The Meat of the Matter – In Re: Veal Analyzed, by Phil Querin,


“When a note is split from a deed of trust ‘the note becomes, as a practical matter, unsecured.’ *** Additionally, if the deed of trust was assigned without the note, then the assignee, ‘having no interest in the underlying debt or obligation, has a worthless piece of paper.’” [In re Veal – United States Bankruptcy Appellate Panel of the Ninth Circuit (June 10, 2011)]

Introduction. This case is significant for two reasons: First, it was heard and decided by a three-judge Bankruptcy Appellate Panel for the Ninth Circuit, which includes Oregon.  Second, it represents the next battleground in the continuing foreclosure wars between Big Banks and Bantam Borrowers: The effect of the Uniform Commercial Code (UCC”)on the transferability of the Promissory Note (or “Note”).

Remember, the Trust Deed follows the Note.  If a lender is the owner of a Trust Deed, but cannot produce the actual Note which it secures, the Trust Deed is useless, since the lender is unable to prove it is owed the debt.  Conversely, if the lender owns the Note, but not the Trust Deed, it cannot foreclose the secured property. [For a poetic perspective on the peripatetic lives of a Note and Trust Deed, connect here. – PCQ]

By now, most observers are aware that Oregon’s mandatory recording statute, ORS 86.735(1), has been a major impediment to lenders and servicers seeking trying to foreclose borrowers.  Two major Oregon cases, the first in federal bankruptcy court, In re McCoy, and the other, in federal district trial court, Hooker v. Bank of America, et. al, based their decisions to halt the banks’ foreclosures, squarely on the lenders’ failure to record all Trust Deed Assignments.  To date, however, scant mention has been made in these cases about ownership of the Promissory Note. [Presumably, this is because a clear violation of the Oregon’s recording statute is much easier to pitch to a judge, than having to explain the nuances – and there are many – of Articles 3 and 9 of the UCC.  – PCQ]

Now we have In re: Veal, which was an appeal from the bankruptcy trial judge’s order granting Wells Fargo relief from the automatic stay provisions under federal bankruptcy law.   Such a ruling meant that Wells Fargo would be permitted to foreclose the Veals’ property.  But since this case arose in Arizona – not Oregon – our statutory law requiring the recording of all Assignments as a prerequisite to foreclosure, did not apply.  Instead, the Veals’ lawyer relied upon the banks’ failure to establish that it had any right under the UCC to enforce the Promissory Note.

Legal Background. For reasons that do not need to be explained here, the Veals filed two contemporaneous appeals. One was against Wells Fargo Bank, which was acting as the Trustee for a REMIC, Option One Mortgage Loan Trust 2006–3, Asset–Backed Certificates Series 2006–3.  In the second appeal, the Veals challenged the bankruptcy court’s order overruling their objection to a proof of claim filed by Wells Fargo’s servicing agent, American Home Mortgage Servicing, Inc. (“AHMSI”).

Factual Background. In August 2006, the Veals executed a Promissory Note and Mortgage in favor of GSF Mortgage Corporation (“GSF”). On June 29, 2009, they filed a Chapter 13 bankruptcy.  On July 18, 2009, AHMSI filed a proof of claim, on behalf of Wells Fargo as its servicing agent.  AHMSI included with its proof of claim the following documents:

  • A copy of the Note, showing an indorsement[1] from GSF to “Option One”[2];
  • A copy of the GSF’s Mortgage with the Veals;
  • A copy of a recorded “Assignment of Mortgage” assigning the Mortgage from GSF to Option One; and,
  • A letter dated May 15, 2008, signed by Jordan D. Dorchuck as Executive Vice President and Chief Legal Officer of AHMSI, addressed to “To Whom it May Concern”, stating that AHMSI acquired Option One’s mortgage servicing business.[3]

The Veals argued that AHMSI [Wells’ servicing agent] lacked standing since neither AHMSI or Wells Fargo established that they were qualified holders of the Note under Arizona’s version of the UCC.

In a belated and last ditch effort to establish its standing, Wells Fargo filed a copy of another Assignment of Mortgage, dated after it had already filed for relief from bankruptcy stay.  This Assignment purported to transfer to Wells Fargo the Mortgage held by “Sand Canyon Corporation formerly known as Option One Mortgage Corporation”.

