per year.

According to figures provided by the online research company PropertyShark.com, condo lien filings more than doubled in Brooklyn during the second half of 2008, and the number of filings in Manhattan zigzagged, with 156 in the first quarter, 186 in the second, 154 in the third and 203 in the fourth.

While the aggregate number of liens is still small (47 in Brooklyn and 67 in Manhattan in December, for example), they may be the first sign of trouble: Liens typically lag months behind defaults in common charge payments, and the bottom didn’t truly fall out of the city’s economy until last fall.

Moreover, barring a swift economic renaissance, lawyers, managing agents and condo boards are bracing for things to worsen significantly this year as job losses mount, severances and savings evaporate, and the new reality sets in.

“The world as we’ve been living in it for the last several years has changed seemingly overnight,” Mr. Finkelstein said. “We’re at the very beginning of this.”

While lawyers are reporting a similar rash of defaults among co-op owners, the risk to the building (and by extension to the defaulter’s neighbors) is slight by comparison. That’s because a co-op building is entitled to its share before the bank can claim anything in the event of foreclosure (the ultimate consequence of nonpayment of maintenance charges).

But in condo foreclosures, the debt priorities are reversed. After a foreclosure process that these days can take two years — during which unpaid common charges proliferate — the building gets its due only after the bank is paid in full. And many condo owners have little equity in their apartments.

“I think it’s safe to say that the value of any apartment purchased in the last two years is less than its purchase price,” said David Kuperberg, the president of Cooper Square Realty, a Manhattan property management company. “The simple calculation is that if you bought an apartment a year ago and financed 90 percent of the purchase price, as many did, and now it’s worth 20 percent less, you’re upside-down as an owner.”

Even worse from the perspective of the condo building, if an apartment owner defaults on common charges but keeps up with mortgage payments, it falls to the building rather than the bank to pursue the foreclosure action.

In that situation, the building must pay the bank the entire balance owed under the mortgage. This prospect is so onerous in a down market that a vast majority of liens for unpaid common charges never advance to the foreclosure stage, said Aaron Shmulewitz, a real estate lawyer at Belkin Burden Wenig & Goldman in Manhattan.

Instead, buildings often sue the owners personally — looking for other assets and garnishing wages, if there are any. But they are effectively powerless to force the expulsion of a deadbeat owner who has no equity. So far, there hasn’t been an uptick in condo foreclosure filings in Manhattan and Brooklyn, according to PropertyShark.com. Instead, owners in financial distress seem more willing to play chicken with the condo board than with the bank, and they appear to have some wiggle room when pressed.

Mr. Bailey said that to date, a majority of defaulting owners had paid up once his firm had filed a lien.

“The owners are hoping we won’t file, and then they find a way to pay, whether they’re borrowing it from relatives or using their last dime,” said Mr. Bailey, who observed that the days of refinancing one’s way out of debt were long gone. “Usually they will pay for their home first, before credit cards and health insurance, because keeping a roof over their heads is their family’s biggest priority.”

But the biggest priority for condo buildings is preserving cash flow. With smaller reserves dictating a more hand-to-mouth lifestyle than that of most co-ops, many have little choice but to assess owners if defaults grow large enough. Never welcome, increased assessments can push additional owners over the brink and into arrears. That is one reason many managing agents and lawyers have begun encouraging condo boards to forsake neighborly empathy and play hardball.

“It used to be three months and then you’d file a lien, and now at the most it’s two months and in many case it’s just one month,” Mr. Shmulewitz said.

Just how long to wait depends on a building’s exposure. “If two people are defaulting in a 200-unit building,” Mr. Finkelstein said, “you can probably exercise some leniency. But it’s more problematic in a 40-unit building, even though it probably won’t kill you. You’ve got to evaluate your risk. If you know someone has a very low mortgage and there’s a lot of equity, you can cut them a little slack, because you can collect if there’s a foreclosure.”

While all condo buildings share vulnerabilities putting them at greater risk than co-ops to defaulting owners, condos of recent vintage appear to be in the greatest peril. For starters, these buildings often have less-experienced boards to navigate a crisis.

“The fear is much more acute in newer buildings than in established condominiums,” said Mr. Kuperberg, the managing agent, whose company has helped about 40 buildings open in the past three years. “There’s a greater likelihood that many apartments were sold for more than they’re worth today. And newer buildings have many people who bought with no-income-verification loans and very relaxed criteria. They also have younger owners who may be less established.”

