New Jersey Real Estate

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The "No Cost" mortgage program benefits all homeowners today, not just first-time buyers or those with low down payments, according to Douglas C. Reilly, the president of Consumers Mortgage Corp. of Middletown.

The program is considered best for the buyer with little down payment available because almost all closing fees are paid by the lender. However, the program is also advantageous to buyers with 20 percent down and more.

"All buyers benefit not only by an added tax benefit (by eliminating non-tax deductable closing costs), but also should the rates drop after the initial closing even by 1/4 to 1/2 of 1 percent, the homeowners may refinance into a new "No Cost' mortgage, and not have thrown away all the fees from closing of the purchase," Reilly said.

In today's real estate market, the amount of cash required to purchase a home is the primary problem, according to the Federal National Mortgage Association. However, with the availability of the "No Cost" mortgage program, the necessary amount of cash required to effect a home purchase has been decreased.

The "No Cost" mortgage program covers closing costs including: appraisal, credit report, title search, title insurance up to the mortgage amount, recording fees, attorney review fee, flood certification, wire fees, courier and tax service fees, $300 toward a survey, and $500 toward buyers' attorney fee.

The additional funds made available by use of this program can frequently make the difference in enabling borrowers to accumulate a sufficient down payment for the purchase of a home. In addition, the extra funds may be used for several other purposes such as "buying down" the interest rate for a lower monthly payment, or to help borrowers qualify for a larger loan amount. For example, if borrowers have $32,500 available for a down payment plus closing costs of $3,500 and are putting 10 percent down, they can purchase a $325,000 home. If they can save $2,500 in closing costs, they could then have a 10 percent down payment of $35,000 which enables them to purchase a $350,000 home, (assuming of course their income will support the higher mortgage amount). Thus the $2,500 increase in down payment actually increases their purchasing power by $25,000.

The additional funds may also be used toward a larger down payment, and in some cases, this additional down payment may eliminate the need for Private Mortgage Insurance or reduce the PMI premium which is required on loans with less than 20 percent down and is more expensive for loans with less than 10 percent down. Eliminating the additional cost of PMI reduces the monthly payment, increases funds available for a down payment, and helps the borrower qualify for a larger loan amount.

In addition to the obvious benefits in increasing buyers' purchasing power, there are added tax benefits to be gained for purchasers as well. In packaging closing costs, which are normally not eligible as an immediate tax write-off, into a tax write-off, buyers have reduced the real after-tax cost of home ownership.

Other options are available today for "low asset" buyers to help increase purchasing power such as 100 percent mortgages, loans that do not require any cash reserves and higher qualifying ratio loans, and loans that avoid the additional cost of PMI with 10 percent down — usually an additional cost when a buyer puts less than 20 percent down.

Combining these programs with Consumers Mortgage Corp.'s "No Cost" program significantly increases the borrowers' purchasing power and enables some borrowers who could not otherwise purchase to have the opportunity to own their own homes.

The "No Cost" mortgage is available for refinances as well as purchases. Refinancing of a mortgage with all closing costs eliminated makes it advantageous to refinance even if the new interest rate is only 1/4 to 1/2 percent lower than the homeowners' current mortgage interest rate. Also at a time when the adjustable rate mortgages are increasing, it is the right time to lock into a fixed rate with the "No Cost" mortgage. All closing fees are covered in the "No Cost" refinance program.

For more information, call (732) 671-0001.

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From MarketWatch

http://www.realestatejournal.com/ 

The country's more than 77 million baby boomers represent more than a quarter of the U.S. population and have a substantial build up of spending power. As more of them move toward retirement age, businesses are paying attention to what this generation's real estate needs are.

And if they learn anything about the boomer consumers, it's to not classify them as over the hill.

"Don't call them aging, don't call them seniors and certainly don't offer them early-bird specials," said Neale Redington, national director of hospitality practice at Deloitte & Touche LLP. They don't like it, he said. For good reason.

After all, this is a generation that expects to work past the traditional retirement age, said Paul D. Prescott, the national director for Deloitte Tax LLP's home-building sector. It's also a generation with active, healthy lifestyles that are in turn helping them live longer.

Deloitte's recent conference call, "The Aging Population: The Impact on the U.S. Real Estate Market," aimed to give some perspective on what this generation wants from its homes, communities and vacation spots.

