City braces for cuts to state, federal grants for local projects

by Edythe Jensen - Aug. 1, 2008 07:45 AM
The Arizona Republic

Chandler is bracing for some belt-tightening it can't control: unexpected cuts in state and federal grants.

Reductions and cancellations of some of the $25.8 million in anticipated grants are already affecting airport projects and will likely reduce how much the city can spend on low-income housing maintenance and rent subsidies, budget manager Dawn Lang said.

The city planned to use the grant money for everything from airport construction and road improvements to police and fire equipment. Cuts aren't likely in the public-safety grants, Lang said.

Airport Manager Greg Chenoweth said he recently received word that airport grants through the Arizona Department of Transportation have been canceled for fiscal 2008-09, although federal money still appears to be available. The state cuts are forcing the airport to postpone improvement projects planned for this year, including replacement of an obsolete computerized weather system for which service is no longer offered, he said.

Affected airport projects include construction of additional parking, new signs and planned improvements to apron areas between hangars and runways just as commercial building is booming around the facility, Chenoweth said.

"There's never a good time to lose this money; we'll have to make do," he said. Cities fear the state won't stop at canceling this year's airport funding and they'll rescind some of the money allocated last fiscal year to ease a massive state budget deficit, Chenoweth said.

Lang said the city has requested slight increases in housing-grant funds to keep up with rising operating and utility costs but is not optimistic those increases will be granted. Because of that, the final housing budget has been delayed and the city is preparing to make cuts in its housing program, she said.

Report: Number of illegal migrants in Ariz., U.S. plummets

by Ronald J. Hansen - Jul. 31, 2008 12:00 AM
The Arizona Republic

The illegal-immigrant population has fallen an estimated 11 percent nationwide over the past year and perhaps even more in Arizona, with stricter law enforcement a likely cause, according to a report issued Wednesday by a Washington organization that promotes less immigration.

The apparent drop preceded a spike in unemployment claims, suggesting enforcement, not the nation's faltering economy, is responsible, said Steven Camarota, director of research for the Center for Immigration Studies. The drop of about 1 million illegal residents happened from August to May, the report says, even as the number of legal immigrants increased.

In Arizona, the number of illegal immigrants may have fallen as much as 18 percent since August, Camarota said, though the data is too spotty to say with confidence. The state, however, is among the leaders in declines, he said.

"There seems to be a sense among the illegals that the enforcement law is back in business," Camarota said.

Estimates before this study put the number of illegal immigrants at 12 million nationwide and 500,000 in Arizona.

Michele Waslin, a senior policy analyst for the Immigration Policy Center, an organization frequently at odds with Caramota's, agreed that the number of illegal immigrants may have fallen, but she thinks the report's conclusion about enforcement is wrong.

"It really misses the point. It's the economy. The economy is by far the biggest factor," she said.

Reliable data is always hard to find for illegal immigration, Waslin said, but unemployment figures in immigrant-heavy industries rose well before the August time frame emphasized in the report.

Caramota's report is drawn from Census Bureau data measuring the number of less-educated, working-age Hispanic immigrants.

Jeanine L'Ecuyer, a spokeswoman for Gov. Janet Napolitano, said a drop in illegal immigrants would be consistent with federal reports of a decline in apprehensions.

She said the U.S. Border Patrol's stepped-up efforts since 2006 seem to have helped.

"The economy?" L'Ecuyer said. "It's had an effect on everything else, so I'm sure it's a factor. But to what extent, who knows?"

Answers in Arizona are as elusive as anywhere. It is unclear, for example, how much the state's employer-sanctions law, which threatens to pull business licenses from those who knowingly employ illegal workers, contributed to any drop-off.

Arizona's housing industry began cooling off in mid-2006, and the state's overall economy has cratered for more than a year. Meanwhile, Maricopa County Sheriff Joe Arpaio has led roundups of illegal immigrants, helping stoke a more militant enforcement climate across the state.

Camarota said the enforcement matters also receive attention in Spanish-language media, further amplifying their effects. He likened it to the way all motorists slow down even if just one driver is stopped by police.

The 12-page report is the latest volley in a debate that for years has roiled the nation, especially its southern border states.

Last month, Wayne Cornelius, director of the Center for Comparative Immigration Studies at the University of California-San Diego, issued a report that said illegal immigration "clearly corresponds to changing U.S. economic conditions."

Utility says finances remain weak, will cut $500 mil in improvements

by Ryan Randazzo - Jul. 31, 2008 12:00 AM
The Arizona Republic

Pinnacle West Capital Corp. will slash $500 million from planned investments in Arizona Public Service Co.'s electrical infrastructure in the next three years to improve the company's "deteriorated" finances, officials said Wednesday.

