Beginner's guide property investing

Foreclosure

2013-04-05T08:12:00.000-07:00

Foreclosure is a specific legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

Formally, a mortgage lender (mortgagee), or other lien holder, obtains a termination of a mortgage borrower (mortgagor)'s equitable right of redemption, either by court order or by operation of law (after following a specific statutory procedure).

Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that (s)he can successfully repossess the property.

Therefore, through the process of foreclosure, the lender seeks to foreclose (in plain English, immediately terminate) the equitable right of redemption and take both legal and equitable title to the property in fee simple.

Other lien holders can also foreclose the owner's right of redemption for other debts, such as for overdue taxes, unpaid contractors' bills or overdue homeowners' association dues or assessments.

The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust." Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien." If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment. In many states in the United States, items included to calculate the amount of a deficiency judgment include: the loan principal, accrued interest and attorney fees less the amount the lender bid at the foreclosure sale.

Foreclosure Crisis Likely 5 More Years

2013-04-05T08:06:00.000-07:00

Despite a decline in the total number of foreclosures across the U.S., the foreclosure crisis is likely to last another 5 years as it takes lenders that long to formally take back homes tied up in legal squabbles, according to a leading real estate research firm.

Lender Processing Services (LPS) found major differences in foreclosure pipelines in states with judicial and non-judicial foreclosures. Judicial foreclosures require courts to approve foreclosures before property can be formally repossessed by a lender.

“On average pipeline ratios – the rate at which states are currently working through their existing backlog of loans either in foreclosure or serious delinquency are almost twice as high in judicial states than non-judicial states,” said LPS analyst Herb Blecher. “At today’s rate of foreclosure sales, it will take 62 months to clear the inventory in judicial states as compared to 32 months in non-judicial states.

“A few judicial states – New York and New Jersey in particular – have such extreme backlogs that their problem-loan pipelines would take decades to clear if nothing were to change.”

CoreLogic counted 767,000 U.S. foreclosures in 2012. Formal foreclosures were down almost 30% than a year ago at the end of February, according to RealtyTrac, the lowest since 2007. Some 45,000 homes were foreclosed in February, less than half when the foreclosure crisis peaked in March 2010.

Financial incentives provided by the federal government to banks to cooperate with mortgage holders in short sales, growing employment levels, lower home prices and near record low mortgage rates are helping to push the housing recovery forward.

However, delays related to Congress approving a new mortgage financing system to replace or redesign Freddie Mac and Fannie Mae and more than 2-million homes that are in the shadow inventory but not yet formally repossessed trouble the housing market. Seven years after the housing market bubble bust, the foreclosure crisis, still stands as the largest block to a full-fledged economic recovery in housing.

Before the bust, formal foreclosures averaged 21,000 each month from 2000 to 2006. But since the financial crisis hit its peak in the summer of 2008, an estimated 4.3 million foreclosures have taken place across the nation, according to CoreLogic. Although the total number of foreclosures varies between real estate research firms tracking the totals, foreclosures are still the major problem hurting the housing market.

Five states account for almost half of all foreclosures in CoreLogic’s tabulation of foreclosures during 2012. The hardest hit states in the crisis include California, estimated to be more than 100,000 residential properties. Florida was second (98,000), followed by Michigan (74,000), Texas (57,000) and Georgia (49,000).

Fiscal Cliff Deal To Significantly Damage U.S. Economy

2013-01-03T00:40:00.001-08:00

The U.S. economy may have avoided falling off the fiscal cliff into a new recession, but it is still going to tumble down a rocky fiscal escarpment -- and that's not so good either.

House Majority Leader Eric Cantor, R-Va., left, and Speaker of the House John Boehner, R-Ohio, on Tuesday, before the House passed a fiscal cliff deal that will avert a recession but still hurt the economy.

The deal struck between the White House and Republicans to avoid the so-called "fiscal cliff" of tax increases and spending cuts is still going to hurt economic growth, economists said on Wednesday. The only question is how much.

The fiscal cliff deal delays or prevents some of the worst consequences of the cliff from taking place, but not all of them. The hit to growth will be something on the order of 1.3 to 1.75 percent, according to a handful of early estimates. That's meaningful for an economy widely expected to muddle along at 2.3 percent gross domestic product growth next year, according to the latest survey of economists by the Wall Street Journal.

By way of comparison, the Congressional Budget Office, Federal Reserve Chairman Ben Bernanke and other economists had warned that going full Thelma-and-Louise over the fiscal cliff would have triggered a new recession in the early months of 2013. Not everybody agreed, but many economists estimated that the full cliff could cut economic growth by between 2 percent and 4 percent this year.

The deal to avoid the cliff is so unhelpful as to be effectively useless, according to University of California-Berkeley economics professor Brad DeLong. His "back-of-the-envelope" estimate is that the deal shaves 1.75 percent from gross domestic product. According to DeLong, the best deal would have not only avoided any hit to the economy, but also added 1 percent to short-term economic growth. This deal "is only 40% of the way back from the 'austerity bomb' to where we want to be," he wrote on Tuesday.

"That isn't enough to make it worthwhile to make a deal before the new congress," he wrote. Too late!

One of the biggest immediate hits to the economy is the expiration of the payroll tax cut, which for some reason nobody was interested in extending for another year. That alone could trim 0.5 percent from GDP, according to Pantheon Macroeconomic Advisors chief economist Ian Shepherdson -- and that doesn't include any "multiplier" effects from weaker consumer spending. Goldman Sachs economist Jan Hatzius sees the payroll-tax cut shaving 0.6 percent from GDP.

Moody's chief economist Mark Zandi said in an emailed statement that he thinks all of the tax increases taking effect this week, including the payroll-tax increase, will cut 0.75 percent from GDP growth and lead to 600,000 fewer jobs being created this year.

All told, Pantheon economist Shepherdson sees the fiscal cliff deal hurting GDP by 1.5 percent, he told clients in a note on Wednesday.

"That’s still far too much for such a fragile economy but it will not push the U.S. back into recession," he wrote.

Most of the effects should pass by the middle of the year, Shepherdson believes -- assuming there is yet another deal on the debt ceiling, the expiring federal budget and delayed fiscal cliff spending cuts, all of which are supposed to hit by late February or early March. No deal on those, and we could be looking at another financial crisis. (No pressure.)

Cullen Roche, founder of Orcam Financial Group, a financial services firm, wrote on his blog, Pragmatic Capitalism, that he thinks the deal will hit GDP by 1.3 percent. His estimate includes Goldman's payroll tax hit and some of the "multiplier" effects cited by the CBO.

Roche also reminds us that, while consumers and businesses have been spending cautiously since the Great Recession, the federal government has been making up for some of the demand by running high deficits. Contrary to what you might hear on C-SPAN or CNBC, this is a good thing. And that deficit will be ever so slightly smaller this year, offering less support for the economy.

"The bottom line: this could have been much worse," Roche wrote. "Unfortunately, it’s not completely over."

Update: Like he does, Phil Izzo at the WSJ's Real Time Economics blog has a fairly comprehensive roundup of economists' reactions. There seems to be a consensus building around a 1.5 percent hit to GDP from this deal.

Inflation: How Is It Measured?

2013-01-02T02:34:00.003-08:00

Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.

In North America, there are two main price indexes that measure inflation:

Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics.

Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics.

You can think of price indexes as large surveys. Each month, the U.S. Bureau of Labor Statistics contacts thousands of retail stores, service establishments, rental units and doctors' offices to obtain price information on thousands of items used to track and measure price changes in the CPI. They record the prices of about 80,000 items each month, which represent a scientifically selected sample of the prices paid by consumers for the goods and services purchased.

In the long run, the various PPIs and the CPI show a similar rate of inflation. This is not the case in the short run, as PPIs often increase before the CPI. In general, investors follow the CPI more than the PPIs.

Social Security (United States)

2013-01-02T02:06:00.001-08:00

Social Security Poster: old man (Photo credit: Wikipedia)

In the United States, Social Security refers to the Old-Age, Survivors, and Disability Insurance (OASDI) federal program. The original Social Security Act (1935) and the current version of the Act, as amended[3] encompass several social welfare and social insurance programs.

Social Security is primarily funded through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). Tax deposits are formally entrusted to the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, the Federal Hospital Insurance Trust Fund, or the Federal Supplementary Medical Insurance Trust Fund which comprise the Social Security Trust Fund.

By dollars paid, the U.S. Social Security program is the largest government program in the world and the single greatest expenditure in the federal budget, with 20.8% for Social Security, compared to 20.5% for discretionary defense and 20.1% for Medicare/Medicaid. According to economist Martin Feldstein, the combined spending for all social insurance programs in 2003 constituted 37% of government expenditure and 7% of the gross domestic product. Social Security is currently estimated to keep roughly 40 percent of all Americans age 65 or older out of poverty.

The Social Security Administration is headquartered in Woodlawn, Maryland, just to the west of Baltimore.

Proposals to partially privatize Social Security became part of the Social Security debate during the Bill Clinton and George W. Bush presidencies.

It's official: U.S. hits debt ceiling

2013-01-02T01:19:00.001-08:00

It's official: U.S. debt reached its legal borrowing limit Monday, giving Congress about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations.

Congress has about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations.

"I can confirm we will reach the statutory debt limit today, Dec. 31," a Treasury Department official said Monday.

A bipartisan fiscal cliff deal passed by the Senate early Tuesday and awaiting a vote in the House did not address the debt ceiling issue.

