Since 2000, law firm PEPP (profits per equity partner) have increased on average 11% for Amlaw 100 firms and 8% for Amlaw 200 firms.  Some observers fear that, like other markets that have sustained growth periods at or near double digits in the past 10 years, the law firm partner profit "bubble" may soon burst as well.

Looking at Amlaw 200 data, PEPP increased by 2% in 2001.  In 2002, the increase was 7%.  2003 saw an increase of 11%, 8% in 2004 and 2005, and 10% in 2006.

This increase doesn't only apply to Amlaw 200 firms.  Looking at the differences from 2005 and 2006 for the top respondent firms in the Law Firm Economic Survey  by Juris Inc. and LexisNexis, respectively (the only two years available), firm PEPP increased 11%.  It is likely that most firms in the mid-market and small market increased incomes by respectable if not similar percentages over the same period.

What can you do to prepare for a stunt in the growth (or decline) of PEPP?  Bruce MacEwen posted an article May 5th  on his blog Adam Smith Esq., titled A "Bubble" in PPP? that looks at some short term ideas to help "mitigate the downward trend" and predicts a change in the las firm business model over the long term:

Short term ideas:

• Redeploy lawyers in troubled practice areas to healthier ones;
• Use the opportunity of "shared pain" with your key clients to get closer to them;
• Adroitly stand by while the normal waves of attrition take their toll;
• Build or at least safeguard capacity in selected practice areas that you anticipate will emerge strongly from the downturn;
• And always, always, keep a sharp eye on costs–although, truth be told, you don't have much material flexibility here. You're not moving your offices to Brooklyn and you're not paying less than market for partners and associates.

Long term predictions:

• the billable hour, lamented by many but eliminated by few, will eventually replaced with a more "value-based" model, though MacEwen stresses that he is not "holding [his] breath" on this;
• the traditional associate/partner model changes to include more non-equity partners and more contract attorneys;
• at least fundamentally, "the core processes by which law firms manage cases and deals must and will change" (ie, more project management, more team philosophy centered around practice groups to become more efficient).

Ultimately, MacEwen believes that due to increased demand (at least for Amlaw 100 firms), finding work won't be the problem.  However, he sees the traditional model as being unsustainable based on the limits placed on things such as productivity (>2,400 hours?), rates (>$1,000 per hour?)and realization (>100%?).  Because of this, if PEPP does suffer a downturn for an extended period of time, the long predicted changes to law firm dynamics may happen.

If this occurs in large law firms, it is incumbent on smaller firms to adapt quickly.  The predictions above are all point towards efficiency that allow firm profits to increase through efficiency rather than increased rates and worked hours.  Much has bee written about the "unmanageability of law firms".  Despite this, firms have continued to make exceptional profits - due in no small part to their enviable margins.  With good management, law firms can see profits that far exceed anything that firms receive currently.   And if partner profits start decreasing, your firm will be in crisis -  just as it is not a good idea to go to the grocery store on an empty stomach, it isn't a good time to contemplate an overhaul in processes during a crisis.

Much of the allure of smaller firms is quality service at a lower price.  Some large firm partners charge rates in excess of $1,000 per hour.  If large firms realize they can offer similar services at lower prices and still increase profits, smaller firms can be squeezed out of the marketplace.

Think Walmart.  As Walmart entered the scene, small businesses were unable to compete based on their lack of purchase power.  Walmart could offer more product selection at a lower price.  Home Depot and Lowes did the same to small hardware stores.  The small shops that survived did so by using their secret weapon - customer service and personal engagement.  Still, you won't find many of these shops who don't struggle on a monthly basis and have to watch as their clients often come to them for advice, then go to Home Depot to buy the big-ticket items.

For small and mid-size firms to compete in this changed environment, they will have to embrace workflow efficiencies that meet or exceed that of the larger firms - and use their "secret weapons" of personal engagement with clients and responsiveness.  However, without the fundamentals of an efficient business in place, your firm will suffer under the weight of your processes.  

There will always be individual clients available, but more dependable sources of income often come from business clients and their leaders.  These clients are already demanding more cost certainty.  If larger firms are able to provide this value to business clients first at a price that isn't so different than yours, your firm may be in trouble.

The time to act is now.

