consultants are sandburs

Tuesday, November 13, 2007

Six of the twenty most exposed banks are in the Twin Cities. Will Pulte go broke? Will D.R. Horton? When was Nedegaard's loan nonperforming? Who knew?

This morning's online Pioneer Press has a look at the financial sector doldrums from a different perspective than failed mortgages - failed construction loans, instead - and if you don't know what a "construction loan" is, think "Bruce Nedegaard" or "John Peterson" for development loans, and then think of the actual home builders, particularly on "spec homes" [built on speculation vs. per a contract in advance with a particular purchaser]. Several builders might attain related construction loans within any particular development; and that is why there was a Master Development Agreement for Ramsey Town Center with only a small fraction of the building set to be done by Nedegaard's building firm.

See here, for a "line-of-credit" description of construction lending. Mortgages to home purchasers are long term credit. Loans to developers or builders are short-term working capital lending. The normal expectation is a construction loan will be cashed out from proceeds of the first purchaser's mortgage loan. The normal expectation for credit to a development is meeting some form of scheduled progress payments, as parts of the project get cashed out (i.e., what in the normal course of events would have been required of Nedegaard and his Ramsey Town Center LLC's borrowing -&- debt service). PiPress reports:

Housing slump stings area banks
Six from Twin Cities among 20 in the U.S. most exposed to failing construction loans
Pioneer Press
Article Last Updated: 11/13/2007 06:58:35 AM CST

An intensifying housing recession is zapping community banks across the Twin Cities - not with belly-up mortgages, but with failing construction loans for the housing behind them.

Since homebuyers slammed on the brakes, developers, builders and families across the region have been defaulting on construction loans for all manner of new housing, leaving community banks holding the bag.

Six of the 20 most-exposed banks in the country, ranked by the percent of overall bank assets that are in nonperforming construction loans, are based in the Twin Cities, according to New York-based investment rating agency Ratings. Nonperforming means the loans are unlikely to be repaid.

They are: Key Community Bank in Inver Grove Heights, Vision Bank in St. Louis Park, Citizens State Bank in Hudson, Wis., Community National Bank in North Branch, BankCherokee in St. Paul and Lake Community Bank in Long Lake.

We recognize that bank. They were the ones with Sandison and Peterson, bank officers dabbling on their personal account in an unlicensed title company with Bruce Nedegaard, when Nedegaard was on the hook, via RTC LLC, to that bank for millions. And they were the ones letting the security bleed out, piece by piece, without the principal of the debt being accordingly amortized.

So, you tell me, I'm ignorant of it, what's the definition of "a nonperforming loan."

Back to the PiPress reporting:

[D]evelopment deals became a bread-and-butter business for many of the small guys during the housing boom. It's not clear how many more shaky construction loans are coming due. With many developers and builders in dire straights [sic], the banks are changing course, with some targeting other commercial lending.

Failing construction loans at the six Twin Cities community banks ranged between 3.6 percent to 5.2 percent of the banks' total assets in the second quarter, according to Philip van Doorn, Ratings bank analyst who ranked the banks nationally based on call reports filed each quarter with the Federal Deposit Insurance Corp., which regulates banks.

Those are high concentrations of nonperforming assets - one FDIC official called the percentages "extreme" - although they represent just $37 million. By comparison, the ratio of nonperforming construction loans to total assets for all banks nationally was 0.06 percent in the second quarter.

That puzzles me, the $37 million number, where it came from. Nedegaard alone, in one deal with Community National Bank of North Branch, had that big an arrearage, so it seems like a low-ball number in any industry-wide context. Perhaps an error in reporting? Or editing error? Possibly, "billion" was meant. Resuming:

"I've been in the business 40 years, and I've not seen it like this," said Gene Haberman, president of Citizens State Bank in Hudson, which has $201 million in assets and nearly $10 million in construction loans unlikely to be repaid. "It was like a line was drawn in the sand, and all the building stopped. No one was prepared for that."

Nonperforming loans either are in default or have stopped accruing interest, but van Doorn's nonperforming count also likely includes many loans in foreclosure. Construction loans include commercial and residential construction.