As expected, Treasury Secretary Tim Geithner had submitted a letter to Congress on Monday saying he had begun a "debt issuance suspension period" that would last through Feb. 28. That means Treasury will employ a series of "extraordinary measures" so it does not exceed the debt limit, currently set at $16.394 trillion.

Such measures include suspending the reinvestment of federal workers' retirement account contributions in short-term government bonds.

By taking those steps, Treasury can buy about $200 billion of headroom. That normally can cover about two months' worth of borrowing, although continuing uncertainty about tax rates and spending make it hard to determine precisely how long the extraordinary measures will last.

The bottom line: Congress will have to raise the debt ceiling soon -- as soon as late February.

And that sets the stage for yet another fight on Capitol Hill, where some Republican lawmakers view the debt limit as leverage in negotiations with President Obama over spending cuts and reforms to Medicare and Social Security.

Last year, political brinksmanship over the debt limit led to the downgrade of the country's credit rating, roiled stock markets and raised questions about the country's willingness to pay all of its bills on time.

A report in July by the Government Accountability Office said the 2011 debt ceiling fight wasted $1.3 billion in taxpayer money because of the uncertainty it wrought on the complex task of federal borrowing.

First-time buyer

2013-01-01T05:30:00.000-08:00

A first-time buyer (FTB) is a term used in the British and Irish property markets, and in other countries, for a potential house buyer who has not previously owned a property.

A first-time buyer is usually desirable to a seller as they do not have to sell a property, and as such will not involve a housing chain.

There are many factors a first-time buyer may need to consider before purchasing their first property; how much initial cash they will need for stamp duty and any solicitors fees, and if they need to arrange a mortgage how much are they able to afford.

In the United Kingdom and Ireland, home ownership is seen as a natural step in the life cycle and the natural form of property tenure. Ireland has one of the highest proportions of owner-occupiers in the EU at around 80%.

In the UK in the 1980s almost half of all mortgages were taken out by first-time buyers, but this has now declined to only about 15%. In Ireland, FTB's represent 34% of the market.

In recent years the number of new buyers purchasing property has declined, with FTBs being "priced out of the market" by ever increasing house prices.

In the 2007 Scottish parliamentary election the Scottish National Party proposed a £2,000 grant for first-time buyers to help them get onto the property ladder.

Grants have not been forthcoming in the rest of the UK, but in July 2007 Housing Minister Yvette Cooper announced it would be broadening the government's Homebuy Shared Equity scheme to help buyers. "Unless we act now by 2026 first-time buyers will find average house prices are ten times their salary. That could lead to real social inequality and injustice," Cooper told Parliament.

Since then however, first time buyers have regained some momentum in the market, with reports in 2010 citing first-time buying as the most popular of consumer enquiries for a local, whole of market mortgage adviser - accounting for 37% of total enquiries.

First time buying a home? Avoid these 4 pitfalls

2013-01-01T05:20:00.000-08:00

Buying a home and taking out a mortgage is a complex process with major financial and emotional consequences.

All buyers are subject to certain critical mortgage mistakes, including the five biggest ones we recently highlighted.

But there are particular pitfalls you should maneuver around if this is your first time buying a home.

Avoid these mistakes, and you'll save yourself some heartache, if not time and money, too.

Mistake 1. Succumbing to false pressure.

First-time home buyers often set arbitrary deadlines for buying a home, like "before the wedding," "before the baby is born" and "before our lease expires."

But the excitement of meeting your goal will wear off quickly. Then you’ll be left with the day-to-day reality of living in a house that isn’t quite right because you rushed into your purchase.

Getting out of a lease early is less expensive than buying the wrong house. And trying to buy a home while pregnant or planning a wedding adds unneeded challenges to an already stressful time.

Mistake 2. Settling for a home that’s not right for you.

Besides arbitrary deadlines, there are other reasons why first-time buyers may settle for a home that isn’t right for them.

The desire to buy a home is so great, and the fear of failure is so high, that buyers will often buy a house that works instead of one that is truly right for them, says mortgage broker Todd Huettner of Huettner Capital in Denver, Colo.

"The results can be costly," he says.

You might think you’ve found the best option in your price range because everything you’ve seen so far is junk. Or you might feel rushed by the fear the real estate or mortgage markets will suddenly change and price you out.

If you can’t shake your impatience, there is a way to minimize the potential damage.

"The key is not to buy a house with a fatal flaw," says Michael F. Levy, principal broker of Grand Lux Realty in Armonk, N.Y.

Avoid any home that is next to a highway or railroad tracks, has road noise or is on a double yellow line street, is in a bad school district, or doesn’t have a flat, usable backyard, he says.

"If the house doesn’t have a fatal flaw, and the buyer hasn’t overpaid for it, they should be able to sell it again and find something better," he says.

Mistake 3. Being afraid to back out.

After investing countless hours shopping, then paying for a home inspection and putting down earnest money, first-time buyers may be afraid to walk away when they finally have a home under contract.

"People will overlook big problems if they think it is the only house for them," Huettner says.

Whether you don’t like something in the home inspection report, or you’re second-guessing how much you can afford to pay, if you have doubts, step back and reevaluate your purchase, says Erica Ramus, broker/owner of Ramus Realty Group in Schuylkill County, Pa.

"Backing out and losing your deposit — for any reason — can be cheaper and less traumatic in the end than buying the wrong house or buying a house that is wrong for any reason at all," she says.

If you see something on the inspection report that causes alarm, contact an expert to get the full scope of any problems, says Mike Canning, vice president of Delaware-based XONEX Relocation. A pro can help you decide which home inspection problems mean it’s time to walk away and which are minor fixes.

Mistake 4. Trying to time the market.

It’s natural to question when it's the best time to buy after so many people have been seriously burned by the housing market over the last decade.

But with home prices still depressed and mortgage rates as low as they've ever been, waiting longer now makes little sense for most buyers.

"Unless you are an investor looking to quickly flip a home for profit, your timing should only be dependent on your own circumstances," Canning says. "If home value is dropping when you purchase, then you are getting a bargain from where it was. If the market is improving, you are getting it today at a bargain as compared to tomorrow."

Reid Hopeful Negotiators to Reach Last-Minute Budget Deal

2012-12-31T08:30:00.000-08:00

Senate Majority Leader Harry Reid said negotiators could reach a U.S. budget deal today that would protect all but top earners from a tax increase at midnight.

With taxes set to increase for almost every U.S. worker at midnight, there is still no agreement and gaps between the two parties remain. Photographer: J. Scott Applewhite/AP Photo

“They’re progressing,” Reid, a Nevada Democrat, said of the talks in an interview as he entered the Capitol this morning. Asked if he thought a deal could be reached today, Reid said, “I really hope so. We’re not there yet, though.”

There is still no agreement and gaps between the two parties remain. Republicans and Democrats were narrowing the annual income level at which tax rates would increase in 2013 to between $400,000 and $500,000.

Progress picked up after a weekend of private talks and public sniping as lawmakers sought to avert more than $600 billion in tax increases and spending cuts that make up the so- called fiscal cliff. Even if a deal is reached and can get through both chambers of Congress, it would be more limited than President Barack Obama and leaders of both parties sought. It would set up another battle early in 2013 over the budget and the federal debt limit.

Senate Minority Leader Mitch McConnell said he and Vice President Joe Biden spoke at 12:45 a.m. and 6:30 a.m. today. As he arrived at his office, McConnell, a Kentucky Republican, gave reporters no indication of whether there was movement toward a deal.

Income Tax Rates

Talks between Reid and McConnell stalled yesterday because of disputes over income tax rates, the estate tax and other issues. McConnell reached out to Biden in an effort to break the impasse, while staffers worked into the night trading and reviewing offers.

Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, told Bloomberg Television today that the odds of reaching a deal are “a little better than 50-50” while noting that “a lot has to go right.”

The Senate reconvenes today at 11 a.m. Washington time. Reid said yesterday on the Senate floor that there would “perhaps” be further announcements then. “I certainly hope so,” he said.

The Standard & Poor’s 500 Index fell 0.3 percent to 1,398.34 at 9:32 a.m. in New York. The benchmark 10-year Treasury bond yield increased two basis points, or 0.02 percentage point, to 1.72 percent at 9:35 a.m. in New York, according to Bloomberg Bond Trader prices.

Bush Tax Cuts

Tax cuts first enacted during George W. Bush’s presidency are scheduled to expire tonight. Obama and other Democrats have sought to extend the reductions for married couples’ income up to $250,000 a year while letting tax rates rise for income above that amount. Republicans oppose tax rate increases for any income level.

“The sticking point appears to be a willingness or interest or frankly, the courage to close the deal,” McConnell said on the Senate floor yesterday. “I’m willing to get this done, but I need a dance partner.”

Illinois Senator Dick Durbin, the second-ranking Democrat, said unresolved issues include the income threshold at which tax rates would rise, expiring estate tax levels and how to prevent an expansion of the alternative-minimum tax. Democrats, who represent many of the high-tax states where the AMT has the biggest bite, want to permanently limit its reach.

Capital Gains

There is a direct relationship between the income level at which higher taxes will begin and the estate tax, said a Senate aide familiar with the negotiations.

The higher the threshold for an income tax increase, the more Democrats want Republicans to relent on estate taxes, the aide said. Republicans want to keep estate taxes at current levels, with a $5.12 million per-person exemption and 35 percent top rate; some Democrats agree with this. Obama wants a $3.5 million exemption and 45 percent top rate.

