This is a coup: the Homeland Security takeover of US elections

The chief of Homeland Security has announced that his office will be taking over US elections.

If you can’t see the coup in progress, you need to keep looking until the message comes through.

Read carefully—ABC News reports.  Comments are in brackets:

“Citing increasingly sophisticated cyber bad actors and an election infrastructure that’s ‘vital to our national interests’, Homeland Security Secretary Jeh Johnson announced Friday that he’s designating U.S. election systems critical infrastructure…”

[Also known as: “we’re taking over.”]

“’Given the vital role elections play in this country, it is clear that certain systems and assets of election infrastructure meet the definition of critical infrastructure, in fact and in law’,” Johnson said in a statement. He added: ‘Particularly in these times, this designation is simply the right and obvious thing to do’.”

[Also known as: “we’re taking over.”]

“Johnson said election infrastructure included storage facilities, polling places and vote tabulation locations, plus technology involved in the process, including voter registration databases, voting machines and other systems used to manage the election process and report and display results.”

[Also known as: “We’re taking over every significant aspect of the national election process.”]

“The designation [of US elections as critical infrastructure] allows for information to be withheld from the public when state, local and private partners meet to discuss election infrastructure security — potentially injecting secrecy into an election process that’s traditionally and expressly a transparent process. U.S. officials say such closed door conversations allow for frank discussion that would prevent bad actors from learning about vulnerabilities. DHS would also be able to grant security clearances when appropriate and provide more detailed threat information to states.”

[Also known as: “we can intercede in the election process and determine its outcome without any need to pretend we’re being transparent; only people we approve will know the details of how we run elections; secrecy works.”]


The Fastest-Growing Loan Type

Deanna White told a contractor she couldn’t afford the $42,200 loan he recommended for improvements to her house in Inglewood, Calif. The contractor, she recalled, said she wouldn’t be on the hook because the loan was part of a “government program.” She applied and was approved.

Two years later, Ms. White is struggling to make payments on the loan, which was packaged with more than 10,000 similar loans into bonds and sold to investors. Under its terms, Ms. White’s five-bedroom house could be foreclosed on if she defaults.

Her loan is part of a booming corner of the lending industry called Property Assessed Clean Energy, or PACE. Such loans, set up by local governments across the U.S., are designed to encourage homeowners to buy energy-efficient solar panels, window insulation and air-conditioning units.

 About $3.4 billion has been lent so far for residential projects, and industry executives predict the total will double within the next year. That would likely rank PACE loans as the fastest-growing type of financing in the U.S.

As the loans spread, so do problems that echo the subprime mortgage crisis. Plumbers and repairmen essentially function as loan brokers but have scant training and oversight. They often pitch PACE loans to help land contracting jobs and earn referral fees from lenders, according to loan documents and more than two dozen borrowers, industry executives and employees.

Creditworthiness matters little to lenders, because loans are based on the value of a homeowner’s property. PACE loans typically require no down payment, and the debt is added to property-tax bills as an assessment. Ms. White’s annual property taxes soared to $6,500 from $1,215.

Loan growth is fueled partly by investor appetite for bonds created from PACE loans, especially among mutual funds and insurers. Investors like the bonds’ relatively high payouts, environmentally friendly reputation and lofty credit ratings. On the other hand, rating firms have said there aren’t enough historical data on PACE loans to forecast potential defaults.

Some local governments that embraced the loans as a way to bring clean energy to the masses didn’t anticipate the messy consequences.

“We wanted to put ourselves in the thick of this,” says Rick Bishop, executive director of the Western Riverside Council of Governments, a group of city and county governments in California that helps run the largest PACE program. “The downside is now we hear about these stories from people who feel like they’ve been misinformed in some fashion.”


The government group tries to resolve problems for borrowers. Riverside County, Calif., has opened an investigation into marketing practices for PACE loans, and California Gov.Jerry Brown signed into law in September new requirements establishing uniform disclosures for PACE loans, an effort to make lending terms closer to those for mortgages. Homeowners who get a PACE loan now have three days to back out.

The largest PACE lender, Renovate America Inc., is accused in three lawsuits filed in November by borrowers of double-charging interest and administrative fees and failing to immediately credit loan payments. The suits seek class-action status. The company denies the allegations and says it will “defend PACE, our company and the program vigorously.”

In November, the Energy Department urged administrators of the loan programs to clearly explain loan costs and other terms, allow borrowers to cancel their loan during a short period and deter kickbacks to contractors.

Industry executives say most borrowers are satisfied with their loans and defaults are rare.

