An ongoing cleanup: Westside farmers work to solve toxic problem...MARK GROSSI, The Fresno Bee
FIREBAUGH,CA-- - MTD TAO PANOCHE 2 -- Dennis Falaschi, General Manager of the Panochi Water District, lf, and Joe McGahan looks at water taken from a well under a field of salt-tolerant plants which are watered with brackish agricultural drainage on the West side of the San Joaquin Valley West of Firebaugh which reduces the salinity. "Panoche has been working aggressively to achieve the water quality objectives for the San Joaquin River, Mud and Salt Sloughs, and water delivery channels in the Grassland Water District. The Use Agreement for the Grassland Bypass Project, signed in November 1995, sets parameters for implementation of that project. The district and farm level efforts to improve water quality have been focused towards meeting the load targets and environmental commitments of the Grassland Bypass Project. Tomas Ovalle/ The Fresno Bee
Farmers west of Firebaugh have spent millions of dollars over the past 14 years to cut 90 percent of the contaminated irrigation water flowing from beneath their fields of tomatoes, garlic and cotton.
But the clock runs out in December on the cleanup program, called the Grassland Bypass Project. Farmers in the Grassland Drainage Area need permission from the federal government to finish the job and eliminate all the toxic drainage, which can poison land and wildlife.
But some environmentalists have doubts. Some even question whether farming should be allowed on land with such problems, even though agriculture generates an estimated $330 million for the local economy.
Lloyd Carter, a board member with the activist group California Water Impact Network, noted that the government ordered the cleanup of this region in 1985.
"Here we are 24 years later, and we're still talking about it," said Carter, a Clovis resident. "That's ridiculous." Farm officials say they are on the brink of a historic breakthrough -- building and testing a treatment plant to dispose of the remaining drainage from their land. Such remedies have been unsuccessful in the past.
"With the plans we have, we're going to take our drainage down to zero," said Dennis Falaschi, general manager of Panoche Water and Drainage District. "Nothing will be going out to the river. We're confident." If the treatment plant works, it could serve as a model for much larger farm areas of the west San Joaquin Valley where the bad water problem persists.
The environmental review of the 10-year extension has been produced for the U.S. Bureau of Reclamation. Comments on the review can be made in person at a Feb. 10 hearing in Los Banos.
The California Water Impact Network and the California Sportfishing Protection Alliance will submit their criticisms of the project, but not all environmentalists feel the same.
The Environmental Defense Fund, a national group that has been critical of west San Joaquin Valley farming, has supported the project for years.
EDF senior counsel Tom Graff said he respects the objections of the Water Impact Network and the Sportfishing Protection Alliance, but his group still backs the project.
"There are big, contentious water issues in California," Graff said. "This is not one of them." For farming to continue this century on the west side, options will be needed to dispose of used irrigation water on an estimated 200,000 acres of poorly drained crop fields.
The Grassland-area growers, who farm 97,400 acres between Firebaugh and Interstate 5, have eliminated the drainage problem on all but about one-third of their acreage over the past 14 years, officials said.
Westlands Water District, south of the Grassland project, faces similar problems on land several times larger, but the district has no solution yet. One government cleanup idea includes broad land retirement at a cost of more than $2 billion.
Falaschi said the Grassland farmers so far have spent about $100 million, about half of which was government funded. They've eliminated 85 percent of the selenium, a natural element that is toxic in high concentrations, and nearly 75 percent of the salt level that flowed into the San Joaquin River in 1995.
"If we hadn't done it, we would have been out of business," he said, because the drainage water would have begun poisoning their fields.
The problem is that the water won't percolate deep into the underground. Instead, it perches on clay layers, allowing contaminants to build up and eventually foul the land. It must be drained away and somehow disposed of safely.
This year, Grassland farmers propose to spend $4 million from a state grant to build and test the treatment plant.
They were forced into the cleanup in the 1980s after government wildlife officials found dead and deformed birds at Kesterson Reservoir. The wildlife disaster was created by toxic levels of selenium in irrigation drainage funneled from Westlands through the San Luis Drain, a concrete-lined canal.
Authorities closed the federal drain and set thresholds for selenium in the area streams. Westlands lost its outlet for the bad water and still is working to find an adequate disposal method.
At the time, the Grassland farmers had been sending their irrigation drainage to the San Joaquin River in canals and sloughs that passed through protected areas, such as San Luis National Wildlife Refuge.
With new selenium standards in place, they lost that option.
They needed a new way to dispose of the bad water without further contaminating the refuges. And they would have to eventually clean up the bad water before it got to the river.
Within a few years, they made a bold proposal: With proper oversight and controls, why not reopen part of the San Luis Drain to send it to the river? Environmentalists and government wildlife agencies didn't like the idea at all.
To get this seemingly unlikely proposal on the table, Grassland farm officials started talking to obvious opponents -- environmentalists and wildlife agencies. They hammered out guidelines under which opponents would support reopening the drain.