Residential

On the residential side, people aren't waiting until retirement to acquire a second -- or even a third -- home, Prescott said. Sometimes the additional home will be located in a favorite vacation spot; oftentimes the intent is to retire there eventually, he said. Many baby boomers want these second homes to be located near a body of water or close to recreational activities.

While retirees tend to gravitate toward places that complement their active lifestyles or provide them a lower cost of living, they're also getting more comfortable with the idea of owning real estate in other countries, Prescott said. Mexico offers retirees warm weather, lower property taxes and more affordable health care, while areas including Panama and Costa Rica offer tax breaks to foreigners seeking to retire there, he added.

On the other hand, many boomers expect to "age in place," given their active lifestyles and plans to work past the traditional retirement age, he said.

What they want from their homes and communities is the flexibility to accommodate a range of physical abilities and medical needs -- along with other amenities including accessibility to services and wired houses that have convenient access to the Internet, Prescott said.

"As a group, the boomers have unprecedented wealth and this wealth gives them choices that earlier generations may not have had," he said.

Although this generation doesn't view itself as being old, the boomers also could create more demand for assisted living down the line. "Even though you think you aren't old, your body is going to have a need for those kinds of facilities," Prescott said.

Retail/hospitality

Teens may frequent their local shopping mall more, but older customers are bigger spenders -- and retail centers have been moving to cater to boomers as a result, said James E. Maurin, chairman of Stirling Properties and a past chairman of the International Council of Shopping Centers.

For one, safety concerns that mature customers have about going to the mall are being addressed in some locations, Maurin said. For example, "malls are starting to clamp down on unruly teenagers," he said, adding that some shopping centers have escort policies for younger customers.

Mall owners also are taking steps to make their buildings easier to navigate, sometimes even offering valet parking services to shoppers, he said. More sit-down restaurants, day spas, even doctors and dentists are being incorporated in malls for convenience.

When it comes to travel, boomers want "adventure without great risk," Redington said. This could mean dog sledding in Alaska with warm accommodations and hot meals or room service in Machu Picchu, he said. "Pre-arrival" Internet research on a hotel's services also is becoming a staple, allowing customers to their homework before they check in.

Good spenders, bad savers

Despite the spending power that boomers have, it's also important to note that they haven't traditionally been the best savers, said James P. Gaines, of the Real Estate Center at Texas A&M University. Gaines wasn't involved with the conference call, but has been studying baby boomers and their housing needs.

"I don't think the boomers are going to retire the same way our parents did," he said. "They're terrific spenders but no great savers."

He also anticipates baby boomers seeking quality over quantity in new homes, more interested in granite counters and Internet wiring than the amount of space they have.

But acknowledging that boomers have much of their wealth concentrated in their home equity, he also thinks that retirees looking to relocate will look for places with lower costs of living, lower taxes and where home appreciation rates have been modest.

"Some of the states that are going to experience some growth (in retirees) are not the ones that have had a run-up in home prices," he said.

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From Dow Jones Newswires

New and existing home sales are expected to fall substantially this year, while home price appreciation will also slow precipitously, as the market works through an inventory backlog, according to new projections released Thursday by the National Association of Realtors.

New home sales are projected to fall 16.1% to 1.08 million in 2006, and existing home sales dip 7.6% to 6.54 million, according to revised NAR projections.

NAR expects housing starts to drop by 9.6% to 1.87 million this year.

Home price appreciation is also expected to slow considerably from previous double-digit gains. The median existing-home price will grow 2.8% this year to $225,900, with the median new home price rising only 0.2%, according to NAR.

The trade association said prices for new homes were depressed by builders cutting prices and offering incentives to reduce inventory.

David Lereah, NAR's chief economist, said the dramatic downshift in price appreciation was noteworthy. "A year ago we had record home sales and tight supply with buyers bidding over the asking price," Lereah said in a statement.

"Under these conditions, we'll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory," he added.

The cooling housing market means investors who purchased homes last year intending to sell them shortly thereafter could face losses.

"Buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned," Lereah said.

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From The Wall Street Journal Online

While Joe Fick and his wife Rachel Vreeman were sleeping in their rental house in Indianapolis one night in July, thieves sneaked up and made off with an estimated $100 of stolen goods. But the target wasn't jewelry or electronics. It was the copper components of the house's central air conditioner.

