MICA Reports Continued Problems for U.S. Homeowners

(CEP News) - Nearly 68,000 American homeowners with mortgage insurance fell more than 60 days behind on their loans in May, outnumbering the 40,687 people who cured their situation in the month, according to a release from the Mortgage Insurance Companies of America (MICA) on Monday.

This is the 26th month in a row that delinquent homeowners have outnumbered cures.

"What we're seeing in the mortgage market is a continuation of the return to realistic and responsible lending standards and privately insured loans are part of that equation," said Suzanne C. Hutchinson, executive vice-president of MICA.

Primary insurance in-force totalled $860.339 billion in May, a 20.8% increase compared to the $712.028 billion reported for the same month a year ago, the report said.

MICA's members reported that 89,365 borrowers used private mortgage insurance (PrivateMI) to buy or refinance a home in May.

By Patrick McGee, pmcgee@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca

Flawed foundations

'It's the worst suffering, it's financially draining, it's destroyed their relationships, their homes. It's so repugnant to what Australians would expect," says Catherine Cusack, the NSW opposition spokeswoman for fair trading. "How have these people that I deal with had all their suffering ignored for so long?"

Cusack is talking about the nightmarish limbo faced by people who are locked in dispute with their home warranty insurers. Unable to move into their homes, get defects repaired or sell as is and start again, many are tens of thousands of dollars worse off because they tried to make a claim against their home building warranty insurance when something went wrong.

Most consumers think that the mandatory home building warranty scheme in place in NSW and Victoria will cover them for substandard building work. But the reality is very different. And consumers groups are concerned.

"No rational consumer would choose to buy this insurance if it wasn't mandatory," Choice's Gordon Renouf says.

In Victoria and NSW, government regulations compel home owners to buy the privately administered insurance, which is exempt from oversight by the Australian Prudential Regulatory Authority.

Voices condemning the mandatory scheme are getting louder following the collapse earlier this year of Beechwood Homes, NSW's biggest home builder, throwing up new doubts about its worth to consumers.

"It has no value whatsoever, in a nutshell," says Gerard Brody of the Consumer Action Law Centre in Victoria. "You can only make a claim when the builder is dead, disappeared or insolvent. So a consumer basically has to exhaust all their legal avenues before they can claim on the insurance. That's not really insurance."

In all states except Queensland (see box), home warranty insurance is only a "last resort" scheme which does not cover all instances of shoddy work.

It's meant to be a safety net for consumers when a builder dies, disappears or becomes insolvent but the unlucky consumers only discover its limited application when things go wrong.

What many don't know is that consumer protection for renovators and home building has never worked well and has been a running sore for years.

There have been more than 30 government inquiries into the system's flaws. Six years ago there was a national review, led by Professor Percy Allen, which was meant to fix the problems.

Since then it is estimated that about $225 million has been collected by the six private insurers in NSW alone, with only a fraction - about $16 million - paid out in claims.

In the Victorian Parliament last year, an answer to a question on notice said premiums in the state were between $90 million and $120 million a year. Vero, owned by Suncorp Metway, has between 60 and 75 per cent of the home building warranty insurance market.

Now, following the release of a highly critical Productivity Commission report in May, an all-party Senate inquiry is investigating the scheme - again.

At the Sydney hearing on June 13, several people who have fallen into the black hole of protracted disputes around home building warranty insurance gathered to hear the submissions. Irene Onorati, who has dedicated years of her life to lobbying on this issue, spoke first.

"The lives of many honest families have been shattered," she told the committee. "We've had enough, we need a new system." There were murmurs of "hear, hear" from the gallery. Onorati has spoken at many of the previous government inquiries into the area. "I'm getting very angry now," she told the Herald later.

"All these cases were in the NSW parliamentary inquiry in 2006, and tell me, what did that get us?"

Submissions to the Senate inquiry suggested a deliberate policy by the insurers, particularly Vero, of dragging out litigation to minimise payouts and force inadequate settlements on claimants - "litigation for harassment", as Senator Christine Milne summarised it. (Vero has not attended the hearings yet but Vero spokeswoman Sue Repanellis says the insurer has not ruled out appearing at a later date.)

Brody says, "You can't claim the legal costs on the insurance at the end of the day, so most consumers get advice and rationally decide not to proceed and don't claim on insurance and are just left out of pocket."

There are horror stories of those who refused to give up, such as Rob Siebert, who is $70,000 worse off after following all the processes necessary to claim on his insurance after his builder refused to remedy defects in his Lismore home.

"From a consumer perspective, it's hopeless," says a Victorian builder and lobbyist, Phil Dwyer.

"It's crucifying people. It's not only the cost and the legal costs but the frustration and the never-ending litigation. One thing rolls into another and it goes on for years. That's why a lot of this hasn't come to a head, because the consumers are only coming out the other end now as broken people. For God's sake, a $2 item in Coles is afforded better consumer protection than what we've got for people's homes. That's why we're so angry about it."

The scheme is also bad news for small-to-medium builders, says Dwyer, the national president of lobby group the Builders Collective Association.

For years, after a claim nearly ruined his business, he has been lobbying state and federal governments to ditch the mandatory scheme, as the Tasmanian Government did earlier this year.

Builders of residential premises under three storeys must obtain home warranty insurance before they begin a project. For a home costing $230,000, the insurance costs about $3000 for a policy in NSW and slightly less in Victoria, Dwyer says. (Vero claims the average premium is less.) This cost is typically passed on to the consumer.

Based on the average cost of the insurance and the number of building permits issued, Dwyer estimates the insurers are raking in about $358 million a year nationally. In order to get the mandatory insurance, builders must sign a deed of indemnity and often get a bank guarantee as well.

