Posts Tagged ‘Bank of America’
Lehman back in the news
This is really an update to my recent post about BofA and Sam Zell’s acquisition of Archstone (http://wp.me/pqerO-7k). As it turns out, the remnants of Lehman had HOPED to do an IPO on Archstone, something that BofA and Barclays had opposed. Now, with Zell’s acquisition of BofA’s share, he has both put a stake in the heart of that hope, but also set a value for the assets at about $16 Billion. Given the convoluted ownership structure of Archstone, Zell has a veto over any of Lehman’s restructuring plans.
Elliott Brown and Robbie Whelan have a great piece on this in tomorrow’s Wall Street Journal. (http://tinyurl.com/749ffa4). Zell wants all of Archstone, and with Equity Residential would be America’s largest apartment landlord, with stakes in more than 190,000 units. Technically, Lehman could block Zell’s offer by coming up with the cash, and they’ve been talking with both Blackstone and Brookfield. However, part of Lehman’s accounting was a valuation of Archstone’s management and “brand” at around $1 Billion. With Zell already owning Equity Residential, that brand value is negligible to him. In short, Zell is in a fairly strong bargaining position to get what he wants.
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Hard to feel sorry for Bank of America…
….but let’s try, just this once. As pretty much everyone knows, over the past few years, they’ve repeatedly shot themselves in the foot, then reloaded, then opened fire again. Public displays of embarassment like the $5 debit card fee are just the tip of the iceberg (and, indeed, helped them shed a lot of low-return or even negative-return depositors who could and should be better handled by credit unions).
More interesting has been their acquisition of Countrywide a few years ago, which everyone agrees was a debacle, and their subsequent messy handling of CW’s meltdown. However, now that they’re in such a fiscal and regulatory mess, BofA is having to shed itself of assets — at firesale prices — that in good years they’d want to keep. The latest example is BofA’s interest in Archstone Residential, one of the biggest apartment owners in the U.S. with 78,000 units. Recall that apartments are doing VERY well today, and are the one sector of the real estate industry which weathered the recession storm nicely. Indeed, given the trend in apartment valuation, BofA would be well advised to hang onto this asset for dear life.
BofA and Barclays acquired a 53% interest in Archstone Residential via a Lehman Brothers-led acquisition. The original purchase price in 2007 was $22 Billion. That works out to about $282,000 per apartment, which is pretty darned high, admittedly. Let’s suggest that a reasonable value would be in the range of $200,000 per apartment, or about $15 Billion. Of course, REITs often sell for a premium over net asset value, so the $22 Billion acquisition price probably wasn’t terribly off the mark at the time. Thus, the total net asset value $15 to $16 Billion, which indeed is close to Dow Jones’ current estimate of $18 Billion.
However, who has $15 to $16 Billion laying around? (Or, to be specific, 53% of $15 to $16 Billion, or about $8 Billion?) Up to the plate steps Sam Zell — yes the same guy who gave us Equity Office Properties. He now owns Equity Residential, which is making a bid for the 53% at….. (drum roll, please)….. $2.5 Billion in cash and stock. In general, this works out to about $64,000 per apartment, which is painfully low. Note also, that Zell is the winning bidder, having out-bid AvalonBay, Blackstone, and Brookfield.
Why is BofA letting this go so cheap? For one thing, they don’t have much choice. The regulators are making them dump whatver they can at Craigslist prices to generate cash and cash-equivilents. For another, the nasty market we’re in makes cash king — no one is financing this sort of deal, not even at these firesale prices.
In some ways, Sam Zell is a lot like Warren Buffett. Often it’s said — mistakenly — that you could do worse than simply buying stock in whatever Buffett buys. That’s true, but only if you pay the prices (usually deeply discounted) that Buffett pays. Now, the same appears to be true with Zell.
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October 10 — Update #1
It’s a rainy Sunday here in the ‘burbs of the Emerald City, and I have a LITTLE bit of time to catch up on things. First thingie on my mind is the somewhat back-page article in many newspapers recently about Bank of America forstalling the foreclosure process until they get the legality of certain title problems straightened out. The Washington Post syndicate had a pretty good article by Brady Dennis and Ariana Eunjung Cha on Thursday that was carried widely, including by our local Seattle Times and the Mortgage Bankers Association.