"They unscrewed the top and pulled out the guts and left the shell there," says Mr. Fick, a campus minister.

The high price of copper is hitting home -- literally. The metal's skyrocketing scrap value is inspiring criminals to hit houses, making off with copper coils in air-conditioning units, copper wires, even the copper pipes used for plumbing, leaving some perplexed residents without running water.

In the past several months, police departments across the country have reported a surge in the number of copper-related thefts at homes, businesses and elsewhere. Police have reported everything from copper vases swiped from gravesites to more serious thefts, such as the copper wire stolen recently from a power substation in Oklahoma City that utility officials say caused a six-hour power outage for 4,000 customers.

Sometimes thieves steal less than $100 worth of the metal but cause many times more in damages. Police in Detroit, for example, are reporting thousands of dollars in repair costs for street lights that have been stripped of copper components.

Driven by increased world demand for commodities, prices of steel, copper, aluminum and other metals are at historic highs. The price of copper has more than doubled in the past year, closing yesterday at $3.65 a pound on the Comex division of the New York Mercantile Exchange. The price of copper scrap -- which is processed and sold to metal-making firms -- has also doubled, with high-grade scrap now fetching around $3 or more per pound at scrapyards, and lower-grade scrap less, depending on quality, according to scrap-metal dealers.

Copper isn't the only metal sought by thieves. Products made from aluminum and steel are also being targeted -- everything from beer kegs to aluminum luggage carts. But thefts of copper -- which commands a higher price -- are especially onerous for homeowners and builders, as the metal is used throughout modern homes, including the inner coil of central air-conditioning units, electrical systems, gutters and water pipes.

Residential air-conditioning units in particular are becoming popular with thieves. The copper insides of a condensing unit -- the portion of a central-air system that sits outside -- can fetch $50 to $150 at a scrapyard, while replacing an entire unit that's been plundered can cost $2,000 or more. That's what happened with the unit that was gutted at Mr. Fick and Ms. Vreeman's rental home. The thieves probably "didn't even get the market value for it," says the house's owner, John Beeler. "I would have preferred if they had just knocked on my door and asked for $100."

Thieves often target units sitting unwatched at new construction sites or empty homes, but more brazen ones will strike even when residents are home. Noreen Alexander, a 62-year-old retired social worker, was in her Detroit home one hot morning this summer when she heard a strange noise out back. About 10 minutes later, her nephew noticed that the outdoor unit of her central air conditioner was gone. "I never believed anyone would steal an air conditioner that size, period," Ms. Alexander says. "Was I mad! I was hotter than the weather."

Police say the culprits are usually petty criminals looking for some quick money. Those who are arrested are charged with burglary or larceny, depending on the circumstances of the theft, and face fines, probation or several years in jail. People can be reimbursed through homeowner's insurance but often must pay a deductible. "The guy who used to collect beer cans for redemption values says, 'Why should I do that? I can get 10 times for that for a fraction of the work' " by stealing air conditioners, says Nathan Frankel, a scrapyard owner in Fontana, Calif.

Another target for thieves is copper piping, which often runs exposed beneath many older homes. Jared Barker, a 27-year-old corrections officer, was renovating his home in Huntington, W.Va., and left it unattended one night last month. He returned to find the kitchen tap not working. After checking below the house, he found that about a thousand dollars worth of copper pipe was gone. He was amazed that thieves would make off with the pipes in the roughly 10 hours he was away. "It takes a lot of guts to crawl underneath somebody's house and cut their pipes out," he says.

Police elsewhere in the country are reporting similar crimes. In Little Rock, Ark., one historic residence in the city's downtown was hit by copper thieves three separate times. In the most recent incident, thieves removed $1,000 worth of copper pipe, leaving the resident without water, according to police reports. Criminals in the city have also posed as servicemen, removing copper plumbing and air conditioners in the middle of the day, says Lt. Terry Hastings of the Little Rock police. He says the city has seen 39 commercial and residential air-conditioner thefts since mid-August, up from almost none in the same period last year.

In response to the rash of thefts, cities are starting to crack down. Montgomery, Ala., recently passed an ordinance requiring scrapyards to report the copper they take in to the police department, and police in Detroit are making sure local scrapyards are licensed and are collecting identification information from people who sell them the metal.