"The builder himself becomes the underwriter of the insurance through the indemnity or bank guarantee," Dwyer says. "We have to undertake to repay to the insurer within 28 days of demand any claim plus all costs to the insurer. It's a bit like having car insurance and having to pay for any accident you have."

From figures provided to the inquiry by the chairman of the Home Building Warranty Scheme Board, it has been calculated that in NSW insurers are paying out a mere 7 per cent of revenue in claims. Vero disputes this. Repanellis says Vero's loss ratio is in line with the accepted premium-to-claim ratio for most consumer protection insurance (about 65 to 80 per cent) but she did not give Money exact figures.

"There's a lot of misinformation out there," she says. "If it was such a profitable business, why were we the only insurer who stayed in the market when HIH collapsed? You'd think all the other insurance companies would drive right in if it was really so profitable."

The present Victorian and NSW schemes came into force after the 2001 collapse of HIH insurance, then the majority provider of home building warranty insurance. When that was followed by the September 11 terrorist attack, the insurance industry contracted and it was harder to obtain insurance.

Under pressure from builders and insurers, in 2002 the Victoria and NSW governments agreed to change the home building warranty legislation to make it

"last resort", shortening the period of cover and limiting maximum payouts.

Then the Federal Government changed the corporations regulations to effectively convert home building warranty insurance from a retail to a wholesale product, stripping out consumer protection requirements and oversight by APRA. That is why the exact figures on premiums taken compared with commissions and payouts made are not publicly available.

"What is of interest in this whole situation is how the regulations came to be put there in the first place," Cusack says. "It's not an oversight; it's a carefully crafted set of words that's devastating in its impact, removing the scheme of any accountability. It removed it from any independent authority looking at consumer complaints. To me that's why it has been allowed to run rampant for so long."

However, the NSW Office of Fair Trading defends the scheme against charges of being "junk insurance".

"It's very valuable insurance," says spokesman Graham Humphreys. "It is a last resort scheme ... If a claim is declined [people] have appeal rights to the tribunal and to courts. So a person does get a chance to have their claim fully assessed. At least there is this form of insurance ... If the builder was to go bankrupt, imagine a situation where there was no insurance. These people would be essentially out of pocket."

Humphreys says that 1250 claims had been settled in NSW as at December 2007 under the scheme but figures about any difference between the payouts and the actual costs incurred in each case were not available.

"We'd like people to make a judgment on the scheme after Beechwood," he says. "We're right in the middle of a process here. If people have criticisms, we'd need to evaluate that at the appropriate time. We'd point to the 1250 cases were the scheme has worked."

Repanellis says: "The problem arises when builders refuse to come back and fix defects, when people are paying the biggest amount of money most of them ever do in their lives. It's the one side of this argument that people seem to forget. "Insurance companies need to be profitable and it's not [as has been suggested] 'obscene' profit. You have to be profitable so you can pay out claims such as Beechwood's collapse. You're looking at millions of dollars here."

Have you had a bad experience with home warranty insurance? Send your stories, with contact details, to newsdesk@smh.com.au

HOW TO PROTECT YOURSELF IF YOU'RE BUILDING OR RENOVATING

For now, people building or renovating their homes in NSW and Victoria are stuck with the mandatory home building warranty scheme. That raises the question of how you can protect yourself when renovating or building.

"Consumers have to wonder whether it's worth building. It's one of the biggest risks for consumers and they can't in essence insure against it, because of the limited application of building warranty insurance," says Gerard Brody from the Consumer Action Law Centre in Melbourne.

Some people mistakenly think they are covered by their general insurance - their home building policy - but these policies specifically exclude building defects.

For instance, NRMA's home building insurance cover excludes inherent defects and structural defects; settling, shrinkage or expansion in buildings, foundations, walls or pavements and faulty design or workmanship.

That means consumers have to be defensive in their thinking and rely only on highly recommended builders.

As a start, they would have to be licensed. Phil Dwyer, builder and national president of the Builders' Collective of Australia, says: "Probably the best thing you can do is find a builder that represents himself, ask the builder for the last three jobs they've done, and get references from owners.

"Check his credentials - not through websites, but through the people he's just worked for. Until such time as we get proper consumer protection, that's the best thing that can be done. It gives you a year's track record for the builder, from people who will know if there will be any issues. And a good builder will be happy to give you his last three jobs."

Real estate consultant and consumer advocate Neil Jenman says progressive payment is key to managing construction work - make sure you hold some money back.

"My wife and I built our house eight years ago. I found that when you pay the tradesmen you wouldn't see them again. So I got them together and said, 'I like spending time with you guys but there's only one way to keep you coming back and that's to not pay you.' So always hold something back, to keep them coming back. Keep control of the purse strings.

"In general, home owners don't understand that you're the boss and the boss calls the shots. When we hire tradesmen or real estate agents we tend to get intimidated. They say, 'It's our policy.'

"Home renovators and home builders themselves should say, 'Let me tell you about our policy; our policy is we don't pay until we're happy the job is done properly. If you don't like it then too bad, go find another job.'

"The way the economy is tightening up, home renovators are in a much better position than they used to be. Home owners don't realise how much power they've got."

Make sure your documentation is as detailed as possible and don't leave anything vague so there is no wriggle room to cut corners or push up costs.

"If you have any trouble later, bring them back to it and say, 'This is what we agreed to'. And always ask, 'Is there anything else I should know?' Later on when they raise something new you can say you asked and they didn't bring it up at the time," Jenman says. KM

QLD LEADS THE WAY

Consumer advocates and builders want a Queensland-style home building insurance scheme to be implemented nationally.