Durbin also said there is a debate over raising the rate for capital gains and dividends from 15 percent to 20 percent. The issue is at what income level the rate would jump to the higher percentage, he said.

According to a person familiar with the talks who asked for anonymity when discussing them, Democrats are pushing for an income level as low as $250,000 as a trigger for a 20 percent tax rate on capital gains and dividends. Taxpayers with income levels below $250,000 would still pay a capital gains and dividend tax rate of 15 percent, the person said.

Capital Gains

Without a deal, the capital gains tax rate for top earners is scheduled to rise 20 percent and dividends would be taxed as ordinary income. With or without a deal, top earners will pay an additional a 3.8 percent tax on capital gains and dividends under the 2010 health-care law.

Lawmakers haven’t said whether any deal would include provisions to halt a cut in Medicare payments to doctors.

Durbin told reporters yesterday that Republicans had offered to let tax cuts expire on household income over $500,000. Democrats countered with a $450,000 threshold.

“People are coming around to about a $500,000 threshold,” Senator Kay Bailey Hutchison, a Texas Republican, told reporters.

House Speaker John Boehner, an Ohio Republican, brought his members back to Washington yesterday, though he has said the House won’t act unless the Senate sends over a proposal.

“We’re waiting to see if the Senate does anything,” said Representative Buck McKeon, a California Republican.

Recession in 2013

Allowing the fiscal changes to take effect would cause a recession in the first half of 2013, according to the Congressional Budget Office.

During an interview broadcast yesterday on NBC’s “Meet the Press,” Obama made a last-minute appeal for compromise and warned of “an adverse reaction in the markets” if Congress doesn’t act.

Republicans “say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” Obama said. He said his offers to Republicans have been “so fair that a lot of Democrats get mad at me.”

In a statement, Boehner called Obama’s comments “ironic, as a recurring theme of our negotiations was his unwillingness to agree to anything that would require him to stand up to his own party.”

Expressing Frustration

The Reid-McConnell talks broke down publicly yesterday with both leaders coming to the floor to express frustration at the lack of progress.

Reid attributed the setback to a Republican insistence on using a new inflation measure that would lead to smaller Social Security cost-of-living increases. Republicans later said they had stopped advocating the formula change.

“It’s not a winning argument to say benefits for seniors versus tax breaks for rich people,” Senator John McCain of Arizona told reporters.

Several Senate Republicans leaving yesterday’s caucus meeting said McConnell told them the talks stalled because Obama insists on using revenue generated from higher tax rates on the wealthy to reduce the spending cuts scheduled to begin in January.

Senator Bob Corker, a Tennessee Republican, said new revenue should go instead to deficit reduction. Democrats “want to spend it all now,” he said.

New Revenue

Democrats have said for more than a year that new revenue should be used to turn off the spending cuts. That was the basis of their proposals in last year’s failed talks by a deficit- reduction supercommittee.

Boehner may be hesitant to work with Democrats to advance a measure that raises taxes just days before he has to stand for re-election as speaker in the next Congress.

In the event the Senate can’t reach a compromise, Obama has asked Reid to ready a bare-bones bill for a vote today to extend expanded unemployment benefits and tax cuts on family income up to $250,000.

In that scenario, Obama said on NBC, “Republicans will have to decide if they’re going to block it, which will mean that middle-class taxes do go up.” Any compromise needs to be passed by the Republican-controlled House.

Defense Layoffs

South Carolina Senator Lindsey Graham, a Republican, said he had discussed the effect of spending cuts on the U.S. military with Defense Secretary Leon Panetta and was told that it would mean 800,000 layoff notices at the beginning of the year. The result would be destroying “the finest military in the world at the time we need it the most,” Graham said.

If Congress does nothing, taxes will rise in 2013 by an average of $3,446 for U.S. households, according to the nonpartisan Tax Policy Center in Washington.

Tax filing for as many as two-thirds of U.S. taxpayers could be delayed into at least late March. Defense spending would be cut, and the economy would probably enter a recession in the first half of 2013, according to the Congressional Budget Office.

The effects of the higher tax rates and federal spending cuts would accumulate over a matter of months. Congress could reverse them by acting retroactively in 2013.

European Central Bank

2012-12-31T05:24:00.000-08:00

German Logo of the ECB. (Photo credit: Wikipedia)

The European Central Bank (ECB) is the sixth of the seven institutions of the European Union (EU) as listed in the Treaty on European Union (TEU). It is the central bank for the euro and administers the monetary policy of the 17 EU member states which constitute the Eurozone, one of the largest currency areas in the world. It is thus one of the world's most important central banks.

The capital stock of the bank is owned by the central banks of all 27 EU member states. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. The current President of the ECB is Mario Draghi, former governor of the Bank of Italy.

The primary objective of the European Central Bank is to maintain price stability within the Eurozone, which is the same as keeping inflation low and preventing deflation. The Governing Council aims to keep inflation (as measured by the Harmonised Index of Consumer Prices) below, but close to, 2% over the medium term. Unlike other central banks, for instance, the Federal Reserve System, the ECB has a single primary objective, with other objectives subordinated to it.

The basic tasks of the ECB are to define and implement the monetary policy of for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and to promote smooth operation of the financial market infrastructure under the TARGET2 payments system and the technical platform (currently being developed) for settlement of securities in Europe (TARGET2 Securities).

Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states could issue euro coins, but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins).

On 9 May 2010, the 27 member states of the European Union agreed to incorporate the European Financial Stability Facility. The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to Eurozone Member States.

The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it lent billions of euros to banks to stabilise the financial system.

Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euro which is held by the national central banks of the member states as shareholders. The initial capital allocation key was determined in 1998 on the basis of the states' population and GDP, but the key is adjustable. Shares in the ECB are not transferable and cannot be used as collateral.

The bank is based in Frankfurt, the largest financial centre in the Eurozone (although not the largest in the European Union). Its location in the city is fixed by the Amsterdam Treaty along with other major institutions. In the city, the bank currently occupies Frankfurt's Eurotower until its purpose-built headquarters are built.

The owners and shareholders of the European Central Bank are the central banks of the 27 member states of the EU. The ECB should not be confused with the European Investment Bank (EIB), the development bank owned by the EU member states.

Euro shares dip as fiscal cliff deadline nears

2012-12-31T05:17:00.000-08:00

World stocks were set to end the year up almost 13 percent on Monday but uncertainty loomed as U.S. politicians prepared for last-minute talks to avoid a fiscal crunch of spending cuts and tax hikes that could drag down the world economy in 2013.

Reuters/Reuters - An employee of a foreign exchange trading company looks at monitors as a television set shows Japan's incoming Prime Minister and the leader of Liberal Democratic Party (LDP) Shinzo Abe speaking in Tokyo December 26, 2012. The yen fell to a 20-month low against the dollar on Wednesday, buoying the benchmark Nikkei stock average, as Japan ushers in a new prime minister eager to pursue drastic stimulus steps to drive the country's economy out of deflation. REUTERS/Yuriko

In Washington, the two political parties are set to hold further talks later to try and avoid the $600 billion "fiscal cliff" kicking in from the start of January and which if left unchecked, would wipe around 4 percent off U.S. GDP.

Senate Majority Leader Harry Reid said the Senate would reconvene at 11 a.m. Washington time (1600 GMT), to continue discussions, but warned on Sunday there were still significant differences between the two sides.

While hope has largely evaporated for any sort of broad deal on Monday, a lack of panic on markets reflected expectations that U.S. politicians will find a solution early in the New Year. U.S. stock futures, notably, were up.

"It is still expected that a deal be reached in early January. That will probably be greeted positively by markets but it looks like it will be a very short-term fix rather than one that addresses the longer-term issues," said Bank of Tokyo-Mitsubishi currency analyst Lee Hardman.

"The Treasury have said they could hold out until February until they have to raise the debt ceiling so going into next year we are set for more of the same kind of political uncertainty."

After a subdued day in Asia, where Japan's Nikkei as well as a number of other indexes had already shut for the year, limited year-end European trading left the MSCI all-world index steady at 336.97 at 6:20 a.m. ET.

The pan-European FTSEurofirst 300 has risen roughly 13 percent this year, largely due to the European Central Bank's actions to stem the region's debt crisis, and recovered from an early morning dip to stand up 0.2 percent by mid-morning.

Falls on London's FTSE were outweighed by gains in Paris while German, Italian and Swiss were among a clutch of other European markets closed.

Many economists have forecast further steady gains in equities next year as central banks continue to provide large scale support to major economies.

CLIFF VIEW

In currency markets, the U.S. dollar last stood at 86.06 yen, having retreated from Friday's high of 86.64 yen, which was the greenback's strongest level versus the Japanese currency since August 2010.

As the year draws to a close, the dollar is up about 12 percent against the yen, putting it on track for its biggest percentage gain versus the Japanese currency since 2005.

With a new Japanese government led by Prime Minister Shinzo Abe expected to pursue a policy mix of aggressive monetary easing and heavy fiscal spending to beat deflation, analysts see the yen staying under pressure in 2013.

The euro was down 0.16 percent on Monday to $1.3192 but is up 2 percent for the year. An agreement on the U.S. budget would be viewed as positive for riskier currencies such as the euro and Australian dollar, while a deadlock is deemed positive for the haven and highly liquid dollar.