The Environmental Defense Fund and the Bay Institute were among those that joined the process. Their questions were answered with cleanup promises from the Grassland farmers.
Years later, the Water Impact Network and the Sportfishing Protection Alliance say the Grassland project has not brought the region into compliance with water standards that apply to the San Joaquin River. They suggest tighter standards on the river and more oversight by the state.
Project officials reply that the Grassland farmers have dramatically reduced the amount of drainage they were sending to the river. They met their obligations under the agreement hammered out to reopen the drain, they said.
To reduce drainage, about half the Grassland farm acreage now has stingy drip irrigation or sprinklers instead of water-intense irrigation, such as filling furrows with water. Less water means less drainage.
Officials further reduce bad water by capturing the drainage in collector systems beneath crop fields or pumping it out of the shallow groundwater table. The bad water then is mixed with fresher water and used again on crops.
The next generation of brackish water is captured again and reused on salt-tolerant crops, such as Jose tall wheatgrass.
The Grassland project now reduces 40,000 acre-feet of bad water each year to about 4,000 acre-feet. One acre-foot is about 326,000 gallons of water, or an 18-month supply for an average Valley family.
Farmers also agreed to pay fines if they didn't reduce the drainage and the contamination year by year. The fines added up to about $250,000 over the past five years, mostly because big storms caused runoff that no one could control.
Though the surrounding habitat has improved, wildlife still has elevated levels of selenium, according to federal officials.
Grassland project officials say they monitor the wildlife and create islands of fresh water in other areas to attract wildlife and help keep them away from potentially harmful areas.
"We are very aware of the wildlife," said engineer Joseph McGahan, who works on the project. "In the 6,000 acres where we reuse drainage water on salt-tolerant crops, there were only six bird nests last year. At Kesterson in the 1980s, there were 240 nests on 1,200 acres. That's a big difference."
Merced County Times
G Street Committee takes on undercrossing project...Jonathan Whitaker...1-15-09
Fixing The Crossing For Good: The first regular meeting of the G St. Undercrossing Citizens Advisory Committee will be held Jan. 29, from 6:30 to 8:30 p.m.. The committee will meet regularly on the third Thursday of the month at the Merced Senior Center at W. 15th Street in Merced. Agendas for the meetings will be posted on the city's Web site, www.cityofmerced.org. Look for the listing of "G St. Undercrossing" under Public Information.
Passionate debate over how to solve traffic and safety problems in a city dissected by railroad tracks turned into a more organized public effort Monday.
Members of the G Street Undercrossing Citizens Advisory Committee gathered at the Merced Senior Center on Monday to select a chair and review the project that will separate the BNSF Railroad tracks from G Street in Merced.
The undercrossing would provide the equivalent of four travel lanes for vehicles, and an elevated sidewalk/bikeway on both sides. It is expected to ease traffic flow and create a fast, direct route for emergency vehicles.
David Gonzalves, the city's acting director of Development Services, Bill King, principal planner, and John Bramble, city manager, gave an overview of the project and the city's staff report. Later, the committee named Bruce Reisdorph as the group's chair, and John Carlos was named vice chair.
For the upcoming first regular meeting, the 20-member team will consider whether to maintain or remove the 25th Street connection to G Street during the construction process. Their recommendation will be sent to the City Project Design Team.
Several factors are involved in the decision that would affect residents living in the project's area and G Street commuters, including:
— Grade (elevation) changes: At the point where 25th Street (west side) meets the proposed G Street curb-line, there will be a grade difference of 6 feet. If 25th Street does not connect with G Street, then a turnaround would be constructed at the end of 25th Street, and a sloped landscaped area will extend between the turnaround and G Street, including a connecting sidewalk. If a road connection to G Street was maintained, then 25th Street would have a new grade for approximately 2 lots west of its intersection with G Street.
— Retaining walls: Under any scenario, a 6-foot tall retaining wall will be needed along the west side of G Street in the vicinity of 25th Street (west side). But depending on the 25th Street connection/turnaround decision, more retaining walls may need to be constructed along 25th Street.
— Access to local schools: John Muir Elementary School is located west of G Street, bounded by 25th Street and 26th Street. Full access to this school is possible from M Street or G Street using 25th Street or 26th Street. The Merced City School District will be reassessing the school bus routes in the area.
— Project cost: Preliminary assessments show that it is more expensive to maintain the connection to G Street than it would to reconstruct it with a turnaround.
San Francisco Chronicle
Plenty spent on endangered species list's tortoise...MIKE STARK, Associated Press Writer
Leathery, shy and a bit world-weary, the Mojave desert tortoise doesn't come across as a high-roller.
But among land-going critters on the endangered species list, it's among the top recipients of money spent by state and federal agencies trying to keep it from the brink of extinction, according to an Associated Press analysis of the last 11 years of available data.
From 1996 to 2006, more than $93 million was spent on managing the long-lived reptile, records show. That's more than was spent on other species such as the grizzly bear, gray wolf or bald eagle.