To be sure, Citizens State Bank and the others are not failing and remain well capitalized, according to van Doorn's review. They all have tier-one leverage ratios - roughly a bank's core capital as a percent of total assets minus some liabilities - above the FDIC's required 5 percent.

Still, the high concentrations are troubling, particularly since the housing recession doesn't appear to have hit bottom and could worsen as more loans come due. Four of the six banks lost money in the second quarter, some because they beefed up loan loss provisions. At the very least, the failing loans and housing recession spell a rough patch for community banks as they change the way they do business.

[...] Haberman and the other bankers insist customers have no need to worry. They're working with their construction borrowers, they said, and the loans pose no threat to financial stability. They dismiss the trouble as a market issue.

If "working with their construction borrowers" is the term for what Community National Bank was doing with Nedegaard, myself, I'd worry.

I'd worry about mature experienced bankers who after years in business claim to be flumoxed by a market bubble bursting.

I'd worry as a banker about the way Nedegaard was allowed to continue, were I a banker in the loan consortium absorbing pieces of the Nedegaard lending activity that Community National packaged out.

I'd worry as someone with cash in such a bank as Community National. In a sock between the mattress and box springs might be safer for storing the cash than in some "banks" were it not for FDIC insurance for the first $100,000 on deposit and at risk in an institution. Anyone still with more than that in Community National, or with any CD holdings there not covered by FDIC protection, should consult his financial advisers quickly. Back to PiPress, with understatement featured:

Haberman and Marshall MacKay, president and CEO of the Independent Community Bankers of Minnesota, say banks may have become too casual with their real estate underwriting.

"I guess the obvious answer has to be yes, because if we knew what we now know, we would have put bigger margins in," Haberman said. "We followed traditional guidelines."

Others disagree standards got lax. The bankers didn't predict how quickly the high-cycle would end, they say.

That Citizens State Bank in Hudson popped out near the top of the list speaks to how the construction loan problems cut across a range of community banks. BankCherokee, Lake Community Bank (formerly State Bank of Long Lake) and Citizens State Bank all are 100-year-old institutions, not the kind of startup banks one might expect to be more vulnerable.

Such as Vision Bank. With assets of just $25 million, the St. Louis Park bank opened in 2005 specifically to fund commercial real estate deals. Brian Weimer, Vision's chief executive, said most of his trouble is one group loan, called a participation loan, that Vision Bank joined to finance a housing development that isn't in the construction phase yet. He wouldn't name the project.

Bad construction loans led Key Community Bank in Inver Grove Heights last year to shut down a residential real estate finance division it opened five years ago and cut back sharply on new housing construction loans. As of June, it still had about $4.6 million in bad construction loans. David Bjerknes, Key's senior vice president, said the bank has been "very effectively" working through the process to secure its collateral.

[... Then our poster child for bank woe] The troubles of another bank in the group are well known. Community National Bank in North Branch made headlines in July for its $35 million group loan to late developer Bruce Nedegaard for his failed Ramsey Town Center housing development. An attorney for that bank blamed the Ramsey Town Center deal for the bank's high concentration of bad construction loans.

FDIC regulators say they can't explain the cluster of failing construction loans in the Twin Cities. Federal banking regulators last year urged caution to small and midsized banks in managing risk.

Don't blame the project. Blame the guy(s) at the switch. Blame anyone who gave Nedegaard liquid cash during 2005 - 2006 without tying on strings. Pioneer Press earlier reported about money diverted into Swiss bank accounts. Probably in that time frame.

Letting that kind of mischief go on under your nose, does that sound like prudent banking to you?

Who else knew of the seriousness of the Nedegaard situation - his thinly capatilized meanderings into the Ramsey Town Center affairs, and all? Tammy Sakry reported City of Ramsey knew. James Norman appears to have told her that.

So what did our prudent city officials do to preserve the security of Ramsey Town Center park plans and promised millions of developer dollars for that precise park development purpose?

What did they know? When did they know it?

What did they do? When did they do it?