There, the government underwrites home warranty risk and the Building Services Authority regulates it.

The insurance is mandatory and there's a binding, low-cost dispute resolution system where a builder's licence may be at risk if he doesn't rectify defects.

Queensland company Real Property Constructions suffered a Beechwood-style collapse in February this year, leaving 233 uncompleted homes.

Under Queensland's "first resort" scheme, the responsible minister, Rob Schwarten, reported that all complaints received by the authority had been assessed and 70 per cent had been finalised - all within three months.

Ian Jennings, general manager of the authority, says: "You're covered for defects, subsidence and non-completion up to $400,000. It works because of the integrated model. You need dispute resolution, a licensing regime, the ability to get rid of a builder, plus you've got to have the insurance. It all comes as a package."

In the event of a dispute with a builder, the Queensland consumer has a clear, simple set of steps to take to have it remedied.

"For example, the house is finished but the roof is leaking," Jennings says. "They've got to raise it first with the builder." If the builder doesn't fix it, the consumer can lodge a complaint with the authority, which will inspect the site with both the consumer and the builder present and determine whether the work complies with the building code and Australian standards. If not, the builder must fix it and, if he refuses, a formal demerit goes on the public register against his licence. Then the insurance kicks in and the authority supplies a rectifying builder to fix the defects then recover costs from the original builder.

"If a house isn't finished," Jennings says, "and a consumer legally terminates a contract because the builder's not performing, then we apply the insurance contract and finish their home. In NSW and Victoria, they'll only pay 20 per cent of the contract price; we will finish their home and then recover from the builder. The consumers' problem has been fixed."

However, the Housing Industry Association, which represents builders, trade contractors, manufacturers and suppliers but also benefits from commissions as the home warranty insurance broker, dismisses the Queensland approach as expensive and unmanageable.

"Queensland's scheme is more expensive than [that of] any other state," it says in its submission to the inquiry.

Jennings disputes this. "It doesn't cost the government," he says. "We're self-funded. All our current liabilities are funded for the next 61/2 years. Our revenue comes from licence fees and insurance premiums. The regulatory business is funded through licensing income and the insurance business is funded through payment of premiums."

The authority's premiums vary according to contract size. The insurance premium for a $200,000 contract is $1580. KM

THE VICTIMS WHO LOST THOUSANDS

For the past 20 years Irene Onorati has fought for the rights of consumers and the victims of shoddy building and bureaucratic indifference. She's spoken at every hearing into the lack of consumer protection. And she's still fighting.

Onorati's volunteer lobby group, the Building Action Review Group, has helped hundreds of consumers left with nowhere else to turn. Here is a small sample of those let down by the scheme.

Yasmin Fahri is a single mother who contracted a builder for $160,000 worth of renovations on her Sydney home in 2005. The builder was licensed by the NSW Office of Fair Trading. Fahri paid $68,500 for work that was defective, incomplete and could not be certified. The dispute escalated and, after receiving threats from the builder, Fahri took out an Apprehended Personal Violence Order against him. She paid for mandatory home building warranty insurance but never received the certificate from her builder. In any case, it is useless to her as it only applies when the builder dies, disappears or becomes insolvent.

FairTrading has no power to force the builder to rectify defects but disqualified him for one year. Meanwhile, Fahri, who can't afford a lawyer, faces a demolition order from her local council. It has cost her $450,820 - more than three times the original contract - and the dispute continues.

"I compare it to a form of torture," she says. "Your builder can take your life savings and have a holiday in Greece! This should not happen in Australia."

In 1993, Redfern pensioners Prokopios and Kalipso Frantzis signed a contract to extend their home. The first builder abandoned the job and left them without a working toilet or hot water for more than three months. Statutory insurance applied at the time and was quickly invoked. But then successive rectifying builders only made the defects worse. In each case the Frantzis family relied on the Fair Trading assessments and used licensed builders. When defects reappeared after the third builder's work in 2001, the insurer, Royal Sun Alliance (now Vero), denied liability, saying it was Fair Trading's responsibility. The botched jobs have together cost them $226,898.

In 2005, Fair Trading's home building service approved demolition and reconstruction but only to a value of $100,000, when the repairs would cost significantly more. This year, the minister, Linda Burney, offered $167,000 for the cost of demolishing and rebuilding the defective works. It's not enough for the job and the family is still trying to get Fair Trading to fix their house.

Then there's Cabramatta man Minh "Charlie" Tran. More than six years ago, dodgy building work left him with a house beset by structural problems, sinking on one side. He now lives in a caravan on his property, with mortgage repayments of $4200 a month, and faces orders from the Land and Environment Court to repair the building under threat of contempt of court or jail.

In 2006, it would have cost $450,000 to fix. Desperate and out of money to pay his lawyer, Tran went to mediation but refused Vero's offer of $75,000 (Vero spokeswoman Sue Repanellis disputes this amount and says their offer was "far in excess of $75,000").

There was no written agreement. Vero took him to the Supreme Court to try to force him to accept the offer. The case was dismissed. The insurer is appealing.

"I did nothing wrong," Tran says. "I've lost five years of my life and $300,000. And instead of paying me $200,000 [then the full amount under the policy], Vero spent $1 million dollars taking me to court. The only thing I suspect is that, if they pay me, there may be another thousand people behind me."

The NSW opposition spokeswoman for fair trading, Catherine Cusack, says: "The revelation of Mr Tran's case is that the insurers are bullying people to accept inadequate payment and saying, 'If not, we'll take you to court.'