The 3-judge panel noted that neither of the assignments (the one from GSF to Option One and the other from Sand Canyon, Option One’s successor, to Wells) were authenticated – meaning that there were no supporting affidavits or other admissible evidence vouching for the authenticity of the documents.  In short, it again appears that none of the banks’ attorneys would swear that the copies were true and accurate reproductions of the original – or that they’d even seen the originals to compare them with.  With continuing reports of bogus and forged assignments, and robo-signed documents of questionable legal authority, it is not surprising that the bankruptcy panel viewed this so-called “evidence” with suspicion, and did not regard it as persuasive evidence.

  • As to the Assignment of Mortgage from GSF (the originating bank) to Option One, the panel noted that it purported to assign not only the Mortgage, but the Promissory Note as well.[4]
  • As to the Assignment of Mortgage from Sand Canyon [FKA Option One] to Wells Fargo[created after Wells Fargo’s motion for relied from stay], the panel said that the document did not contain language purporting to assign the Veals’ Promissory Note.  As a consequence[even had it been considered as evidence], it would not have provided any proof of the transfer of the Promissory Note to Wells Fargo. At most, it would only have been proof that the Mortgage had been assigned.

After considerable discussion about the principles of standing versus real party in interest, the 3-judge panel focused on the latter, generally defining it as a rule protecting a defendant from being sued multiple times for the same obligation by different parties.

Applicability of UCC Articles 3 and 9. The Veal opinion is well worth reading for a good discussion of the Uniform Commercial Code and its applicability to the transfer and enforcement of Promissory Notes.  The panel wrote that there are three ways to transfer Notes.  The most common method is for one to be the “holder” of the Note.  A person may be a “holder” if they:

  • Have possession of the Note and it has been made payable to them; or,
  • The Note is payable to the bearer [e.g. the note is left blank or payable to the “holder”.]
  • The third way to enforce the Note is by attaining the status of a “nonholder in possession of the [note] who has the rights of a holder.” To do so, “…the possessor of the note must demonstrate both the fact of the delivery and the purpose of the delivery of the note to the transferee in order to qualify as the “person entitled to enforce.”

The panel concluded that none of Wells Fargo’s exhibits showed that it, or its agent, had actual possession of the Note.  Thus, it could not establish that it was a holder of the Note, or a “person entitled to enforce” it. The judges noted that:

“In addition, even if admissible, the final purported assignment of the Mortgage was insufficient under Article 9 to support a conclusion that Wells Fargo holds any interest, ownership or otherwise, in the Note.  Put another way, without any evidence tending to show it was a “person entitled to enforce” the Note, or that it has an interest in the Note, Wells Fargo has shown no right to enforce the Mortgage securing the Note. Without these rights, Wells Fargo cannot make the threshold showing of a colorable claim to the Property that would give it prudential standing to seek stay relief or to qualify as a real party in interest.”

As for Wells’ servicer, AHMSI, the panel reviewed the record and found nothing to establish that AHMSI was its lawful servicing agent.  AHMSI had presented no evidence as to who possessed the original Note.  It also presented no evidence showing indorsement of the Note either in its favor or in favor of Wells Fargo.  Without establishing these elements, AHMSI could not establish that it was a “person entitled to enforce” the Note.

Quoting from the opinion:

“When debtors such as the Veals challenge an alleged servicer’s standing to file a proof of claim regarding a note governed by Article 3 of the UCC, that servicer must show it has an agency relationship with a “person entitled to enforce” the note that is the basis of the claim. If it does not, then the servicer has not shown that it has standing to file the proof of claim. ***”

Conclusion. Why is the Veal case important?  Let’s start with recent history: First, we know that during the securitization heydays of 2005 – 2007, record keeping and document retention were exceedingly lax.  Many in the lending and servicing industry seemed to think that somehow, MERS would reduce the paper chase.  However, MERS was not mandatory, and in any event, it captured at best, perhaps 60% of the lending industry.  Secondly, MERS tracked only Mortgages and Trust Deeds – not Promissory Notes.  So even if a lender can establish its ownership of the Trust Deed, that alone is not enough, without the Note, to permit the foreclosure.