They announced the cuts while discussing the company's $133.9 million profit earned from April to June.

Those profits were boosted by unusual circumstances, including a $30 million tax benefit and big sale in its real-estate division.

Officials downplayed the profits, emphasizing that APS is earning about an 8.5 percent return on its investments, less than the 10.75 percent it is legally allowed to earn.

They said that without a rate increase, they have little choice but to cut infrastructure spending.

In the past year, APS has raised its base rates, fuel rates and twice increased transmission rates, but officials say it is not enough.

They are asking the Arizona Corporation Commission for another base-rate increase, and said the company's ability to meet growing energy demands in Arizona is jeopardized by its rate structure.

"Ongoing earnings are flat for the year with inflation offsetting our efficiency savings and revenue growth," Chairman Bill Post said.

Getting higher rates approved is critical to maintaining the company's credit rating, officials said. If its credit slips, funding new power plants will be even more difficult.

"Sustaining superior, reliable customer service requires a financially strong company," Post said. "We cannot invest in the infrastructure needed to reliably meet customer needs without consistent financial help."

In addition to the 9.4 percent rate increase that would bring the monthly average household electric bill up about $11, APS has asked the Corporation Commission to grant the utility an interim increase that would raise bills about $4.66 in the meantime while the lengthy rate hearings take place.

The full rate hearing likely won't be finished until fall 2009, but the interim request could be enacted by November.

The utility has an obligation to provide power to new customers, but top executives will review every capital-expense project from power-plant upgrades to transmission lines and cut what they can, President Don Brandt said.

"They will look at each project and assess the overall business risk of deferring or eliminating that project," Brandt said.

Profits increased

A one-time tax benefit and selling its Hayden Ferry Lakeside development in Tempe helped Pinnacle West's profits by $30 million and $19 million, respectively.

Pinnacle West, which also owns SunCor Development Co., reported profit of $133.9 million, or $1.33 a share, compared with $79 million, or 78 cents a share, in the same quarter last year.

Excluding the tax benefit and the office-building sale, Pinnacle West still earned $84.9 million, $5.9 million more for the quarter than a year ago, a 7.4 percent increase.

Revenue rose 7.3 percent to $926 million for the quarter.

Analysts polled by Thomson Financial Network estimated earnings of 80 cents a share, which the company topped even excluding the one-time items.

Wall Street analysts for the most part characterize the relationship between the company and regulators as poor.

"Fundamentally, (Pinnacle West) has a great market, with customer growth about twice the national average, and reliably hot summers," analyst Philip Adams of Gimme Credit research said. "But (Pinnacle West) has historically had a problem getting timely regulatory relief to meet rising costs and a return on invested capital to support the growth."

Company shares rose Wednesday 94 cents, about 3 percent, to $32.52.

Executive pay raise

Earlier this month, APS gave the vice president in charge of Palo Verde Nuclear Generating Station a $252,000 raise - upping his annual base salary to $800,000 - and $1 million a year in deferred compensation for four years.

Brandt said the increase was justified even amid the company's financial problems because that official, Randall Edington, is well regarded in the industry and critical to helping the nuclear station get out of regulatory trouble.

"There are a small number of people in the world that can do what Randy can do," Brandt said.

He added that Edington won't get the $4 million in deferred compensation if he leaves before 2012, which gives him a strong incentive to stick around and see the plant through its current troubles.

"He and his team are doing a great job," Brandt said.

Law ends loophole for down payments

Housing bill halts practice vital to recent Arizona sales

by J. Craig Anderson - Jul. 31, 2008 12:00 AM
The Arizona Republic

Since the collapse of subprime lending, Arizona's bloodied housing market has been leaning heavily on a makeshift crutch known as seller-funded down-payment assistance.

A federal housing bill signed into law Wednesday will yank away that crutch on Oct. 1.

Down-payment assistance programs allow home sellers to funnel cash to buyers through specialized non-profit organizations.

Phoenix real-estate analyst Jim Belfiore and others in the housing industry expect an artificial spike in home sales over the next two months, as potential buyers rush to take advantage of existing no-down-payment programs before the federal ban takes effect.

Once it hits, new-home sales in the Valley could decline as much as 50 percent, they said.

Down-payment assistance programs exploit a loophole in federal lending laws allowing non-profit organizations to gift mortgage down payments. In some ways, they have become a substitute for subprime loans, in that they give builders a way to place first-time and low-income buyers into new homes even when they can't afford a down payment.