"It's deliberate and predatory. I find it difficult to believe that such a thing can happen but it's real. I've spoken to these people and I've seen their documents. The victims can't reconcile themselves to the injustice of their situation.

"In Australia you'd think there would be consumer protection to curb this behaviour but there is none in relation to home warranty."

Onorati agrees: "They're trying to force people to go into mediation when they have no more money to continue in court. The smallest building repair ends up the biggest nightmare of your life and destroys completely your health and financial livelihood. The whole system needs fixing." KM

Financial risk analysis and the space industry revisited

by Taylor Dinerman
Monday, June 23, 2008
Last week we looked at the different risks that exist in different parts of the space industry (see “Financial risk analysis for the space industry”, The Space Review, June 16, 2008). Roughly speaking they divide into two groups. One is the conventional space industry, which includes both the military and civil space sectors as well as the conventional commercial space sector. In these sectors risk is well understood and can be managed by conventional means. This is also the sector where risk has been bought down by ample and sustained government investments.

Then there is the NewSpace sector: entrepreneurial and visionary, but full of technological and financial unknowns. This is the area where the greatest potential profits exist and where there are excellent chances for unwary investors to lose their proverbial shirts. However, one must recognize that these dangers have been reduced over the past decade. The NewSpace firms that have survived are agile, thick-skinned beasts who either have very rich patrons or have become exceptionally good at scavenging the landscape for contracts and investors.

NewSpace is the area where the greatest potential profits exist and where there are excellent chances for unwary investors to lose their proverbial shirts.
Companies like SpaceDev, TGV Rockets, and XCOR Aerospace are not going away anytime soon. They have all gotten beyond the “viewgraph engineering” stage and are cutting metal and building products. By itself this may not be enough to secure their future profitability, but it’s a long way from where they were eight or nine years ago. SpaceDev, for example, has latched onto a successful niche making actuators and similar small components at its facility in North Carolina while still working on more ambitious systems in California. The firm may be making a small profit, but it still has a ways to go before it can compete with better-established ventures.

One thing that the NewSpace firms all have in common is that they share big ambitions. They may have different visions of what they want to do, but none of them are thinking small. They all believe that one way or another their ultimate success will transform the way the space industry operates and will open up the solar system for human exploitation. Those who dream big dreams can often be their own worst enemies when it comes to dealing with the day-to-day world of equity and finance. Smart investors do not simply put their money into good ideas, they invest in people. If the CEO and other leaders in a firm appear to have their heads stuck in the clouds, their chances of raising risk capital will remain earthbound.

Investors and business leaders are ready to take risks, but they are not willing to take stupid risks, at least not normally (anyone remember the “New Coke”?) Mitigating risk by spreading it around is a basic principle of money management. Yet as the techniques of risk mitigation become more and more sophisticated, so do the opportunities for systemic failure: we have all seen what happened to the financial engineers who helped create the subprime mortgage disaster. The success of Western capitalism is due in large part to the inventions of the joint stock company and the insurance industry. Entrepreneurs who make it big are ones who know how to use these institutions rather than those who spend time and effort fighting them.

The next phase of the NewSpace industry will logically result in the emergence of one or two major new companies that will take their places amongst the so-called “big boys”. Virgin Galactic and Scaled Composites are part of large conglomerates, and while they may behave like small, independent firms, they have the kind of support needed to carry though with their plans without the need to raise new capital or to win new government contracts. The independent companies are the ones that will either grow or go under. This is where investors will have to take real risks.

However one or more of these firms could make the kind of technological breakthrough that would turn them into a giant of the 21st century. They simply have to come up with the right product at the right time for the right price. This usually requires a divine miracle.

The history of capitalism is full of such miracles, yet as we all know there are far more failures than successes. What is happening is the convergence of various technologies with the demand for low cost access to, and operations in, space. The basic science of rocketry is now better understood than it was fifty or sixty years ago when it was much more of an “art”. The NewSpace firms are free to try and use combinations of new products and ideas to build their products. Some or most are sure to fail, but those who do not may have their hands on a gold mine. For example, a firm that comes up with a genuine new two-stage-to-orbit RLV that can dramatically cut launch costs will instantly change to economics of the commercial launch industry.

Technology may be taking some of the “art” out of rocket science, but it cannot help much with the “art” of risk management in the space industry.
Imagine what would happen if, in say, 2011 or 2012, a NewSpace firm were to put into service a launch vehicle that could put a two-ton payload into geosynchronous orbit for two million dollars. Would this hurt the market for the Ariane 5, the Proton and for Sea Launch? Probably, but only if there were satellites available in that class that could provide services roughly comparable to the heavy ones that are now being designed and built. To truly disrupt the market, the new satellite would have to combine lower manufacturing costs and lower operating costs with the lower launch costs. The launcher would have to be shown to be at least moderately safe and reliable.

Some of these factors could be met by turning an orbital space tourism vehicle into a satellite launcher. If a vehicle designed to safely carry passengers into orbit works as planned, then modifying it to profitably carry satellites is only logical. This may be why the European conglomerate EADS is looking to build its own suborbital space tourism vehicle.

For everyone involved in the space industry their are risks and dangers involved in staying with today’s tried and true expendable rocket technology and even greater ones in investing in the next generation of reusable launchers. The only way to avoid these risks is to get out of the industry altogether.

Technology may be taking some of the “art” out of rocket science, but it cannot help much with the “art” of risk management in the space industry. It takes men and women with years of experience and considerable investing skill to understand this emerging industry. It is evident that investors must place their bets on people, rather than on hardware that may or may not work as well as planned.