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Goals-based strategic planning takes a different tact than a "basic" strategic plan in that there is a singular focus by which the firm sets goals.  Focusing on financial goals is more manageable and attainable than the comprehensive strategic plan, but requires attention and accountability nonetheless.  Aspects of goals-based planning include:

1. Identifying key performance indicators that affect profitability
2. Developing goals for each indicator
3. Develop a budget based on the goals
4. Forecast earnings based on the budget
5. Measure and adjust

Identifying key performance indicators that affect profitability  - The key drivers to profit include leverage, rate, realization, productivity, margin and cash flow.  Firms may also want to include other indirect drivers such as client development (relationship building), "firm citizenship", etc. that may not have a direct impact on profitability, but are part of the core values that the firm holds.

Developing goals for each indicator - goals are particular to each fee earner but in total should reflect the financial targets for the equity partners.  Each goal should reflect the capabilities of the fee earner and the realities of the market.  For example, productivity targets may reasonably be set to 1,800 hours per year but setting the hourly billing rate at $350 may be unreasonable for a second year associate who works exclusively in insurance defense.  Set goals that are attainable.

Develop a budget based on the goals - Budgeting simply states your goals in a measurable way.  Fee earner budgets measure your productivity; client budgets measure your efficiency; expense budgets measure your spending.

Forecast earnings based on the budget - Forecasting models your budgets so that you can predict the results.  It isn't enough to just state goals. Forecasting allows you to see what the bottom line will be if you meet your goals.  If the bottom line isn't what you wanted, adjust the budgets until the forecast is agreeable.  Most businesses forecast annually with quarterly reviews.  During the quarterly review, the forecast can be adjusted based on the actuals.  If business is thriving, you can increase your forecast - if business is down, you can reduce the expectation set in your annual forecast.

Measure and adjust - like anything else you implement in the firm, you must measure performance and be willing to adjust if needed.

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

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• Law Firm Business Model Is A Must Tool for the Managing Partner
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• Exception Measures

The Free Management Library has some good information related to developing a strategic plan.  The site lays out several models that can be implemented for both profit and non-profit businesses.   The focus of this post is the "Basic" strategic plan.  This is also the one that most firms use when developing a strategic plan.  The process includes:

• Identifying your core purpose or "mission statement"
• Determining the goals that align with that purpose
• Determine the methods you will use to reach those goals
• Create action plans to implement these methods
• Measure, adjust and modify as needed.

Identifying your core purpose or "mission statement"  - this is the part that starts and sometimes ends the process.  Firms can easily get bogged down in determining the language for the firm's "mission".  If you look around at other's mission statements, you can find that they pretty much say the same thing - client-driven, quality, service, honesty, integrity, seeking justice, etc.  Be careful how you draft your mission statement - you will be judged by the words you choose; by your clients, your employees and your competitors.  The mission statement is the "big picture" so it needs to encompass everything you want to accomplish with the strategic plan.  Answer these 4 "whats" (adapted from The Lawyer's Guide To Strategic Planning by Thomas C. Grella and Michael L. Hudkins) and compress it into a single statement:

1. What areas of practice are our focus?
2. What is our goal in representing clients?
3. What market segment do we serve?
4. What are our core values?

Determining the goals that align with that purpose  - the goals are the metrics against which you will measure success.  Most people think of setting long-term goals.  I think for smaller firms, you should pick short-term goals with long-term objectives.  This is especially true when looking at financial goals, but with any change you have to set goals that are attainable in the short term.  Since strategic plans should be reviewed annually, you can set new goals next year.  It is more important that they are aligned with your core purpose than comprehensive.

Determine the methods you will use to reach those goals - the methods used to reach your goals require a review of all your processes.  Processes that are inhibiting your ability to reach your goals need to be eliminated.  While you are at it, those processes that are inefficient should be streamlined.  If you do not have a clear organizational chart, this would be a good time to develop one. 

Create action plans to implement these methods - who are we kidding here?  Attorneys creating action plans?  It isn't hard to see why firms get lost in the process.  However, you have to set benchmarks to measure success or failure.  The action plan is the blueprint for success that you follow based on the processes set up to reach the goals that align with your core values.  One idea for an action plan (again from The Free Management Library) requires the following to be addressed:

1. The goals to be accomplished;
2. How those results will be achieved
3. Who is responsible for achieving the results
4. When will the results be achieved (timeline)
5. What is the status of the goal (with an as of date)

Considering that action plans will have a short-term negative impact on productivity, many firms will not want to do this.  Understand the purpose and create your own method of accountability.  Some consultants do not promote action plans, but promote organizational focus to implement the plan.  Additional staff are needed and focus placed on them to ensure that processes are in place and functioning.  If it works, stick with it.  If it falters, you need to implement things that work.  How will you know if it falters?  Through measuring performance.

