California Watch - Money and Politics

Group promoting third-party candidates faces rebellion

Will Evans — Thu, 24 May 2012 07:05:03 +0000

Will Evans

plherrera/istockphoto.com

Americans Elect – the innovative effort to jolt the political system with a third-party presidential candidate – is facing a democratic uprising of its own.

A hastily organized contingent of Americans Elect activists is agitating to reverse the group's decision last week to pull the plug on its nomination process after failing to generate sufficient interest in its candidates. Complaining that the group’s leadership hasn't listened to the membership, the insurgents are pushing for Americans Elect to forge ahead. They don't want the $35 million the group raised to get on the ballot in 29 states, including California, to go to waste.

Involved in the effort is a Bay Area activist and filmmaker who ran for the Americans Elect nomination and came in third place, after former Louisiana Gov. Buddy Roemer and former Salt Lake City Mayor Rocky Anderson. Michealene Risley, a resident of Woodside in San Mateo County, said she was shocked when she heard – via press release – that Americans Elect was shutting down the nomination process.

"People feel really used and manipulated," said Risley, who ran on a platform of campaign finance reform.

"Without a viable candidate added to the national stage in this election, the brand name of AE will be tarnished," Risley wrote to the group's board. "Instead of being the prototype for high tech democracy, it will be stigmatized as the latest example of third party failure."

Americans Elect had bulldozed through the tremendous hurdles alternative parties face in getting on ballots, gathering more than a million signatures to become the first new official party in California since 1995. But in its announcement last week, Americans Elect explained that its rules mandated an end to the process because no candidate achieved the "national support threshold" necessary to enter its online convention in June.

Roemer, for example, needed 10,000 supporters among those who registered as Americans Elect delegates online, but he came up with only 6,293. Risley and Anderson needed to collect 50,000 supporters – more than Roemer because they didn't have high-level political experience.

Anderson decried the higher requirements as "discriminatory" and said he would have redoubled his efforts to qualify if he had a lower bar.

"We were extremely frustrated that they had set the bar at an impossible level for those that they apparently consider second-class candidates," Anderson said.

Anderson, who is also running as a Justice Party candidate, endorsed the Americans Elect mutiny and would like to see the top six candidates move on to the next stage in the nomination process.

"I think that the more choices voters can have, the healthier it is for democracy," he said.

Andrew Evans, an Americans Elect delegate from North Carolina, is rallying support to resuscitate the process under the banner "Americans of Americans Elect." While maintaining that "it's not a revolt," Evans and his cohorts are trying to activate a provision of Americans Elect's rules that would give delegates a chance to reverse a board decision.

"We feel we really didn’t get the proper say in the decision that the board made," said Evans, who also leads the Modern Whig Party. "It’s extremely frustrating because we feel that our voices were not heard."

Americans Elect's CEO, Kahlil Byrd, said in an e-mail to California Watch: "We honor and appreciate all delegates. They are part of a growing national community hungry for real change in our political system."

David King, a member of Americans Elect's advisory board and a lecturer at Harvard's Kennedy School of Government, said the group made the right decision.

"I think the rules were well understood from the beginning, and Americans Elect didn’t have candidates that seized the opportunity, so it doesn’t seem right to change the rules this late in the game," King said. "A wonderful stadium was built, but not enough players got on the field. The next time there’s a major-league season, we’ll see what happens."

Americans Elect always faced long odds in its quest to field a viable, centrist presidential candidate who would shake things up. The group also drew criticism for not disclosing the donors who bankrolled the effort. In a previous story, California Watch found that one of the main funders, board Chairman Peter Ackerman, once had to pay millions of dollars in delinquent taxes and penalties for an alleged tax shelter scheme.

"They haven't been the most transparent group from the outset," Anderson said. "Nobody really knows how the rules were set from the beginning or how Americans Elect has been financed."

Even Americans Elect die-hards had their share of gripes. One of the main complaints was that prospective voters had a hard time registering as delegates through the website.

Risley said the Americans Elect model gave her "hope for the first time in a long time." But as she held campaign gatherings at her home and reached out to like-minded activists at Occupy protests, she became frustrated with the group's online system. Some supporters couldn't get through the site's intensive verification of whether they were registered voters or didn't want to provide the last four digits of their Social Security numbers, she said.

"Why make it so hard for people?" Risley said.

Ileana Wachtel, Americans Elect's press secretary, said only 300 out of tens of thousands of people had problems with the website that couldn’t be resolved, mostly because of inaccurate voter registration data.

"When dealing with voters most precious franchise, the vote, there cannot be any compromise on the issue of security," she said in an e-mail. “Bottom line, AE's created the first ever secure online nominating process, preparing the pathway that is just the beginning."

Americans Elect still might shake up the political landscape in 2016 or 2020, said Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California.

"But absent a viable candidate in 2012, it’s difficult to see what the benefits of moving forward quickly rather than gradually would be," Schnur said.

"Instead of being the political version of Facebook, it could end up being the political version of Friendster," he said. "But you wouldn't have gotten Facebook if there wouldn’t have been a Friendster first."

In order to continue, though, Americans Elect must face the challenge of delegate dissent.

Risley said the group's top-down decisionmaking "feels like more of the same" instead of an alternative to the traditional two parties.

Evans said he appreciates the work and money the group's leaders have provided, but said he has lost faith in the way the organization is run.

"Some of the delegates, they’re fed up with Americans Elect," he said. "They’re like, once bitten, twice shy."

Video: Texas firm accuses hundreds of Californians of mortgage fraud

Serene Fang — Thu, 24 May 2012 00:02:53 +0000

Serene Fang, Rick Jurgens and David Ritsher

Nearly a million California homeowners lost their homes in the foreclosure crisis. Now, some are being pursued by a little-known Texas company with a controversial strategy for seeking profit in the real estate collapse.

React & Act: What is second-mortgage debt?

Sarah Springfield — Wed, 23 May 2012 22:03:37 +0000

Sarah Springfield and Ashley Alvarado

Michael Short/California Watch Oscar Trejo lives in this San Jose home. Heritage Pacific Financial sued Trejo to keep a bankruptcy judge from erasing an $88,000 second-mortgage note against a house Trejo lost through foreclosure in 2008. Trejo won, but the firm has appealed.