Flurry on Smith Hill means the end is near

By Katherine Gregg, Steve Peoples, Cynthia Needham and EDWARD FITZPATRICK

PROVIDENCE — In their usual chaotic rush to finish after six months at the State House, lawmakers raced through votes yesterday on scores of high-profile bills including a new $6.9-billion state budget now headed to the governor to be signed into law; a bill to “quash-and-destroy” criminal records, no matter how serious the offense, and legislation aimed at easing the brunt of the foreclosure crisis.

Other bills that bubbled to the surface in recent days — such as the proposed $12.6-million sales-tax rebate to the Canadian company talking about building a heavy-equipment auction house in West Greenwich — were still hanging in the balance.

Among the highlights of a session, that included 106 bills in the House alone on what may have been the next to last day of this year’s legislative session:

•The Senate approved, and sent to the governor, a $6.9-billion spending plan that lops hundreds of people from the state’s health-care and welfare rolls, freezes non-school aid at this year’s already-reduced levels, and relies on more than $150 million in iffy — and not yet fully explained — savings in the state employee and Medicaid arenas to help avert a humongous deficit during the budget year that begins in two weeks. The bill cleared the House a night earlier after close to 9 hours of debate, and the Senate on a 36-to-2 vote that belied the depth of some of the objections.

“The choices we had were slim,” said Senate Finance Committee Chairman Stephen D. Alves. “We came to realize that we were not going to tax our way out of this budget problem.”

Despite the lopsided vote, a chorus of senators voiced concern over cuts to early childhood programs, reduced health-care coverage and a perceived lack of oversight in the plan to transform Medicaid programs that serve more than 180,000 Rhode Islanders. “I honestly feel like we’ve kicked some people under the bus,” said Sen. Daniel J. Issa, D-Cumberland.

•A bill to lift a looming July 1 deadline for sprinkler and other fire-code requirements sailed through the House, with Rep. Joseph Trillo, R-Warwick saying that if left untouched, the law would “force the closure of many schools and places of business…because a lot of them have been unable to meet the code requirements at this point.” The bill — now headed to the Senate — does not specify a new deadline, leaving it to the state’s Fire Safety Code Board of Appeal & Review to grant extensions “for good cause.”

•Jerome Williams won Senate confirmation as director of the Department of Administration, the mega-state agency that oversees hiring, purchasing and auditing of government operations, after a year as state transportation director. Noting that “Jerry is no stranger to this building or state government,” Senator Alves, D-West Warwick, said, “Jerry certainly has the qualifications and knowledge to run that department.” Senate Government Oversight Chairman J. Michael Lenihan, D-East Greenwich, called him “a breath of fresh air.”

•Despite objections from the governor, state police and attorney general, a House-passed bill to automatically “quash and destroy,” after five years, the criminal records of people given “deferred” prison sentences was headed for a final vote by the Senate, after clearing a key committee on a 6-to-1 vote last night.

This was the sentence given, for example, to one of the admitted co-conspirators in the Lincoln bribery scandal, the executive secretary for the Barrington police chief who pleaded no contest to embezzling town money and the admitted accomplice to a gunpoint robbery in Waterplace Park who traded testimony for a reduced sentence.

Advocates say clean records are essential to the kinds of jobs that would provide an individual a second chance. For example, current state law bars people with certain felony convictions from obtaining state licenses to work in nursing, social work and auto repair; this would provide a way around that. But opponents question how the state, and other employers, can do required background checks if criminal records are erased.

Current law allows a judge to expunge a single nonviolent offense from the record of a first-time offender five years after the individual has completed a sentence for a misdemeanor, 10 years after completing a sentence for a felony.

This bill is not limited to youthful offenses, first-time offenders or even nonviolent crimes. Cosponsors included Representatives Joseph Almeida, D-Providence, Grace Diaz, D-Providence, Nicholas Mattiello, D-Cranston, and Frank Ferri, D-Warwick.

The criminal-defense lobby also scored another victory, with House passage of a bill to spare those criminals who can’t afford to pay court-ordered fines — as evidenced by their food stamp eligibility, for example — from going to jail.

But some bills got snagged on objections from powerful lobbies, such as the mortgage bankers association, including a bill aimed at making sure the banks that acquire multifamily houses, by foreclosure, pick up the bills for “essential services” such as water for at least 60 days so tenants are not left without.

Advocates for this “Tenant Protection Bill” conveyed a willingness to compromise. But a scheduled vote by the House Judiciary Committee was postponed, with the chairman, Rep. Donald Lally, D-Narragansett, saying he was concerned about “unintended consequences” and the possible problems cited in an e-mail to him from the chairwoman of the Bar Association’s Title Standards and Practices Committee. Among them: the potential difficulty in determining who is a bona fide tenant, and who paid what before the foreclosure.

“The practical effect is to require any foreclosing lender to pay all of the tenant’s ‘essential services’ as soon as the foreclosure takes place,” regardless of how much the tenant may have paid before, the writer, Linda Tessman warned. Lally promised to revisit the bill today.

More successful was the so-called Foreclosed Property Upkeep Act, which would require lenders — and any one else — who acquires a foreclosed property to post a bond equal to 25 percent of the assessed value of the property, subject to forfeit if the property condition slides below minimum housing code standards. The bill’s chances in the Senate are unclear.

The sponsor, Rep. Charlene Lima, D-Cranston, said the bonds would save taxpayers from having to spend “excessive” amounts for police and fire protection and code enforcement. But warning of more unintended consequences, Rep. Nicholas Gorham, R-Coventry, said “banks are going to be reluctant to foreclose if they have to pay for upkeep…Instead of foreclosing, they’ll just let the property rot.”