Lenders are working with consumer groups to create nationwide standards “to prevent things that wouldn’t benefit consumers,” says JP McNeill, Renovate America’s founder and chief executive.

The growing pains are largely the result of the industry’s young age, the executives say. The first PACE program was started in 2007 by Cisco DeVries, then chief of staff to the mayor of Berkeley, Calif.

Thirty-four states and Washington, D.C., have passed legislation allowing the creation of PACE programs, according to PACENation, an industry trade group in Pleasantville, N.Y.

Mr. DeVries, who calls himself a “capitalist hippie” and now is chief executive of Renew Financial Group LLC, a clean-energy finance company in Oakland, Calif., says he is “really proud of what we’ve accomplished.” He adds: “We set out to help people save money and save energy, and it’s under way.”

The industry could get a new growth spurt from a July decision by the Department of Housing and Urban Development to allow the Federal Housing Administration to purchase mortgages on homes with PACE loans.

PACE loans range in size from about $5,000 to more than $100,000, with an average of about $25,000, and charge interest rates of 6% to 9% over a repayment period of usually five to 25 years.

Instead of making monthly mortgage payments, PACE borrowers pay what they owe once or twice a year along with their property taxes. Cities and counties collect the loan payments and pass along the money to lenders.

Local governments collect fees from finance companies. In the fiscal year that ended June 30, the Western Riverside Council of Governments collected revenue of $7.1 million, or about 15% of its budget, from the PACE program.

Another quirk of PACE loans is that the debt usually goes to the front of the line, ahead of the homeowner’s mortgage. Like a typical tax assessment, that means if a homeowner defaults on the PACE loan, the property can be seized as collateral and sold to repay the lender.

That setup puts local governments in the awkward position of potentially foreclosing on their constituents. If that happens and the house turns out to be worth less than the amount owed by the homeowner, other taxpayers could be stuck with a loss on the difference. So far, that hasn’t happened.

Some investors say the extensive involvement in PACE loans by governments across the country amounts to an implicit financial backstop. The belief that governments stand behind the loans is a major reason why investors are attracted to the bond deals, according to investors.

“There is such big national and state backing,” says Mike Warmuth, portfolio management vice president at FBL Financial Group Inc., the owner of Farm Bureau Life Insurance Co. in West Des Moines, Iowa. The insurer owned $22 million of PACE bonds at the end of September.

Mr. Warmuth says the insurer’s broker suggested the bonds, which generally yield about 4%. He says he isn’t aware of any underwriting deficiencies with the loans, adding that Farm Bureau only had access to aggregate loan data before buying the bonds.

Defaults on loans in PACE bond deals overall have been less than 1%, according to Kroll Bond Rating Agency Inc. Cecil Smart, a senior director at the ratings firm, says the bond deals are structured so that lenders bear the brunt of any losses, rather than investors.

Germany’s Deutsche Bank AG is one of the largest packagers of PACE loans into securities and led a $284 million deal in mid-December, which drew far more investor demand than expected. The bank is aware of problems stemming from the role of contractors, says a person familiar with the matter.

Contractors often line up loans while on house calls and can earn a referral fee of at least $500 per borrower, according to current and former employees. The loans also are marketed at county fairs and by cold calling, borrowers say.

Renovate America uses about 8,000 contractors to help line up loans, according to bond documents. Those contractors are overseen by 23 employees at the San Diego company.

The company says it recently put in place a more-stringent contractor management program. Renovate America says only about 200 contractors are actively arranging PACE loans.

Cindi Ventura, 65 years old, says she was urged last summer by her plumber to apply for a PACE loan after sewer pipes eroded underneath her three-bedroom house in San Jose, flooding the property. She said she had recently filed for personal bankruptcy, didn’t have the money to make all the repairs and couldn’t qualify for a home-equity line of credit.

She and her mother, 83, received a $16,732 loan for five years from Ygrene Energy Fund Inc. with a 6.5% interest rate. Ygrene (“energy” spelled backward), based in Santa Rosa, Calif., is the second-largest provider of PACE financing in the country, based on loan volume.

Ms. Ventura, a receptionist, says she was confused about the loan’s terms because it was called an assessment. She says she called and emailed Ygrene several times with questions about her loan documents and never heard back. “I still don’t really understand what the program is,” she says.

Louis Lalonde, chief marketing officer of Ygrene, says company representatives had a call with Ms. Ventura and her mother to answer all their questions before the loan was signed. He says he has no record of any further attempts to contact them.

The 3,200 contractors who drum up business for Ygrene are regularly screened for compliance with contractor licensing requirements and receive training before they are allowed to pitch loans to homeowners, he adds.