Not bad for a pokey desert dweller that spends most of its time in underground burrows in parts of Utah, California, Arizona and Nevada.
Not that preserving the tortoise is simple.
The tortoise's "critical habitat" stretches across 9,600 square miles. Jurisdictions include four states, seven military installations, four national parks and scores of federal, state and county agencies.
Add to that a long list of threats, from highways, urbanization and wildfires to disease, off-road vehicles and climate change.
"We don't have a good silver bullet for the tortoise," said Roy Averill-Murray, desert tortoise recovery coordinator for the U.S. Fish and Wildlife Service in Reno, Nev.
Congress in 1988 added a section to the Endangered Species Act requiring an annual species-by-species expenditure report. Before then, no one knew how much was being spent to save plants and animals on the list, said Valerie Fellows, a spokeswoman for the Fish and Wildlife Service.
The reports are an attempt to calculate how much states and 31 federal agencies — from the Coast Guard to the Federal Highway Administration — are forking over for threatened and endangered species.
By far the top recipients have been salmon in the Pacific Northwest and the Steller sea lion. Hundreds of millions of dollars have been spent on those species since reporting began in 1996.
The 2006 report, the latest released by the Fish and Wildlife Service, estimates that $884 million was spent on more than 1,100 species on the list.
There's a wide disparity in how money is doled out. The pallid sturgeon, a prehistoric-looking freshwater fish, topped the 2006 list with $39 million. A rare herb in Utah called the Barneby reed-mustard got just $6.
About $10.5 million was spent on the desert tortoise. Spending in 2007 was more than $11 million, according to a draft report.
"Nobody thought it was going to be an inexpensive proposition," said Ileene Anderson, a biologist with the Center for Biological Diversity, an environmental group. "But the desert tortoise is a bellwether for the health of our deserts."
Tortoises in southwest Utah were listed as threatened in 1980. That designation was expanded to Mojave tortoises in the rest of their range in 1990.
Since then, millions have been spent on monitoring, fences to keep them from wandering onto highways, studies on a respiratory disease and stacks of long-range plans intended to make sure the tortoise survives.
One of the most ambitious plans was to relocate 770 of the reptiles to Bureau of Land Management land to make way for the expansion of Fort Irwin, a national military training center near Barstow, Calif.
The move started in March but was put on hold in October after about 90 tortoises died — most killed and eaten by coyotes.
Averill-Murray estimates there are 111,000 to 187,000 adult desert tortoises in areas designated as critical habitat.
Getting them off the endangered species list means populations must increase or remain stable for at least 25 years.
But it's unclear whether progress has been made. In fact, many populations have declined dramatically.
The federal government is in the midst of revising its recovery plan. A final draft is expected later this year.
Averill-Murray said the tortoises' peculiar nature — secretive and slow to breed — means there's a lag in seeing results from all the effort to keep them from disappearing.
"We really haven't given the tortoise enough time to know whether we've done any good or not," he said.
On the Net: More on tortoise: www.nps.gov/archive/moja/planning/tort.htm
Los Angeles Times
Court stops Utah oil and gas leases
Environmental groups win a temporary restraining order, potentially leaving the fate of the 110,000 federal acres to the Obama administration...Nicholas Riccardi...1-19-09
Reporting from Denver — A judge late Saturday halted the Bush administration's efforts to open 110,000 acres of federal land in Utah to oil and gas exploration, ruling that the danger of damaging the pristine land required further study before leases were awarded.
The leases to the parcels had been auctioned off Dec. 19 in a move that environmental groups said was a last-minute gift to the energy industry before President Bush left office.
A coalition of seven groups sued for a temporary restraining order, and the ruling by U.S. District Court Judge Ricardo M. Urbina means the checks written by energy companies for the land cannot be cashed.
Urbina's order postpones any sale until after he can hear arguments on the merits of the case, a delay that will potentially place the fate of the land into the hands of the Obama administration. Aides to President-elect Barack Obama have objected to the sale.
"We're thrilled with this decision," said Stephen Bloch of the Southern Utah Wilderness Alliance. The Bureau of Land Management's "attempt to sell these leases just before the Bush administration left office has been showcased for what it really is -- a parting gift to the oil and gas industry."
The original package of 360,000 acres included land that abutted national parks. After the National Park Service objected, some of the leases were discarded, but environmentalists said the remaining parcels still included key parts of Utah's red-rock country.
UCLA researcher injured in lab fire dies...California Briefing
A UCLA research assistant seriously burned in a lab fire last month died from her injuries Jan. 16, according to a school spokesman.
The 22-year-old woman, who was not identified, died Friday at Grossman Burn Center in Sherman Oaks, where she was transferred after first being treated at UCLA Medical Center, said spokesman Phil Hampton.
The accident occurred in the school's molecular sciences building, after chemicals caused a flash fire.
The woman suffered second- and third-degree burns over her upper body, officials said.
The fire is under investigation by UCLA's Environmental Health Science department, Hampton said.