Chuck Carr, a spokesman for the Institute for Scrap Recycling Industries in Washington, an association of metal-recycling companies with about 3,000 scrap-yards throughout the U.S., says his organization is bewildered by the sudden surge in theft. The organization has a scrap-theft alert system, which alerts scrap dealers by email when large lots of metal are reported stolen. The group also has a grant to launch a minor advertising campaign to educate people the public on metal theft as part of National Crime Prevention Month.

"No legitimate scrap dealer wants to intentionally take stolen material," says Mr. Carr. "Not only is it the wrong thing to do; it's bad for business on so many levels."

All the activity is keeping air-conditioning contractors busy. Larry Taylor, president of AirRite Air Conditioning Co. in Fort Worth, Texas, says his company has received a service call nearly every day for the past 40 days from a home or business owner whose air conditioning has been damaged or stolen. Brenda Hawk, office manager for Camair Inc. in Orlando, Fla., says the company has gotten about four times as many telephone calls this summer compared with last year regarding stolen or gutted equipment.

One was from Krystian Zygowiec, who put his Orlando home on the market early in the summer and left for Michigan with his wife. About two weeks ago, a neighbor who was mowing the lawn noticed the air-conditioning unit on the side of the house had been reduced to just a few pieces. Because Mr. Zygowiec didn't want to bring prospective buyers to see a non-air-conditioned house, he had to cancel several open houses. "In this troubled housing market, every day is valuable," he says. "It was pretty much the worst time they could have stolen it."

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By Alex Frangos
From The Wall Street Journal Online

Architects unveiled plans for three shimmering office towers at Ground Zero, completing the latest vision for the World Trade Center reconstruction.

Architects Fumihiko Maki, Richard Rogers and Norman Foster showed off their plans Thursday for three distinct-looking towers of ascending height that will line the east side of the trade-center site. The cost to construct the three buildings will be about $7 billion. The entire trade-center site, including the Freedom Tower, the Sept. 11 memorial and a transit hub will cost more than $12 billion, according to people familiar with the project.

While the unveilings show progress toward a goal of completing the rebuilding by 2012, obstacles remain nearly five years after terrorist attacks destroyed the World Trade Center. Private office developer Larry Silverstein and the site's owner, the Port Authority of New York and New Jersey, have yet to finalize an agreement on the designs of the buildings, the layout of the labyrinthine underground concourses the buildings share with retail and transit functions, and the way to pay for it all.

Mr. Foster's tower, known as Tower 2, at 200 Greenwich St., will rise 1,254 feet, topped by an 85-foot, triangular-shaped antenna -- making it one of the tallest buildings in the U.S. and only a shade shorter than the original Twin Towers. Earlier versions of Tower 2 put the height at 1,150 feet. The nearby planned Freedom Tower's roof parapet will rise to the same height as the taller of the Twin Towers, 1,368 feet, but its antenna will reach a symbolic 1,776 feet. Tower 2 will have a sloped roof with four diamond-shaped panels, which face the memorial. Mr. Foster described the panels as a "beacon" that will draw people's view from throughout the city toward the memorial.

Mr. Rogers's tower, known as Tower 3, at 175 Greenwich St., will rise 1,155 feet, also taller by 105 feet than originally envisioned. Plans show a flat top with four spires at the corners that rise an additional 100 feet. The façade exposes the structural steel that will hold up the tower, a signature of Mr. Rogers's work.

Mr. Maki's tower, known as Tower 4, at 150 Greenwich St., will be 947 feet and have a sleek, minimalist look. Notches run up the building along the corners, increasing the number of corner offices. The façade on the upper part of the tower is set at an angle to the lower portion of the building.

All three buildings have 50- to 70-foot-tall lobbies that face the memorial. The lower floors in each building include street-facing retail space and entrances to underground transportation. Towers 2 and 3 will include several large trading-room floors to attract major financial tenants. The towers will be paid for through a combination of insurance funds and government-subsidized, tax-exempt loans.

Construction at the site has long been delayed over how Mr. Silverstein, the Port Authority and other parties would divide and pay for the site's various functions. A tentative rebuilding agreement struck in April involved Mr. Silverstein ceding rights to own the iconic, but financially uncertain, Freedom Tower and another yet-to-be-designed tower to the Port Authority. In exchange, the Port Authority agreed to reduce Mr. Silverstein's lease payments. The developer kept the rights to own towers 2, 3 and 4.