To understand Rick Jurgens’ article on the second-mortgage debt and one Texas firm’s aggressive collection methods, you must first look at the origins of the mortgage crisis. Here, we provide an explainer, a glossary of terms, a guide to available resources and a recommended reading list.

Explainer: The mortgage crisis

Five years after the housing bubble burst in 2007, the mortgage crisis appears far from over. More than 250,000 Californians have received notices of default in the last year, on top of the nearly800,000 Californians who lost their homes to foreclosure since the crisis began.

The mortgage crisis, which contributed to the steep decline of the state and national economies, is rooted in poor lending decisions by both borrowers and banks. Lending institutions and borrowers entered mortgage agreements counting on a housing market many believed would never stop expanding. But the overheated market turned cold. Too many homeowners found themselves committed to mortgages they could not afford and were unable to refinance or manage their adjustable interest rates once changes set in. As a result, nearly 1.5 million Californians defaulted on their mortgages, and foreclosures became rampant.

What is subprime lending?

Not everyone has good credit. Not everyone has a high-paying job. When banks loan money to these borrowers for cars, houses or other large purchases, the practice is called subprime lending. Because the loans are riskier, they often come with higher interest rates or interest rates that adjust over time – mostly up.

Many of these mortgage agreements were poorly constructed. Down payments were low – making it easy for borrowers to accept loans without much money in the bank. Many adjustable interest rates were designed to skyrocket after a short grace period. There view process for loans was minimal.

These subprime loans, specifically those with adjustable interest rates, contributed greatly to the crisis. Once housing prices began to fall and the economy tanked, new homeowners found themselves unable to sell their homes or refinance.

Why did housing values decline so quickly?

The simplest answer is supply and demand. As housing prices hit new highs between 2005 and 2006, construction of new homes was booming as well – to the point where the number of available homes was soon higher than the number of people willing and able to buy them, even with subprime lending. As homes went into foreclosure and lending institutions sought to sell them, the market was further saturated, and prices dropped even lower.

Glossary

Mortgage: A large-sum loan, usually from a bank, for the purpose of purchasing property. The property itself is used as collateral.

Promissory note: Legal document guaranteeing payment of money by a certain date. Promissory notes are signed when mortgages are taken out, promising unconditionally that the principal value of the loan plus interest will be repaid in specific intervals over a given period of time and naming the borrower as personally responsible for this repayment.

Mortgage fraud: The intentional botching of mortgage paperwork to obtain a larger loan – or any loan at all – that would not have been granted had the lender known the truth.

Default: Persistent failure to repay a loan – either principal or interest – according to the agreed-upon schedule.

Foreclosure: Seizure and sale of a property when a homeowner cannot make payments on his or her mortgage or deed of trust.

Deed of trust: A legal document giving a third-party trustee the ability to quickly initiate foreclosure on a property once a borrower has defaulted on a loan. Colloquially, the term often is used interchangeably with mortgage.

Second mortgage: Arrangement similar to the original mortgage, but riskier for the lender and more expensive for the borrower. A second mortgage is made while the original loan is still in place. In the case of foreclosure, payments are made toward the second loan only when the first mortgage has been paid off. This usually translates to higher interest rates on the loan for the homeowner.

Deficiency judgment: Court order granting a lending institution the right to claim a borrower’s other assets– cars and jewelry, for example– if a foreclosure sale does not earn enough money to repay the original loan. However, most mortgages in California are “non-recourse loans,” which do not allow for deficiency judgments.

Debt collection: Once a borrower has defaulted on a loan, the lending agency usually will sell that account to a debt-collection agency. That account is often sold at a fraction of its face value. The collection agency can then sell that debt again to another institution, or work to get the borrower to repay the loan. The federal Fair Debt Collection Practices Act establishes consumer rights and appropriate conduct required of debt collectors.

Debt-collection lawsuit: If loans remain unpaid, debt-collection agencies often sue borrowers to get them to pay.

Default judgment: A court judgment issued in favor of a plaintiff when defendants fail to appear in court or respond to a court summons.

Bankruptcy: A legal evaluation of a borrower’s assets and a determination of how much outstanding debt can be paid off in exchange for the remainder of the debt being forgiven.

Discharge: Official order removing a borrower from responsibility to repay the full amount of loan following bankruptcy proceedings.

Recommended reads

"The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis" by Michael W. Hudson
"Broke, USA: From Pawnshops to Poverty, Inc. – How the Working Poor Became Big Business" by Gary Rivlin
"The Debt Machine: How the Collection Industry Hounds Consumers and Overwhelms Courts" [PDF] by the National Consumer Law Center
"The Debt Buying Industry: A White Paper" [PDF] by DBA International

Resources

National Association of Consumer Advocates: Find a private attorney who handles debt-collection or foreclosure cases.
LawHelpCA.org: This website provides a searchable directory of legal aid providers, including Housing and Economic Rights Advocates in Oakland and the Public Law Center in Santa Ana.
DBA International and the Association of Credit and Collection Professionals provide debt buyers’ or collectors’ perspectives on their respective sites.

Texas firm targets Calif. homeowners with foreclosed 2nd mortgages

Rick Jurgens — Wed, 23 May 2012 22:03:29 +0000

Rick Jurgens

Michael Short/California Watch Oscar Trejo, pictured here at his current home in San Jose, said he had never heard of Heritage Pacific before it asked a judge not to discharge its $88,000 claim against him.

Adding new uncertainty in the state’s ongoing mortgage crisis, a Texas company is aggressively pursuing hundreds of Californians to collect second-mortgage debt – on homes they’ve already lost through foreclosure.

Many of these former homeowners believed their mortgage debt had been erased after their houses were taken by banks and lending companies. But the Texas company, Heritage Pacific Financial, has aggressively pursued collections and filed lawsuits claiming those debts still linger.

For Ahmed Abdelfattah of San Jose, debt collectors started calling in 2009, saying he owed Heritage Pacific $135,000. He said he’d never heard of the company before.

“It’s been a nightmare,” Abdelfattah said. “It’s cost me money and time, and they ruined my credit until now.”