Customers in outlying communities such as Laveen, Maricopa, Surprise and the Hunt Highway corridor of northern Pinal County currently use down-payment assistance for nine out of every 10 sales, Belfiore said.

"Almost every builder out there is heavily marketing homes with down-payment assistance," he said. "The hardest-hit area of the market will be the starter-home market."

Recovery from the ban's effects could take up to two years, Belfiore said, as both the market and consumer expectations undergo a major readjustment.

"We will eventually go back to the mind-set of a society where you have to have 3 percent up front to buy a home," he said.

However, Jacque Petroulakis, spokeswoman for Pulte Homes and the Communities of Del Webb, said her company expects an overall improvement in the market as a result of the housing act, though she agreed the loss of down-payment assistance could hurt sales.

"It does create some challenges for some of our buyers," she said. "How that specifically will impact our operations, I don't know."

More importantly, Petroulakis said, the bill's creation of a $7,500 tax credit for first-time home buyers, to be repaid without interest over a 15-year period, will boost the housing economy more than the loss of no-down-payment offers will depress it.

2 non-profits

Two national non-profit organizations that have become synonymous with seller-funded down-payment assistance, AmeriDream, based in Gaithersburg, Md., and Sacramento-based Nehemiah Corp. of America. They lobbied frenetically to save down-payment assistance in the weeks leading up to Wednesday's passage of the Housing and Economic Recovery Act of 2008.

Nehemiah President Scott Syphax said the ban, which technically prohibits the Federal Housing Administration from insuring such loans, could have a devastating effect on Arizona's economy because of its widespread use.

"It will further depress an already struggling housing market," he said.

Syphax chastised Congress and the Bush administration for passing the bill "knowing that millions of Americans will awake to a law that leaves them with zero alternatives for attaining homeownership."

He vowed to press the administration - and its successor, if necessary - to reverse the ban through legislation.

"We haven't given up on the American people, and they haven't given up on us," Syphax said.

Patricia Garcia-Duarte, president and chief executive officer of the non-profit Neighborhood Housing Services of Phoenix, said it is really home builders, not the American people, who are reaping the benefits of seller-funded down-payment assistance.

She said the services of Nehemiah and AmeriDream need to go because they do nothing to promote responsible homeownership and exist primarily to help builders sell more homes.

Garcia-Duarte said her organization and many other government and non-profit agencies already offer "true" down-payment assistance, a far cry from the handouts buyers have been receiving through seller-funded programs.

For instance, Neighborhood Housing has strict payment-to-income standards and requires borrowers - the assistance eventually must be repaid - to attend borrower-counseling sessions and take financial-literacy and budgeting classes.

Garcia-Duarte said the down-payment assistance services her organization provides will not be affected by the ban, which focuses solely on the seller-funded variety.

Home builders using seller-funded programs artificially inflate home prices by as much as 6 percent before passing that money to buyers, she said.

"There are good down-payment programs, and there are bad down-payment programs," she said. "The government is trying to ban the bad ones."

Surprise resident Jesse Grob disagreed, saying it's a shame first-time buyers will no longer be able to utilize seller-funded assistance programs as he did.

"I'm a hardworking guy - I'm by no means poor," he said. "I made $70,000 last year, and I still had a hard time coming up with a down payment."

Surge in calls

Phoenix loan originator Dean Wegner said lower wages and rising gas and food costs have cut about $4,500 out of the average family's yearly budget, making it harder to accumulate savings to buy a home.

He said area lenders have experienced a recent surge in calls as residents scramble to beat the ban.

"I think the word is out," Wegner said. "If they want to buy a home with no down payment, they'd better do it now."

In the meantime, home builders will be scrutinizing the new legislation in search of new ways around the ban, Belfiore said.

"I'm sure they are scrambling to understand what is allowed and what isn't allowed," he said.

Neighborhoods Where the Bubble Hasn't Burst

In a report for Forbes.com, Hotpads.com, an aggregator of rental listings, produced a price-to-earnings spread for each ZIP code in the country's 40 largest cities by comparing rental costs with buying costs for similar properties, based on number of bedrooms, location, and price per square foot.

A price-to-earnings ratio, or P/E, expresses how much a buyer has to pay for each dollar of return. Buyers in high P/E neighborhoods pay a huge premium to live in the area relative to how much it costs to rent a similar property there.

A high P/E can simply mean a neighborhood is overpriced, but it can also indicate where buyers have gambled that the area will ultimately appreciate further, turning an overpaying buyer into a smart investor.