After several groundbreakings and false starts, preliminary foundation work for the Freedom Tower, the memorial and the transit hub began earlier this year. To move forward on all the buildings at the site, however, an agreement on the design of the underground warren of delivery ramps, mechanical rooms and pedestrian walkways must be completed. Both sides had hoped to finalize the agreement in time for Thursday's unveiling. It now appears an agreement won't be ready until the Port Authority's next scheduled board meeting, Sept. 21.

Despite the lack of an agreement, Mr. Silverstein said unveiling the drawings was a significant step. "We're about to embark on the true rebuilding of the trade center," he said.

The federal government and New York state have tentatively agreed to rent at least half of the Freedom Tower, though leases haven't been signed. Of the towers unveiled Thursday, New York City and the Port Authority have offered to fill Tower 4 with government offices, though they are continuing to negotiate with Mr. Silverstein on rental prices. Mr. Silverstein is seeking private tenants for Tower 2 and Tower 3.

His prospects for landing major tenants have gotten better in recent months. Businesses are expanding in Manhattan, causing vacancy rates to decline and rents to increase. He has landed several tenants for his already-rebuilt 7 World Trade Center, including Moody's Investors Service, which is set to take 15 floors.

Evidence mounted that the housing slowdown is in full force, with builders delivering gloomy news and a real-estate group projecting a significant drop in sales of new and existing homes and a sharp deceleration in price appreciation.

New home sales this year are expected to fall 16.1% to 1.08 million and existing home sales to dip 7.6% to 6.54 million, as the market works through an inventory backlog, according to the National Association of Realtors. NAR's latest projections released Thursday also have housing starts dropping 9.6% to 1.87 million.

Home prices will no longer post double-digit gains, the group projected. The median existing-home price will grow 2.8% this year to $225,900, with the median new home price rising only 0.2%, according to NAR. The trade association said prices for new homes were depressed by builders cutting prices and offering incentives to reduce inventory.

Beazer Homes Inc. on Thursday again cut its earnings forecast for 2006, blaming higher cancellation rates and weakening sales as the deluge of negative news from the home-building group continues. Wednesday, home builder KB Home cut its profit projection, while single-family home builder Hovnanian Enterprises Inc. reported a 34% decline in its third-quarter profit.

David Lereah, NAR's chief economist, said the dramatic downshift in price appreciation was noteworthy. "A year ago we had record home sales and tight supply with buyers bidding over the asking price," Mr. Lereah said in a prepared statement.

"Under these conditions, we'll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory," he added. The cooling housing market means investors who purchased homes last year intending to sell them shortly thereafter could face losses.

"Buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned," Mr. Lereah said.

Atlanta-based Beazer said net home sales for the two months ended Aug. 31 fell 49% from the year earlier as the cancellation rate rose to 50% from 26% in the same period in the previous year.

"As compared to prior years, a higher percentage of home closings are being deferred or cancelled, immediately prior to closing in many cases, due to worsening buyer sentiment and the inability of buyers to sell their existing homes," the company said.

Beazer said in expects to close on fewer homes in its fiscal fourth quarter than anticipated, and trimmed its 2006 per-share profit forecast to a range of $8 to $8.50 a share.

In July, the company lowered its annual estimate to $9.25 to $9.75 a share as the housing market began to slump. Beazer said its revised 2006 outlook "also contemplates potential charges to exit non-strategic land positions currently under review." It estimates it will deliver between 12,000 and 13,500 homes in fiscal 2007. In fiscal 2005 the company closed 18,146 homes.

KB Home cut its profit projection for the year ending Nov. 30 to between $8 and $8.50 a share, from a June forecast of $10 a share, reflecting what it called "an increasingly challenging" housing market.

The home builder said unit net orders "continue to be adversely affected by higher cancellation rates" in many markets. Traffic to KB Home's new-home communities and gross unit orders were each down about 11% during the third quarter.

The Los Angeles company, which has operations on the West Coast, in the Southwest, in the Southeast and in the central U.S., also said it expects to report earnings for the third quarter ended Aug. 31 of $1.85 to $1.95 a share, down from year-earlier net income of $227.5 million, or $2.55 a share. It expects to report net orders for the quarter of 5,989 units, down 43% from a year earlier.

Hovnanian reported the lower profit as the company struggled with higher costs, slower-paced orders and increased cancellations.