Oscar Trejo said his first encounter came a few days before he expected to exit bankruptcy and get a fresh financial start. That was in November 2010, he said. Heritage Pacific sent Trejo, who also lives in San Jose, a letter saying it had asked a bankruptcy judge not to discharge, or erase, its $88,800 claim against him.

Trejo invested in properties in Merced and later lost them all in foreclosures. But he hadn’t done business with Heritage Pacific. “I had never seen the company’s name,” he said.

Heritage Pacific was started by identical twin brothers, Chris and Ben Ganter, who once starred in a reality TV show, “PayDirt,” about investing in the Dallas-Fort Worth real estate market.

The company’s lawsuits often accuse defendants of misstating their incomes on loan applications. While many borrowers did overstate their incomes on applications, consumer attorneys say Heritage Pacific is targeting people who filled out their forms honestly or whose mortgage brokers pumped up their applications without their knowledge.

Critics of Heritage Pacific say the company’s central tactic is forcing settlements from people who can’t afford a drawn-out legal fight and who don’t know the details of California law. The company has sued people with second-mortgage debts of less than $150,000, despite a state law prohibiting lawsuits alleging fraud on mortgages below that amount.

Heritage Pacific’s collection methods now face legal challenges, including a class-action lawsuit in Santa Clara County Superior Court that contends that the company is carrying out an “insidious and illegal debt collection scheme.”

The company doesn’t make mortgage loans, but instead attempts to collect payments on loans originated by others. Heritage Pacific launched its effort in late 2008 when it began buying – at a steep discount – second-mortgage loans that borrowers had stopped paying. Many of the loans were secured by houses that already had been sold in foreclosure by first-mortgage lenders.

By demanding payments from more than 1,000 individuals in California, the lawsuit contends, Heritage Pacific has violated “the rights of those who have already suffered the emotional and financial distress that results from the loss of their foreclosed home.”

Heritage Pacific is nothing more than “people in Texas acting as vultures,” said Will Kennedy, a lawyer in the class-action suit.

In an answer to the lawsuit, Heritage Pacific says it’s not suing “innocent home-owners who, through no fault of their own, lost their homes.” Instead, the company says it targets defendants who “made material misrepresentations to secure large loans upon which they soon stopped paying.”

Fraud claims “are the only ones we’re interested in pursuing,” Chris Ganter, the company’s chief executive and main owner, said in an interview.

But some former homeowners now threatened with legal action by Heritage Pacific dispute these claims. They told California Watch that the income they claimed on their mortgage applications was valid, and they stopped paying because they lost their jobs, their income plummeted and banks foreclosed on their houses. Others said they signed applications that had been prepared by brokers.

Amassing second-mortgage notes

Heritage Pacific had no trouble finding plenty of so-called non-performing second mortgages for sale. During the recent real estate boom, an estimated 25 percent of house buyers took on a second mortgage rather than make a down payment, according to a 2007 Federal Reserve study.

A giant foreclosure wave swept hundreds of thousands of Californians from their homes. They often left behind second-mortgage loans that looked uncollectible and worthless.

While lenders can sell foreclosed properties and keep the proceeds, in California theycan’t pursue borrowers if the sale falls short of the amount owed. Foreclosure also takes away most of the legal tools for creditors to seek payments on second mortgages.

Dallas Business Journal Chris and Ben Ganter, identical twins, started Heritage Pacific Financial. The brothers once starred in a reality show, “PayDirt,” about the Dallas-Fort Worth real estate market.

That’s where Heritage Pacific has stepped in.

Rather than shy away from seemingly worthless second-mortgage notes, Heritage Pacific spent millions of dollars to assemble an inventory of at least 40,000 second-mortgage notes, according interviews with company executives and deposition testimony.

Fraud accusations against former homeowners became Heritage Pacific’s tactic for restoring value to its second-mortgage notes. California law gives a lender that can prove that a borrower fraudulently obtained a loan for more than $150,000 the right to sue. A creditor also may allege fraud to prevent a debt from being erased in bankruptcy.

Abdelfattah, a 52-year-old naturalized American who was born in Egypt, said it wasn’t fraud, but a steep drop in his income as a sales manager at a local Honda dealership, that caused him to fall behind on his monthly house payments of $5,000.

In 2008, the holder of his first mortgage foreclosed on the three-bedroom, 1,170-square-foot Santa Clara house that he had purchased in 2005 for $675,000.

But to his chagrin, Abdelfattah found that foreclosure didn’t end his house-related financial woes. As the summer of 2009 faded, he started getting collection calls from two or three individuals representing Heritage Pacific. They wanted him to pay a portion of the $135,000 balance they said he still owed on the second-mortgage loan he had used in his house purchase.

The callers were “really annoying,” Abdelfattah said. One was “really aggressive, cursing on the phone.” They accused him of never having lived in the house. They sent him a letter asking him to verify his income, and another titled, “Demand for Payment of Outstanding Debt.”

In May 2010, Heritage Pacific named Abdelfattah in a lawsuit that claimed that he had used fraud to obtain a second mortgage. But on March 19, a Santa Clara County Superior Court judge threw out the company’s claim against Abdelfattah because the alleged fraud had involved a loan for less than $150,000.

Abdelfattah, who wants to buy a house, was only somewhat relieved: “They are not able to sue me, but (Heritage Pacific’s claim) still affects my credit.” Abdelfattah’s countersuit alleging violations of debt-collection law by Heritage Pacific is scheduled for a jury trial in July.

Heritage Pacific declined to comment on the details of Abdelfattah’s or other individual cases, but said, “Any court rulings against Heritage Pacific Financial will be appealed to the California Court of Appeals as soon as it is possible to do so.”

Heritage Pacific can ignore the prohibition on pursuing fraud claims related to loans for less than $150,000 because it still can get default judgments and out-of-court settlements from some defendants, said Kennedy, the attorney in the civil action.

As a practical matter, he added, “the law only applies to people who are in a position to defend themselves.”

Focusing on fraud claims

Heritage Pacific’s website portrays the company as a friend to its collection targets. It says the company wants to help foreclosed homeowners “begin again and regain financial independence without the baggage of old liens or bad credit history.”

The home page also features a link to a proclamation of the company’s intent to seek “justice against those who have perpetrated, conspired, and participated in the mortgage fraud (that) plagues our nation and our nation’s economy.”