Malcolm Scott, 61, was planning to pay in cash the $34,000 it would cost for a new air-conditioning unit, furnace and other improvements at his house in Woodland Hills, Calif. His contractor suggested applying for a PACE loan.

Mr. Scott was surprised to find out less than 24 hours later that he had been approved for $94,000. Renovate America says he qualified for the larger loan based on the amount of equity in his house. He decided to borrow just the $34,000.

Michael Gardner, who runs Mediterranean Heating & Air Conditioning, which lined up the loan, says he has been recommending loans for about two years and got “an hour or two” of online training from Renovate America.

The program “is real nice because there are no FICO score requirements or anything like that,” says Mr. Gardner.

Some lenders have taken steps to strengthen underwriting practices, make loan documents more transparent and boost contractor oversight. Renovate America now requires in-house representatives to speak with a borrower by phone—outside of the room and away from the contractor—before signing a homeowner up for a PACE loan.

Renovate America, which is backed by nine private-equity and venture-capital firms, says it has spent the last several months working with consumer groups and regulators to come up with national lending standards for PACE. The new standards could include a year with no payments for borrowers who are suffering from an economic hardship.

“At the end of the day, PACE is an unregulated industry, and it’s just a matter of time before we get regulated,” says Mr. Lalonde of Ygrene.

Phil Adleson, a lawyer in San Jose, Calif., who represents borrowers, says PACE is “a very great idea implemented in a dangerous fashion.”

Ms. White, the borrower in Inglewood, a neighborhood in Los Angeles County, says a contractor from a company named the House Next Door told her in late 2014 not to worry that she couldn’t afford the $42,200 loan because “it wouldn’t be coming out of my pocket.”

The company says no one there would ever describe PACE loans like that and says Renovate America has held weekly training sessions for its contractors for “more than a year.”

Ms. White says the contractor finished the drought-resistant landscaping at her house only after being contacted by a Journal reporter. Renovate America says the contractor has been “under suspension” for the past several weeks.

Her loan went into a pool of 11,282 PACE loans that are collateral on bonds issued by the Western Riverside Council of Governments. Deutsche Bank packaged the bonds into a $240 million deal called “HERO Funding Trust 2015-1.” Kroll gave it a AA rating, the firm’s third-highest.

According to the latest available figures, fewer than 70 of the underlying PACE loans have defaulted, and Kroll said the transaction “has performed as projected.”

Ms. White’s next loan payment is due in April. She says she doesn’t know how she will be able to pay it.

Wall Street Journal, Jan. 10, 2017

The Registry Is New, And The Password Has Changed

The password for the PAPER SOURCE REGISTRY OF NOTE INVESTORS & SERVICERS has changed.  The new password is in the most recent issue of THE PAPER SOURCE JOURNAL. 

Not only is the password new, but you’ll see that the Registry is in a brand-new, much more user-friendly format. All you do is select the type of note you want to sell and all the investors who buy those notes appear, along with information about their companies, who to contact, phone numbers and links to their websites and email.

You can also select from companies that have notes to sell, service notes and have products and services for note investors and brokers.

Try it out at at the tab “Registry of Investors” and then “Subscriber Login.”

If your company invests in notes or provides products or services to the industry, you should be in the Registry. Contact me for information: or 800-542-2270.

SFH Subdivisions For Tenants Only

Property developers are pouncing on sustained demand for stand-alone home rentals by taking a big step: Building entire single-family neighborhoods designed for renters.

When the housing market crashed, investors took advantage by buying low-price homes in foreclosure in order to rent them out to tenants. That demand has proven brisk.

The new rental communities look identical to for-sale projects, with pools, fitness centers and walking trails. But they are operated like apartment complexes, with management handling maintenance, lawn care and leasing.

Developers cite growing demand from younger millennials and aging baby boomers who want the additional space and traditional setting of a new single-family neighborhood—without the long-term commitment.

“It used to be that if you were an adult and didn’t own your own home, you were kind of a bum,” said George Casey, a former home builder who is chief executive of Stockbridge Associates, an industry consulting firm. That stigma has now “been blown into a million pieces,” he said.

The number of renter households increased by 9 million between 2005 an

d 2015, marking the largest increase over any 10-year period on record, according to the Harvard Joint Center for Housing Studies. In all, about 5% of all new single-family construction was built for rent in 2016, up from a historical average of less than 3%. Experts say that could expand in coming years if homeownership remains depressed and as older Americans consider downsizing.

Developers building single-family communities for rent said they are transforming what began as a distressed-asset play into a completely new market somewhere between apartment living and homeownership.