New-home sales in Southland fall 53% in December
Bargain hunters snag foreclosures, sending overall purchases up 51% from a year earlier as house values sink...Peter Y. Hong
The long, sharp slide in Southern California home values is all but eliminating demand for new houses.
Just 1,813 new homes sold in the six-county region last month, down 53% from December 2007 -- and down 63% from the 20-year average for the month of December, a real estate information firm reported Monday.
By comparison, sales of all homes rose 51% last month compared with a year earlier as bargain hunters continued to snap up foreclosures and other distressed properties. The median price of a Southland home slipped to $278,000, down 35% from December 2007, MDA DataQuick said.
With prices falling and lenders off-loading foreclosed properties at deep discounts, few want to pay "retail" for a new home, so builders have put the brakes on new construction.
"The builders are in a holding pattern, staying alive until the market recovers," MDA DataQuick President John Walsh said.
That holding pattern, however, could also further put off a market recovery.
Although the home-building freeze could help clear the oversupply of homes, the loss of construction jobs has also been a leading cause of unemployment in the state. There were 67,700 jobs lost in residential and commercial construction statewide in November compared with the year before, according to the latest figures from the California Employment Development Department.
Those construction job losses were 32% of the total jobs lost in that period.
The spillover effect from lost construction jobs -- additional job losses in areas such as retail, for instance -- will probably delay the broader economic recovery needed to stabilize the housing market, economists say.
Slowly reviving home building "will be helpful in stimulating the economy," said UCLA economist Edward Leamer.
It would produce a benefit not only by boosting employment, he said, but because "it's an important symbol of the healing of the market," which could bring back investors who've fled the mortgage market, easing credit, Leamer said.
Early in 2008, builders slashed prices to lure buyers for their glut of homes. But the foreclosure avalanche moved faster than builders' price cuts.
In January 2008, the median home sales price in Southern California was $415,000, and 23% of the homes sold had been foreclosures. By year-end, 56% of homes sold had been foreclosures, pulling the median sales price down to $278,000.
The lowest December median sales prices were reported in San Bernardino County ($180,000) and Riverside County ($209,000), where foreclosures have been rampant. The Inland Empire had also been among the busiest regions for home building, but builders can seldom compete with the low prices of foreclosed homes.
For now, home building has largely ceased because of the glut of properties on the market.
In Los Angeles County, building permits are at 18% of their peak level during the boom, Irvine real estate consultant John Burns said. Orange County permits are at 14% of their peak while those in San Bernardino and Riverside counties are down to 17% of the peak level, Burns wrote in a recent note to clients.
Los Angeles-based KB Home, one of the nation's largest home builders, said recently that its number of homes under construction was down 86% from the company's peak level in 2006.
"There's a de facto moratorium on building," Jerry M. Howard, executive director of the National Assn. of Home Builders, said in a recent interview.
California home builders are among those pushing for a federal tax credit to spur home purchases. Statewide, the California Building Industry Assn. estimates that fewer than 64,000 new homes were built in 2008, the lowest total since 1954.
The December sales total for new homes in Southern California was 79% below the peak sales month of December 2005, when 8,723 new homes were sold.
Although there remains an oversupply of homes, Leamer said new-home construction would soon be necessary to prevent "another mania" in housing.
"We overbuilt from 2004 to 2006, but now we're underbuilding," he said. "In four or five years, when the economy is strong again and people come back to the housing market, there may not be enough units."
Such strong demand may be far off, but prices are falling, along with mortgage rates, making homes more affordable.
Los Angeles County's median sales price of $320,00 was down 32% from December 2007, while Orange County's median price fell 30% to $397,000. San Diego County's median price dropped 30% to $300,000. Ventura County's median was $338,000, down 36% from a year earlier.
The typical monthly mortgage payment that Southland buyers committed themselves to paying was $1,239 last month, DataQuick estimated. That was down from a revised $1,380 for November, and down from a revised $2,060 for December 2007.
Bulldozer Owners Say Rule Could Be Stimulus Roadblock...Cindy Skrycki
It's one thing for Barack Obama to begin his presidency with a call to rebuild the economy. It's another to get the bulldozers moving.
About $30 billion of Obama's $825 billion economic stimulus plan is being set aside for highways and bridges. Some of that money would be squandered unless the new president blocks a rule that might keep some earthmovers from doing their economy-lifting work, a group of contractors says.
The Associated General Contractors of America wants Obama to put up a federal barrier to a California clean-air rule that regulates off-road diesel engines already in use. It will require the replacement or retrofitting of the engines of earthmoving equipment. The state has an estimated 180,000 loaders, graders, excavators and other heavy equipment.
"What is the point of stimulus money if it's used to replace equipment instead of building?" asked Mike Kennedy, general counsel of the Arlington-based group. The regulators "assumed costs could be passed along, but economic circumstances have changed so dramatically that the rule has to be reopened."