Ganter said Heritage Pacific is pursuing appraisers and loan officers with its fraud claims. But while two lawsuits in Santa Clara County name appraisers as defendants, in dozens of Heritage Pacific second-mortgage lawsuits reviewed by California Watch, the defendants were homebuyers whom Heritage Pacific accused of overstating their incomes on loan applications.

Even Kennedy, the lawyer pursuing the class-action lawsuit against Heritage Pacific, acknowledged that the company is probably “able to find inflated incomes without too much problem, on a lot of them (but) not all of them.”

But that’s only part of the story, Kennedy stressed: “The banks knew exactly what was going on.”

Kennedy isn’t alone in identifying lenders and their agents as key drivers in mortgage market abuses.

Subprime loans were “often aggressively sold to consumers by profit-seeking lenders rather than sought out by consumers,” according to a report by the U.S. Government Accountability Office. And the U.S. Housing and Urban Development Department’s report on the root causes of the foreclosure crisis found that “most fraud is driven by mortgage brokers in their efforts to earn profits by originating loans.”

In California, aggressive lending helped inflate a housing bubble that more than tripled average house prices in the decade that ended in 2006. From 2000 through 2007, lenders originated nearly 3.3 million subprime mortgages in the state, according to the GAO.

But then the bubble burst, sending average house prices in the state down 46 percent since 2006. By March 2009, more than half of the 1.4 million subprime mortgages in California were delinquent, defaulted or foreclosed, according to GAO. By March 2012, about 835,000 homes in the state had been lost in foreclosure, according to DataQuick, which compiles real estate data.

Falling house prices and souring loans ravaged homeowners, lenders, and the housing and mortgage market in California and nationally. Among those hit by the slump was Ganter, a homebuilder who built 200 town homes in Texas suburbs and planned to build another 60.

In 2010, Ganter briefly sought bankruptcy protection for his Paydirt Real Estate Investment Trust, which listed a $6,300 rental deposit as its only asset and $572,000 in unpaid bills. Ganter said the bankruptcy did not involve Heritage Pacific and was later dropped.

Even as his real estate enterprise foundered, Ganter used money from investors to begin assembling a portfolio of second-mortgage loans. In depositions, a company executive put the total face value of the company’s claims in a range from $1.5 billion to $2 billion. To cash in on those assets, Heritage Pacific began pursuing collections from hundreds of foreclosed homeowners.

Lydia Pina was one. In 2009, Heritage Pacific’s collectors began pushing her to pay up on a second mortgage she took out in 2007, when she bought a house in Gilroy for $675,000. She lost the house in foreclosure 14 months later.

The collectors were willing to deal, according to Pina’s sworn declaration. If she would pay $29,000, they would settle their $139,000 claim. If not, they would garnishee her wages.

In May 2010, a process server came to Pina’s workplace. When the receptionist called Pina, she said she was late for a meeting and asked that he come back later. Instead, he left a summons with the receptionist. And that’s how Pina learned that she was being sued for $139,000.

That lawsuit remains pending in Santa Clara County Superior Court. Through her attorney, Pina declined to comment.

Debt collection methods

Ganter said he couldn’t comment on pending litigation, but said Heritage Pacific generally uses a “nice-guy strategy” to pursue collections.

In practice, the company’s collection methods don’t differ much from those used by debt buyers and collectors who search out and demand payments from borrowers on charged-off credit card accounts, student loans or medical bills.

Heritage Pacific first sends a form letter to a borrower, then follows up with at least 20 collection letters or telephone calls, according to depositions by a company executive and an attorney.

In a presentation to investors, the company said it typically offers to settle with borrowers who repay 20 percent of their outstanding balance.

Heritage Pacific’s first big foray into California came in U.S. District Court in Los Angeles, where in a three-month period beginning in December 2009, Heritage Pacific filed three lawsuits seeking $46 million in actual and punitive damages from 158 defendants who took out 143 loans.

That push yielded mixed results. One judge signed 21 default judgments ordering no-show defendants to pay $1.8 million. But a lawyer who showed up to represent one of the defendants persuaded another judge to shut down the company’s multi-party lawsuits. The defendants had “nothing in common … other than that they each applied for and received a loan that Heritage now owns,” the judge wrote.

Meanwhile, Heritage Pacific opened another front in California state courts. California Watch reviewed online records in 10 of the state’s 17 largest counties and found 365 lawsuits in which Heritage Pacific was a party.

A counterclaim filed in one of those lawsuits became a class action that seeks to keep Heritage Pacific from filing new fraud claims. The class action claims that the company goes to court “based upon a high statistical probability that the foreclosed homeowner lacks the resources to defend the lawsuit.”

When defendants fail to show up, courts can issue default judgments that affirm the validity of debts and allow creditors to seize debtors’ paychecks or property.

In a deposition, a Heritage Pacific lawyer estimated that 60 to 70 percent of the defendants in its lawsuits default, and the company has obtained about 200 default judgments.

But Ganter said default judgments aren’t very valuable. Heritage Pacific found itself paying $20,000 to $30,000 for “a piece of paper that says somebody owes you money.”

Michael Short/California Watch Santa Clara University law professor Gary Neustadter (left) is representing Trejo in his case before the 9th Circuit Bankruptcy Appellate Panel, with the help of SCU law student Jennifer Bregante.

Cases in bankruptcy courts

Heritage Pacific also has filed more than 220 cases in federal bankruptcy courts in California, including the claim against Trejo. Heritage Pacific contended that he had overstated his monthly income, but a judge ruled that while Trejo didn’t make $9,500 a month as he stated, the lender had “ignored obvious problems” with Trejo’s loan application and couldn’t block the discharge of his $88,800 debt.

Heritage Pacific has appealed that ruling to a Bankruptcy Appellate Panel, arguing that the lender’s reliance on Trejo’s undocumented assertions reflected “the custom and habit of the mortgage industry at the time.”

In the meantime, regulators in Arkansas have cracked down on Heritage Pacific’s fundraising. The Arkansas Securities Department found that in September 2010, four Arkansas investors paid $50,000 each to buy bundles of second mortgages from Heritage Pacific, and the buyers signed separate deals to pay Heritage Pacific to collect and distribute payments from their mortgages.