"If we come in on Wednesday and don't have a resolution I don't think we will see a big risk-off move," said Michael Sneyd, FX strategist at BNP Paribas.

"The market seems to have almost taken into account the U.S. fiscal cliff discussions will go into the new year and investors seem to have taken off any risk-on positions before the holiday period."

OIL SLIPS

Commodities have been finding some recent support as economic data in key emerging economies China have started point to a gradual pick-up in the pace of growth in 2013.

Gold was $1,664.10 an ounce by 6:15 a.m. ET, up around 6 percent for the year and on track for a 12th consecutive year of gains on rock-bottom interest rates, concerns over the financial stability of the euro zone, and diversification into bullion by central banks. Copper also rose, consolidating this year's 5 percent gain.

Oil prices bucked the trend, however, slipping for a third consecutive session, with failure to reach a solution in U.S. budget talks seen likely to cause a serious slowdown in the global economy and a large drop in fuel consumption.

Brent crude was down 40 cents to $110.22 a barrel by 6 a.m. ET. It is up 2.8 percent and averaged more than $111.65 this year, its fourth successive year of annual rises and above the previous 2011 record of $110.91.

"Significant market moves are likely when the deal gets done - or if no deal is done before the year-end ... In any case, neither outcome is fully priced in," Jason Schenker, president of U.S. consultancy Prestige Economics.

Hours from "fiscal cliff," Washington still awaits deal

2012-12-31T02:26:00.001-08:00

The U.S. Congress comes back on Monday without a deal to avert the "fiscal cliff" and only a few hours of actual legislative time scheduled in which to act if an agreement materializes.

U.S. Senators John McCain (R-AZ) (L) and Jon Kyl (R-AZ) leave

the SenateChamber for the caucus at the U.S. Capitol in

Washington December 30, 2012. Efforts toprevent the economy

from tumbling over a "fiscal cliff" stalled on Sunday as Democrats

and Republicans remained at loggerheads over a deal that would

prevent taxes for all Americans from rising on New Year's Day.

Negotiations involving Vice President Joe Biden and Senate Republican leader Mitch McConnell appeared to offer the last hope for avoiding the across-the-board tax increases and draconian cuts in the federal budget that will be triggered at the start of the New Year because of a deficit-reduction law enacted in August, 2011.

A jolt from the financial markets could also prod the parties, as it has occasionally in the past.

"I believe investors will show their displeasure" at the lack of progress in Washington, said Mohannad Aama, managing director at Beam Capital Management, an investment advisory firm in New York.

Democratic and Republican leaders in the Senate had hoped to clear the way for swift action on Sunday. But with the two sides still at loggerheads in talks, Senate Democratic leader Harry Reid postponed any possible votes and the Senate adjourned until Monday.

The main sticking point between Republicans and Democrats remained whether to extend existing tax rates for everyone, as Republicans want, or just for those earning below $250,000 to $400,000, as Democrats have proposed.

Also at issue were Republican demands for larger cuts in spending than those offered by President Barack Obama.

Hopes for a "grand bargain" of deficit-reduction measures vanished weeks ago as talks stalled.

While Congress has the capacity to move swiftly when motivated, the leaders of the U.S. House of Representatives and the Senate have left themselves little time for what could be a complicated day of procedural maneuvering in the event of an agreement.

House Speaker John Boehner has insisted that the Senate act first, but that chamber does not begin legislative business until about noon Monday.

OTHER BUSINESS ALSO ON AGENDA

And the cliff is not the only business on the House agenda. Farm-state lawmakers are seeking a one-year extension of the expiring U.S. farm law to head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.

Relief for victims of Superstorm Sandy is waiting in line in the House as well, though it could still consider a Senate bill on assistance for the storm until January 2, the last day of the Congress that was elected in November 2010.

Expiring along with low tax rates at midnight Monday are a raft of other tax measures effecting tens of millions of Americans.

A payroll tax holiday Americans have enjoyed for two years looks like the most certain casualty as neither Republicans or Democrats have shown much interest in continuing it, in part because the tax funds the Social Security retirement program.

The current 4.2 percent payroll tax rate paid by about 160 million workers will revert to the previous 6.2 percent rate after December 31, and will be the most immediate hit to taxpayers.

A "patch" for the Alternative Minimum Tax that would prevent millions of middle-class Americans from being taxed as if they were rich, could go over the cliff as well. Both Republicans and Democrats support doing another patch, but have not approved one.

At best, the Internal Revenue Service has warned that as many as 100 million taxpayers could face refund delays without an AMT fix. At worst, they could face higher taxes unless Congress comes back with a retroactive fix.

After Tuesday, Congress could move for retroactive relief on any or all of the tax and spending issues. But that would require compromises that Republicans and Democrats have been unwilling to make so far.

Obama said on Sunday he plans on pushing legislation as soon as January 4 to reverse the tax hikes for all but the wealthy.

Duff & Phelps

2012-12-31T01:15:00.000-08:00

Duff & Phelps Corporation is a publicly traded financial advisory and investment banking firm, providing services principally in the areas of valuation, transactions, financial restructuring, dispute and taxation. The company operates in three segments: Financial Advisory, which provides valuation advisory, tax services, and legal management consulting; Alternative Asset Advisory, which provides portfolio valuation, operational due diligence, and complex asset solutions; and Investment Banking, which provides mergers and acquisitions advisory services, transaction opinions, and restructuring advisory services.

Duff & Phelps serves a number of industry-specific clients across the globe. Clients include: financial institutions, professional service firms, media and entertainment companies, aerospace companies, energy companies, real estate companies, utilities companies, pharmaceutical companies, health care companies and consumer product companies.

The company, which was founded in 1932, is based in New York City and has offices in North America, Europe, and Asia.

Carlyle Agrees to Buy Duff & Phelps

2012-12-31T01:03:00.000-08:00

Carlyle Group LP and investors including Swiss bank Pictet & Cie agreed to buy investment- banking firm Duff & Phelps Corp. (DUF) for $665.5 million.

The buyers, also including Stone Point Capital LLC and Geneva-based Edmond de Rothschild Group, will pay $15.55 a share, 19 percent more than Duff & Phelps’s closing price on Dec. 28. The transaction is expected to be completed in the first half, the companies said in a statement yesterday.

The group of buyers will help New York-based Duff & Phelps continue its international expansion, according to the statement. Revenue at the 80-year-old firm, which also provides financial-advisory services, is predicted to rise 17 percent this year to $465.8 million, the average of analysts’ estimates compiled by Bloomberg.

Shares of Duff & Phelps, which has more than 1,000 employees worldwide, have declined 10 percent this year, while the Standard & Poor’s 500 Index gained 12 percent. The stock advanced 1.9 percent to $13.05 on Dec. 28, below the 2007 initial public offering price of $16.

Private-equity firm Carlyle, based in Washington, has jumped 18 percent since its May IPO. This month, the firm agreed to buy a stake in energy investor NGP Energy Capital Management for $424 million. Other deals this year included the photo archive Getty Images Inc. and DuPont Co.’s auto-paint unit.

‘Go-Shop Period’

The Duff & Phelps merger agreement provides for a “go- shop” period ending on Feb. 8, during which the company can solicit and receive alternative proposals. Duff & Phelps would pay a break-up fee of about $6.65 million if it gets a higher bid and ends the agreement before March 8.

Duff & Phelps, started in 1932 to provide investment research, was a financial adviser to the examiner in the Lehman Brothers Holdings Inc. bankruptcy in 2009 and an administrator for the Rangers Football Club Plc in the largest soccer club insolvency in U.K. history, according to its website.

Duff & Phelps was advised by Centerview Partners and got legal counsel from Kirkland & Ellis LLP. The group of buyers’ lead adviser was Sandler O’Neill & Partners LP. Credit Suisse Group AG, Barclays Plc and RBC Capital Markets also advised and provided financing. Wachtell Lipton Rosen & Katz was legal counsel.

Starbucks expands cup campaign aimed at U.S. fiscal deal

2012-12-29T13:21:00.000-08:00

Starbucks Corp (SBUX.O) is expanding its campaign of using messages written on coffee cups to inspire U.S. lawmakers to reach a deal and avoid going over the "fiscal cliff" of automatic tax hikes and government spending cuts.

As President Barack Obama and congressional leaders were in a final effort to reach a budget agreement before year's end, Starbucks this week began urging workers in its roughly 120 Washington, D.C.-area shops to write the words "come together" on customers' cups.

A spokesman for the world's largest coffee chain said the company would expand the effort to all U.S. stores, continuing through next week.

"Stores from across the country have been asking if they could join in and we have been saying absolutely yes," Starbucks spokesman Jim Olson said in an email late Friday.

"Based on this unprecedented response, we are inviting all of our partners at U.S. stores to start signing their customers' cups with Come Together through next Friday," Olson said.

Starbucks' cup campaign aims to send a message to sharply divided politicians and serve as a rallying cry for the public in the days leading up to the January 1 deadline to avert harsh across-the-board government spending reductions and tax increases that could send the U.S. economy back into recession.

"We believe the (Washington) DC effort caught on so swiftly because they Come Together message is such a simple and respectful gesture that expresses the optimism that is core to our country's heritage and to Starbucks mission," Olson said.

"This is an important moment for Starbucks to use its scale for good and give Come Together an even louder voice - as we move from signing tens of thousands of cups in DC to tens of millions of cups across the U.S. over the course of next week."