What’s more, many of these overleveraged, less well established owners are among the several hundred thousand who bought under the 421-a tax abatement program. As the 10-year abatements phase out in steps every two years, the recipients experience increasingly drastic tax increases — which many had been counting on income gains to offset.

Consider the following hypothetical situation, provided by Paul J. Korngold, a real estate lawyer in Manhattan, which he said was consistent with many Manhattan units selling in the $1 million to $2 million range under the 421-a program. What starts out as a $1,214 annual tax bill climbs to $4,613 in the third year, $8,012 in the fifth year, $11,411 in the seventh year and $18,209 when the abatement expires.

But those numbers assume that the city doesn’t raise assessed values or tax rates. Factoring in what Mr. Korngold called a historically conservative 3 percent combined average increase, the unit owner who begins with a $1,214 annual tax bill owes $10,046 in the fifth year and a staggering $32,887 when the abatement expires.

Nearly 300,000 condo units were constructed under the program in the five boroughs from 2002 through 2007, according to the Department of Finance. That figure includes 132,431 units in Manhattan, where about 22,000 owners are in their fourth year of the program, 31,000 are in their fifth or sixth, and 12,000 are in their seventh. Because 421-a purchases were concentrated in a limited number of buildings, they are potentially destabilizing to these buildings in a down economy.

Mr. Kuperberg sketched out a second chain of events, this one pertaining to new buildings with many unsold units. It unfolds like this: Unable to sell half the units in a building, a struggling developer stops paying common charges and defaults on obligations to the lender. Foreclosure by the lender may take years, while individual unit owners effectively wind up paying double their normal common charges. This pushes some owners, themselves struggling, into default. Meanwhile, they are trapped — unable to sell, even at a steep loss, because most mortgage lenders won’t lend to potential buyers in a building where half the units are in default.

“That is a death spiral that could push a building into bankruptcy,” Mr. Kuperberg said. “You basically have a building unable to meet its operating expenses.”

Once the lender succeeds in foreclosing on the developer, there may not be enough money to cover the lender costs and unpaid common charges, forcing the unit owners to permanently swallow the loss. And while the lender must pay carrying costs going forward, it may decide not to throw good money after bad and instead dump the units at auction. The investors who buy them may act against the building’s best interests — renting them out cheaply (introducing a transient population that, among other things, inflicts more wear and tear) and electing boards who defer maintenance and refuse to make improvements.

“We work with a building that’s about 50 percent sold and the developer is gone — they lost all their money and they weren’t able to sell,” said one managing agent who asked to remain anonymous out of concern for the impact on property values in the building. “The lender took over and pays the common charges but doesn’t talk to us and won’t return our calls. If you’re running a building and 50 percent of the ownership doesn’t give you direction, that’s a problem. But I’m really nervous about what happens if the lender sells into the vulture market.”

Even condo boards in fully sold buildings have begun to contemplate the once unthinkable: slashing the very amenities that defined the recent boom.

“The boards are starting to talk about cutting things that might be considered a little excessive,” said Leslie Bogen Winkler, the vice president and director of management at Penmark Realty, a property management firm that has opened 50 condo buildings in the last three and a half years. “They may reduce health-club hours and maybe scale back breakfast. The biggest amenities that are costly are the health club with a swimming pool. It can run up to $200,000 to $400,000, depending on the size, hours open and operator.”

Staff cuts may also be in the offing at some buildings, though union contracts present significant hurdles. Moreover, said J. Brian Peters, the senior managing director of property management for Rose Associates, which owns or manages about 20,000 apartments in New York, “you can cut positions, but at a certain level that’s devaluing the product. And it’s the best product that’s going to survive the easiest in this downturn. We’re really more focused on increasing revenue.”

To that end, condo boards are considering adopting flip taxes, increasing alteration fees and bumping up sublet fees. They are also easing restrictions on the length of sublets so that strapped owners unable to sell their units can more easily rent them out.

Then again, other condos have the luxury of spare cash and might actually come out ahead in the downturn, Mr. Kuperberg said. “The recession can be a good opportunity to buy capital improvements and do upgrades,” he explained, “because contractors don’t have a lot of work and material costs are way down. It’s an opportunity to invest not only in cosmetic things like the lobby but in infrastructure that could reduce operating costs.”