In December 2011, the securities department issued a cease-and-desist order directing Heritage Pacific to stop selling unregistered securities.

Ganter said that Heritage Pacific had not agreed to a settlement and that the case was “not finished up.”

Campbell McLaurin, an attorney for the Arkansas Securities Department, said he believed that his state was “not unique as far as (Heritage Pacific) seeking investors.”

In a deposition, a Heritage Pacific executive said the company had spent $20 million to $25 million buying second-mortgage notes, and the source of its funds was a “guarded secret, for sure.”

A contract disclosed in a lawsuit shows that in one instance, Heritage Pacific raised $500,000 from a company incorporated in Alaska but controlled by Guy C. Alexander III, an Orange County homebuilder.

“I can’t comment on our individual partners,” Ganter said. Alexander did not respond to phone messages left at his office.

Consumer lawyers hope that rulings in Trejo’s case and two other bankruptcy appeals, as well as the class-action lawsuit, will put a stop to Heritage Pacific’s collection campaign in California. The company hopes the outcome in those cases will leave it with the tools to make its second-mortgage loans profitable.

Meanwhile, as hundreds of lawsuits work their way through state and federal courts in California, it seems unlikely that the battles between foreclosed California homeowners and Heritage Pacific over millions of dollars of soured mortgage loans will end anytime soon.

Libertarians fight business-labor coalition on term limits

Will Evans — Wed, 23 May 2012 07:05:03 +0000

Will Evans

ericsphotography/istockphoto.com

Out-of-state libertarians are trying to defeat a term limits measure on the June ballot, but so far, they haven't been able to match the financial heft of the coalition of unions and business interests backing it.

Prop. 28 would tweak the current term limits regime by reducing the total amount of time a California legislator can serve from 14 to 12 years, while allowing a legislator to serve any of those years in either the state Assembly or Senate. Currently, under limits set by ballot initiative in 1990, lawmakers can serve a maximum of six years in the Assembly and eight years in the Senate.

The campaign supporting the measure has raised more than $2 million from sources that are often rivals: Democratic and Republican donors, labor and business groups, and even a pair of dueling developers. On the other side, opponents of the measure have rustled up only $150,000.

The biggest anti-Prop. 28 contribution came from the Liberty Initiative Fund, a new Virginia-based advocacy organization started by longtime ballot initiative activist Paul Jacob. Jacob doesn't like Mitt Romney much better than Barack Obama and wrote of former President George W. Bush's policies: "Too few of us dubbed it 'socialism' back then."

Jacob said Prop. 28 proponents are "masquerading" as term limit supporters when, in reality, they're trying to weaken them.

"This is a very serious scam being played on the people of California, and we want to do everything we can to alert folks," Jacob said. "If the word gets out, the people will overwhelmingly defeat Prop 28."

The Liberty Initiative Fund started this year "to put measures on the ballot that will expand and protect individual freedom, economic freedom, and that will hold government accountable," Jacob said. It is working on initiative efforts in Colorado, Washington, Arkansas, North Dakota, Montana, Arizona and Nevada. Jacob declined to identify the organization's donors.

"We’re relatively a pretty small player, but we think that’s going to change, and change rapidly," Jacob said.

Howard Rich, a real estate developer famous for funding libertarian causes, gave the opposition effort $45,000. Rich and Jacob are old term limit warriors; Rich founded the group U.S. Term Limits, and Jacob ran it for many years.

Rich has been active in California before. In 2006, the San Francisco Chronicle reported that a complicated web of advocacy groups with ties to Rich funneled millions of dollars to a ballot measure that would have limited the government's ability to seize private property. The initiative failed.

Opponents of Prop. 28 blast the ballot measure campaign for being bankrolled by "special interests." The Los Angeles County Federation of Labor provided hundreds of thousands of dollars in contributions and loans, while Pacific Gas & Electric and the Los Angeles Chamber of Commerce each gave $100,000.

Former Univision CEO and GOP mega-donor Jerry Perenchio gave $100,000, while liberal billionaire Eli Broad gave $50,000. They usually have more distinct political tastes. Perenchio gave $500,000 to a super political action committee supporting Mitt Romney this year, while Broad gave $35,800 to the Obama Victory Fund last year.

Gabriel Sanchez, a spokesman for the Prop. 28 campaign, notes that good-government groups like California Common Cause and the League of Women Voters of California also support the measure.

"What we have now is a broken status quo," Sanchez said. "What we have is lawmakers constantly campaigning, looking for the next job."

Sanchez said that under the current system, legislators bounce around from the Senate to the Assembly to other political posts without being able to focus on their jobs. He objected to the notion that the campaign is snookering voters.

"It’s a simple reform," he said. "When voters look at it, I’m sure they’ll have the same conclusion. It’s very clear what it does."

Opponents, though, are especially critical of contributions to the measure from two competing developers. Majestic Realty, owned by Ed Roski, gave $400,000, while L.A. Live Properties – part of Denver billionaire Philip Anschutz's entertainment company AEG – gave $100,000. Anschutz wants to build a professional football stadium in downtown Los Angeles, while Roski aims to build one in the City of Industry.

The two prominent developers used to be partners, working together to develop the Staples Center, and both still own parts of the Los Angeles Lakers and Los Angeles Kings. Anschutz, whom The New Yorker dubbed "The Man Who Owns L.A.," also owns the conservative Weekly Standard.

The two developers have had help from state legislators. In 2009, the Legislature gave Roski's stadium project an exemption from state environmental regulations. Last year, lawmakers voted to fast-track environmental challenges to Anschutz's stadium project.

Jacob, the Prop. 28 opponent, said the fact that the developers then gave money to a measure he believes relaxes limits on legislators just "stinks."

Sanchez called the argument that the developers might be trying to reward lawmakers "completely bogus" because the measure doesn't affect current legislators.

"They’re supporting it the same as we have support from the business community, the labor community and good-government groups – because it’s a sensible law," he said.

