Affordable Housing Institute : US

By: David A. Smith 

 

I found out last Monday

That Bob got locked up Sunday

They’ve got him in the jailhouse way down town.

– In the Jailhouse Now, Jimmie Rodgers

 

You’ll need some large collateral

 

Despite their prevalence in hard-boiled movies, I’ve never understood the business model of bail bondsmen until now, when a Wall Street Journal made it all clear, by revealing how that business model is under real-estate-related stress:

 

The housing bust has put homeowners in debt, damaged credit ratings and devastated property values across the nation.

 

It also has made it harder to post bail.

 

Bail bonds are a subcategory of surety bonds, and as such they represent a curious form of insurance.

 

A business as old as lending … or pawning

 

The bail bondsman is betting that you will not run, or that if you run, the bondsman can collect the full bail – not just the bail fee – from your left-behind assets or from you.  Hence there is a credit decision to be made each and every time someone seeks to post bail via a bondsman:

 

Not as easy as it looks: Melissa from McGoo’s bail bonds 

 

The best collateral, the collateral that is the largest personal asset, the most likely to hold its value, and the hardest to abscond with, is the immovable home.

 

For decades, family homes were the ultimate “get out of jail” cards for the accused, providing collateral for people required to pay bail to remain free prior to or during their trial.

 

It carefully doesn’t say ‘free’

 

Mind you, not ‘Get out of jail free‘ – an 8% fee appears to be standard.

 

Note the asterisk: * Conditions apply

 

What happens when the collateral ceases to anchor the accused to a locality?  The bail-bonds market has to reprice its services upward and has to change its business model.

 

But in the past few years, home prices have tumbled by more than 30% nationwide, and plunged by more than half in the hardest-hit markets, which include parts of Florida, Nevada, and Arizona.

 

Aside from charging higher premiums, Point is to make collateral forfeiture painful.

 

Defendants accused of nonviolent crimes are usually granted bail, and typically spend only a day or so locked up before being released. But when Daniel Romero was arrested and charged with felony grand theft and conspiracy to defraud, he was held for six weeks.

 

Felony grand theft, readers may recall, is what they charged Lindsay Lohan with for her light-fingered necklace jaunt.

 

I wonder if my home has enough equity collateral?

 

The San Diego house his in-laws offered as collateral for bail was underwater—worth less than its mortgage.

 

Collateral tends to bring out the extended family, who may have assets the youngsters do not. 

 

Those who can’t afford to post bail themselves enlist the help of a bail-bond agent, who typically guarantees the bail and charges a fee, usually around 10% of the total bail. When the bail demanded by the court is a large amount, agents almost always want collateral, which in better times was generally a home.

 

Except that many homes are underwater, and bail bondsmen must find other collateral that they can secure.

 

Now he’s downtown in jail

Nobody to go his bail

The judge done said that he will pay the fine.

 

Jimmie Rodgers, the ‘father of country music’

 

As a result, a dozen bail-bond agents refused to take Mr. Romero’s case. Finally, a family friend convinced Jason Meyerson, owner of Bail Bond Professionals of Tustin, Calif., to handle the matter.

 

 

For bail of $300,000, Mr. Meyerson agreed to take a $24,000 fee, $7,500 up front and $375 a month for five years, instead of full payment up front and high-value collateral.

 

Actually, the Journal missed the second financing component of the story: Mr. Meyerson not only took a second mortgage on the property, he also went into the financing business.  Payments of $375 per month for 60 months add up to $22,500, not the $16,500 that Mr. Meyerson deferred, and work out to an annualized interest rate of roughly 13.75%. 

 

[For you Excel geeks, the formula for the monthly rate is =RATE(60,375,-16500,0.01), and then to annualize the rate, the results to the twelfth power: =(1+Result)^12. – Ed.]

 

Which, by the way, is not unreasonable at all.

 

Involved in more than just flight risk

 

Had it not been for Mr. Meyerson, “I’d still be sitting there,” says Mr. Romero, who recently was found guilty of some of the charges and faces sentencing this summer.

 

Hopefully Mr. Romero used his time out of prison to earn a vligving.

 

Some 23% of residential properties with a mortgage were underwater at the end of the fourth quarter, led by Nevada’s 68%. In Arizona, 50% of mortgages were underwater, while California had 33%, according to CoreLogic. Worried that American homes are too heavily leveraged, bail-bond agents are turning away from residential real estate in weak markets.