Measure, adjust and modify as needed - measurement improves performance.  In this case, measurement will hold people and processes accountable so that you can modify the processes and mentor the people (to the extent you can).  The largest issue I have found in firms that enact change isn't necessarily the processes - people eventually get used to processes.  It is the accountability.  It is imperative that there is buy-in by the principals or else plans can easily falter and a large investment in time and money is wasted.  If the firm is even-handed and consistent in its application of the plan, positive results will ensue. 

 

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• The One-Person Planner Approach for the Law Firm
• Strategic Planning Will Not Predict the Future, But It Will Prepare the Law Firm for It
• Six Big Picture Trends for Law Firms
• RULES: Another Path to Law Firm Success

When some talk of strategic planning, they are talking about retreats and consultants, about mission statements and long term goal setting.  Strategic planning can be all of this - however, it doesn't necessarily have to be a complex document that takes weeks or months to develop.

In a more simpler form, strategic planning consists of reviewing the current environment, setting goals to improve it, and implementing them, measuring performance along the way.  How you get from "review" to "do" is the focus of several posts this week.

 There are several different "models" of strategic plans.  Some listed on The Free Management Library include:

• "Basic" Strategic Plan - this is the plan typically implemented in firms that invest in developing a strategic plan;
• Goal-Based Model - this model is more focused on goal setting and performance metrics relating to meeting the goals;
• Alignment Model - this model is targeted to driving the organization to align itself with the firm's mission;
• Scenario Model - this model uses scenarios to help identify strategic issues and goals;
• "Organic" Model - this model focuses on embracing the shared values and evolving the plan through the continual dialogue that will hopefully eventually increase the values that are shared. 

74% of the respondents to the 2007 Law Firm Economic Survey from LexisNexis stated they did not have a written strategic plan.  However, 89% of those who did plan said that there was a correlation between their plan and income.  What is your firm's plan?

For a look at reasons why strategic planning has been a problem for law firms to implement, look at an earlier post on the subject:  Law Firms With Strategic Plans More Profitable.

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• Survey Targets Business Development In Law Firms
• Law Firm Challenge Number 1: Get a Plan!
• For Long Term Increases To Income, Partners Must Delegate Work
• The End of Generally Accepted Accounting Principles?

I received an email earlier this week from a reader who corrected an error I made when discussing the effects of inflation within the post How Law Firms Can Increase Income By $100k Per Partner In 1 Year.  Rather than re-working the example in the original post(where few would notice it), I decided to dedicate a post to the effects of inflation on your bottom line and clarify the point, which was not in error.  Considering the overwhelming negativity flowing through the minds of many regarding our current economy, a discussion on inflation's affect on profitability appears ripe anyway.

During the 1990's inflation increased an average of 3% per year.  In fact, many of us have become accustomed to using the standard of 3% when adjusting any cost by the rate of inflation.  From 2000-2006, inflation was even a little better, increasing on average of only 2.85% per year. 

 

Source:  www.inflationdata.com

In 2007, the average rate of inflation was still only 2.85%.  However, in the last 2 months of 2007, a trend began that is continuing this year.  From November, 2007 until January, 2008, inflation has exceeded 4%.  On March 14, the February inflation percentage will be released.  It will be interesting to see if this trend continues [MARCH 14 UPDATE:  Core inflation was unchanged in February - news that, while perhaps temporary, opens the door to another interest rate cut by the Federal Reserve.].  Regardless, January's inflation was highest in the month of January since 1991.

 

Source:  www.inflationdata.com

Inflation has actually has been moving up since 2000, except for an interruption after the impact of Hurricane Katrina caused inflation to first spike just after the storm, then drop to under 2% in late 2006.  It wasn't until late 2007 that rates returned to the 6 year trend, according to the below chart.

 

Source:  www.inflationdata.com

Whether inflation is going to stay at plus 4% in 2008 remains to be seen, but let's just consider the effect of inflation based on the average from 2000-2007 (2.85%).   In the following example, annual revenues are $1 million (for simplicity).  To determine the effect of inflation on your bottom line, the scenario I am using utilizes fixed margin percentages of 10%, 11%, 15%, 20%, 30%, 40% and 50%.  (Using these percentages alone make business owners of other industries indignant, as many can't imagine pulling margins of 50% - though the best performing law firms in the 2007 Law Firm Economic Survey were doing just that)  As well as factoring inflation, I also factor in a 6.5% increase in revenue (based on predicted rate increases from firms in the 2007 Survey).  Will this offset inflation?