Recall that home ownership and mortgage lending (or specifically, the act of pledging a home as collateral in a lending transaction) is LEGALLY a state-governed issues. The Federal government regulates banking and the lending process, but the actual pledging of a home (or any real estate, for that matter) is strictly a state issue (subject, of course, to certain Federal oversight.) Thus, if a nationwide lender like Bank of America (or Countrywide, which it bought) wants to make loans across the U.S., it still has to get permission in each and every state in which it does business, and the lending process needs to be tailored to each state’s peculiar laws.
As it happens, property ownership had a somewhat different emphasis from one state to the next. In South Carolina, where I used to live (and for that matter, in about half the states), foreclosing on a home is a very difficult process. The lender has to go to court and prove that the mortgage is in default, and further prove that the lender has the right to foreclose. In those states, the foreclosure process simply cannot proceed without a judge’s orders. In other states (my current home of Washington, for example), the process is much easier and does not require a judge.
The distinction is less important than the fact that there is a variance in processes among the states. When you are BofA (or Wells, or Chase, or any big lender), you want to bundle the loans together and sell them as pools. The pool actually WANTS loans from different parts of the country, to benefit from diversification. To facilitate this, and to make mortgage pools fungible and tradeable, the various lenders started subscribing to a service about 10 years ago called the Mortgage Electronic Registry Service (MERS), in Reston, VA. MERS separates the “real estate pledge” (that’s what the mortgage actually is) from the promissory note (which is what investors actually want to buy). In theory, MERS wouldn’t be an issue in an individual loan unless that loan went into foreclosure.
Now, in any given mortgage pool, even in GOOD years, a few of the loans will go into foreclosure. Fortunately enough, in “good” years, there are enough foreclosure buyers out there to keep the mortgage pool solvent, and no one really cares if every “i” wasn’t dotted and every “t” wasn’t crossed in the process.
But… sigh… these are anything but normal or GOOD times, and apparently bankers are churning ou the foreclosure doc’s so fast they’re getting carpel-tunnel from filling out paperwork. Guess what? If the mortgages were made slopily in the first place (as many were), and if the mortgage-note bifurcation was handled too rapidly (as most apparently were) and if the foreclosure applications are coming out of the bank like a firehose, then… well, remember that about half of the states require a judge to sign off on each and every foreclosure, right? And judges just HATE sloppy paperwork, right?
With THAT in mind, the foreclosure process is quickly grinding to a halt. In some states, the courts have ruled that MERS does not have a valid standing to initiate foreclosure proceedings. Class action suits have been filed in California and Nevada, no doubt with more to follow. The nightmare scenario for banks is that not only are foreclosures invalid because of sloppy paperwork (let’s don’t forget the sloppy underwriting that got us in this mess in the first place) but also one might argue that any foreclosure initiated in the past 10 years is also invalid. Thus, if you lost your house at the leading edge of this mess, two years ago, assuming the statute of limitations is still in effect, you may have a case.
Sadly, the vast majority of these foreclosurse are probably valid, albeit that may be difficult to substantiate with the sloppy paperwork. Homeowners who can’t make their payments anymore need closure so they can move on with their lives. Lenders (and mortgage pool investors) need to get assets redeployed. Neighborhoods with boarded up homes need families living in those homes again, whether they are homeowners (who frequently buy “fixer-upper” foreclosures) or renters. The system is not served at all by dragging this process out.
On the other hand, we constantly teach students that one of the strengths of the western economy is the rule of law. Contracts mean something, and badly drawn or poorly executed contracts cannot have the same legal standing as good ones. To allow such in the name of expediency puts us pretty far down the slippery slope.
I’ll be following this story. This is a complicated story, and newspapers, sadly, end up putting complex stuff on the back pages. This issue, however, deserves some front page attention.
EDIT #1 —
Since I wrote this, Foxnews.com published a very good synopsis of the problem.
From a small northwestern observatory... 