The Red Bank, N.J., company reported net income of $77 million, or $1.15 a share, for the quarter ended July 31, down from $116.1 million, or $1.76 a share, a year earlier. The company booked $11.4 million in write-offs for walk-away costs and an additional $800,000 in land write-downs for the latest quarter.

Revenue rose 18% to $1.55 billion from $1.31 billion in the prior-year period. Costs rose 26% to $1.43 billion from $1.13 billion a year earlier.

Net contracts for the third quarter, excluding joint ventures, declined 19% to 3,349 contracts. On the same basis, the dollar value of net contracts decreased nearly 24% to $1.1 billion from $1.4 billion last year. Hovnanian's contract-cancellation rate rose to 33% from 24%.

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By Bernard Wysocki Jr.
From The Wall Street Journal Online

Federal regulators are trying to hit the brakes on commercial real-estate lending. That annoys Bradley Rock, the chief executive officer of Smithtown Bancorp Inc.

Wheeling his black Lexus sedan toward the clubhouse of the Fox Hill Golf & Country Club, Mr. Rock gazed at the lush fairways of the 175-acre property, appraised at more than $15 million. The owners of the club owe $2.7 million to his bank. "You could sell the property for massively more than the debt," Mr. Rock said. "It's impossible for the bank to lose money."

Like thousands of community banks across the U.S., Smithtown, of Hauppauge, Long Island, has feasted on commercial real-estate loans. About 80% of Smithtown's $800 million loan portfolio is concentrated in that category, which Mr. Rock calls "the last safe, profitable niche" for community bankers trying to compete against giant banks. The banks consider these loans -- the $1 million to $10 million loan to a home builder or strip-mall owner -- to be their sweet spot.

To bank regulators, the rapid growth in commercial real-estate loans -- up 16% in 2005 alone to $1.3 trillion -- is alarming. In January, four regulatory agencies, including the Federal Reserve, proposed a clampdown. In a draft of new "guidance," they said banks exceeding certain levels of lending in construction and commercial real estate should step up risk monitoring or add capital, or both.

The proposed guidance wasn't a hard rule and didn't impose limits on lending, but the bankers went bonkers. The Independent Community Bankers of America, the American Bankers Association and more than 1,000 banks wrote protest letters. The community bankers, citing the government's own reports, said commercial real-estate loan performance is healthy and growth is driven by employment and population growth. Bankers argued that their lending practices had become far more sophisticated since the last real-estate bust in the early 1990s, while the regulatory guidance had all the finesse of a meat cleaver.

A hearing on the issue before a House subcommittee is set for Thursday. Regulators probably will issue final guidelines sometime after that, and the implications could be significant. If regulators are too lax, there could be a raft of bad loans. If they are too tough, they could prompt a credit crunch, with small business owners unable to get loans. That could cast a chill on the entire U.S. economy.

Commercial real-estate loans "can be the sweet spot -- or the tar pit" for banks, says Susan Bies, a governor of the Federal Reserve. It supervises bank holding companies and about 900 state banks, including the Bank of Smithtown, a wholly owned subsidiary of Smithtown Bancorp.

The regulators conjure up memories of the late 1980s and early 1990s, when aggressive lending led to overbuilding, vacant properties, price collapses and huge losses for taxpayers. From 1987 through 1994, more than 1,100 banks and nearly 1,000 savings-and-loan institutions failed or required financial assistance, according to the Federal Deposit Insurance Corp.

"It is hard to overstate the impact of that crisis on our economy," John Dugan, the comptroller of the currency, said in a speech to New York bankers in April. Mr. Dugan's agency, part of the U.S. Treasury, supervises more than 2,500 nationally chartered banks.

Cracking Down

Though the guidance isn't finalized yet -- and, even when completed, won't include hard-and-fast lending caps -- examiners already are cracking down, say bankers. TransAtlantic Bank, of Miami, has cut back commercial real-estate loans in reaction to the regulators' proposals, while expanding unsecured loans to doctors, lawyers and other business customers. Chief Executive Miriam Lopez says the unsecured loans are actually riskier; the bank has more than doubled its credit department to handle the change in strategy.

"Talk about unintended consequences," says Mr. Rock, who as vice chairman of the American Bankers Association is helping lead the charge against regulators.