Who were the parties responsible, and what were their responsibilities to the City and its taxpayers? Who knew what and should have been communicating with others, (besides the Community National insiders and Nedegaard, who appear to deliberately have not communicated as much as I would expect other bankers in the package would have wanted)? City officials at fault? Only city officials? What about well paid consultants, what were their actions and responsibilities?

Such questions are something to examine in detail in future postings.

And will Pulte and D.R. Horton go broke? I doubt that for now, but how long will the housing market slump, what exposure do those mega-firms have in different housing sectors, what's their inventory control - how much built stock are they sitting on that they'd want to move and are they keeping some crew activity going to avoid layoffs and unemployment insurance spiraling - and the big question, what's their credit situation with their lenders and their situation with local affiliated builders to whom they may have given credit? Debt service without cash flow can erode liquidity quickly. As publicly traded companies Horton and Pulte had to do some reporting, it might be informative, but aggregated figures might not be enough to predict such things, depending upon the firms' exposures in different parts of the country, and depending on which regions are the worse markets now and over the next six months.

I took the above photo Aug. 21, 2007. There was Hovnanian effort then at Town Center, along the west side of Rhinestone near Hwy 116, the Symphony at Town Center effort.

Unfinished symphony, so far. But it is new shared-wall inventory. Hovnanian is building in 2007 and not sitting still, and I think building there is continuing now, this quarter. It could be a local-affiliate builder with working capital taking the risk, apart from the parent firm. But Hovnanian recently was reported as one of the nationwide builders facing trouble - or at least aggressively unloading inventory:

Hovnanian Orders Drop
By Nicholas Yulico Staff Reporter
11/6/2007 10:13 AM EST

Hovnanian Enterprises (HOV - Cramer's Take - Stockpickr - Rating) reported a 10% drop in quarterly new-home orders and said sales significantly deteriorated in October.

Some analysts now expect the Red Bank, N.J., homebuilder to implement another round of steep price cuts to clear its large inventory of houses. More than half of Hovnanian's orders in the recent quarter came during the company's heavily hyped "Deal of the Century" weekend sale.

For the fourth quarter ended Oct. 31, Hovnanian's contracts totaled 2,781 homes, down 10% from a year ago in the fourth quarter. Cancellations rose to 40% of contracts from 35% in the third quarter.

During the quarter, the company used cash flow from home sales to reduce its debt by $390 million.

Hovnanian attributed the increased cancellation rate to the tightening of mortgage underwriting standards, which has lead [sic] some customers to terminate their contracts due to an inability to obtain mortgage loans.

The results were better than expected, but more pain could lie ahead, according to Bank of America analyst Daniel Oppenheim. He expected a 25% year-over-year decline in orders.

"Sales likely fizzled after Hovnanian attempted to pull away incentives from its 'Deal of the Century' promotions the weekend of Sept. 14-16," Oppenheim said in a research note.

During the "Deal of the Century" sale, Hovnanian sold homes at fire sale prices to get rid of inventory. The company said after the sale that it had 1,700 contracts from the weekend.

"We expect that Hovnanian will reintroduce discounts similar or greater than before in order to maintain sales and generate positive cash, since competitors who matched its temporary promotions actually set new market prices," the analyst said.

I am not one to second guess a fortune 500 firm, but the discounting and promotions as reported seems to have been going on at Town Center, by Hovanian, with this photo also from Aug. 21. "Fire sale prices" indeed. It looks like used-car lot signage.

Friday, November 09, 2007

Is it the same "Jim Norman" as formerly worked for City of Ramsey?

Jim Norman

Owner, Norman & Associates

Greater Minneapolis-St. Paul Area

* Contact Directly
* Get introduced through a connection

Current * Owner at Norman & Associates

Past * Associate at The Tinklenberg Group

Education *** Minnesota State University, Mankato

Connections *** 2 connections

Industry ***Government Relations

Jim Norman’s Experience

*** Owner -- Norman & Associates

(Government Relations industry)
February 2007 — Present (10 months)

*** Associate

The Tinklenberg Group
(Government Relations industry)
2007 — 2007 (less than a year)

Jim Norman’s Education

* Minnesota State University, Mankato - 1973 — 1977

The photo is from City of Ramsey days, that James Norman for certain, from before he did any blonding of the hair, pictured in front of that dreadfully stupid signboard that gets left around city hall (past and present), and is tacky, bad propaganda that should have been given back to Bruce Nedegaard and the RTC LLC affiliated design crew well before the man died last fall.