Survey: Likely voters back tax increase, oppose high-speed rail

Billionaire insurance exec backs initiative to change rate rules

Rail authority policy to purge e-mails draws critics' ire

Lance Williams — Mon, 21 May 2012 07:05:03 +0000

Lance Williams

Dusan Jankovic/Shutterstock

A congressional committee is investigating California’s $68 billion bullet train project. The U.S. Government Accountability Office is investigating, too.

Meanwhile, this proposal for the largest public works project in California history is the target of a flurry of lawsuits filed by local governments and opposition groups.

All those investigators, lawyers and bullet train critics want to pore over the California High-Speed Rail Authority’s trove of documents, looking for evidence.

So it’s an unusual time to purge five years’ worth of bullet train project e-mails, critics say. Nevertheless, that’s what the agency is contemplating.

In February, the rail authority filed papers with the state saying it intended to enact a new policy to destroy its e-mails after 90 days.

Then, on May 1, in response to a request for information from a project critic, the rail authority said it could not produce e-mails that were older than 90 days, citing the new policy.

The rail authority’s lawyer downplayed the issue’s significance, but it has caused concern among high-speed rail critics, who say they fear the authority is jettisoning important information about how the expensive project is being shaped.

The new e-mail policy is “highly suspect,” said Kathy Hamilton of the Community Coalition on High Speed Rail, a San Francisco Peninsula group that opposes the bullet train. The project would link San Francisco and Los Angeles with trains traveling up to 220 mph.

It was in a letter to Hamilton that the rail authority first revealed its new e-mail policy.

In a phone interview, Hamilton said she didn’t believe the rail authority had already discarded the e-mails she sought – exchanges between the staff and a panel of rail experts called the peer review group. In the past, the group has criticized the bullet train plan’s financial projections.

“If they are being investigated and they have been dumping e-mails, they would be in all kinds of trouble,” Hamilton said of the rail authority. She said she had forwarded the letter about the e-mail policy to the staff of U.S. Rep. Darrell Issa, a Republican from Vista and chairman of the House Committee on Oversight and Government Reform.

Issa’s committee is investigating alleged misspending of federal funds on the bullet train project. In a letter last month, the lawmaker warned the rail authority to preserve two years' worth of documents, including e-mails, so his investigators could review them.

In a phone interview, Thomas Fellenz, chief counsel and acting chief executive officer for the rail authority, said the e-mails sought by Issa have not been discarded.

Fellenz said all state agencies are supposed to have a policy on retaining documents, including e-mails. But the rail authority had never enacted a policy regarding e-mail, he said. Most state agencies delete e-mails after 90 days, he said. The rail authority’s staff will cull the e-mail, saving documents that “we think, for business or legal reasons, we need to retain” and dumping the rest, he said. There’s a five-year backlog. But nothing will be discarded until after Issa’s probe is complete, he said.

“We will be completely responsive to the committee,” he said. “We stayed our implementation (of deleting e-mails) – we have this investigation ongoing.”

Fellenz acknowledged that the rail authority does indeed have the e-mails Hamilton had sought in her request, which she made under terms of the state Public Records Act. The authority has sent her another letter saying it would give her the e-mails she requested, he said.

State law sets guidelines on how many years specific types of records must be retained by public agencies. E-mails that aren’t considered “substantive” can be deleted upon receipt, said Peter Scheer, executive director of the nonprofit First Amendment Coalition advocacy group. Mistakes can occur, depending on whether the person making the decision knows the rules, he said.

“When you have ordinary staff deleting or destroying e-mail based on their own understanding of the law, you are inevitably going to be destroying lots of public records,” he said.

David Schonbrunn, a plaintiff in an environmentalist lawsuit that challenged the high-speed rail project’s proposed route over the Pacheco Pass in Santa Clara County, said he suspects the rail authority routinely destroys e-mails that would provide useful insights into its decisionmaking.

Schonbrunn said part of the lawsuit turned on whether the rail authority had altered a computerized “travel mode demand model” that had been used to plot the best route to link the Bay Area with the Central Valley. The plaintiffs believed the model had been tweaked to make the Pacheco Pass route seem more attractive than an alternative route over the Altamont Pass, he said. During pretrial investigation, the plaintiffs found evidence that the model had indeed been changed, said Schonbrunn, a paralegal who worked on the case.

“But because the e-mail was destroyed, we were unable to get somebody giving the instructions for that to be done,” he said.

“An awful lot of business is transacted using e-mails, and when those are deleted, you’re losing the entire history.”

School officials challenged by post-redevelopment process

Kendall Taggart — Wed, 16 May 2012 07:05:02 +0000

Kendall Taggart

401kcalculator.org/Flickr

With billions of dollars at stake, school district representatives charged with overseeing the shutdown of about 400 redevelopment agencies may be underprepared.

Seven-member local oversight boards consisting of representatives from K-14 districts, the county, the city and special districts are now responsible for vetting decisions about how the former agencies will be dismantled and how the property taxes that previously went to redevelopment will be spent.

But some observers are concerned that many school district representatives are not well-equipped to review the complex contracts and financial arrangements left in redevelopment’s wake.

In a report earlier this year, the Legislative Analyst’s Office suggested that the state provide $1 million to help train K-14 oversight board members, but no additional funds have been allocated. To fill the gap, the Fiscal Crisis and Management Assistance Team, which advises school districts on financial matters, has offered several workshops to help educate school officials.

“Even a district staff person who is an experienced school finance person generally has very little background that is directly relevant to redevelopment agencies,” said Dante Gumucio, CEO of Public Economics Inc., an economic consultancy firm that specializes in helping school districts with redevelopment issues and has led the Fiscal Crisis and Management Assistance Team workshops.

“I’m sure that there are some schools that don’t even know how to spell redevelopment,” said Barbara Christensen, director of community and government relations for the San Mateo Community College District, and a member of five oversight boards in the county. San Mateo County education officials have been holding regular meetings to help educate local school officials about redevelopment. “But we might be unique,” Christensen said.

Not all school officials agree about school officials’ level of preparedness. “I’ve been working with the redevelopment agencies for the last 10 years, and they’re not out of the ordinary for me,” said Doug Claflin, assistant superintendent of business services at the Etiwanda School District. He said that his work with bond issuances for school facilities has prepared him for his position on the Rancho Cucamonga oversight board.

In some cases, the oversight boards are finding potentially illegal items in the budgets.