The 54-year-old banker grew up in Hauppauge, 50 miles east of Manhattan, where he was a high-school football star. He worked as a lawyer before becoming chief executive at Smithtown in 1990.

He has produced strong results: soaring loan and deposit growth, rising profits and minimal bad loans. The bank says investors who bought its Nasdaq-listed stock in 1995 have enjoyed a more than 20-fold return on their investment.

The Smithtown formula involves gathering deposits, currently about $835 million, at 13 branches on Long Island. The bank then lends out the money at interest rates that are more than four percentage points higher, on average, than what it pays on deposits. Demand is robust in Long Island's mostly white-collar economy, which has enjoyed strong job growth in health care and education, according to Moody's Economy.com Inc., although it says high costs could crimp that growth.

The bank mostly steers clear of consumer lending, such as auto loans and credit cards. Residential real estate is just 14% of the loan portfolio. Mr. Rock says Smithtown can't compete with the big banks that blanket the greater New York market.

"Citibank, Chase, Bank of America, they spend enormous amounts of money on the mass market," Mr. Rock says. "You need to be on television every night" with advertising, he says. "There's no way we can afford to do that."

Instead, Smithtown has a small lending team of five people who specialize in making real-estate loans to businesses. One banker focuses on loans to homebuilders. Mr. Rock's 24-year-old son recently joined the bank and is cutting his teeth on mortgages for small commercial buildings. The bank also lends to owners of multitenant office buildings and family restaurants.

In recent years, Mr. Rock has moved into the five boroughs of New York City, lending to smaller developers who might, for example, need a $5 million loan to convert an industrial building in Brooklyn's trendy Williamsburg section into condominiums or rental apartments.

He has an army of loyal borrowers, such as Vincent Di Canio, a Smithtown developer who has received dozens of real-estate loans from the Smithtown bank over the past 25 years. Mr. Di Canio says he goes to the big banks only when he needs more than $10 million. He is worried the regulators' guidance will cause Bank of Smithtown to cut back lending. "It would be detrimental to me and all midsized entrepreneurs," he says.

Mr. Rock acknowledges that real-estate busts occur and can be devastating. In his first years as CEO, in the early 1990s, his own bank had several loans go sour. Often, the bank hadn't paid attention to the income stream on the borrower's property, he says.

He slows his car to an intersection in Melville, just off the Long Island Expressway, and gestures at rows of 250,000-square-foot office buildings that were built in the 1980s, sometimes with financing from big banks. By the early 1990s, a number of the Melville buildings lay vacant and were sold at a loss.

"Here's your 1980s real-estate bust," Mr. Rock proclaims. "The biggest amounts came from the biggest banks putting mortgages on the biggest buildings."

Mr. Rock believes most smaller banks such as his aren't engaging in the sort of indiscriminate lending that caused trouble 15 years ago. Nowadays, he says, he ensures that a developer's income from property is enough to pay down the mortgage, and he leaves an ample margin of safety in his loan portfolio in case real-estate prices turn south.

Mr. Dugan, who took over as comptroller in August 2005, is less sanguine. A former Washington lawyer with many financial institutions as clients, Mr. Dugan was heavily involved in the savings-and-loan cleanup as a U.S. Treasury official from 1989 to 1993. He declined to be interviewed, but his speeches leave no question about his concerns.

At a conference last October of credit experts from the Office of the Comptroller of the Currency in Atlanta, Mr. Dugan noted that about a third of national banks had commercial real-estate loans amounting to 300% or more of their bank capital. In its simplest definition, capital is equal to a bank's assets minus liabilities. Under U.S. regulations, banks are required to hold a certain amount of capital, measured in various ways, as a financial cushion. Mr. Dugan urged his credit staffers to continue "carefully monitoring banks where these concentrations could become, or already are, significant."

Warning Letters

Within weeks, the office's regulators in the field were sending out letters to banks, warning about concentrations.

Community bankers say the letters made them shudder. "I was very upset," says Everett Crawford, chief executive of First National Bank of Artesia, N.M. If he has to cut back such lending, "it will diminish the franchise," says Mr. Crawford, who worries the 103-year-old institution may have no choice but to sell itself.

By all accounts, banks have a much better handle on their loan portfolios these days than two decades ago. Nonetheless, regulators fear standards still aren't strict enough sometimes.