But some bills had a clear shot of passage, including one giving elderly drivers a break by raising the age threshold from 70 to 75 before they have to start renewing their licenses every two years. One of the two versions of the bill has cleared the General Assembly.

And the bills that sparked the longest debates were not necessarily those that had ever before captured public attention. In the House, for example, lawmakers spent 50 minutes arguing over who should pay for local hydrants –– ultimately deciding to shift the burden from taxpayers to anyone who pays for water, including tax-exempt institutions such as hospitals and colleges.

But it was a national political question of electing presidents by the popular vote that provoked the most vigorous House debate.

After clearing both chambers, the bill would allow Rhode Island to join a compact of states, who pledge their delegates to whoever wins the national popular vote. Legislators argued passionately for more than an hour on whether the change would help make Rhode Island more — or less — relevant on the national political stage. In one of the closest votes of the night, they voted 36 to 34 to approve the change.

Supporters argued that the “one person, one vote” concept creates a more democratic system while getting presidential candidates to pay attention to states such as Rhode Island that fall far beyond the so-called “battleground states” such as Florida and Ohio that are crucial under the electoral college system .

But critics on both sides of the aisle warned that abiding by the national popular vote wouldn’t get rid of the Electoral College; it would simply force Rhode Island to join a compact, which if it swings in favor of a Republican candidate, would force this Democratic state to vote Republican.

“This is absolutely trashing a good system for no good reason at all,” Rep. Robert Jacquard, D-Cranston, said.

While politics weighed heavily on the outcome of many decisions, the Senate in an unusually tight 17-to-15 vote approved a bill to allow the Town of North Providence to take by eminent domain 15 acres currently known as Camp Meehan to keep it out of the hands of a Lincoln developer who is the father of Rep. Peter Petrarca, the vice chairman of the House committee where a matching bill is stalled.

Senate President Joseph Montalbano recused himself from the vote without explaining why.

The last debate to hit the House floor was one of the more intense.

For more than an hour, Republicans lobbied against a plan to build a courthouse in Smithfield several years from now that would cost taxpayers $88 million. The lawyer-dominated legislature, they said, shouldn’t be so quick to commit an astronomical amount of money to the court system in a year that’s been fraught with fiscal cuts.

“How can we burden our state with $88 million of debt when we just came through one of the most difficult budgets?” House Majority Leader Robert Watson said.

But after a prolonged screaming match, Democrats ultimately won out, passing the courthouse bill in a 49-20 vote. Majority Leader Gordon D. Fox said it was critical to offer the citizens of Rhode Island an alternative to the congested Garrahy Judicial Complex in Providence.

“Access to justice is one of the services government must provide its citizens and to do that, infrastructure matters,” Fox said.

Originally planned as a less expensive facility to be located in Lincoln, the proposed courthouse was relocated to Smithfield this spring, with funding pushed off until 2010.

The Senate voted 33 to 0 for a bill that would prevent utility shutoffs in homes with children who are age 2 or younger. “It’s an important bill considering the budget and fuel prices,” said the sponsor, Sen. V. Susan Sosnowski, D-South Kingstown.

On lighter topics, the Senate approved the issuance of WaterFire license plates and a judge emeritus license plate for the recently retired Superior Court Judge VinBudget Briefing

The Rhode Island House and Senate have approved a $6.9-billion budget for the fiscal year that begins July 1. Here are highlights:

TAXES: No increases in income, sales, capital gains or corporate taxes. Tax on medical and dental premiums increases from 1.1 to 1.75 percent

DEFICIT: Closest estimated deficit of $422 million, mostly through spending cuts. Largest include $67 million in Medicaid spending; $90 million in cuts to state work force.

AID TO CITIES AND TOWNS: $12.5 million cut in non-school aid. Slight increase for school aid.

COMMUNITY SERVICE GRANTS: $9 million cut to programs such as Meals on Wheels, the Rhode Island Community Food Bank and the Crossroads homeless shelter.

WELFARE: Cut in maximum stay on welfare from five years to four years; recipients barred from collecting benefits more than two consecutive years of benefits in any five-year period.

MOTOR VEHICLES: $10 increase for motor vehicle violations; proposed $50 fine for driving while talking on handheld cell phone is rejected.

HEALTH CARE: $67 million in Medicaid savings through reducing eligibility to expensive nursing home care, requiring Medicaid recipients to use least expensive health care providers and other measures; cutting about 1,000 adults from state Rite Care health insurance program.

MOVIES: $15-million cap on tax credits for movie productions in Rhode Island.

HEATING: Repeals program to help poor people pay heating bills.

With reports from Associated Press

kgregg@projo.com

AIG loses its head

WHAT could underline more clearly the pain that the global credit squeeze is inflicting on financial giants? Seven months after Citigroup, America’s largest bank, booted out its chief executive amid mounting mortgage-related losses, the world’s biggest insurance group has followed suit. On Sunday June 15th, after a hastily convened board meeting, American International Group (AIG) said that its beleaguered boss, Martin Sullivan, would step down with immediate effect. His replacement is Bob Willumstad, the company’s chairman and a former high-ranking Citibanker.

Mr Sullivan’s undoing was AIG’s bulging book of credit-default swaps, much of it tied to subprime mortgages, which has been written down by some $20 billion. After posting total losses of some $13 billion over the past two quarters, the company has been forced to join the humiliating rush to raise fresh capital. As with the “monoline” bond insurers, such as MBIA and Ambac, its woes stem from straying from its core business—in AIG’s case, underwriting property, casualty and life policies—into the alphabet soup of structured finance. Writing swaps on collateralised-debt obligations linked to mortgage-backed securities is a long way from pricing the risk of a hurricane or flood ravaging a factory.