This high-stakes clash between environmental and economic interests is an example of the kind of regulatory decisions the new administration will have to make. The 33,000-member contractors' trade group petitioned California last month to amend or repeal the rule and asked the Environmental Protection Agency not to approve the waiver the state needs to enforce it.
During the presidential campaign, Obama promised to quickly approve a U.S. waiver for another hotly debated California air standard -- on auto emissions. The Bush administration recently postponed higher auto-mileage standards, citing the industry's financial troubles.
The EPA is still reviewing the waiver for existing diesel engines, said Cathy Milbourn, an agency spokeswoman. Another federal rule already requires emission controls from new off-road diesel equipment.
The California Air Resources Board's diesel standard starts phasing in by March 2010 and is estimated to cost equipment owners $3.4 billion. The board estimates the savings in health costs from fewer illnesses and deaths at $18 billion to $26 billion over 20 years.
Kennedy of the contractors' group said the compliance date is forcing companies to plan next year's expenditures for equipment purchases at a time when they are underbidding on jobs and revenue is tight. He said the rule's deadlines "are coercing contractors to spend money" on equipment.
While it's likely that California will get the federal approval for its off-road program, everyone agrees it couldn't come at a worse time.
When the regulation was completed, home-building was booming in California and state regulators assumed the cost of the rule would be passed on to customers.
Not now, said Gary Rohman, vice president of Ecco Equipment Corp., in Santa Ana, Calif., which has one of the largest construction-equipment rental fleets west of the Rockies.
After "33 straight months of rental decline," Rohman said, there is no demand to buy old equipment, and rental fees are down 25 percent. "We are doing everything to keep our doors open and we are representative of the industry."
To bring one of his Caterpillar D10 'dozers into compliance before March 2010 cost him $226,000 for a new engine and $56,000 for filters, he said. Ecco has been buying cleaner equipment since 2000 to change over its fleet in an effort to be a good environmental citizen, according to Rohman.
The contractors said they need time and money to meet the rule. They have been fighting the notion of regulating the existing fleet for years, saying equipment should be used until it dies a natural death, which can be 20 years or more.
Officials at the California air board said that when they issued the rule, they hadn't expected the economy to tank. In anticipation of the costs, the state offered incentives for early compliance and it is examining questions that have been raised about the safety and availability of engine filters.
Kim Heroy-Rogalski, manager of the off-road implementation section, said the air board will hold a hearing on Jan. 22, and it is working on a response to the industry petition.
Environmentalists said the tough economy is just the industry's latest excuse.
"Through the regulatory process, construction-trade groups pulled every trick in the book," said Diane Bailey, senior scientist with the Natural Resources Defense Council in San Francisco. The effort to delay the rule is "no surprise."
Kathryn Phillips, an Environmental Defense Fund official in Sacramento, said that while some companies are starting to comply with the diesel rule, the contractors' group continues to try to change or delay it out of fear that the California rule will be copied by other states and become a de facto national standard.
The contractors' association also has taken its case to the state's Occupational Safety and Health Standards Board, asking it to change its safety code to address concern that the soot filters required by the rule impair visibility and pose dangers for burns. The industry's opponents say this move will throw another monkey wrench into the pollution rule by delaying it.
"It's unfortunate this got so far down the road and these safety issues came up," said Marley Hart, executive officer of the safety board. She said the board is examining the industry petition.
New York Times
Banks Foreclose on Builders With Perfect Records...JOHN COLLINS RUDOLF
TEMPE, Ariz. — Dave Brown, one of this city’s best-known home builders, had kept his head above water through the housing downturn, not missing a single interest payment on his loans.
So he was confounded a few months back when one of his banks, spooked by the decline in his company’s revenue, suddenly demanded millions of dollars in additional collateral to continue carrying loans on his projects.
He was unable to come up with the money, and in October, JPMorgan Chase foreclosed on five of his developments. Shortly thereafter, Brown Family Communities, 33 years in the business, decided to shut its doors.
“They treated me like a deadbeat who missed his car payment,” said an embittered Mr. Brown, 76. “They wanted their money now.”
After riding high on one of the greatest housing booms in American history, the nation’s home builders today face a devastating reversal of fortune.
Although the housing crisis is nearly two years old, many banks had refrained from cracking down on small home builders.
They are starting to do so, and a wide swath of the industry could be forced out of business in the next few years. The trouble is concentrated especially in the Sun Belt, the scene of so much overbuilding.
Not only have new-home sales stagnated, but builders confront a rising wave of foreclosed properties coming to market at prices below the cost of building a new home. To move houses, they have to mark them down to less than the cost of construction.
The convergence of these problems is bringing many small and medium-size builders — who account for about 70 percent of new-home construction in the United States — to their knees.
“The reality is, we’re seeing conditions in home construction and home finance that are the worst since the Depression,” said Steve Fritts, associate director of risk management policy at the Federal Deposit Insurance Corporation, the government agency that insures bank deposits.
Life has been difficult for large publicly traded home-building companies as well, where stock prices have collapsed and construction sharply cut back. Yet for now, many of the public companies can meet their obligations.