Recent maneuvers suggest BofA-MBIA pact likely: analysts

2012-12-12T13:41:00.001-08:00

A long-running legal dispute between Bank of America Corp (BAC.N) and insurer MBIA Inc (MBI.N) could be settled in early 2013 after recent maneuvers involving MBIA's bonds, analysts at research firm CreditSights wrote.

MBIA last month won the necessary consent of bondholders to change the terms of some of its debt, despite a move by Bank of America to thwart the change. That outcome has reduced the bank's negotiating leverage, increasing the likelihood of a settlement, the analysts wrote in a report dated Tuesday.

Bank of America, the second largest U.S. bank by assets, last week also said that it was proceeding with an offer to buy some of MBIA's bonds, which could be part of a settlement strategy, according to the report. The bank took a similar approach in a pact this year with insurer Syncora Holdings Ltd (SYCRF.PK), CreditSights said.

"We speculate that BofA is adding exposure to MBIA's capital structure to conceal the amount of a settlement so as to not set a precedent for negotiations with other litigants," analysts Rob Haines and Eric Axon wrote.

MBIA declined to comment. A Bank of America spokesman could not immediately be reached.

The legal wrangling is a major cloud hanging over both companies, which have struggled to recover from mortgage-related troubles from the financial crisis.

MBIA claims that Bank of America owes it billions of dollars over soured mortgages that it wants the bank to buy back. Bank of America says the insurer owes it billions over certain credit default swap transactions.

CreditSights said it expects a comprehensive settlement that would cover both issues.

MBIA proposed the changes to its debt on November 7 to eliminate the risk that it might be considered in default if a troubled insurance unit were put into rehabilitation or liquidation by the New York State Department of Financial Services.

MBIA said at the time that if there were such a default, it would have insufficient liquidity to make good on the notes and would probably immediately pursue other actions, including bankruptcy.

Bank of America countered with an offer to buy MBIA bonds, saying it believed the changes would increase the risk of MBIA's insurance unit being placed in rehabilitation or liquidation. That would jeopardize all policyholder claims, including Bank of America's, the bank said. But on November 26, MBIA said it won the necessary consent of bondholders to make the changes.

On December 5, Bank of America said it waived certain conditions in order to continue with its offer to buy MBIA bonds through Tuesday. It has not said whether it has extended the offer.

CreditSights said MBIA could avoid regulatory seizure for three to four years or potentially altogether if a settlement with Bank of America occurs.

RPT-EDF sells UK Sutton Bridge power station to Macquarie-led group

2012-12-12T13:31:00.000-08:00

EDF Energy will sell its 819 megawatt (MW) Sutton Bridge gas power station in England to a group of investors led by Australian bank Macquarie, EDF Energy said on Wednesday.

The divestment of the power station, built in 1999, is one of the commitments made by EDF Energy to the European Commission at the time it bought British Energy in 2008, the statement said.

"EDF Energy confirms that it has reached agreement for the sale of Sutton Bridge Power Station, an 819 MW Combined Cycle Gas Turbine (CCGT) power plant located in South East Lincolnshire, UK, to a Macquarie-led consortium of investors," the company said in a statement.

EDF Energy is owned by French state-controlled utility EDF, the world's biggest nuclear power plant operator.

A spokesman said that the acquisition price was confidential.

Macquarie is already an active player in Britain's wholesale power and gas markets.

Analysts say that natural gas, although currently less profitable for power generation than coal, will be an attractive investment in Britain as the government is keen to reduce power production from coal to meet its emissions reduction targets.

Natural gas emits less carbon emissions, blamed for climate change, than power generated from coal.

Investor Confidence Gives Euro A Boost

2012-12-12T13:22:00.002-08:00

The Euro rallied for a second consecutive day against the U.S. Dollar after reports showed that German investor confidence rose this month. According to the ZEW Center for European Economic Research, the index climbed to 6.9 in December after it posted at -15.7 in November.

The U.S. Dollar weakened against the majority of its online Forex trading peers as investors await the outcome of the Federal Reserve’s two-day meeting. Speculators believe the Fed will announce an additional $45 billion in monthly asset purchases. Furthermore, data released yesterday showed that the country’s trade deficit expanded in October due to a drop in exports. Economists believe this was due to the global slowdown while official figures indicated that the gap widened by 4.9%.

Other news about current exchange rates confirmed that the Swiss Franc declined against the Euro after the country’s largest bank, UBS AG, announced it will now impose a levy on all customers who have a cash balance in Swiss currency. The amount of the levy will be released to the clientele within a few days.

In the South Pacific, the Australian Dollar fell against all of the Forex currency majors as data revealed that business confidence dipped to the lowest level in 3 years. And the New Zealand Dollar traded at the highest level in 5 weeks versus the Aussie currency after a release showed that home prices increased 7.3% last month, suggesting they escalated at the quickest pace in 5 years.

How Much Is Enough to Retire? Careful Now...

2012-12-12T12:05:00.000-08:00

What is your magic number? A million dollars? Two million?

As people settle into their early 40s and begin to look out over the horizon of their lives, the closest and most obvious thing they see is their own parents, who typically are just starting their retirement years.

And so a middle-aged couple begins to wonder: How much is enough to retire?

CNBC recently covered the question of how much is enough to retire from an international perspective. The answer, expressed as income in U.S. dollars, ranged from $85,781 (Germany, which has a strong social safety net) to $276,150 (Dubai, which clearly does not) and every number between.

Among 13 countries, the average was $161,000, according to Skandia International’s Wealth Sentiment Monitor. It also hinged on an exceedingly loaded question, namely, “How much income to you need to be happy?” (Americans were not surveyed by Skandia.)

Let’s make an assumption: That all of these numbers are really equal.

After all, a lot depends on your cost of living. In a major metropolitan city in Europe, you might have access to significant collective resources that reduce your need for income, at least compared to a developing capital with limited healthcare and housing options. Food might be more or less expensive, or energy. It’s hard to say.

For now, let’s accept the international average as reasonable and apply that to our fictional American middle-age savers. To generate that kind of income, the “happiness assured” level, what might be a good target for your portfolio?

Try about $2.8 million.

There’s a bunch of assumptions behind this result. Our couple is about 45. They have saved some and are sitting on a starting balance in tax-deferred accounts of $250,000. Their target is to quit work at 65, assuming they aren’t downsized or fall ill.

Their rate of return is 7% before retirement on $35,000 in retirement contributions per year, and their saving level increases with inflation. It is presumed that they will spend 30 years in retirement.

So, they make it, right? Not really.

Inflation is the killer. Their nominal (dollar) income is $13,723 a month, but the spending power of that money gets zapped over two decades. It will be worth about half, just $7,598 a month. That comes to $91,176 per year in real dollars, far below the “happiness” target.

In a nutshell, inflation explains the Sunbelt. It’s not just about warmer climes and country living. Retirees often simply have to find cheaper places to live. States like Florida fill up with older folks in part because of good weather — but zero state income tax, real estate exemptions and other tax breaks are a big draw, too.

Redefining ‘happy’

People who otherwise diligently save for retirement often make the fundamental error of ignoring inflation. So what would it really take to get to $161,000 and be as happy, at least on paper, as our average citizen of the fictional land between Germany and Dubai?

One way, all else being equal, would be to kick your savings goals up to $75,000 a year, targeting $5.1 million. Another would be to earn a 10% return on your investments while saving $45,000 a year.

Yet another would be to kick off your savings spree at $500,000 earning 7% and put away at least $58,000 a year.

Or, frankly, redefine “happy” down to a number you can live with, which is exactly what people do.

China's Wanxiang wins auction for U.S. government-backed A123

2012-12-10T02:22:00.000-08:00

Wanxiang's approach for battery maker A123 had
stirred a political storm.

WILMINGTON, Delaware (Reuters) - China's largest maker of auto parts won a politically sensitive auction for A123 Systems Inc , a bankrupt maker of batteries for electric cars that was funded partly with U.S. government money, the investment banker for A123 said on Saturday.

Timothy Pohl of Lazard Freres said Wanxiang Group Corp's bid of about $260 million topped a joint bid from Johnson Controls Inc of Milwaukee and NEC Corp of Japan for the maker of lithium-ion batteries.

Siemens AG of Germany had also qualified to bid, according to two people familiar with the auction, who asked not to be identified. The auction began on Thursday.

One U.S. politician was quick to warn about A123 and its sensitive, U.S. taxpayer-financed technology falling into the hands of a Chinese company.

"Given the thin line between Wanxiang and the Chinese government, I am concerned about the government of China having access to sensitive technologies being used by our military forces," said a statement from Congressman Bill Huizenga, a Republican from Michigan where A123 has plants.

The sale did not include parts of A123's business that works with the U.S. Defense Department, a source close to the deal said. That portion of the company went to another bidder, which the source did not identify.

The sale must be approved by Delaware Bankruptcy Court judge Kevin Carey at a hearing scheduled for Tuesday.

Opposition to the deal will likely focus on the Committee on Foreign Investment in the United States, which would need to approve the sale to Wanxiang.

U.S. politicians and retired military leaders have already pressed the government panel to reject Wanxiang.

Separately, the U.S. government has also said it must give its consent before its $249 million grant to A123 can be transferred to a new owner. The battery maker can still draw $120 million under various government grants, according to court records.

It was unclear if the grant would be transferred to Wanxiang.

A123, whose customers include Fisker Automotive, General Motors Co , BMW and the U.S. military, received the U.S. government grant as part of a program to promote clean energy.