That above text beside and under the photo is from linkedin, a web-community networking thing, I suppose.

It is a mystery but not a mystery - since the connection of Norman noted with lobbyist El Tinklenberg matches with the two of them as attendees at the Feb. 6, 2007, Rogers-Dayton-Hassan Township joint meeting over road and land development - a Crabgrass session. That was where lobbyist Tinklenberg apparently had Hassan Mainstreet LLC interests to advance, along with The Beard Group, present on behalf of the Stone's Throw dense housing + mixed use effort (competitive for new housing buyers in today's slumping market with the Ramsey Town Center dense housing + mixed use thing we're saddled with, thanks in large measure to James Norman, including the moving of city hall without any referendum on the wretched excess represented by that $19.2 million bonding-and-spending spree).

But if the "Jim Norman & Associates" individual is our ex-City Administrator - there is the mystery -- why that extensive course of dealing and experience is not listed and touted.

If it is the ex-Ramsey James Norman, who are those "Two connections?"

It does make sense that lobbyist Tinklenberg would affiliate James Norman onto his cash-business. Both have governmental "experience" related to the type of thing being proposed in Hassan Township & environs; and there's a massive roadway interchange project associated with Stone's Throw. It was while James Norman headed Ramsey's city staff that the City's consultancy contract was inked with The Tinklenberg Group - related to transportation issues of mapping and arranging buy-out terms and conditions along Highway 10 in Ramsey.

Sometimes it is not easy to scratch everywhere on one's back. An old saying arose from that fact. Friends help friends, and there has been woofing about "The Good Ol’ Boy network is alive and well."

And then this, from City of Oakdale Sept. 11, 2007, meeting minutes, p.2:


Mayor Sarrack opened the meeting up to the audience at this time.

Jim Norman introduced himself as the Interim Coordinator for the NorthEast Suburban Transit organization.

No other comments were heard.

If the most current NorthEast Suburban Transit info shows a James Norman in the NEST, that way, it is transit funded status - linked to Metropolitan Council, who the ex-Ramsey James Norman helped sell flushes, and MnDOT which lobbyist El Tinklenberg headed in the past and used as a springboard for his private-sector consultancy; The Tinklenberg Group - which does not rely upon its website to make its sales. A site like that is squatting on turf, locking in the name and little else. How long has Tinklenberg Group been on the consultancy payroll of Ramsey? And, that long and the website's still under construction? Huh? Why?

[UPDATE: Web search revealed here, that already in Sept. 2004, The Tinklenberg Group had its talons into the Ramsey fisc (i.e., was on a consulting contract) while his MnDOT resignation was Oct. 2002, so, unless the consultancy contract was in place well before that news article, at least the tires cooled from driving north from St. Paul before the consultancy in Ramsey was in place. A whois indicated El Tinklenberg as contact person, with the site registered April 8, 2004 (and no WayBack archive record) so within a half year of staking out the web name, Tinklenberg Group was in the press as a Ramsey consultant -&- news source.]

Go figure. Something sells Tinklenberg Group consultancy goods, and sells services of lobbyist El Tinklenberg, besides the quality of the website. What that is, is something known to Tinklenberg and those buying goods and services, but unknown to me.

I cannot see a single reason to hire or rely on the man for anything.

Yet the sale has been big-time and wide-ranging.

And with Beard Group fronting for the money people behind that Stone's Throw promotion, wouldn't it be interesting to know precisely whose money is behind Stone's Throw, and behind Hassan Mainstreet LLC, the client of lobbyist El Tinklenberg? You can bet the GOP will be interested in whose money it is, if lobbyist Tinklenberg gets the DFL endorsement ahead of clean-energy advocate, Bob Olson of St. Cloud; in the Minnesota Sixth District DFL caucuses when they pick the candidate to challenge GOP incumbent Michele Bachmann, whose campaign donor listings provide separate fodder for a host of "whose money" questionings.