Mr Sullivan did himself no favours by mismanaging expectations. He and his team poo-pooed critics, insisting until this year that AIG had oodles of excess capital and that its actual (as opposed to mark-to-market) losses would be modest. The firm has since been forced to admit that its accounting models were too optimistic, after its auditors found “material weaknesses” in them. It continues to argue that much of the damage to its bottom line will be reversed, thanks to the vagaries of fair-value accounting—indeed, it has campaigned to have the rules softened in times of turmoil. But any such write-ups are unlikely before 2009, if they appear at all. The markets are in no mood to give glass-half-full managers the benefit of the doubt.

Mr Sullivan’s fate was probably sealed on June 6th, when AIG admitted that the Securities and Exchange Commission, America’s markets watchdog, and the Justice Department were investigating the way the company valued its credit-default swaps—in an ugly echo of the accounting probes that brought down Mr Sullivan’s predecessor, Hank Greenberg, in 2005.

This appears to have been the last straw for some big shareholders, including Legg Mason, a fund manager, and Eli Broad, a billionaire, who have seen the value of their holdings dive by 41% since the beginning of the year. They called for the board to consider replacing the current management team. Mr Greenberg, who has been at war with AIG since being shown the door, and remains its largest individual shareholder, also threw his weight behind an overhaul. There was even disquiet within the AIG empire. Executives at International Lease Finance Corporation (ILFC), the world's biggest buyer of commercial aircraft and part of AIG since 1990, have been agitating for a spin-off. They worry that AIG's woes will drag down ILFC, whose credit rating was cut along with its parent's following the latest loss.

The defenestration of Mr Sullivan may placate dissident shareholders, but AIG is hardly out of the woods. Quite apart from its unknowable swap losses, the group is increasingly viewed as the Citi of insurance: too large and sprawling to be managed effectively. Mr Willumstad has the advantage of his experience at Citi, where he served as president before losing out to Chuck Prince for the top job. He should be able to outmanoeuvre those calling for a break-up of AIG, which would not be easy given the strong ties between its various businesses. Restoring the robust profits of the Greenberg era is another matter.

Mr Willumstad faces other headwinds. With pricing power dwindling and catastrophe pay-outs set to climb after an unusually calm couple of years, America's property and casualty industry—dominated by AIG and Berkshire Hathaway—is entering another of its periodic downturns. With stockmarkets sputtering, life insurance and annuities could suffer too. And insurers face lower returns on investments in alternative assets, such as hedge funds and private equity. Mr Willumstad pronounced himself honoured to take the reins at such a critical juncture. He must be more than a little apprehensive, too.

Foreclosures heat as market cools

Lower Mainland foreclosures have doubled in the last two years as affordability has decreased along with the promise of quick profits.

Kap Hiroti, who tracks Lower Mainland foreclosures at ForeclosureList.com, says foreclosures stand at 20 per week, up from 10 per week in 2006.

"For one reason or another, they didn't pay the mortgage, or insurance, or property tax," says Hiroti, who advises real estate owners looking to foreclose or prospective buyers looking to buy a foreclosed property. "Or they get behind in their strata or condo fees, or face a one-time cost such as a roof or a leaky condo, which might set them back 40, 50 or 60 thousand dollars."


The Lower Mainland, largely buoyed by Olympic optimism and a good international reputation, has so far eluded the real-estate meltdown south of the border.

In the U.S., home foreclosures hit a record high in the first quarter. Almost one in 100 homes were pushed into a foreclosure proceeding in the quarter, the Mortgage Bankers Association reports.

And the U.S. mortgage delinquency rate hit a record 6.35 per cent, indicating foreclosures will still climb.

As house prices fall in the U.S., foreclosures often result when people whose mortgage is worth much more than a home's potential selling price simply walk away rather than make payments on a losing proposition.

Even Ed McMahon, Johnny Carson's sidekick on "The Tonight Show" for three decades, may lose his home to foreclosure. McMahon's Mediterranean-style estate on storied Mulholland Drive north of Beverly Hills faces a $643,596 default notice on a $4.8-million mortgage.

Former baseball star Jose Canseco is another of the 650,000 U.S. homeowners in the foreclosure process.

"It's happening to anyone and everyone," Canseco says.

Hiroti believes the Lower Mainland real-estate market has "flatlined," meaning investors who were counting on making a profit no longer see an upside.

As a result, some have chosen to lose their investments through foreclosure rather than hanging on with no sign of a significant upside return.

"They were kind of speculating that the market would go up, but when the market flatlines, some people just choose to get out. Local people are getting priced out of the market."

Helmut Pastrick, chief economist with Credit Union Central of B.C., says many foreclosures result from unexpected turns of events -- a job loss, a divorce -- and are not necessarily driven by traditional investment decisions or market swings: "It could be income, divorce, or a change in the household."

Falling interest rates will help some people who have trouble making payments, he says.

"Since January, mortgage rates have dropped more than one per cent. I think we'll see rates at this level, or even lower, through the end of this year, and they shouldn't increase until at least 2009."

Pastrick says most Canadian lenders have taken a much more cautious approach to lending money. He doesn't expect as many Canadians to be faced with foreclosure as in the U.S., where the twin problems of lax lending standards and falling housing prices have created a crisis.

Check By Phone

When you have been in business for a while, you know that success isn’t just about winning jobs or selling products. It’s also about getting paid. And the sooner the better.