 

Where else will they get the collateral?

 

“I’ve got better luck winning the lottery than I would finding someone with a home up for collateral that actually has value to it,” says A.J. Pontillo, owner of A.J.’s Bail Bonds in Modesto, Calif., who is still smarting over a home he accepted as security in 2009.

 

You have to admit, he looks the part: A. J. Pontillo

 

Mr. Pontillo accepted a two-bedroom ranch home in Turlock, Calif., to cover a $100,000 bond. But the defendant, whom Mr. Pontillo says was accused of killing someone while driving drunk, skipped a court date last April –

 

Collateral is not the only difference between secured lending and consumer lending – so is the loss-mitigation model.  In collateralized finance, you repossess the collateral, then sell it.  Not so in consumer finance, where you chase the debtor:

 

– and hadn’t been heard from until a bounty hunter located him in Mexico earlier this month.

 

Looking tough is part of the uniform: Dog the Bounty Hunter, from A&E

 

The house has peeling paint and leaky plumbing, and is unlikely to cover the $40,000 bounty-hunter’s fee and other expenses, Mr. Pontillo says. “I don’t even know if it’s worth taking ownership,” he says, citing the cost of foreclosing on the house, fixing it up and then reselling it.

 

Now Mr. Pontillo needs either a realtor or a management agent – one unlikely to go to jail, that is.

 

Even if a home appears to have enough equity to cover the bail amount, agents have to worry about other liens on the property, such as a second mortgage or equity line of credit.  Such liens could dilute any possible financial claim by a bail bond agent.

 

In secured lending, one must run the title or otherwise assure that one’s mortgage has priority.  I presume Mr. Pontillo did this.

 

The problems are having a ripple effect across the criminal-justice system. Bail agents and criminal-defense attorneys are offering more payment plans to those who can’t afford their fees up front –

 

Extending credit will put the bail bondsmen into the real-estate lending business whether they like it or not.

 

You may walk, but only if your money stays behind

 

– and some bail agents say their incomes are dropping.

 

Seems likely – as credit tightens, collateral shrinks, so there will be less bail business.  [Or it may become a seamier business, where bail bondsman can impose additional fees and even surrender their clients back to jail. – Ed.]

 

As the accused spend more time in jail, some worry that could contribute to jail overcrowding.

 

It probably could.

 

“Are people sitting in jail longer? Absolutely. That leads to a problem for the judges of jail overcrowding,” says Richard Caretti, a circuit-court judge in Macomb County, Mich., near Detroit. “There are so few homes that have equity anymore. It’s a very tragic situation.”

 

It may be tragic but the judge’s sympathies are limited

 

Roughly 60% of those accused of felonies are released from jail before the case ends, according to the Department of Justice. Of those released, 42% use bail-bond services.

 

If I understand the Journal’s arithmetic, roughly 25% of all felony defendants get out on bail, and most of those probably pledge home assets as collateral.

 

Types of pretrial release among felony defendants  

 

Bail agents are rethinking that approach, and some are asking relatives of defendants to chip in money.

 

Though we no longer have debtor’s prison, prison is a debtor’s place, since the person incarcerated cannot earn money.  To be bailed out, one needs pre-charge assets … or trusting family.

 

In Mr. Romero’s case, seven different family members and friends co-signed for his bail.

 

That is a tremendous tribute to the power of family.

 

Aimed at the family, not the accused

 

Other agents are starting to operate more like pawnbrokers, requiring clients to surrender jewelry, laptop computers, cars and boats to secure the loan.

 

George Zouvelos, a bail agent in New York City who is president of the state’s bail-bond trade group [And, by the way, a controversial figure himself – Ed.], said he is assigning more liens on bank accounts, stock and bond holdings and fine paintings. “It’s a remedy to the housing issue,” he says. “It’s thinking outside of the box.”

 

Thinking outside the jail?

 

Actually, thinking outside the home.

 

We’re in the jailhouse now

We’re in the jailhouse now

I told that judge right to his face

We didn’t like to see this place

We’re in the jailhouse now.

 

Mr. Zouvelos at his sentencing for misdemeanor charges of possessing an unloaded shotgun and knife,

“and attempting to pass the weapons to someone else while the police were arresting him in his office.”