Wanxiang has had its eyes on A123 for a while. The Chinese company struck a $465 million investment deal meant to save A123 from bankruptcy earlier this year. That agreement fell apart after A123 failed to meet certain criteria, according to court documents.

The Chinese company is no stranger to investing in the United States.

Wanxiang generates about $1 billion in revenue in the United States by supplying parts to GM and Ford Motor Co and has bought or invested in more than 20 U.S. companies, many of them in bankruptcy, said a congressional report.

Those past investments could help Wanxiang get approval to buy A123, but the deal will be closely scrutinized because it involves advanced technology, said Andrew Szamosszegi, who wrote the report for the U.S.-China Economic and Security Review Commission.

A123 filed for Chapter 11 bankruptcy protection in October.

The money from the auction will go toward paying off A123's creditors. The company listed liabilities of $376 million when it filed for bankruptcy.

In Miami, Using the South American Playbook

2012-12-09T11:38:00.000-08:00

Outside the United States, many real estate developers have less of an appetite for risk than their counterparts here.

MyBrickell, a condo that the Related Group is building in Miami, is mostly being financed by its buyers.

In South America, for instance, developers typically ask buyers to pony up a big chunk of the total price of an apartment in a new development long before it’s finished.

So South Americans pay huge installments — often 50 percent or more of the cost of the unit by the time the building is completed. It’s a system that most Americans, accustomed to financing at least 80 percent of a property with a bank loan, would consider unworkable.

I remember being shocked to learn from the owner of the apartment I rented in São Paulo, Brazil, where I lived as a foreign correspondent, about the schedule of huge payments — totaling 57 percent — he had had to deliver to the developer as the condo building went up. It was all nonrefundable, he told me.

But what if something went wrong, I asked him, like the developer going bankrupt? Or if the economy suddenly exploded into crisis, which is certainly not unheard of in South America?

He just shrugged. That’s simply how things are done down south, where interest rates are much higher, and where historically high inflation made financing riskier and more expensive than in the United States. The practice is especially common in Brazil and Argentina, but also in smaller countries like Uruguay, where Donald Trump has a licensing agreement for a new residential tower in the beach resort of Punta del Este that will require down payments of 40 percent from buyers before construction begins.

That perspective offers a different lens on the risks that developers are taking in Miami’s recent condo boomlet.

The Miami of today is not the Miami of 2004, when property prices were still rising in large part on a wave of speculation, with buyers putting down, at most, 20 percent and then flipping properties before construction was done.

This is post-bubble Miami, where banks are still skittish about backing new condo projects.

So Miami developers have taken a page from the South American playbook — a handy strategy, given how many willing buyers are flocking to Miami from that continent. Developers of several condos downtown and at the beach are requiring initial deposits of 40 percent or more, and more as they get closer to completion. By the time the building is finished, buyers are forking over as much as 80 percent of the total price of their apartments.

“Essentially, the buyers are helping developers build their buildings,” said Ann Nortmann, senior project director for Palau at Sunset Harbor, a 50-unit development planned for South Beach that requires a total deposit of only 40 percent because the developer, SMG Management, expects more American buyers.

Jorge M. Pérez, chairman of the Related Group of Florida and a chief architect of the new strategy, defends it as necessary to get developments off the ground, and to prevent speculators from flocking back to Miami, hoping to flip apartments as they did in the old days.

“Financing died during the recession,” Mr. Pérez said. “We all were awakened by the things that happened. We said, ‘If we don’t have the buyers that will pay for the majority of the price in the building upfront, then we don’t want to take the chance of building these buildings.’ ”

Related has employed the financing strategy in three buildings now under construction in South Florida (Apogee Beach, MyBrickell and Millecento) and in three others where sales, but not construction, have started (Beachwalk, Icon Bay and One Ocean). A 3,200-square-foot penthouse at One Ocean is listed for $8.5 million.

For all six towers, Related is requiring buyers to pay 40 percent by the time construction begins, and even more during construction. By the time they move in, buyers will have paid 50 percent to 80 percent of the total apartment price.

The strategy isn’t exactly keeping buyers away. MyBrickell and Millecento, both in downtown Miami, have all their units under contract, while Apogee Beach has only two apartments out of 49 still available, according to a Related spokeswoman.

“People said there is no way people would pay that, and people have,” Mr. Pérez said. That’s in large part because South Americans are South Florida’s biggest condo buyers right now. Argentines are “by far” the top buyers, he said, followed by Brazilians, Colombians, Venezuelans, Mexicans and Peruvians. Argentines concerned about high inflation in their country have seen Miami real estate as a stable place to park their money.

The site where the Related Group
is to build the Millecento.

Wealthy Europeans, including some from economically distressed countries like Greece and Italy, are also flocking to Miami real estate, as are Americans from the Northeast and Chicago. Many of those buyers are willing to pay all cash for the condos.

Related is sitting on another 20 or so pieces of land from Palm Beach to Miami where it is considering beginning sales for developments “when we think the market is ready,” Mr. Pérez said.

South Florida’s real estate industry has been buzzing about more than 80 planned residential developments. But Mr. Pérez said he saw that as mostly hype.

“There is not that much development going on right now,” he said. “There are a lot of projects that have been announced. But I don’t know where they are going to get financing from.”

For now, with buyers assuming more risk, they don’t have to worry as much. Still, “South Americans are not stupid. They are not going to give money to someone they don’t think is going to deliver the building.”

The new financing strategy is great for developers, who can reduce their risk, but it carries some downsides. For one, it has motivated developers to build more towers for the rich — mostly with foreigners in mind, though they rarely want to admit that — and not for middle-class Americans who simply cannot afford the big down payments, real estate lawyers said.

That could keep lenders from returning to more traditional lending practices, which some appraisers believe is necessary for Miami’s bifurcated real estate market to become truly healthy again. As it is, luxury residences are breaking price records even as tens of thousands of foreclosure cases clog the courts.

Inspections are also an issue. Normally banks require regular inspections during construction to ensure that the buildings are meeting standards. With banks out of the process, developers won’t face the same level of scrutiny, real estate lawyers said.

“Will a developer cut corners?” said Avi Tryson, a lawyer with Beloff Parker Jacobs PLC in Miami Beach. “I am sure they might.” It will fall to government authorities, which require some inspections of their own, to police developers, he said.

And buyers, of course, will have more nonrefundable skin in the game. If they cannot close for whatever reason, developers don’t have to refund the big down payments. “But we will work to help you sell your unit,” Mr. Pérez said.

For now, Related will stick to the high down-payment strategy in its new planned developments. At some point, Mr. Pérez predicted, developers will loosen rules to require 30 percent down.

“The world is going to change,” he said. “I just hope we don’t go back to the past, when we had very highly leveraged buildings” that attracted speculators.

Mr. Tryson, the lawyer, sees the big-money spigot — still flowing so strongly from South America especially — eventually shutting off.

“I don’t know how long it can continue,” he said. “There is only so much foreign money. There is only so much domestic money. At some point there has to be a breaking point where they implement a more mixed model or go back to 20 percent.”

On ‘Madoff Day,’ Think About How to Avoid Becoming a Victim of Fraud

2012-12-09T11:05:00.001-08:00

This is the time of year when most people think of gifts and holiday gatherings. I couldn’t help thinking of frauds past.

Three men accused of defrauding clients arriving at federal court. From left, Marc Dreier in Manhattan on May 11, 2009; Bernard Madoff in Manhattan on March 12, 2009; and R. Allen Stanford in Houston last Feb. 29

Four years ago this week, Marc S. Dreier, a high-flying lawyer, was arrested and later charged with defrauding his clients of $700 million. A few days later, Bernard L. Madoff’s fraud was uncovered. Totaling an estimated $65 billion, Mr. Madoff’s fraud was in a class by itself. And then, a short time afterward, some of the brokers who had been selling fraudulent certificates of deposit for R. Allen Stanford began to turn on him; he was arrested in February 2009 and later convicted of a $7 billion fraud.

These schemes collapsed with the economy in 2008. But on their anniversaries, it may be a good time to ask whether you have done all you can to lower your risk of being caught up in a similar fraud. Call it Madoff Day (celebrated on Dec. 11, the day of his arrest).

Protecting yourself against fraud, or simply bad advice, is easier said than done. The most common advice is to make sure your money is held by an independent custodian or firm whose job is to keep your money safe. That wasn’t the case with either the Madoff or Stanford fraud. But that is only one small step.

So what else can investors do to protect themselves, not only from unscrupulous advisers but also from rushing into an investment that is clearly too good to be true?

Marc H. Simon, a lawyer who lost two years of bonuses, his job and months of unreimbursed expenses when Mr. Dreier’s law firm collapsed, said he has thought a lot about what he could have done differently.

Mr. Simon said that six or seven years before the fraud was uncovered, he knew of inconsistencies in the firm’s 401(k) plans. But the big red flag should have been that Mr. Dreier had sole control over every major decision at the law firm. Still, that had been Mr. Dreier’s pitch: work for him and don’t worry about the irksome details partners typically face.

“People like Drier and Madoff were highly intelligent individuals, they were very charismatic and they were giving people what they wanted,” Mr. Simon said. “It is harder to bring into question those who are providing you something you want.”

Randall A. Pulman, a lawyer in San Antonio who represents many victims of Mr. Stanford’s fraud, agreed that the will to believe was what ensnared people.