Check by phone offers credit card convenience for check customers. Check by phone provides you with:

• Immediate payment for goods & services
• Up to 100% larger marker—instantly
• Reduced in-house paperwork
• Increased return on advertising
• Solid customer loyalty


• Lower credit card costs
• Collection of past due accounts over the phone
• Ship products faster—no more COD hassles
• Easy implementation

What is check by phone?

Check by phone is an extension of the pre-authorized payment system used by insurance and mortgage companies since the 1970s.

Your customer authorizes you to debit his/her checking or savings account as a means of payment for your goods or services. Once you have authorization from the customer, you are in control of being paid. Using the banking information provided by your customer, you simply enter the information on an Internet based software program to collect check by phone sales. The check by phone amount moves from your customer’s checking or savings account into your business checking account within 48 hours!

Increase Your Market & Your Profits.

Less than half of the American public owns a credit card—even fewer businesses. And half of those businesses that do can’t use them. You are probably already accepting checks from these customers. Why not take advantage of the convenience and financial benefits of accepting checks over the phone, fax or Internet as they would a credit card.

• Mail order/catalog sales
• Travel agents
• Collection agencies
• Advertising sales
• Parts suppliers
• Network marketing companies
• Utility companies
• Television shopping networks
• Charity fund raisers
• Florists
• Pharmacies
• Internet service providers
• Delivery services

Any business that accepts checks can enjoy the ease and profitability of check by phone services.
How does it work?

Accepting your customer’s check by phone, fax, Internet, or email can be as easy as accepting a credit card. Ask your customer for the bank routing and account numbers which are printed at the bottom of every check. You enter this information using Internet based software to collect your funds within 48 hours. It is as simple as that!

What does check by phone cost?

This depends on the volume of checks to be processed monthly. A very inexpensive amount is typical which will almost always be less than the cost of accepting credit cards.

Now you can offer credit card convenience to checking account customers by allowing them to pay by check right over the phone, and save the hefty percentage you are paying on credit card customers. If you have customers who order over the phone, check by phone can increase your sales potential by 100 million customers in the U.S.

By: C. J. & Tuck Consulting, LLC owns and operates www.cashflownow.org. We specialize in Electronic Payment Processing Services and offer a low cost Check by Phone service as well as many other Electronic Payment Processing services. For more information, contact: Pat A. McDavitt, Author and Sole Manager of C. J. Tuck Consulting, LLC Telephone: 512-837-1358 Fax: 512-837-0345

More Headaches for McCain’s Camp

For weeks now, John McCain's presidential campaign has faced awkward questions about the outside activities of several top advisers. Add one more name to the list: former Texas senator Phil Gramm, McCain's longtime friend and one of his five campaign co-chairs. (A sixth, former congressman Tom Loeffler, quit recently after NEWSWEEK reported on his lobbying work for Saudi Arabia.) According to McCain spokeswoman Jill Hazelbaker, the co-chair position affords Gramm "broad input into the structure, financing and conduct of the campaign." She added that Gramm, who has a doctorate in economics, is also "a valued voice on economic policy." Gramm is not a paid McCain adviser, but his day job—vice chairman of a U.S. division of Zurich-based financial giant UBS—could pose new tests for a candidate who has promised high ethics standards and ditched advisers who failed to meet them.

UBS has recently written off huge losses in subprime-mortgage-based securities, and last week liberal bloggers noted that Gramm was a registered UBS lobbyist on mortgage-securities issues until at least December 2007.

NEWSWEEK has learned that UBS is also currently the focus of congressional and Justice Department investigations into schemes that allegedly enabled wealthy Americans to evade income taxes by stashing their money in overseas havens, according to several law-enforcement and banking officials in both the United States and Europe, who all asked for anonymity when discussing ongoing investigations. In April, UBS withdrew Gramm's lobbying registration, but one of his former congressional aides, John Savercool, is still registered to lobby legislators for UBS on numerous issues, including a bill cosponsored by Sen. Barack Obama that would crack down on foreign tax havens. "UBS is treating these investigations with the utmost seriousness and has committed substantial resources to cooperate," a UBS spokesman told NEWSWEEK, adding that Gramm was deregistered as a lobbyist because he spends less than 20 percent of his time on such activity. Hazelbaker said the McCain campaign "will not comment on the details … of ongoing investigations and legal charges not yet proved in court."

McCain's campaign is already distancing itself from some of Gramm's other work for UBS: his involvement in attempts to sell financial products known as "death bonds," which BusinessWeek described last summer as one of "the most macabre investment scheme[s] ever devised by Wall Street." Not long after joining UBS, the Houston Chronicle reported, Gramm helped lobby Texas officials, including Gov. Rick Perry, to sign on to a UBS proposal in which revenue would be generated for a state teachers' retirement fund by selling bonds, whose proceeds would in turn be used to buy annuities and life-insurance policies on retired teachers. UBS would advance money to the retirement fund, then repay itself, compensate bondholders and pocket profits when insurance companies paid off on retirees who died. According to a banking-industry source, who asked for anonymity when discussing a sensitive matter, Gramm was involved in efforts to pitch similar UBS products to other financial institutions.

Gramm's office declined NEWSWEEK's request for comment. A source familiar with the bank's current business, who also asked for anonymity, said UBS no longer markets the kind of plan that Gramm was allegedly trying to sell to Texas. Hazelbaker said that McCain, who has been critical of the financial industry's performance in the subprime market, disapproves of death bonds and "supports increased accountability, transparency and capital backing in our financial markets as a solution to these problems." Death bonds, she continued, "move markets away [from]—not toward—these goals."