“We basically looked at the institutional market and said ‘Would Blackstone, would all of these people be pumping tens of billions of dollars into this space if it wasn’t a good opportunity?’” said Mark Wolf, chief executive of AHV Communities, a California-based single-family rental developer that operates around San Antonio and Austin, Texas, and is looking to expand to North Carolina. “Then we said ‘Looking at what they do, how can we do it better?’”

Amenities packages and proximity to quality school districts are crucial to the business model. By offering perks similar to higher-end apartment complexes, the goal is to attract young families who want good schools but may struggle to buy in certain districts because of insufficient savings or high levels of student debt.

The model doesn’t work in all markets. In areas such as California, for example, where land is expensive, developers would likely have to charge rents that would be too high to justify the cost of construction. Markets such as Arizona, Texas and North Carolina make more sense because land is plentiful and demand is high.

“It’s about figuring out what places have the growth, but also have the highest rents possible for the lowest price of the home,” said Shaun McCutcheon, a senior manager who studies the single-family rental market at Meyers Research, a housing consultancy.

National home builder Lennar Corp. has tried the model in one of its master-planned communities outside Reno, Nev. RSI Communities, a home builder in California and Texas, is testing out two fully leased new communities outside San Antonio and is considering expanding the model to other markets.

John Bohnen, RSI’s chief operating officer, said the for-rent approach allows the company to build homes at a faster and more efficient pace than its traditional for-sale operation. That is because builders don’t have to wait to start construction until a sale is completed, giving construction crews that are in high demand more certainty about the number of homes they will build in a given timeframe, thus providing more of a guaranteed pay schedule.

And by exposing tenants to their homes, Mr. Bohnen believes the company could eventually generate demand on the for-sale side.

Matt Blank was a former hedge-fund investor who moved to Phoenix in 2011 to start snapping up distressed properties. He was soon crowded out when major investors likeBlackstone Group LP entered the market and prices shot up. He instead turned his attention to buying empty lots and building affordable homes that adults could rent.

His company, BB Living, has since built about 350 rental homes across the Phoenix area, some in stand-alone communities and others alongside owner-occupied homes in large master plans. All six projects he has completed initially sparked controversy from neighbors worried their property values could be impacted by inadequately maintained rentals. But he said he got buy-in after assuring them the properties would be professionally managed and look no different from the surroundings.

“This is a new concept that hasn’t really been done before,” Mr. Blank said. “Once you get around that first hurdle, the pitchforks come down quite a bit.”

Wall Street Journal, Jan. 6, 2017

House Flipping Boom

House flipping, a potent symbol of the real-estate market’s excess in the run-up to the financial crisis, is once again becoming hot, fueled by a combination of skyrocketing home prices, venture-backed startups and Wall Street cash.

After nearly being felled by real-estate forays almost a decade ago, a number of banks are now arranging financing vehicles for house flippers, who aim to make a profit by buying and selling homes in a matter of months. The sector is small—participants say roughly several hundred million dollars in financing deals have been made in recent months—but is expected to keep growing.

In recent months, big banks, including Wells Fargo & Co., Goldman Sachs Group Inc. andJ.P. Morgan Chase & Co. have started extending credit lines to companies that specialize in lending to home flippers. Earlier this month, J.P. Morgan agreed to lend an estimated $60 million to 5 Arch Funding, an Irvine, Calif., company that offers financing to flippers, according to people familiar with the deal.

“The floodgates have opened,” says Eduardo Axtle, a 35-year-old former telecom entrepreneur in Oakland, Calif., who has taken out about 50 home loans over the past five years. These days, he is bombarded by unsolicited emails from brokers offering him access to financing.

The number of investors who flipped a house in the first nine months of 2016 reached the highest level since 2007. About a third of the deals in the third quarter were financed with debt, a percentage not seen in eight years.

Trying to win business, big banks in the past few weeks have flown executives to Southern California—where much of the house-flipping activity is occurring—to organize funding deals, say people familiar with the meetings.

Investors are making an average profit of about $61,000 on each flip, up from about $19,000 at the bottom of the market in 2009, according to housing-research firm ATTOM Data Solutions, which is the parent company of real-estate website RealtyTrac. The calculation measures the difference between the housing value when an investor purchases the home and when it is sold.

The market for house-flipping loans in the U.S. is expected to reach about $48 billion in total sales volume this year, the highest since 2006, according to ATTOM.

That’s in part because home prices across the country are rising, reaching levels not seensince before the 2008 financial crisis. Housing also is in relatively short supply. Meanwhile, low interest rates and a surge in demand for homes from institutional buyers have also benefited house flippers.