The Tinklenberg Group's contract with Ramsey involved appraisal and other effort, for example, per RESOLUTION # HRA-05-09-004 in the Ramsey online documents, whereby the then council [pre 2006 election] sitting wearing their Housing Redevelopment Authority hats voted to have the CITY via HRA:

[...] establish a Redevelopment Project Area as described herein the Redevelopment Project Area in connection with the acquisition of certain properties for right-of-way purposes described as

Lots 2 and 3 Block 1 Deal Industrial Park Anoka County Minnesota

and adopting the Redevelopment Plan for the Redevelopment Project Area the Plan all pursuant to and in conformity with applicable law.

And if you on first blush, like me, think that meant millions of tax dollars [RALF tax money] going to Jim Deal, well, not exactly.

The story is more involved than that, and it may be the subject of a later separate Crabgrass posting and examination.

Monday, November 05, 2007

Cause for City and bank to sit tight, hunker down, and wait. Plus - what's fair, when "fair notice" should arguably be given?

Sitting Tight.

Precipitous action is usually ill-advised action; such as Ramsey getting sucked into the entire Town Center fiasco in the first place.

Now, let's consider a sit-tight response.

Strib reports that the housing market appears to not have bottomed out yet. Fall-winter is not the peak real estate dealing season. Those projecting the current housing market doldrums continuing at least to next summer are looking to have guessed right. Strib, at the start of the month reported:

Number of U.S. homes facing foreclosure doubles in third quarter
Associated Press
Last update: November 01, 2007 – 7:54 AM

LOS ANGELES— A soaring number of U.S. homeowners struggled to make mortgage payments in the third quarter, with properties in some stage of foreclosure more than doubling from the same time last year, a mortgage data company said today.

A total of 446,726 homes nationwide were targeted by some sort of foreclosure activity from July to September, up 100.1 percent from 223,233 properties in the year-ago period, according to Irvine-based RealtyTrac Inc.

Doubling of foreclosure rates nationwide is big news. And if the trend is your friend, your friend is saying sit tight and don't push real estate promotions since the market's gotten more sour, quarter-by-quarter:

The current figure was 33.9 percent higher than the 333,731 properties in foreclosure in the second quarter of this year.

There was one foreclosure filing for every 196 households in the nation during the most recent quarter, RealtyTrac said.

All but five states reported a year-over-year increase in foreclosure filings, which include notices of default, auction sale notices or bank repossessions, the company said.

A single property can sometimes receive more than one notice in a three-month period.

In all, 635,159 filings were reported in the third quarter, up 99.5 percent from the year-ago quarter and up 30 percent from the second quarter of this year.

RealtyTrac CEO James J. Saccacio said in a statement that August and September accounted for the highest monthly totals since the company began issuing foreclosure filing reports in January 2005.

"Given the number of loans due to reset through the middle of 2008, and the continuing weakness in home sales, we would expect foreclosure activity to remain high and even increase over the next year in many markets,'' he said.

Mortgage lenders are bracing for a flood of defaults as many adjustable-rate mortgages originated in 2005 and 2006 during the height of the housing market frenzy reset to higher interest rates.

The loans were initially attractive options for buyers because of their cheaper "teaser'' interest rates that kept monthly payments low, but even a small percentage increase can translate into a far higher payment.

With home sales in decline and prices down or flat in many regions, more homeowners are landing in foreclosure because they can't afford to sell their homes after falling behind on payments.

The three states with the highest foreclosure rates during the third quarter were Nevada, California and Florida, RealtyTrac said.

Nevada reported one foreclosure filing for every 61 households, with 16,817 filings on 12,982 properties.

That marked a 22.8 percent increase in filings from the previous quarter and a tripling from the year-ago quarter.

California led the nation in total foreclosure filings and reported one filing for every 88 households.

The state had 148,147 filings on 94,772 properties, an increase in filings of 36 percent from the previous quarter and nearly four times more than the year-ago period.