Here are 10 neighborhoods, by ZIP code, where P/E is highest, but so is the confidence that the area will appreciate further:

New York, TriBeCa, ZIP code 10013, Purchase-to-rent spread: 36.3

Boston, Chinatown, ZIP code 02111, P/E spread: 30.5

Seattle, Downtown, ZIP code 98104, P/E spread: 30.3

Los Angeles, West Hollywood, ZIP code 90038, P/E spread: 30.2

San Diego, Calif., Mission Hills, ZIP code 92103, P/E spread: 30

San Francisco, Outer Sunset, ZIP code 94122, P/E spread: 28.5

Phoenix, Coronado, ZIP code 85006, P/E spread: 27.1

Dallas, Greenway Parks, ZIP code 75209, P/E spread: 26.7

Portland, Ore., Rose City Park, ZIP code 97213, P/E spread: 26.6

San Jose, Calif., Willow Glen, ZIP code 95125, P/E spread: 26.1

Source: Forbes.com, Matt Woolsey (07/29/2008)

Hedge funds are buying up loans, foreclosed properties

Jul. 31, 2008 12:00 AM
Associated Press

Guess who holds your mortgage now? It's your friendly neighborhood hedge fund.

Dozens of hedge funds, private equity groups and other investors have plunged into the beaten-down mortgage market in recent months, buying tens of thousands of distressed loans and foreclosed properties.

They hope to profit from the woes of banks and other investors holding mortgages that have plummeted in value as home values sink and defaults soar.

They are buying them from Wall Street investment banks eager to rid themselves of bad assets. Merrill Lynch & Co., for example, said this week it would sell mortgage-linked investments once valued at $30.6 billion for just $6.7 billion to Lone Star Funds, a distressed-debt investor in Dallas.

Many of the hedge funds, run by former Wall Street and lending industry executives, claim they can do a better job than banks or other investors of modifying mortgages at terms that consumers can afford.

However, the hedge funds acknowledge that the loans they purchase are often in such trouble that as many as two-thirds to one-half can't be salvaged. In that case, the fund obtains the property through foreclosure and tries to sell it off, or allows the borrower turn over the house keys in return for forgiving the outstanding mortgage balance.

Evan Gentry, chief executive of G8 Capital, says that for some borrowers the best move is to "simply do a deed in lieu of foreclosure and simply start over," adding that many borrowers "feel a great relief when we tell them it's OK" to do so.

So far, housing advocates say they haven't yet seen the impact of such hedge funds among the borrowers they counsel. But they hope these new investors will be more amenable to borrowers interests' than the current mortgage holders, which have been widely criticized for being sluggish to modify loans amid an unprecedented volume of defaulting loans.

Still, there are some worries that desperate borrowers unwittingly may be giving up protections, such as the right to sue the original lender, when they agree to a modification.

"Borrowers are not represented by an attorney or anybody who can advise them about the legal effects of what they're signing," said Kurt Eggert, a professor at Chapman University's law school.

Housing permits doing the wave in Gilbert

by Brian Duggan - Jul. 30, 2008 01:34 PM
The Arizona Republic

It's bittersweet news for Gilbert's housing sector, town officials say.

Housing permits are showing some growth since the number issued by the town began to dip last year, bottoming out at 43 in January.

But since the winter low, permits have grown to a 2008 high of 171 in May and dipped to 151 in June, according to the town.

Although historical averages for May and June are usually around 250 to 300 each month, it's still better than expected, said Greg Tilque, Gilbert's development services director.

"We thought it'd stay pretty flat for a number of months," Tilque said.

But the growth may not be permanent. Preliminary number's for July's housing permits suggest that they are sinking again since this year's high, said Marc Skocypec, Gilbert's assistant town manager. Skocypec said the town is expecting about 100 to 110 permits for July.

"We have kind of an uptick since January, but it's tailing off a little bit," he said.

In March, the town cut nine jobs from the development services department in light of the low housing permit numbers. Since then, Skocypec said his staff budgeted to issue about 50 permits a month.

The growing number of housing permits, while low historically, is still surprising, Skocypec said.

Housing and Economic Recovery Act of 2008

H.R. 3221, the “Housing and Economic Recovery Act of 2008,” passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the bill on July 30, 2008. The bill includes the following provisions:

• GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• FHA Reform – including permanent FHA loan limits at the greater of $271,050 or 115% of local area median home price, capped at $625,500; streamlined processing for FHA condos; reforms to the HECM program, and reforms to the FHA manufactured housing program. The downpayment requirement on FHA loans will go up to 3.5% (from 3%). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• Homebuyer Tax Credit - a $7500 tax credit that would be would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan).