The letter Mr. Crawford received was from Kay Kowitt, a deputy comptroller of the currency. She didn't single out his bank but dwelt on several emerging problems among the 400 banks supervised by the western district of the agency. Noting that "competition in virtually all markets is intense," the letter fretted about "liberal terms for speculative land loans" and said some borrowers had only a thin margin between the cash flow from their property and their loan repayments. It also questioned whether some banks are getting fully independent property appraisals.

Regulators also believe new forces in the market are pushing up real-estate prices. One new factor: Unlike small banks, the biggest banks often are selling their commercial loans to be packaged into securities and sold to global investors. That market is making it easier for banks to come up with money for loans, which in turn boosts demand for commercial property.

In April, Mr. Dugan sounded the alarm bells again, this time before the New York Bankers Association. In the late 1980s and 1990s, he said, failed banks had three times the real-estate concentrations of banks that survived. With Mr. Rock looking on, Mr. Dugan also defended the guidance proposed by his agency and three others. It would single out for scrutiny banks that have lent more than 100% of their capital in construction or more than 300% of their capital in commercial real estate generally.

Smithtown's portfolio is way over the guidelines because its commercial real-estate loans amount to 750% of, or 7.5 times, its capital. Mr. Rock believes it is simplistic to lump all commercial real estate into "a single bucket." His portfolio, he argues, should instead be viewed as "75 buckets" of diverse loans with different maturities and risks. Mr. Rock says he welcomes examinations, but he thinks examiners should dig down and assess the risks of individual loans and various types of loans.

In a June 20 meeting that Mr. Rock and officials from the American Bankers Association held with regulators, Mr. Rock complained that field examiners are using the measures in the guidelines to "beat up" banks with heavy concentrations of commercial real-estate loans. "Susan, here's the essence of the disconnect," he says he told Gov. Bies of the Fed. "You call it guidance, but examiners are in my bank, criticizing me for having too many commercial real-estate loans."

Gov. Bies, in an interview, says she hasn't received concrete evidence of overzealous activity by bank examiners, but she says the Fed will start a training program for its staff once the guidance becomes final. Regulators say their metrics are a valuable screening device to flag potential problems. Bankers say the definition of a commercial real-estate loan is too broad.

On a recent afternoon, Mr. Rock drove around Suffolk County, his prime lending area, and stopped outside a medical office building. He has extended a $350,000 line of credit to the doctors backed by the property, which he said is valued at two to three times that amount. He drove past one of Mr. Di Canio's housing developments, with 34 single-family units under construction, and said his lenders minimize risk by doling out money little by little as the work progresses.

Then Mr. Rock drove a few miles out to the Fox Hill golf club. If the property ever got developed into houses on half-acre lots, he said, it could be worth $40 million or more. "This is just my idea of an absolutely great loan," Mr. Rock said. "But the regulators are saying I have a 'concentration.' So if another one comes along like this, I'm supposed to turn it down."

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By James R. Hagerty
From The Wall Street Journal Online

African-American and Hispanic borrowers remain much more likely than whites to pay high interest rates on mortgage loans, according to a Federal Reserve study released Friday.

The report is based on data collected each year under the Home Mortgage Disclosure Act, or HMDA, from 8,850 lenders nationwide. Under that law, lenders must make pricing disclosures for home loans whose interest rate exceeds certain thresholds. For first-lien loans, lenders must report those on which the rate exceeds the yield on comparable Treasury securities by at least three percentage points.

In 2005, about 55% of first-lien home-purchase loans to African-Americans exceeded that threshold, compared with 46% for white Hispanic borrowers and 17% for non-Hispanic whites. Lenders and bank regulators say the disparities largely reflect differences in incomes and credit histories. Even so, regulators look at the data from individual lenders for indications of possible race discrimination.

Critics of the mortgage industry say one problem is that loan officers and mortgage brokers often earn higher fees for persuading borrowers to take higher-cost loans. Minority borrowers, who often have less experience in home buying, may be less skilled in negotiating over loan terms and shopping among lenders.

Keith Ernst, senior policy counsel for the Center for Responsible Lending, a nonprofit group in Durham, N.C., said the latest data reinforce the case for lenders to use only objective criteria for setting rates and fees on loans rather than giving loan officers and brokers leeway to negotiate those items with borrowers.

Overall, 26% of all 2005 loans reported by lenders exceeded the high-cost threshold, up from 16% in 2004.

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