Construction Industry Counts on Oh BAMA

Hopes for 2009 Rest with Economic Stimulus Plan???? 

As the economy slowed last year, the commercial-building unit of Kokosing Construction Co. had $130 million in projects -- a year's worth of revenue for the division -- halted in a three-week stretch. But now, with the prospect of a massive public-spending package by the Obama administration, the Ohio-based contractor is out recruiting workers.

"I told my managers that based on the expectation of a stimulus plan, we should continue interviewing people at colleges, hoping to have work for them by the time they graduate in the spring," says Brian Burgett, president and chief executive of Kokosing, a family-owned firm in Fredericktown, Ohio, that has built highways and industrial facilities for half a century.

After a rough year on the ground and in the stock market, engineering and construction companies are eager for the financial tap to be reopened. As the incoming administration assembles its stimulus plan, many contractors are lobbying hard for projects that will spend money fast rather than focusing on longer-term environmental and smart-growth policy goals.

That is largely because the industry has had steep job losses and foresees more bloodletting this year unless the government applies shock treatment to the economy. In December, construction accounted for 101,000 lost jobs, or nearly one-fifth of all U.S. jobs, capping a year in which the sector shed 632,000 jobs, according to the Bureau of Labor Statistics. Employment in nonresidential and heavy-engineering construction shrank by 7% and 9%, respectively.

The Associated General Contractors of America, the country's largest trade association of nonresidential builders, recently polled its members and found that, barring a change in the business climate, expected layoffs could cut construction employment by 30% this year.

 

If a stimulus package included funding for infrastructure projects, however, some 85% of the survey's respondents said they wouldn't lay off workers and in fact would hire more.

The contractors association has submitted a white paper to the presidential transition team and to Congress that outlines the economic benefits for all types of infrastructure and emphasizes road and bridge work.

Mr. Burgett of Kokosing, who hopes to add fresh college graduates to his payroll, notes that Ohio has identified $1 billion in highway projects that could be started by June. Repairs to a bridge in Cleveland and upgrading an Interstate highway junction, not to mention the state's crumbling sewer lines, mean that "there is just an immense amount of work," he says.

Highlighting the industry's holding pattern, though, Mr. Burgett has put all equipment orders on hold until the stimulus package clarifies the environment. Typically, he orders $35 million of equipment a year.

Stephen Sandherr, chief executive of the contractors association, says there are some $64 billion of approved "shovel ready" transportation projects. The imperative to spend big and spend fast creates a potential clash between some contractors and proponents of environmentally friendly policies that President-elect Barack Obama espouses. "If the objective is to get things out quickly ... it would be counterproductive to add smart-growth requirements to any of these projects," Mr. Sandherr says.

The public-relations battle is on for portraying major infrastructure projects -- whether or not they are part of the stimulus plan -- in the greenest possible light. Shaw Group Inc., a Baton Rouge, La., engineering firm, has attracted investors' interest after firming up a $4 billion nuclear power-plant contract.

"With the importance that is being placed on developing new sources of clean energy, we are anticipating a nuclear renaissance that will assist in reinvigorating the U.S. economy," says Gentry Brann, director of corporate communications at Shaw.

Company executives last week said they also are well positioned for levee, environmental remediation and other potential infrastructure work in a stimulus plan. The company is adding about 1,000 jobs to its 26,000-strong work force.

Contractors point out that their work is often subject to increasingly stringent environmental regulations. "A lot of the stimulus [spending] will go to projects that are green at some level," says J. Doug Pruitt, chairman and chief executive of Sundt Cos. in Tempe, Ariz.

Don Weaver, vice president of Weaver Bailey Contractors Inc. in El Paso, Ark., says, "The highway industry doesn't get a lot of credit, but we're one of the biggest recyclers."

David Goldberg, communications director for Transportation for America, a nonprofit coalition of transit, housing and urban-planning groups, counters that "the real issue is whether we are creating more car dependence and oil dependence." He and other smart-growth advocates agree that road and bridge repair can be an effective use of quick stimulus money.

"We also want to make sure that for the longer term, we give ourselves a minute to think about the infrastructure we need for the post-oil-dependent economy," he says

In addition to highway maintenance, Transportation for America supports funding mass-transit authorities to preserve jobs and investment in rail, bicycle and pedestrian facilities that expand transportation options.

Write to Jonathan Karp at jonathan.karp@wsj.com

Printed in The Wall Street Journal, page C10