• FHA foreclosure rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.

• Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.

• VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.

• Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision is effective from October 1, 2008 through September 30, 2009.

• GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.

• Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.

• National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.

• CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.

• LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.

• Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.

Bad economy halts all state land sales

by Michael Clancy - Jul. 29, 2008 10:48 AM
The Arizona Republic

The State Land Department has halted almost all land sales "for quite some time," a state official said.

The last attempted land sale, for a small parcel in northeast Phoenix on July 9, drew no interest.

Several previous sales attracted no bidders, including large parcels in or near the desirable Desert Ridge area of northeast Phoenix.

The State Land Department controls almost all undeveloped land in north and northeast Phoenix. It hoped to begin selling land north of Pinnacle Peak by now. That land, several Desert Ridge parcels and other pieces of land are now tentatively scheduled for sale in 2009.

Department officials have blamed the decline in interest on the economic downturn and the housing crisis.

No auctions are scheduled for August.

In September, only three small right-of-way auctions are scheduled.

In October, the State Land Department has scheduled three right-of-way sales, two in Pinal County and one in Pima. It has scheduled a 5-acre land sale to a church in Sierra Vista.

Beyond October, nothing is scheduled.

"You will not see us bringing new parcels to auction for quite some time," Deputy State Land Commissioner Jamie Hogue said after the failed auction this month.

The fiscal year that just ended had several parcels in northeast Phoenix and elsewhere that failed to sell.

Mark Winkleman, state land commissioner, said the department is continuing to talk to land owners about relieving their obligations.

Mutual of Omaha banks open

Firm glad of First National takeover opportunity, chance to make its mark in Southwestern region

by Russ Wiles - Jul. 29, 2008 12:00 AM
The Arizona Republic

The banking industry is slogging through its worst year in well over a decade and the Southwestern real-estate market remains in the dumps, yet Arizona's newest player is betting on better times ahead.

Mutual of Omaha Bank became one of the state's top 10 banks virtually overnight by purchasing deposits and certain assets of First National Bank, after regulators closed the Scottsdale firm Friday in a transaction that will leave depositors fully protected.

"We're just so excited," said Jeff Schmid, chairman and chief executive officer of the Nebraska-based bank. "We're going to look back on this in five years and be so happy."

Mutual of Omaha takes over a network of 28 branches, including 15 in Arizona and the rest in California and Nevada.

The firm had no previous operations in those states yet recognizes the growth potential in the region. Mutual of Omaha had started exploring ways to enter the Southwestern region around the start of the year, before First National's financial problems escalated.

"This couldn't have happened at a better time for us," Schmid said.

He predicted that Mutual of Omaha will retain most former First National employees.

"The fact we're a new player here has a huge upside because it means we need everybody," Schmid said.

After the Office of the Comptroller of the Currency closed First National and appointed the Federal Deposit Insurance Corp. as receiver, First National's staff temporarily became employees of the FDIC. But most of them will transition to Mutual of Omaha Bank, starting with customer-service representatives and extending to loan officers, information-technology staff and others.

"The most important thing at the moment is to make customers feel good," Schmid said.

He said Mutual of Omaha will honor the yields on deposit accounts offered by First National. He said customer activity was low after the news broke late Friday. Now that the status of depositors has been resolved, "we're sensing some money is moving back in," he said.

Schmid said his firm was especially interested in Community Association Banc, a First National unit that caters to the banking needs of homeowner associations.

"That supercharged our interest," he said. "We can brand that big time."

Schmid and other Mutual of Omaha executives can afford to be upbeat. The bank, founded last year, is too new to have much exposure to the subprime-mortgage debacle and resulting fallout. It also has a big-pocket parent in Mutual of Omaha, a 99-year-old insurer.

In fact, Schmid said that Mutual of Omaha Bank will become an active mortgage lender, adding that the firm not only will retain all of First National's Arizona branches but may add some.

He indicated Mutual of Omaha hasn't yet decided what to do with First National's headquarters in north Scottsdale. Nor has the firm named a top Arizona-based executive.

Schmid isn't the only one expressing optimism for banking in Arizona.

"Long term, the Arizona market still has very good demographics," said Robert Sarver, head of Western Alliance Bancorporation, whose Alliance Bank of Arizona unit recently posted a 25 percent profit increase for the second quarter while generating a record amount of new loans.

"The current economic environment has created challenges, but the disruption in the marketplace also creates opportunities," he said.

Sarver said the short-term outlook for banks here will be heavily influenced by lingering real-estate weakness. But he cited favorable signs such as firming prices for new homes, a stable number of listings and improving sales figures.