“They’re better capitalized and they have cash on hand,” said Ivy Zelman, a housing analyst. “They’re in a much better position than the private builders.”
No hard count exists of precisely how many builders have gone out of business since the downturn began. According to an estimate by the National Association of Home Builders, at least 20,000 builders — about a fifth of the total nationwide — have closed up shop in the last two years.
With the industry still owing hundreds of billions of dollars in loans made at the market peak, many more face insolvency in the coming months and years. “Probably north of 50 percent will fail,” Ms. Zelman said.
Much of that borrowed money went to finance land deals that now appear to have been catastrophic miscalculations. In cities like Phoenix, where housing starts are near record lows, demand for undeveloped land has plummeted, and prices have followed.
As defaults and delinquencies rise, home builders, once prized banking customers, have become pariahs. Even builders who are up to date on their interest payments or still managing to sell houses are getting trampled, as in the case of Mr. Brown.
“They’re not distinguishing the track records of one borrower against another,” said John Fioramonti, a real estate consultant in Scottsdale, Ariz. “If you’re a builder, you are a bad risk.”
With the pullback accelerating, complaints among builders of hardball tactics and shoddy treatment by banks are mounting, as is a general sense of betrayal.
“The behavior of the banks is unprecedented,” said Mick Pattinson, a home builder from Carlsbad, Calif. who has organized a national coalition of builders to draw attention to what they regard as unreasonable treatment. “Yes, there was overleveraging in the industry. But the aftermath doesn’t need to have been as brutal as it has been.”
Some experts defend the banks, saying they are starting to do what is necessary to come to grips with the turmoil in real estate. For months, they have been under pressure from federal bank regulators and their own shareholders to curtail lending to a faltering industry.
“The lenders are not operating irrationally or unfairly, generally speaking,” Mr. Fritts said. “They have to protect themselves.”
Access to credit is essential to builders, who rely heavily on borrowed money to finance land acquisitions and home construction.
More than 15 percent of loans for single-family home construction were in some form of default by September 2008, up from 10 percent in January of that year, according to figures from Foresight Analytics, a housing analysis firm. Still, until recently, banks had largely chosen to keep past-due borrowers afloat, in the hope that a housing recovery might pave the way for them to repay their debts in full.
Only now, with the economic outlook darkening, are lenders stepping up foreclosures of troubled loans. Zelman & Associates, a housing analysis firm, estimates that losses on land and construction loans could eventually reach $165 billion, one reason federal regulators are pushing banks to come to grips with the problem.
“When we talk to regulators now, they say they’ve lost patience,” said Ms. Zelman, who is chief executive of Zelman & Associates.
In this climate, keeping loan payments up to date — something many builders are struggling mightily to do — is not necessarily any protection.
Many loans in the building industry are of short duration, coming up for renewal at least once a year. This allows banks to take a fresh look at the financial health of a borrower, as well as the assets securing their debt. A steep fall in cash flow or a decline in the value of the collateral — usually building lots or half-built houses — can mean an automatic default, whether a borrower has missed payments or not.
It was a combination of these factors that put an end to Mr. Brown’s home-building company, Brown Family Communities.
In 2005 and 2006, with loans from JPMorgan Chase and the big finance company GMAC, Brown Family Communities bought hundreds of acres of land on the far outskirts of Phoenix, in towns like Goodyear and Buckeye, where development was rapidly transforming cotton and alfalfa fields into malls and upscale subdivisions.
The company was emerging from a record year in 2005, selling an average of 85 homes a month and booking revenues of $352 million.
Each succeeding year brought a decline in sales, and by 2008, the company was on pace to sell fewer than 300 homes. A glut of foreclosures on the market drove down prices, forcing Mr. Brown’s company to discount homes by as much as $100,000.
In early 2008, GMAC, citing the depreciating worth of assets the company had used as collateral, shut off construction loans for two subdivisions under development. Though Brown Family Communities had yet to miss a payment, renegotiating the debt proved impossible, and GMAC — struggling with huge problems of its own because of the global credit crisis — foreclosed on the neighborhoods.
“They were in chaos,” Mr. Brown said of GMAC. “We couldn’t even get them on the phone.”
In late July, JPMorgan Chase followed suit, freezing construction loans on five subdivisions it had financed. Again, a workout proved elusive. And this time, when the bank foreclosed, it delivered a fatal blow to Brown Family Communities.
Neither JPMorgan Chase nor GMAC would comment on their banking relationship with Mr. Brown’s company. “We have been and continue to work with our clients to find the best solution to manage risk for them and for us,” said Mary Jane Rogers, a spokeswoman for JPMorgan Chase.
In one otherwise finished subdivision, a half-dozen of Mr. Brown’s partially built homes stand amid weeds, their wooden frames slowly bleaching in the desert sun. In another, chain-link fences surround houses that appear only days from completion.
Buyers were lined up for several of the homes before the bank halted construction, Mr. Brown said. But they are long gone.