“For you and me, it’s too good to be true,” he said. “For the guy who has been working in the oil fields, how is he supposed to know?”

Of course, fraud and just plain bad advice are not limited to the poor or unsophisticated. Robert P. Rittereiser, the former chief financial officer of Merrill Lynch and former chief executive of E. F. Hutton, is working as the receiver for two funds suing J. Ezra Merkin, a former money manager who steered money to Mr. Madoff. Mr. Rittereiser did not think investors in Mr. Merkin’s funds knew that their money was simply being passed on to Mr. Madoff. But even if they did, they may not have seen anything to be concerned about.

“They were investing money and getting appropriate returns for the kind of fund it was,” Mr. Rittereiser said. “Most of them had a relationship of some kind and confidence with Merkin and the people he was dealing with.”

So how do you protect yourself? The first step would seem to be picking an honest adviser. The good news is that only about 7 percent of advisers have disciplinary records, said Nicholas W. Stuller, president and chief executive of AdviceIQ, a company that evaluates advisers. The bad news is that those violations appear only after someone has filed a complaint.

Mr. Stuller’s company, which has now approved some 2,400 advisers, rejects anyone with any type of infraction — from a securities fine to a misdemeanor for getting into a fight. He said this policy might keep some good advisers off the site, but his goal is to search the records of federal and state regulators to find advisers he knows are clean.

“There are advisers who have significant negative disciplinary history with one regulator but appear to be pristine with another regulator,” Mr. Stuller said. “There was a guy in Minnesota who was stealing insurance premiums. In his enforcement record, it says, ‘We’re going to alert Finra,’ but his Finra record is clean,” he said, referring to the Financial Industry Regulatory Authority. “That’s where the regulators don’t talk to each other.”

AdviceIQ’s main competitor, BrightScope, takes a different approach. It notes disciplinary actions taken against advisers but leaves it up to the consumer to go to regulators to determine what the violations were.

“We want the consumer to go to the source data, because there is a lot of liability in publishing that,” said Mike Alfred, co-founder and chief executive of BrightScope. “Many of these folks are good advisers, and they’ll take care of you. But what if they had one crazy client who put all his money in Internet stocks in 2000 and then sued?”

Both services have obvious downsides. With AdviceIQ, a crooked adviser could be rejected from the site and no one would know about it, while BrightScope’s listing could hurt an otherwise honest adviser who had a frivolous suit brought against him.

Mr. Stuller said his site’s main goal was to match advisers with clients of similar needs, like a doctor with someone whose clients are mostly doctors. Mr. Alfred said his site left it to the individual to do more due diligence, though he pointed to an adviser with 55 violations and said she would have trouble explaining those away. (Both sites charge featured advisers an annual fee.)

Ross Gerber, president and chief executive of Gerber Kawasaki, a wealth manager, said clients with sizable wealth should not trust it to any single adviser, no matter how good the adviser seems to be.

He said one of his clients, with about $25 million, has $5 million with him, $10 million with a private bank, and $10 million with a trust company. Each month, Mr. Gerber sends her statement to the private banker, who acts as the point person to make sure the various portfolios aren’t all invested in Apple.

“I’m not threatened by other investment managers who work with my client,” he said. “My clients with a lot of money have a lot of private banking relationships, or lending relationships, or things we don’t provide.”

Mr. Gerber added that he would steer clear of advisers who didn’t want to share with other advisers what they had done for clients. “If Starbucks goes from $50 to $80, it’s easy to show them why it did well,” he said. “When you’re investing in these scams, they’re funds. You don’t see what’s in them. People don’t necessarily ask a lot of questions or they don’t care.”

In some cases, investors do not even know the questions to ask. Marc Odo, director of applied research at Zephyr Associates, a financial software firm, said he had been asked by a client whether a return could be so high or consistent for so long that it might signal a fraud.

Not knowing the answer, he applied sophisticated financial models to compare Mr. Madoff’s record, using a fund that fed money to Mr. Madoff, Fairfield Sentry, against the returns of Hedge Fund Research’s Equity Hedge index from 1990 to 2008.

He plotted the returns on a graph that measured the frequency of losses and the amount of time returns were positive. All but five equity hedge funds were grouped together at the left side of the graph, and four of those outliers were still close to the pack. The Madoff returns floated in the top right corner, like a distant planet.

“This is a more mathematical way to quantify the ‘too good to be true,’ ” Mr. Odo said. “This helps pick apart the numbers. It helps you understand the risks out there.”

He said this analysis was particularly important with investments in hedge funds or other vehicles that do not disclose their holdings: testing how believable the returns are over a long period of time may be the only way to know if they are achieved legitimately.

Still, Daylian Cain, an assistant professor of organizational behavior at the Yale School of Management whose research has looked into how advisers who disclose their conflicts can give people a false sense of comfort, said anyone, no matter how smart, could be duped if the situation were appealing enough.

He said the best advice would be for investors to ask themselves at the moment they are about to invest: What would happen if the investment is not what I think it is?

“Asking, ‘Could I be wrong?’ is psychologically completely different to the brain than, ‘Could I be right?’ ” he said. “It’s not ‘Could this be true,’ but ‘How could this investment be a bad idea?’ ”

The very act of asking that question, he said, might prompt a potentially positive response: procrastination. “If the opportunity is gone tomorrow,” he said, “it may mean that your money and your adviser is gone tomorrow, too.”

Banks Agree to Sell Back Some Greek Bonds

2012-12-09T09:17:00.000-08:00

LONDON — Greece moved a step closer to completing a complex debt-reduction deal on Friday when the country’s largest banks said they had agreed to sell their discounted bonds back to the government.

Yannis Stournaras, left, and Pierre Moscovici, second from right, with Jean-Claude Juncker, right, at a meeting Monday in Brussels.

The buyback, which aims to trim about 20 billion euros, or nearly $26 billion, from Greece’s 323 billion euro debt, was scheduled to close at the end of the day on Friday. But people involved in the transaction said they did not expect an official announcement of the results until early next week.

Greece’s so-called troika of international overseers has said meaningful participation by bondholders in the buyback program will be crucial to the release of more than 40 billion euros in the next installment of bailout loans. The country desperately needs those loans to recapitalize its banks, service the interest on its debt and pay billions of euros in bills.

“It looks as if they will hit the higher range of their expectations,” said Dimitris Drakopoulos, a sovereign debt expert at Nomura in London.

Bankers involved in the transaction say it is too early for Greece to declare victory in the buyback. Given the political and financial sensitivities involved, they say, last-minute snags are still possible.

“It is not done until it’s done,” said one banker involved in the transaction, who spoke on condition of anonymity. “But I am reservedly optimistic.”

The better-than-expected participation of hedge funds, which bankers say have sold 50 to 70 percent of their 24 billion euros in bonds, together with the involvement of the banks, have increased the chances that the buyback will succeed.

The Greek banks are one of the larger groups invested in the country’s bonds. They hold 17 billion euros of the 63 billion euros in private sector debt that is in circulation after Greece’s most recent debt restructuring.

That write-down was overseen by the troika that determines when and if Greece receives each round of bailout money: the European Commission, the European Central Bank and the International Monetary Fund.

The combined participation of Greek banks and foreign investors could be enough to reach the goal of 20 billion euros in net debt reduction that Greece and the troika set for the buyout. To reach that goal, Greece would need to buy back bonds worth 30 billion euros in face value because the country has borrowed 10 billion euros from Europe to conduct the buyback program.

The I.M.F. has said it will provide additional bailout loans to Greece if the buyback is successful and the country continues to reduce its debt toward sustainable levels.

Analysts say that while many hedge funds indicated that they might hold out for a higher price, tough talk by government officials and bankers persuaded many investors to take profits now, rather than risk having to absorb losses later.

Since the government announced on Monday a price range of 30 to 40 cents on the euro, the bonds have increased in value, hitting a high of 35 cents late this week. Investors say the increased demand is coming from buyers who think the bonds will push even higher once the buyback is complete and Greece’s financial position improves.

“We are seeing a lot of real money buying these bonds now,” said one large investor who had participated in the exchange. “I am not surprised. Things are finally improving in Greece.”

Democrats Hint at Entitlement Program Cuts in U.S. Budget

2012-12-08T05:14:00.001-08:00

As Democrats demand tax concessions from Republicans to avert a collision over the federal budget, Senate Democratic leaders are signaling that they may be willing to trade an entitlement spending overhaul to secure a deficit- reduction deal.

Seniors pick up information about various state organizations that can help answer questions about Medicare, senior center programs, and other retirement concerns.

Dick Durbin of Illinois, the second-ranking Senate Democrat, said he might reluctantly be open to expanding means- testing for Medicare eligibility - charging more to higher- income seniors. New York Senator Chuck Schumer said he wouldn’t rule out changing entitlements, challenging Republicans to come up with specific proposals.

Republicans “want something to put up on the wall and say, ‘OK, we gave on taxes, they gave on’” entitlements, Durbin said in an interview late yesterday. “We may end up facing it as the only way out of this.”

House Speaker John Boehner scheduled an 11 a.m. news conference today in Washington.

The newfound flexibility could be a sign that both parties are edging toward a compromise to avert what has been labeled a fiscal cliff - a Jan. 1 surge of more than $600 billion in automatic tax increases and spending cuts that could propel the nation into recession.

Not everyone is convinced.