Some borrowers and private lenders say investors have been offered debt in excess of the value of the home, also known as a high loan-to-value ratio. Others say some lenders are loosening up their documentation rules, requiring bank statements to get a loan, but not a W-2 tax earnings statement, for instance.

As these loans are made by relatively small finance companies and aren’t classified as owner-occupied loans, they don’t fall under many of the postcrisis rules written for banks and home mortgages. Some banks used to make these loans directly but now fund finance companies instead.

The boom is being accelerated by online lenders such as San Francisco-based LendingHome Corp. and Asset Avenue Inc. in Los Angeles, as well as crowdfunding websites such as Groundfloor Finance Inc., that allow individual investors to fund fix-and-flip loans. LendingHome, backed by venture-capital investors, says it has extended more than $1 billion in loans in the 2½ years since its launch.

Anchor Loans is one of the largest private lenders to house flippers. The Calabasas, Calif., company has received more than $220 million in new credit facilities, mostly from major banks, in 2016 alone, said Chief Executive Stephen Pollack, who declined to identify the banks.

After the financial crisis, a shortage of funding from large banks meant that Anchor had to turn away fix-and-flip business. This year, the company is on track to originate $1.1 billion in loans to real-estate investors, up from $713 million in 2015, Mr. Pollack says. “For the first time in our history, we actually have enough money to lend,” he says.

Loans to house flippers are short term—usually around seven months—and come with interest rates ranging between 7% and 12%. Because real-estate investors are typically higher risk, they put more cash down—sometimes as much as 65%. By comparison, a 30-year home mortgage has an interest rate around 4%, and borrowers typically don’t put more than 25% down.

Over the past year, 37-year-old David Franco has collected profits of more than $200,000 on houses that he has quickly refurbished and resold, turning a hobby into an unexpectedly lucrative business. “There’s plenty of money to be made,” says Mr. Franco, who lives just outside of Los Angeles.

House-flipping television shows and training “schools” for new investors are proliferating. One “super-intense, hardcore” house-flipping boot camp in Bourne, Mass., promised to teach students about real-estate investing in three days to make “REALLY MASSIVE PROFITS,” according to marketing literature.

The increasing amount of speculative housing in recent months is “concerning,” ATTOM noted in a recent report. “We’re starting to see home flipping hit some milestones not seen since prior to the financial crisis.”

ATTOM said profit margins are getting squeezed in some markets. While house flippers typically aim to purchase a house at a 30% discount to the market, in some areas they’re buying homes at a 15% or 10% discount, said Senior Vice President Daren Blomquist. The research firm noted that the number of smaller, inexperienced house flippers entering the market is a sign of rising speculation.

George Geronsin, 36, a Southern California real-estate agent and house-flipper who has been in the business since 2008, said he recently sold the majority of the homes he was working on and is sitting on cash “until the next big correction” in the housing market.

“Anybody and everybody is getting into the business of house-flipping—that’s when you know it’s the end of the rope,” said Mr. Geronsin.

Investors in one large crowdfunding site, Realty Mogul Co., were interested in funding $1 billion in fix-and-flip loans through its marketplace, said Chief Executive Jilliene Helman. But the company decided to stop making such loans this summer because competition among lenders meant it couldn’t charge a high enough interest rate to make up for the risk.

Another question mark is the future of long-term interest rates. Since Donald Trump’s surprise election victory, mortgage rates have been surging. If the trend continues, it is likely to chill housing markets, making it harder for investors to quickly flip homes for a profit.

There are only imprecise ways to measure home-flip default risks. The average foreclosure rate for loans secured by investment properties is 0.43% compared with 0.6% for loans on owner-occupied homes, but the foreclosure rate for investment property loans originated in 2016 is more than double owner-occupied homes, according to ATTOM.

Finance companies say their loans to home flippers are prudent. LendingHome, for example, says it limits its average loan size to reduce risk.

Big banks are offering lenders credit lines ranging from $5 million to $150 million, with interest rates between 3.5% and 6%, say the people familiar with the deals. The banks say they are shielded from major losses because their loan deals are backed by pools of securitized loans, sheltering them from a potential bankruptcy of the lender. 

In the 5 Arch deal with J.P. Morgan, the bank securitized 150 5 Arch loans in a $60 million bond, and then lent out a portion of that amount back to 5 Arch in what operates like a credit line. The bank can also sell pieces of the resulting bond to other investors if it chooses.

Ahead of any funding deal, bankers say they are spending weeks reviewing the underwriting process that lenders use, making sure borrowers will be able to repay their loans.

Wall Street Journal, Dec. 28, 2016