“Now you talk about good business sense — the bank wouldn’t allow us to finish them,” he said. “Did the bank get millions less than if they had handled it differently? Yes.”
With thousands of small and midsize builders facing similar circumstances, the outlook for the industry is dire. “The downturn that we’re experiencing right now is so unprecedented that there’s really no business model that works,” said Joel Shine, a real estate investor.
Some builders are now demanding federal relief. They want a tax credit of up to $22,000 for new-home purchases and they want the government to buy down interest rates on new mortgages, to 3 to 4 percent.
Some analysts, however, believe such a bailout would artificially re-inflate home prices and encourage further building in a saturated market. “What is the public good for that?” asked Thomas Lawler, a housing analyst and former vice president for risk analysis at Fannie Mae.
Meantime, new construction has collapsed, sending workers in search of employment. Brown Family Communities had a full-time staff of 160 at its peak, not including the thousands of subcontractors at work on hundreds of home sites. Now, only a handful of employees are left.
Mr. Brown found it excruciating to fire the people who had helped him build his business.
“They’d come in and say goodbye and we’d have a good cry and then they’d go on their way,” Mr. Brown said. “There’s nothing out there for them. The real estate market’s gone.”
Banks likely to head back to the trough
Large financial institutions are expected to need more capital later this year. But after TARP money from the government runs out, where will the cash come from?...David Ellis
NEW YORK (CNNMoney.com) -- Can anything satisfy banks' appetite for capital?
Judging by the way things are going in the sector lately, the answer seems to be a resounding 'No.'
Last week, the government allocated an additional $20 billion for the seemingly steady Bank of America (BAC, Fortune 500) to help the company close its acquisition of Merrill Lynch. BofA has now received $45 billion in government funds as part of the government Troubled Asset Relief Program, or TARP.
And in late November, the government effectively had to double down on its bet in Citigroup (C, Fortune 500) by investing an additional $25 billion in the company to stave off its collapse and prevent broader fallout across the financial system. Citi has also received $45 billion in TARP capital.
So far, $192 billion in government money has been invested in more than 200 financial institutions. But that may not be enough to fix the many problems in the banking sector.
Many large banks are continuing to face massive writedowns tied to the mortgage-related assets on their books that have tumbled in value alongside the broader U.S. housing market.
At the same time, the industry is now entering what some have labeled as one of the most difficult economic climates since the Great Depression. As unemployment climbs, banks are certain to face widespread losses on both consumer and commercial loans. That will only deteriorate banks' capital levels even further.
No TARP for you!
"At this point [banks] have got enough capital to play through the next round of earnings," said Jason Tyler, a senior vice-president at the Chicago-based Ariel Investments, whose firm oversees about $7 billion in assets.
So what happens after that?
To be sure, banks may be able to get some help from the second half of the government's $700 billion financial rescue package.
But hopes of getting additional government funds has begun to dwindle in recent weeks as both President-elect Barack Obama and fellow Democratic lawmakers have revealed their plans for the remaining TARP funds.
Up to $100 billion is expected to go towards addressing rising foreclosures. That could ease some of the problems that the deteriorating U.S. housing market has been having on banks.
But that also means that there is $100 billion less that is available for any bank facing an immediate need for capital.
Part of the remaining TARP funds are also expected to go towards expanding consumer credit, including expanding a Federal Reserve program tied to boosting the securitization market for mortgages, credit card loans and student loans. That program is scheduled to start next month.
Last week, outgoing Treasury Secretary Henry Paulson indicated that progress was being made towards buying the troubled assets from banks and placing them into a so-called "bad bank" -- the original purpose of the $700 billion legislation.
Such a move, however, could trigger an accounting rule, which could prompt banks to take yet another painful series of writedowns, leaving their capital levels even more depressed.
Banks, which have endured plenty of criticism for failing to specifically use TARP funds to make more loans available to consumers and businesses, are also finding that they are not the only ones competing for TARP funds.
Two of Detroit's Big Three automakers claimed a piece of the first half of TARP in December. Under new legislation proposed by House Financial Services Chairman Barney Frank, D-Mass., the incoming Treasury Secretary could also use money from the bank bailout for areas such as commercial real estate, farming and small business.
If this happens, the banks could be faced with a far smaller portion of TARP funding available to them -- precisely at a time when many banks may need more capital to boost their reserves and prepare for more loans losses.
Regulators, including the Federal Deposit Insurance Corp.'s Chairman Sheila Bair, have suggested publicly in recent days they hope that private investors will step in and provide more banks with capital.
That has happened to some extent. Earlier this month, billionaire investor Wilbur Ross agreed to take a majority stake in the closely held First Bank & Trust of Indiantown, Fla..
But private investors largely remain on the sidelines, hampered by existing regulatory restrictions that limit their investments in depository institutions.
At the same time, a couple high-profile bad bets, most notably a $7 billion investment by private equity giant TPG in Washington Mutual last year, which soured after the company collapsed and was subsequently taken over by JPMorgan Chase (JPM, Fortune 500), have kept many private investors on the sidelines.