With President Barack Obama and Boehner - the chief Republican negotiator - not disclosing any progress in their private talks, Jon Kyl of Arizona, the Senate’s second-ranking Republican, said: “It doesn’t appear to me that they’re going anywhere. And that’s too bad.”

Senate Sparring

In the Senate yesterday, Majority Leader Harry Reid, a Nevada Democrat, and Minority Leader Mitch McConnell, a Kentucky Republican, sparred over Obama’s proposal to give himself authority to raise the federal debt ceiling without approval by Congress. McConnell sought a vote on the proposal, though he retreated by threatening a filibuster after Democrats determined that they had the 51 votes necessary to pass the bill.

McConnell “hasn’t learned that this is not 2010 anymore. There’s no hay to be made by playing politics with the debt limit,” said Schumer.

Reid, McConnell and Representative Nancy Pelosi of California, the House Democratic leader, have been excluded from the negotiations, leaving it to Boehner and Obama alone to find a deal, said a Republican aide who requested anonymity when discussing the negotiations. According to another Republican aide, having the more partisan minority leaders from both chambers as participants in similar talks last year wasn’t constructive.

Tax Rates

Obama has stressed that no deal is possible without letting income tax rates rise for the top 2 percent of earners. All rates will increase without a deal as tax cuts first enacted under President George W. Bush expire in 2013. Both sides say they don’t want that to occur for 98 percent of taxpayers.

In a Bloomberg Television interview this week, Obama signaled he’s ready to make concessions on entitlements, saying “I don’t expect Republicans to agree to any plan where they’re just betting on the come that entitlement reform will happen.”

Yesterday’s Democratic comments coincide with signs that the once-unified opposition among Republicans on the tax-rate issue is splintering.

‘All Options’

A few dozen Republican lawmakers have signed a bipartisan letter calling for “all options” to be considered on taxes and entitlement programs in the deficit-reduction talks, even as Boehner has insisted that his party won’t agree to higher tax rates for anyone.

A Republican leader of the petition to consider all revenue options, Representative Mike Simpson of Idaho, said he could accept higher tax rates for married couples earning more than $500,000 a year in exchange for an overhaul of entitlement programs.

Obama wants to let tax rates increase for individuals with incomes above $200,000 annually and for married couples with incomes exceeding $250,000.

Durbin expressed openness to Simpson’s suggestion to raise the income threshold for higher tax rates.

“If you’ve been around here long enough, you know there’s going to be some give on both sides,” Durbin said. “As the president said, and I’ll just leave it in his words, ‘I’m open to good ideas.’”

Market Reaction

Stocks rose. The Standard & Poor’s 500 Index (SPX) rose 0.3 percent to 1,417.90 at 9:38 a.m. New York time. The Dow Jones Industrial Average gained 52.09 points, or 0.4 percent, to 13,126.13. Treasuries fell for the first time in four days. Ten- year note yields rose three basis points, or 0.03 percentage point, to 1.62 percent at 9:09 a.m. New York time, according to Bloomberg Bond Trader data.

Boehner, in a $2.2 trillion deficit-cutting plan he offered this week, proposed using a new inflation yardstick -- the so- called chained consumer price index -- that would reduce cost- of-living increases in Social Security, as well as raising the Medicare eligibility age. Other Republicans have also advocated means-testing.

Democrats have long regarded their party as the champions of preserving safety-net programs for the poor and elderly, and Reid has repeatedly said that Social Security is off the table in debt-deal talks.

Failed Talks

Still, raising the Medicare eligibility age and using a different Social Security inflation yardstick were on the table during failed budget talks between Obama and Boehner in 2011.

Simpson cited either of those options as a way to win Republican votes for a tax rate increase on top earners.

Schumer, when asked about the ways to trim entitlement costs, said, “Let them give it to us officially as an idea,” without ruling them out.

Since Obama’s re-election last month, much of the public debate on a possible deal has focused on taxes. Obama yesterday visited a middle-class couple in Falls Church, Virginia, a suburb of Washington, to emphasize the need for an agreement to keep their taxes from rising.

Entitlement programs are the biggest driver of the long- term debt. With the oldest of the baby-boom generation reaching retirement age, the number of people age 65 and older is projected to increase by about one-third in the next decade, according to the Congressional Budget Office.

Means Tests

Durbin said it would be “difficult” to change the calculation of Social Security cost-of-living increases, and raising the Medicare eligibility age could hurt impoverished seniors who retire early with health problems.

Medicare is already a means-tested program, with beneficiaries earning more than $85,000 a year paying more for some of its benefits.

“The question is what other means tests should apply,” Durbin said. “I think that is reasonable, and certainly consistent with the Democratic message that those who are better off in our country should be willing to pay a little more.”

Republicans have “got to come through with specifics on that,” he said.

Many of the options for curbing entitlements have met with fierce opposition from powerful groups including the AARP seniors’ lobby, which wrote to Congress and the president last month expressing its concerns about such proposals.

The group fanned out across Capitol Hill this week to lobby against two elements in Boehner’s plan: raising the Medicare eligibility age and using the chained CPI for Social Security. Medicare’s eligibility age, 65, hasn’t been increased since the program began in 1966.

Medicare Savings

The Medicare change could save the federal government more than $100 billion while increasing health-care costs to senior citizens, states and employers. People age 65 and older could pay an extra $2,000 for health insurance if they are excluded from Medicare, according to the nonpartisan Kaiser Family Foundation.

The chained CPI inflation method to determine annual cost- of-living adjustments for millions of Americans was a central feature of both the plan presented by the co-leaders of Obama’s 2010 debt commission and a blueprint by the Bipartisan Policy Center’s Debt Reduction Task Force.

Social Security and other government benefits, along with much of the tax code, are automatically adjusted to reflect inflation. Yet economists say that exaggerates how quickly prices increase, meaning the government pays too much for annual cost-of-living gains while collecting too little tax revenue.

Projected Spending

Over 10 years, using the chained CPI pushed by Boehner would reduce projected Social Security spending by 1.2 percent, according to the CBO.

“Every bipartisan group that has reached a conclusion has said those are the elements you have to have,” said Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, referring to the proposed changes to entitlement programs.

“It’s just as clear as it can be,” he said on Dec. 4 when asked about the need for his party to compromise. “Both sides have to move off their fixed positions in order to reach an agreement.”

Upshot of the Foreclosure Backlog

2012-12-08T01:21:00.001-08:00

FORECLOSURES are taking significantly longer in states where lenders must go through the courts, and the delay may or may not be good for borrowers, depending on their circumstances. But some researchers say that dragging the process out hurts society at large.

About half of the 50 states have judicial foreclosure systems. The housing market crash so bogged down the systems in New York and New Jersey that foreclosures there have routinely dragged on for two or three years; their timelines are among the longest in the country. The national average, which factors in nonjudicial states, is about one year, according to RealtyTrac, which monitors foreclosures nationwide.

The sluggish process has caused a backlog of loans in foreclosure and is slowing the housing market recovery in judicial states, says Michael Fratantoni, the vice president for research and economics at the Mortgage Bankers Association. As of the end of the third quarter, according to the association, 6.6 percent of all loans were in foreclosure in judicial states, compared with 2.4 percent in nonjudicial states.

A study released last summer by researchers at the Federal Reserve Banks in Boston and Atlanta found that the longer properties languish in delinquency or under a bank’s ownership, the greater the negative effect on the value of surrounding properties.

“The best outcome is to prevent the foreclosure,” said Paul S. Willen, an economist and policy adviser at the Boston Fed. “But if it’s clear that can’t be done, it’s in society’s interest to get the foreclosure done as soon as possible.”

In a separate study last year, Mr. Willen and his colleagues question the basis for giving borrowers more time to try to fix mortgage problems. The study found that avoiding foreclosure was no more likely for borrowers subject to either judicial foreclosure, or laws forcing lenders to wait 90 days before beginning foreclosure proceedings, than it was for other borrowers.

Consumer advocates agree that foreclosures are taking too long in some states. High concentrations of vacant properties have taken a heavy toll on certain neighborhoods, said Michael D. Calhoun, the president of the Center for Responsible Lending in Washington. “We agree that borrowers should be considered quickly for loan modifications,” he said. “They’re more successful if they’re done early on.”

But in his estimation, the delays aren’t a result of the protections provided to consumers under the judicial process, because the court process has worked fine in “normal times.” The problem now, he said, lies with the mortgage servicers. “We had a servicing system that was totally overwhelmed by the housing boom and even more so by the housing crash,” Mr. Calhoun said. “The backlog is due to servicer errors and lack of capacity.”

Communication gaps are also a factor, says Mark S. Cherry, a lawyer who represents borrowers in the state-sponsored foreclosure mediation program in New Jersey. His clients must sometimes return to mediation sessions five or six times before finally getting a loan modification. “Persistence breaks resistance,” he said.

Courts, too, have been overwhelmed. In New Jersey, a typical year brings about 24,000 residential foreclosure filings; in 2009 and 2010, annual filings surpassed 60,000.

The courts have since had time to adjust, especially because lenders have halted the processing of thousands of old cases while they work with federal regulators on improving their practices, said Kevin M. Wolfe, the assistant director of the Civil Practice Division of New Jersey’s Administrative Office of the Courts.

New foreclosure cases are moving much more quickly, and there is no backlog, Mr. Wolfe said. The average time for foreclosures filed this year is 6.4 months.

By the time lenders begin processing those old cases, the court should be far better prepared, he said, adding, “We’re not going to be caught up short this time.”