"I think we're seeing the beginning of the bottom on the residential side," he said.

Bank failures are expected to keep rising this year and possibly into 2009 or 2010. Still, the pace of failures has been below past periods of stress in the financial industry, such as in the late 1980s and early 1990s.

"We're not out of the woods yet," said Herbert Kaufman, a finance professor at the W.P. Carey School of Business at Arizona State University. He cited the possible failure of a much larger bank as a development that could seriously rattle the financial markets.

"It's a precarious time," Kaufman said. "But barring that, we see some signs of stabilization in credit and housing."

Kaufman said he supports the government lifeline to Fannie Mae and Freddie Mac as well as Federal Reserve efforts to lower interest rates and generally provide more liquidity.

"The unprecedented cooperation among Congress, the White House and the Fed has been appropriate and welcome," he said.

Feds shut largest Ariz.-based bank

First National to be taken over by Mutual of Omaha

by Russ Wiles - Jul. 26, 2008 12:00 AM
The Arizona Republic

First National Bank, the state's largest locally based bank and a specialist in lower-quality mortgages, was closed by regulators Friday, a victim of problem loans and the lingering real-estate slump.

The bank failure will cost the Federal Deposit Insurance Corp.'s insurance fund an estimated $862 million.

However, a smooth transition for First National customers and employees is expected. First National's deposits were purchased by Mutual of Omaha Bank, a subsidiary of Mutual of Omaha.

All 28 First National offices, including 15 in Arizona, will open under the Mutual of Omaha name on Monday. First National's other branches are in Nevada and California.

In the meantime, depositors can continue to write checks, make ATM withdrawals and use debit cards. Jim Nolan, spokesman for Mutual of Omaha Bank, said it will honor deposit yields and other account terms for the immediate future.

Scottsdale-based First National Bank ranked eighth in size among banks doing business in Arizona, with 2.6 percent of statewide deposits.

It is the sixth bank failure of 2008 and the first involving an Arizona institution since 2002. It was just the second Arizona banking failure in the past 16 years.

Friday's announcement ends a decadelong odyssey for First National, which rode Arizona's economic boom to become the largest independent bank here, only to collapse even faster.

The announcement was another bright-neon sign that the nation's housing slump and subprime-lending woes have come home to roost.

Multiple offers

On Friday, the Office of the Comptroller of the Currency closed First National, and the FDIC was named receiver.

The FDIC opened bidding for its deposits on July 23 and received multiple offers.

"There was a lot of interest in this bank," said David Barr, an FDIC spokesman, currently in the Valley with other agency officials.

Mutual of Omaha Bank bought all insured and uninsured deposits, meaning former First National Bank customers face no risk of loss from the failure. It was only the second time in the past 10 bank closings that another firm bought all deposits.

Two weeks ago, after the collapse of California's IndyMac Bank, regulators didn't find a suitor to take over assets of that firm, leaving the status of some uninsured depositors in limbo.

Mutual of Omaha Bank also will acquire $200 million in other assets from First National.

The estimated $862 million to be covered by the FDIC insurance fund reflects other assets and liabilities not assumed by Mutual of Omaha Bank.

"That's basically what they were in the hole," Barr said of First National.

Technically, the transition affects First National Bank of Nevada, into which First National Bank of Arizona was merged four weeks ago, as well as a California bank, First Heritage. All were units of Scottsdale-based First National Bank Holding Co.

"We've got temporary signs and banners for Monday with the new identification," Nolan said.

Nolan said no near-term staffing changes are likely. First National counted roughly 1,000 workers, mostly in Arizona.

In a news release, the FDIC emphasized First National Bank isn't connected to another bank with a similar name, National Bank of Arizona, a unit of Zions Bancorporation.

At its peak early last year, First National employed more than 2,200 people, including 1,300 in Arizona.

But the firm reported a $140 million loss in the first quarter, along with mounting delinquencies and charge-offs, and a worsening capital position. Its fate was sealed by an inability to find a white knight.

In a July 15 interview with The Arizona Republic, President and Chief Executive Officer James Claffee said the firm was in serious discussions with two unnamed potential investors, one a bank and the other a private-equity firm, to shore up a serious capital deficit caused by mortgage losses.

At the time, Claffee clung to hope First National could recover but cited difficulty in attracting a suitor.

A First National spokeswoman reached Friday night said the firm's principals have no current comment.

Raymond Lamb was the driving force behind First National throughout its 10-year history. Lamb owned more than 80 percent of the shares in the privately held company.

A veteran banker with nearly 40 years in the business, Lamb bought his first bank at age 29, in North Dakota.