Sovereign wealth funds, which invested heavily in the U.S. financial services sector in late 2007 through the spring of last year, have also tightened their purse strings after the value of their investments were virtually wiped out.
"Everyone who has invested in banks to this point has been burned," said Jaime Peters, banking analyst at Morningstar. "How many times are you going to stick your hand in the fire before you learn not to?"
Few options remain in a tough market
All this means banks may look to other ways to raise capital, such as asset sales.
Citigroup, one of the nation's hardest hit banks during the credit crisis, agreed to sell a majority stake in its Smith Barney brokerage business last week to Morgan Stanley (MS, Fortune 500) in exchange for a $2.7 billion cash payment.
There is also speculation that the company is poised to put its Japanese brokerage business -- Nikko Cordial -- on the auction block as well, the Wall Street Journal reported over the weekend.
But most analysts think banks won't be able to fetch premium prices for any assets sales in this market. So that limits how much capital they can raise by splitting up or getting smaller.
Banks could also move to raise cash by issuing common stock. But analysts note that determining the price of the offering could prove tricky, especially since investors have continued to shun bank stocks this year after a brutal 2008.
Even if banks could find a good price to sell more stock, the banks would probably face a significant backlash from existing shareholders since an increased number of shares on the market would make their investments less valuable.
That's in addition to growing concerns about what might happen if the government had to completely take over a financial institution, as was the case with mortgage financing giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). Shares in those two firms are now largely worthless.
"People are worried about banks issuing more common stock," said Ralph Cole, a portfolio manager at Portland, Ore.-based Ferguson Wellman Capital Management. "You worry about getting diluted and having the government take over and wiping out those shareholders as well."
That largely puts some hard-hit banks closer to the very unwelcome position of relying on the government to keep them afloat, said Sam Golden, head of the Financial Industry Advisory Services Group at Alvarez & Marsal and former ombudsman of the Office of the Comptroller of the Currency.
"Do you nationalize the whole system? I hope that is not the complete answer," he said. "But if you look at the trends, the only place where any meaningful source of capital is coming from is the government."
Bank stocks take another huge tumble
Shares of many top banks plunged Tuesday as investors fear that many more woes lay ahead...David Ellis
NEW YORK (CNNMoney.com) -- Wall Street could not shake its fears about the health of U.S. banks Tuesday as shares of many leading banks suffered another vicious selloff.
Just days after posting a $8.3 billion loss and unveiling plans to break up the company, Citigroup (C, Fortune 500) shares fell 11% to new 52-week lows as analysts issued a bleak forecast for the banking giant.
Ladenburg Thalmann's Richard Bove and Sanford Bernstein's John McDonald both warned Tuesday they expected the New York City-based company to report a loss for both 2009 and 2010.
One analysts also raised concerns about the health of Wells Fargo (WFC, Fortune 500), which is due to report its fourth quarter and full-year results next Wednesday, and has been viewed as one of the better-managed banks during the credit crisis.
Friedman, Billings, Ramsey & Co.'s Paul Miller wrote Tuesday that he expected the company would move to cut its dividend at some point as it continues to grapple with rising credit costs, especially in the wake of the company's acquisition of Wachovia late last year.
"We would continue to avoid the shares until its balance sheet is better capitalized," Miller told clients.
Wells Fargo shares lost nearly 15% in midday trading Tuesday.
Other major financial institutions were also hit hard as more details became available about just how difficult the fourth-quarter was for the financial services industry.
Shares of the institutional money manager State Street (STT, Fortune 500) lost more than half their value at one point Tuesday after the Boston-based firm reported a steep profit decline during the final three months of 2008 and issued a dismal forecast for 2009.
Waiting for the bailout to work
Investors were not only focused on the latest bad earnings news, but also the latest government-led efforts aimed at curing the ails of the nation's banking sector.
So far, the government has injected $192 billion into more than 200 financial institutions nationwide.
Just last week, regulators also moved to invest an additional $20 billion into Bank of America to help it complete its purchase of Merrill Lynch. Bank of America (BAC, Fortune 500) stock declined by as much as 22% before paring some of its losses Tuesday.
Members of the Obama administration have hinted at what possible steps might be taken next to help banks, including purchasing troubled assets from financial institutions. But with no official details in place, that only added to investor unease.
"That is one of the reasons people aren't confident," said Todd Clark, managing director and head of equity trading at Nollenberger Capital Partners Inc. in San Francisco. "They can't see the light at the end of the tunnel here."
That general nervousness spilled over to other parts of the sector, infecting names like Pittsburgh-based PNC (PNC, Fortune 500), whose stock was trading nearly a third below Friday's closing price.
Even JPMorgan Chase (JPM, Fortune 500), one of the most secure banks during the recession, was getting squeezed. Shares fell 14%. The bank reported a surprise quarterly profit last week, but CEO Jamie Dimon warned that 2009 would be difficult for his firm and other banks.