A chief business official for Santa Cruz City Schools serving on the local oversight board sent an e-mail to the state complaining about the city's failure to disclose key information to the oversight board, the Santa Cruz Sentinel reported.

The state Department of Finance and county auditors are also charged with reviewing the former redevelopment agencies’ budgets. The state has already returned over two dozen budgets because of questionable payments, California Watch previously reported.

Members of the oversight boards work on a volunteer basis.

After the former redevelopment agencies are dissolved, it’s unlikely most districts will see any additional revenue. Instead of increasing school budgets, property taxes allocated for schools will offset payments previously made by the state to ensure all districts meet the required funding level.

Only districts whose revenue from local property taxes exceeds minimum funding levels – known as basic aid districts – might see more money. They make up about 10 percent of the 1000 school districts in the state.

State challenges local redevelopment budgets

Explainer: The end of redevelopment agencies

Critics struggle to end 'pay to play' in school bonds

Will Evans — Mon, 14 May 2012 07:05:04 +0000

Will Evans

Boaz Yiftach/freedigitalphotos.net

Critics of the practice in which financial firms help pass school bonds that they profit from are continuing to push for reforms, but so far have faced resistance and failure.

In California, underwriting companies hired by school districts to sell bonds often make campaign contributions to help convince voters to pass the bond measures. A California Watch investigation found that leading underwriters gave $1.8 million over the last five years to successful bond measures, and in almost every case school districts gave underwriting contracts to those same firms.

Underwriters are essentially middlemen, buying bonds from districts and selling them to investors at a higher price. Underwriters say they generally only give campaign contributions after getting hired; school districts argue the money has no influence. But critics call it a “pay to play” system that potentially costs taxpayers more than a strictly competitive process would.

The California Association of County Treasurers and Tax Collectors has been pushing to end the practice for years. Last year, it sponsored a bill to prohibit financial firms from providing both underwriting and campaign services for bond measures. The bill failed in committee, but its author, Assemblyman Chris Norby, R-Fullerton, vows to bring it back next year and add limits on campaign donations.

"It’s a clear conflict of interest. Wall Street brokerage houses are buying local elections," Norby said. "The whole democratic process is being subverted and corrupted."

Norby acknowledged his efforts face determined opposition from school districts and some underwriting companies. Similar bills failed in 2010, 2009 and 2008.

"You have the public school establishment in an unholy alliance with Wall Street," Norby said. "It’s hard to beat it."

School districts are worried that Norby's legislation would freeze underwriter campaign donations, which are needed to successfully pass bonds, said David Walrath, legislative advocate for the Small School Districts' Association.

"We believe this bill, if enacted, would make it less likely that we could pass bonds, which would mean we’d be less able to provide adequate facilities for our students," Walrath said.

Walrath said the proposal would especially harm small districts in rural areas, which are less able to raise money for bond campaigns from residents. He also takes issue with the bill for singling out financial firms, while architects, builders and unions also routinely give money to bond campaigns.

"What is it about the service (underwriters) provide that’s so objectionable that they cannot have political free speech rights to assist in a campaign for something they believe in?" Walrath said.

Federal regulators have also expressed concern that restrictions on bond measure contributions wouldn't pass constitutional muster. The U.S. Supreme Court has upheld limits on contributions to individual candidates, but not for ballot initiatives.

"It does touch on a person's ability to make constitutional speech," said Ernesto Lanza, deputy executive director and chief legal officer of the Municipal Securities Rulemaking Board.

For years, some financial giants have been pushing the self-regulatory agency to adopt restrictions. In 2008, representatives of Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc. urged the board to limit bond measure contributions from financial firms because of "the perception that making such a contribution could cause an underwriter to be selected and to help ensure that the playing field is leveled for all underwriters."

Other underwriters, however, pushed back. School districts and other government entities “are in need of the public policy and campaign expertise of experienced regional investment banking firms," wrote an executive of George K. Baum & Company.

The Municipal Securities Rulemaking Board ended up requiring disclosure of campaign contributions and is still considering whether more regulations are necessary, Lanza said.

In California, the debate has focused on underwriters that provide election-related services along with their traditional underwriting business.

In 2010, for example, Franklin-McKinley School District in San Jose hired George K. Baum to help lay the groundwork for a bond measure campaign and to underwrite the bonds once they passed. The pre-election services included strategic planning, a public information program and a community opinion survey.

"George K. Baum & Company offers school districts a turnkey approach to facilities funding," the company advertised in its proposal. "Our school district bond election clients have been overwhelmingly successful."

The additional services are supposed to be free. School districts are prohibited from using public funds for bond campaigns. But county treasurers argue that school districts end up paying more under these arrangements.

"We feel that these prepackaged campaign and underwriting relationships result in higher fees to the taxpayers," said Jackie Denney, president of the California Association of County Treasurers and Tax Collectors.

Neither the district nor George K. Baum responded to requests for comment.

But in its proposal to the school district, the company stated, "Our competitors would like you to believe that the District will pay a higher fee for our additional services, but this is patently untrue. The only differences in this regard between our firm and our competitors are our smaller profit margin and our dedication to specialization."

Under its contract with the district, George K. Baum stood to make 1.1 percent of the bonds sold.

The company gave $8,500 to the campaign for Measure J, a $50 million bond measure on the November 2010 ballot. It also provided $10,000 worth of "Campaign Consulting Services," according to campaign filings. The measure passed with 70 percent of the vote, and George K. Baum has been selling the district's bonds since then.

Judge: Ex-school official can't join lawsuit over his postal records

Corey G. Johnson — Thu, 10 May 2012 07:05:02 +0000

Corey G. Johnson

Brigaid/Flickr

A federal judge has rejected a former school official's request to join a freedom of information lawsuit the state Fair Political Practices Commission has filed against the U.S. Postal Service.

U.S. District Judge Garland E. Burrell Jr. ruled on April 26 that William Eisen's request didn't meet the legal standards required to be allowed to argue alongside government attorneys representing the Postal Service in the case.

The Fair Political Practices Commission has sued the post office in federal court over what it calls the "improper" withholding of records related to Eisen, a former member of the Manhattan Beach Unified School District board.