In Florida, there were 86,465 foreclosure filings on 60,992 properties during the third quarter, RealtyTrac said. Foreclosure filings rose 51.5 percent from the previous quarter and more than doubled from the same quarter last year.

Florida's foreclosure rate amounted to one filing for every 95 households, RealtyTrac said.

Rounding out the top 10 states in foreclosure rates were Michigan, Ohio, Colorado, Arizona, Georgia, Indiana and Texas.

So, Minnesota is not in the "ten worse" category, but leave statewide worry aside - where is Ramsey Town Center in comparison to those ten worse states? Worse percentage-wise than Nevada? Than Florida?

Fair Notice.

And is John Peterson's market niche doing better or worse than shared-wall high-density? Probably, if you look at the cornfield on Nowthen by Trott Brook, that has sprung up a new cash crop - lumber, not raw, but nailed together, etc.

But the gun club. I drove through there - one home being built on a cul-de-sac with swamp on three sides - but the rest as roadways and a couple of big pits. So, where was the lead-polluted part, and what's its status now? Should people buying there be given notice that the homes are built over a former hobby shooting range so that residents know to have blood lead levels monitored more closely than would be applicable for the general population? There's sense to having a City ordinance requiring such notice, as a matter of public health protection. Give notice, someone buys, they make a rational choice. Withhold notice, somebody buys, they have a right to feel hoodwinked by developer and city each turning a blind eye to the particularized risks of living atop a former hobby shooting range.

Is that, silence when there's good cause for notice, what our City, Ramsey, is all about? If so, whose interest is served by any such silence? Mine, yours, or Ben the Taxpayer's? Crabgrass probably propsers regardless of residual lead levels and risk, but then crabgrass is very adaptive and opportunistic. Given any chance it can grow as wild and unrestrained as allowed. The question is what to allow.

Town Center - If there are negotiations ---

If the bank wants to talk, and the council voted to consider talk, then the City as a first step should require disclosure of the "potential buyers" that Minnwest's spokesperson, Bushman, spoke of in general (but with a refusal to publicly identify them via the press). What thinking do each of them have, how compatible would any of them be with City aims, etc. Make up some litmus tests, and then do some litmus testing. Know who you might be dealing with. Before concession-making, not as an after the fact surprise.

There is no cause for the bank to expect it can buffer the City away from such potential development contacts, while asking the City for concessions. That would be unreasonable.

Also, it appears from Pioneer Press reporting that the Community National Bank was given an exclusive dealing franchise for banking in Town Center - a franchise that Jim Deal reportedly purchased, holds, and intends to enforce.

Hence, inquiry is suitable into what other exclusive dealings or franchises were given out by Nedegaard's RTC, LLC, and whether the bank in negotiations wishes to have ANY such arrangement honored while at the same time seeking major concessions from the City.

Again, that would be an unreasonable bank negotiation position to be rejected totally and unequivocally.

It there's to be rewriting, then a key question is, "What's now written," that EITHER side would like to keep and not give up.

If anything's on the table, everything should be.

A whole fresh cut of the cards and dealing of new hands all around would be proper. With no player keeping any aces up the sleeve to play later for raking in a humongo sized pot off the table, by surprise.

For instance, has anyone obtained "exclusive" rights to build a commuter rail station with restaruant space or retail outlets a part, and if so, who and under what terms? Has there been any franchise for retail of any kind awarded by Ramsey Town Center LLC that has survived bankruptcy to rear its ugly head? An interest in real property not recorded and revealed is different from personal property rights such as business franchise rights. Security interests not duly perfected are not binding on bona fide parties without notice. But what of franchise rights previously conveyed but not litigated as cliams before the bankruptcy court? What exactly was done, in bankruptcy court? What were outcomes, in terms of limits of court actions and judicial decision-making as well as in terms of affirmative decisions clearly made of record? The devil's in such details.


Avoid surprise. Pin down ALL relevant facts now. Pin down who is a real player, or real potential player, and what each would expect beyond what City and bank might consider in negotiation. It is part of working things out to know what things need attention, to be worked out.