Not hardly.  In fact, at low margins, inflation is deadly.  If margin is 10%, even with a rate increase of 6.5%, income purchase power is reduced by 22%.  Even at 15% margin, your purchase power is reduced 13%.  It is not hard to see how small businesses with low margins struggle to survive even moderate inflation.

With margins up to 40%, you are still losing money when revenue increases 6.5% and inflation is as low as 2.85%.    However, at least when margins are 40% you are close to offsetting inflation - so long as revenue increases more than double the rate of inflation.

The above model takes into consideration a rise of expenses that includes both inflation and the revenue increase.  The assumption is, as Parkinson's Second Law states, that "expenses rise to meet income".  When you increase revenue, it is likely due to an investment, whether that investment is additional staff, timekeepers, technology, pay increases, etc.  The numbers above change if you only apply inflation to expenses, but that would assume that you are not investing in the above to increase revenue.  One way to accomplish increased revenue without  additional cost is through increasing productivity, at least in the short term (for those who increase productivity will soon seek financial reward).

In the above, you can see the drastic difference taking "revenue cost" out of the equation.  If you can increase revenue without adding cost, inflation is suddenly no longer a threat - all you must do is keep up with the rate of inflation and inflation is abated.  In the above, you actually see a higher percentage increase with lower margin.  In any event, income across the board goes up.  The above, however, is accurate only in the short-term, as costs inevitably increase with revenue.

What can be concluded from this?

• Rate increases must be much higher than the rate of inflation to offset its effects (ie, rate alone isn't a path to increasing income);
• The higher your margin, the less inflation affects income;
• Higher productivity with higher rates can substantially increase income in the short term and minimize its effects in the long run.

For subscribers of the blog, I have attached a spreadsheet with both formulas for you to use to plug in your own numbers and forecast how inflation will affect your profits in both the short run (if you budget for higher revenue without additional cost - such as increasing productivity) and the long run.  To download, click here.  If you haven't already subscribed, registration is free.  Thanks to Joe Dwyer for his time and thoughts.

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• The Case Against Income Partners
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 David Maister, management consultant and author of several books, has made an offer on his website to give a free copy of his book, Strategy and the Fat Smoker, to a senior executive or managing partner of your firm.   Maister in 2006 declared that law firms are unmanageable - could his "Give a Copy to Management" campaign be a sign that he has regained some hope?

 

In larger firms, at least, there are strong indicators of more management - the number one indicator being skyrocketing per partner income.  Law firm consultants know that the service industry model is enviable.  There are no fluctuations in price due to factors beyond their control (such as gas prices).  The main cost to the law firm is also a source of its revenue.

 

The main obstacles to improvement in management are the firm owners who don't want to follow the key drivers that affect income (usually due to entrenched "firm culture" no one is able to alter).  In any other company this would be the fatal flaw that calls in the Grim Bankruptcy Trustee.  In law firms, the margins are typically good enough to deceptively cover the lack of attention to these drivers until a preventable event occurs that causes a firm to split or fail.

 

However, many are predicting change in the fortunes of law firms.  Interest rates are above 4%.  Firms who otherwise wouldn't necessarily see a difference in their bottom line by not measuring performance may soon see falling incomes and may not know about it until it becomes a crisis.  The signs are everywhere and many firms are taking note.   It is to these firms that Maister's book is so important a read.  Tom Collins has written about Maister's book in the October 25th, 2007 post The Strategy Problem in Law Firms. 

 

You can take advantage of this offer by clicking here.  Do it quickly.  The offer is only good for the first 100 eligible senior executives or firm managing partners.

 

Morepartnerincome.com is sponsored by Juris®.  For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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Although the housing market has grabbed headlines recently as the credit issues continue to unravel, the indicators have been present for several years.  The businesses who planned for this are now in a better position to adjust and prosper while other businesses close their doors.

Law firms aren't insulated to market downturns. The New York firm Thacher Proffitt & Wood "informed around 50 associates that their futures at the firm were uncertain because of the collapse of the market for mortgage-backed securities, an area where the firm had had a leading practice." New York Lawyer, 11/28/2007.  CitiBank and Hildebrandt released a Client Advisory predicting the "perfect storm" of indicators hurting the legal industry.

It doesn't have to be this way. The firm can retain talent even when the marketplace shifts by planning not just for economic good times but for bad times as well. How?

Retain Earnings
Rather than distribute every dollar of profit, project into the future and if indicators suggest that there may be a drop in business in a particular practice area, allocate additional funds to maintain your marketing budget and talent retention.