The commission regulates the political activities of public officials, lobbyists and campaign committees. It also enforces California's campaign reporting and disclosure requirements, conflict-of-interest rules and election laws.

Since 2008, the state watchdog agency has investigated allegations that Eisen violated campaign disclosure rules related to mass mailings, but the Postal Service declined to release certain records to state investigators, citing privacy concerns. At the time, Eisen was the focus of a recall effort.

State investigators wanted postal records that would help determine whether mass mailings purportedly from the South Bay Taxpayers Association and the South Bay Republican Club, in support of Eisen, were actually sent by Eisen.

The U.S. Justice Department is defending the Postal Service against the state's claims. Eisen petitioned the federal court in February, asking for the right to join in the defense. The Justice Department didn't object to the move. State attorneys, however, argued Eisen's addition would only confuse and impede the case. Commission attorneys wrote:

Mr. Eisen has not given any reason why the USPS would not vigorously defend its position, right or wrong, or why Mr. Eisen’s interest in non-disclosure of this same information would be inadequately represented.

The fact is, Mr. Eisen has not offered any such evidence because there is none. Both he and the USPS share the same ultimate objective: to prevent the FPPC from obtaining information that would enable it to perform its duty of enforcing important provisions of California’s Political Reform Act on behalf of the people of the State of California.

When a proposed intervener and a party share the same ultimate objective, as they do here, a presumption of adequacy of representation applies.

The outcome of this unusual records battle between California and the federal government could have broad repercussions. Justice Department attorneys are slated to file new arguments against disclosure this week. A hearing in the case has not been set, but could occur in early August.

The state commission has determined that Eisen might have violated state law. But no final action has been taken because the records that would fully substantiate the case remain with the Postal Service.

Commission Chairwoman Ann Ravel said in January that she fears if the state isn't allowed access to the records, it would result in a shutdown of campaign disclosure enforcement:

California, twelve other states, and the Federal Election Commission all regulate mailed political communications with regard to either the number of mailed pieces or dollar amount spent on the mail pieces before being categorized as a mass mailing.

Without compliance from the USPS, neither these 13 states, nor the federal government will be able to determine whether a mailing is in violation of their respective laws. The USPS denial of these claims will effectively shut down enforcement of state and federal laws regarding campaign communication disclosure on mass mailings, thereby depriving the public of the ability to identify and take action against persons in violation of these laws.

Eisen, 69, blamed the commission investigation on past political opponents, who he says are still seething over his criticisms of wasteful spending and his other political stands.

"For the last year and a half, I'd thought this whole thing was dead," Eisen told California Watch in a previous interview. "Now I see they're back on the track, trying to drum up stuff against me."

Feds ask judge to drop Calif. postal records suit

State, USPS battle over postal records of former school board official

GOP senators call Wine Train project 'tax dollar sinkhole'

Wed, 09 May 2012 07:05:03 +0000

Lance Williams

Dewet/Wikicommons The Napa Valley Wine Train flood-control project is costing about $79 million.

No-bid contracts cost taxpayers big money, and that’s one reason the $79 million Napa Valley Wine Train flood-control project has become a “tax dollar sinkhole,” two U.S. senators say.

In a statement issued yesterday in response to a California Watch report, Sens. John McCain, R-Ariz., and Tom Coburn, R-Okla., faulted the U.S. Army Corps of Engineers for not seeking competitive bids on the Wine Train job.

The project involves relocating a rail bridge for the Wine Train tourist attraction as part of construction to stop serious winter flooding on the Napa River.

“Taxpayers ultimately lose when contracts aren’t competitively bid,” the senators said. “The Wine Train project is truly a gravy train of government waste.”

As California Watch reported last week, the Corps of Engineers, in an apparent rush to get work under way, steered the $64 million Wine Train contract to a small Alaska construction company called Suulutaaq in 2008. Competitive bids weren’t solicited because the company was eligible for sole-source federal contracts under a program to assist Alaska Natives.

In 2010, Suulutaaq’s former chief executive testified in a lawsuit that the government had paid $10 million too much because it hadn’t sought competitive bids.

Meanwhile, costs on the project have risen by more than 20 percent, from $64 million to more than $79 million, records show. About $64 million has come from the federal stimulus program.

McCain and Coburn first criticized the Wine Train project in 2009, when they listed it among the 100 most “silly and shortsighted” federal stimulus projects in the nation. In their statement yesterday, they derided the project as a “stimulus handout,” and said, “Sadly, we’re not surprised by allegations that the Army Corps overpaid by $10 million.”

Spokesmen for the Corps of Engineers, Suulutaaq and the city of Napa didn’t respond to requests for comment for this story.

But in last week's story, Suulutaaq General Manager Tracy Crain disputed that the government had overpaid on the Wine Train project.

Napa Mayor Jill Techel in a 2009 interview defended it as an ideal stimulus project, saying it was "shovel-ready, green and it creates jobs.” The Corps of Engineers told the Government Accountability Office in 2010 that the no-bid contract speeded completion of the flood-control project, saving taxpayers money on overhead and inflation.

Allegations that the government had overpaid by $10 million surfaced in pretrial testimony in the 2010 lawsuit, which involved a contract dispute between Suulutaaq and a construction management firm. Greg Poynor, former Suulutaaq CEO, testified that after the company had obtained the contract for the Wine Train job, it subcontracted heavy construction work to the giant Kiewit Corp. construction firm.

Before work began, Kiewit officials scrutinized the no-bid contract, Poynor testified. The Kiewit officials concluded that a competitive bid would have been $10 million less than what the government had agreed to pay Suulutaaq, Poynor testified.

Crain, the Suulutaaq official, contended that Poynor couldn’t be trusted, saying he had been fired for fraud. In a lawsuit, Poynor has denied wrongdoing and said his firing was unjustified.

In a phone interview last week, Sen. Coburn also questioned whether there had been “an adult in the room” when the corps decided to steer millions in stimulus funds to the Wine Train project.

Federal money for flood control in California is limited, Coburn said. He said it might have made more sense to spend flood-control funds in the Sacramento-San Joaquin River Delta. There, some experts worry that the system of 100-year-old levees may be prone to collapse during earthquakes.

“If you set priorities, probably (the Napa project) would not have been one,” he said.