He spent most of the next couple of decades running banks in the Midwest and New Mexico before turning his attention to Arizona and the Southwest.

He founded the company with the 1998 purchase of Laughlin National Bank, then started a sibling bank in Arizona in 1999.

The company later added a bank in California.

4 key areas

The entire enterprise, called First National Bank Holding Co., focused on four key areas: commercial loans, construction loans, small-business loans and mortgages. Lamb and other top executives stressed personal service and an ability to make quick, local decisions on lending, a slap at the large national banks that dominated and continue to dominate the landscape here.

He tried to create a "heritage" company that would last for generations. Lamb appointed sons Phillip and Patrick and daughter Elizabeth to senior management positions.

"Frankly, we have a lot of families working here," he said in a 2005 interview.

"We really want this bank to last for generations, where people feel secure that we won't merge with someone bigger and have their lives screwed up," he said back then.

Bank executives didn't see the approaching train wreck in the real-estate and credit markets.

"I don't see a bubble," said former president and CEO Gary Dorris, also in mid-2005.

Dorris, who retired earlier this year, at the time described the real-estate boom as different from a prior steep downturn in the 1980s.

"(Back then), you had credit chasing deals, and loans were made above the present value of the real estate," he said at the time. "Today, banks are requiring more equity from participants. Our company typically would require 20 to 30 percent equity from a developer."

First National's fortunes quickly began to unravel in late 2006 and early 2007.

A specialist in lower-quality "Alt-A" mortgages, the company eventually was hit with lawsuits alleging it had failed to document borrower qualifications on bad loans that were sold to Wall Street investors.

In April 2007, it announced the first layoffs in company history, affecting more than 200 workers, including 53 in Arizona.

Four months later, First National decided to close its national wholesale-mortgage operation and let more than 540 people go.

Office vacancy rate jumps in Chandler

by Luci Scott - Jul. 23, 2008 10:35 AM
The Arizona Republic

The office-leasing market for Class A space in Chandler has slowed, and vacancy rates have nearly doubled from a year ago. But the city is still considered one of the healthier markets in the Valley, a key to competing for companies that create local jobs.

The vacancy rate is 12 percent compared with 6.8 percent a year ago, said Christine Mackay, Chandler's acting director of economic development.

Potential tenants are still looking, but with different attitudes.

They want to see a building completed before they will even look at it, Mackay said. "They're definitely saying, 'I want to touch it, feel it, walk around in it.' "

Developers also are luring tenants by putting completed spec suites within their buildings to display the possibilities.

Mackay said tenants want to see a building completed before they sign a lease because they have more choices today.

"Before, product was flying off the shelf," she said. "Now definitely we're moving back more into a tenant market."

Many tenants are not waiting the traditional 90 to 120 days to move in, said Michael Myrick, a vice president at Grubb & Ellis/BRE Commercial.

"The key now is to move in immediately," he said.

Even with the higher vacancy rate, Chandler is still one of the healthier markets in the Valley, Myrick said.

It ranks near areas with the lowest rates, including 11 percent in midtown Phoenix and 10.4 percent in the area around Phoenix Sky Harbor International Airport.

"Overall, (Chandler) is a healthy market compared to others in Phoenix," Myrick said.

Myrick said medical offices are the strongest segment of the market.

There are virtually no medical-office vacancies around Chandler Regional Medical Center, Mackay said. The key for medical offices, however, is where they're built.

"As fast as they can build them, they sell or lease them ... as long as they're near a provider such as a hospital or urgent care center," Mackay said.

Medical-office condos in neighborhoods, however, are moving more slowly.

"Location is everything in that market," she said.

In fact, any office space is leased sooner if it's near the Santan Freeway or Loop 101, Mackay said.

"People are really not interested in looking at office product not on those freeway corridors," she said.

Compared with the rest of metropolitan Phoenix, the Chandler office market is doing well.

"A surprise to most people is that north Scottsdale is not faring very well," Myrick said. One reason is that Chandler has more affordable housing.

"Chandler is a bedroom community, where north Scottsdale ... has a lot of second homes and vacation homes," he said.

Also, CEOs live in north Scottsdale and most employees commute from elsewhere in the Valley. Chandler has many companies in which executives and employees all live in Chandler, Gilbert or Queen Creek, he said.

"They don't need a Scottsdale address; they don't need to be near the airport. They want to be close to their home," Myrick said. "It's a different mind-set."

High gas prices are having an impact, too, meaning that companies are paying more attention to their location in relation to where their employees live, he said.

"Overall in the long term, I think Chandler will remain a vibrant and healthy office market," he predicted.