Prepare for the upswing
Have associates hit the road  with partners to build and maintain relationships in the industry. If your client survives the poor economy it will come back stronger. Cement those relationships while mentoring associates so that when the market comes back, your firm has already done the legwork to expand the business.

Transfer Knowledge
Forms are gold, especially in document-driven industries making up transactional practices. Have associates review all firm forms against available case law and take the opportunity to build a solid foundation of accurate and up-to-date forms.  Offer an incentive to create "products" representing reproducible work.

Help with the overflow
Just because one industry is hurting that doesn’t mean other areas of the firm aren’t thriving. Give associates an opportunity to absorb work from the more active areas of law.  In fact, a firm recently did this when Dechert, LLP, initially layed off 13 associates, then changed its mind and re-assigned them to other practice areas.

Some associates won't have the sufficient motivation to change. That is fine. Keep the ones who do.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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"Best Of More Partner Income" highlights some of the best posts over the three years of its existence.  This article was originally posted on August 14, 2006 and is titled Strategic Planning Will Not Predict the Future, But It Will Prepare the Law Firm for It:

 

If you don’t believe in strategic planning, you must read Rob Millard’s post Creating Prepared Minds. His post includes an excerpt from an article by McKinsey & Co.’s Eric Beinhocker titled Creating Strategy in an Unknowable Universe.

Breinhocker gets it right. If you think strategic planning is about predicting the future, you are dead wrong. If that is why you are not doing it, you need to revisit the issue. Assumptions (predictions) are inaccurate. If you get one right, it is just the luck of the draw. The first rule of the planning process is that you must plan to change the plan. As the future gets closer, you continually change your expectations and reactions to it until you arrive on target.

Planning gets the entire law firm team playing from the same play book. It prepares the team for the future and capitalizes on its opportunities. Rob’s post is a must-read that may inspire you to read Beinhocker’s entire article.

Chance does favor the prepared mind. Top performing firms do it. If you want a good reason to start, consider this reason: more than an eight fold difference in per-partner income.  [The 2006 Law Firm Economic Survey] . . . discloses that the top performing 25 percent of firms earn more than eight times the per-partner income of the bottom 25 percent. That seems to be a good enough reason to start.

Three important rules for successful planning include:

• The planning plan must be to change the plan. Strategies are temporary targets based on inaccurate assumptions and estimated capabilities.
• The planning document should consist of words and phrases to facilitate frequent updating.
• The structure is a critical part of the process.

The structure for the strategic portion of the planning process that I have successfully used includes nine main areas to be addressed by the planning team in the order listed. The nine subject areas are:

1. Nature of the law firm (or activity, e.g., practice area or department)

2. Environment in which firm operates

3. Opportunities/Capabilities (SWOT)

4. Assumptions about the future

5. Objectives–Mission/Strategic Thrust

6. Policies/Procedures (changes or new ones needed)

7. Strategies–How we are gong to achieve objectives

8. Priorities and schedules for programs, new resources required, measurements

9. Organization and delegation

For more step-by-step suggestions, reread the earlier post The Structure to Structured Planning. I also suggest a reread of Consensus Building for a discussion of the role of the structured planning process in building a consensus, i.e., preparing the mind to deal with an uncertain future in pursuit of a common vision. 

Morepartnerincome.com is sponsored by Juris®.  For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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Planning is an oft-referenced theme on this blog.  Plan for increasing wealth, plan for economic down cycles, plan for disasters.  What about during interruptions such as the recent blackberry outage?

 

There are many things that can cause business interruptions.  Planning for them will mitigate the consequences those interruptions have on your firm's operations.  Not planning for them will cost you money.

 

What are some things you can do to prepare?  There are companies that make a living selling plans to businesses, but basic guidelines include:

• Business Impact Analysis:  Determine the effect an outage would have on the  firm's most crucial systems and processes. More or less identifying the important processes subject to interruption and how that interruption will affect business.  In a law firm, this includes (but is not limited to) telephone systems, computers, staff, software systems.  
• Plan what you will do if business interruption takes place:  This, of course, is the hard part.  Planning means taking the time to think of ways around the interruption - and gain approval for the procedure.  For example, if your office is unavailable, where are critical staff?  They need to have a place to meet to put in effect the plan.  Remote communication is easier now than it's ever been.  Cell phones help but what about email?  If your email servers go down, you will need a backup plan to send and receive communications.  There are services such as Mimecast Unified Email Messaging that can provide a seamless transition that clients won't notice - making it appear as if there were no interruption at all - so long as you have access to high speed internet or have a data-enabled mobile device.  In the case of an interruption of internet access, there needs to be a secondary plan to know where your people are.
• Always have good, redundant, and off-site backups available:  All the benefits of technology are in vain in a disaster situation if you have no backups.  It has been reported that 25% to 30% of backups don't save properly.  When was the last time your office checked to make sure the backups were working?   Services such as LexisNexis Data Backup and Protection Services provide continuous automatic off-site storage of your data.
• Run a drill or two to test the processes: It is paradoxical to interrupt the business day to test processes geared to mitigate interruptions in the business day.  But it has to be done.  Otherwise you may not find the flaws in the plan until you put the plan in action - not the time you want to find out that you left out an important facet.
• Review the plan annually:  Don't just dust off the Y2K disaster readiness plan and change the cover page.  Times change, technologies change, and needs change.  Make sure you are up to date on all your systems and their effect on your business.

A sample business continuity and disaster preparedness plan, courtesy of ready.gov, can be downloaded by clicking here.

 

Morepartnerincome.com is sponsored by Juris®.  For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

 

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Alan Reynolds of the Cato institute claims that misinformation from the media related to the subprime mortgage market has been propagated in part by the Center for Responsible Lending (CRL). Further, it is alleged that a crafty investor is channeling funds to the CRL and is profiting from the alarmism through the shorting of mortgage-backed securities. Such are the implications in an entry by Chris Edwards on the Cato @ Liberty blog:

 

Alan notes that there is a lot of misinformation out in the media about mortgages, much of it coming from the Center for Responsible Lending which, in turn, received a lot of cash from John Paulson who just made $3-4 billion by shorting mortgage-backed securities during the panic and hype about “subprime.”

 

Nothing like good conspiracies.

 

A quick look at the Center for Responsible Lending's website confirms at least the alarmism. The headline Sunday night read The Subprime Disaster Gets Even Worse. There is a call for Congressional action to "stop foreclosures and prevent more reckless lending". They predict millions will be losing their homes due to the real estate market crash. There is little question that this interest group is at the very least positioning itself to take advantage of the perceived crisis.

 

So what are the facts? Reynolds notes the following:

• Most foreclosures are prime, not subprime.
• Half of subprime mortgages are fixed, not ARMs.
• The vast majority of recent subprime loans were for refinancing, not buying. As house appraisals went up, some just borrowed all the phantom equity and spent it.
• About 96% of all mortgages are paid on time. Most of the rest are late, but not in default.
• The main reason for default is that home prices fell in some areas, leaving more owed on the mortgage than the house is worth.
• Serious delinquency (2-3 months late in payments) is much more common than foreclosure, partly because deals are being renegotiated. The media often confuse numbers of late payers with numbers of actual defaults.
• Most foreclosures of ARMs happened before the rate adjusted, not after. Often within one year. This was often due to borrower fraud — lying about income and assets. When the house or condo could not be quickly flipped at a profit, those with zero down just stopped paying.
• Very few subprime borrowers qualified for the lowest teaser rates — most paid about 7% or so from the start, so far as [he] can tell.
• The adjustments on ARMs are limited, and with rates now falling some adjustment will be down rather than up.

The sentiment that all is not as bad as it seems is shared by Stefan Swanepoel, Chairman and CEO of RealtyU Group, Inc. He wrote an article on his site Retrends.com titled Mortgage Market Mayhem, sharing Reynolds view that the media is overstating the effects of the subprime market on the economy. Swanepoel believes most of the mortgage businesses that went bust shouldn't have been in the business in the first place (I recall similar reaction to the tech bust in 2000). He notes that there were several pre-warnings that the market was due for a correction and that the poorly run businesses failed to account for a shifting market. Though the real estate market was due for a correction, Swanepoel writes, "the market creates numerous opportunities to grow a business and gain market share. As with any trend or change, knowledge is the key and being pre-warned is also strategically smart." This applies not only to real estate markets but to legal markets as well.

I am of the opinion that it is too early to accurately predict the effects of the subprime market "correction". Volatility in markets make for bad prognosticating. Whether or not millions will be losing their homes this year is yet to be seen, but we should expect that there will be effects on the real estate market and home values in many areas. Whether we are in for several tough financial years or just a bump in the road, take the time to research and learn of emerging trends and warnings (from several sources, not just the main stream media) in industries that your firm services. Position your firm as ready to serve the needs of clients during changes in the political and economic landscape.

Not to the extent alleged of Paulson, of course.

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