He cited the city's growth and the boost offered by the completion of the Santan Freeway.

Chandler Echelon is under construction on the southwest corner of Loop 101 and the Santan Freeway. Phase I is a 180,000-square-foot office building with structure parking. Phase II is two hotels, and phase three is another 180,000-square-foot office structure.

Across the street, Park Place is under construction. The first phase will be a 250,000-square-foot office project.

Further east, Opus West is constructing a second 90,000-square-foot office building in the Chandler Airpark. Its first building was recently fully leased by Ottawa University and CDW, a technology sales and service company.

Those new large tenants brought the vacancy rate down, said Mark Krison, a broker with C.B. Richard Ellis. Another relatively new tenant is Pearson, an educational software developer that moved into a new five-story building at Loop 101 and Ray Road.

Despite more vacancies, rental rates aren't dropping, Mackay said.

The rates range from $15 a square foot for the lower-end space up to $28.50 for Class A.

In the past decade, the office market has mushroomed, Mackay said. In 1998, the total space in Chandler was 900,000 square feet. Now it's 5.1 million square feet.

10 Cities Where Cost of Living Is Growing Fast

Forbes magazine looked at inflation in the 40 largest metro areas in the U.S. to see where prices were rising fastest.

The numbers were supplied by the Bureau of Labor Statistics and Moody’s Economy.com and reflected changes between January and June 2008.

Resetting mortgages, rising food prices and runaway fuel costs are the biggest sources of the pain.

Here are the top 10 cities with the highest annual inflation rates.

1. Seattle, 5.82 percent
2. Dallas, 5.82 percent
3. Washington, D.C., 5.74 percent
4. Miami, 5.71 percent
5. Portland, Ore., 5.68 percent
6. San Jose, Calif., 5.61 percent
7. Milwaukee, Wisc., 5.61 percent
8. Tampa, 5.60 percent
9. Phoenix, 5.44 percent
10. Los Angeles, 5.41 percent

Source: Forbes, Matt Woolsey (07/18/2008)

Congress Ready to Nix Seller-Financed Loans

Congress is expected to pass a housing package this week that eliminates seller-financed mortgage programs.

Under these programs, nonprofit organizations finance the down payment for buyers, then home sellers repay the organizations. Millions of people have bought homes this way, but the Federal Housing Administration says the foreclosure rate on these transactions is four times higher than it is on its other transactions.

The Senate version of the housing bill banned seller financing; the House version did not. Negotiators crafting a compromise bill have agreed to follow the Senate’s position, which is also supported by the Bush administration.

"No insurance company can sustain that amount of additional costs year after year and still survive," Brian D. Montgomery, the FHA commissioner, said in a recent speech.

But supporters of this kind of assistance say the system may have its problems, but because it is vital to low- and middle-income buyers, it should be fixed, not abandoned.

Source: Washington Post, Dina ElBoghdady (07/22/2008)

City's financial scrutiny of developers limited

by Luci Scott - Jul. 18, 2008 06:32 AM
The Arizona Republic

Chandler now has two commercial projects where construction has stopped: the Chandler Piazza mixed-use development on Frye Road east of Loop 101 and the better-known Elevation Chandler high-rise next to the mall.

People driving by these abandoned sites can't help but wonder what the city's role is in scrutinizing developers more closely before projects are approved.

However, experts say as long as development projects are privately financed, cities lack the authority to demand financial details.

If there is some sort of public component like a partnership with the city or an economic development incentive that gives a city a stake, "then absolutely, there would be the due diligence in terms of making sure there were enough financial resources available to do the project," said Ken Strobeck, executive director of the League of Arizona Cities and Towns.

But if it's a private development, such as Elevation or Piazza, the city can only regulate zoning, issue building permits and perform inspections.

"We don't have any authority at all to go in and say, 'Show us your balance sheet before you begin this project,' " Strobeck said.

Chandler Piazza is planned as an 18-acre mixed-use project at Frye Road and Ellis Street. Work stopped there in May.

The developer, E.J. Pospisil, CEO of Scottsdale-based Momentum Commercial Real Estate, said in June he was reorganizing the financing. He blamed a slow leasing market for the work stoppage.

Doug Ballard, Chandler's director of planning and development, said he is especially concerned about Chandler Piazza because particleboard used for the walls is exposed to the elements and won't last long without deteriorating.

Elevation Chandler was planned as a high-rise hotel topped by luxury condominiums. Work stopped there in April 2005 and developer Jeff Cline has had a series of financial problems since. The project is in bankruptcy but has a potential buyer.