As recent litigation has revealed, some large lenders, such as Countrywide, made a habit of holding on to their Promissory Notes, rather than transferring them into the REMIC trusts that were supposed to be holding them.  This cavalier attitude toward document delivery is now coming home to roost.  While it may not have been a huge issue when loans were being paid off, it did become a huge issue when loans fell into default.

So should the Big Banks make good on their threat to start filing judicial foreclosures in Oregon, defense attorneys will likely shift their sights away from the unrecorded Trust Deed Assignments[5], and focus instead on whether the lenders and servicers actually have the legal right to enforce the underlying Promissory Notes.

[1] The word “indorsement” is UCC-speak for “endorsement” – as in “endorsing a check” in order to cash it.

[2] Although not perhaps as apparent in the opinion as it could have been, there were not successive indorsements of the Veals’ Promissory Note, i.e. from the originating bank to the foreclosing bank. There was only one, i.e. from GSF to Option One.  There was no evidence that the Note, or the right to enforce it, had been transferred to Wells Fargo or AHMSI.  Ultimately, there was no legal entitlement under the UCC giving either Wells or its servicer, AHMSI, the ability to enforce that Note.  The principle here is that owning a borrower’s Trust Deed or Mortgage is insufficient without also owning, or have a right to enforce, the Promissory Note that it secures.

[3] Mr. Dorchuck did not appear to testify.  His letter, on its face, is clearly hearsay and inadmissible.  The failure to properly lay any foundation for the letter, or authenticate it “under penalty of perjury” is inexplicable – one that the bankruptcy panel criticized. This was not the only example of poor evidentiary protocol followed by the banks in this case.  However, this may not be the fault of the banks’ lawyers. It is entirely possible these were the documents they had to work with, and they declined to certify under “penalty of perjury” the authenticity of them. If that is the case, one wonders how long good attorneys will continue to work for bad banks?

[4] This is a drafting sleight of hand.  Mortgages and Trust Deeds are transferred by “assignment” from one entity to another. But Promissory Notes must be transferred under an entirely different set of rules – the UCC. Thus, to transfer both the Note and Mortgage by a simple “Assignment” document, is facially insufficient, by itself, to transfer ownership of – or a right to enforce – the Promissory Note.

[5] The successive recording requirement of ORS 86.735(1) only applies when the lender is seeking to foreclose non-judicially.  Judicial foreclosures do not contain that statutory requirement.  However, to judicially foreclose, lenders will still have to establish that they meet the standing and real party interest requirements of the law.  In short, they will have to deal head-on with the requirements of Articles 3 and 9 of the Uniform Commercial Code.  The Veal case is a good primer on these issues.

Phil Querin
Attorney at Law
121 SW Salmon Street, Suite 1100 Portland, OR 97204 
Tel: (503) 471- 1334

Bend’s economy is coming back to life, By Ben Jacklet, Oregon Business Magazine

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Shelly Hummel has been selling homes in Bend for more than 20 years, and she’s got the attitude to match: upbeat, confident, a dog-lover who took up skiing at age 4. She labors to keep things positive, but every so often her frustration slips free: “The banks just kept giving the builders money, without even looking at plans or doing drive-bys of the places they were selling. The market just exploded with new construction. Boom! Selling stuff off of floor plans. Unfortunately, selling them to people who had no business buying them. It was a perfect storm of stupidity.”

We are touring the wreckage of that storm in Hummel’s Cadillac Escalade, driving down Brookswood Boulevard into a former pine forest that now hosts a swath of housing developments with names like Copper Canyon and Quail Pine. “This was the boundary line until 2003,” says Hummel. “These roads dead-ended. That home sold for $350,000. Now it’s on the market for $175,000. Short sale.”

Hummel never intended to become a “certified distressed property expert” specializing in selling homes for less than is owed on their mortgages. But in Bend, she didn’t have much of a choice. No city in Oregon — or arguably, the nation — experienced a more dramatic reversal of fortunes during the Great Recession than Bend, the economic engine for Central Oregon. Home values got cut in half. Unemployment soared to over 16%. A once-promising aviation sector imploded. So did an overheated market for destination resorts. Brokers, builders and speculators once flush with cash woke up underwater and flailing. Banks renowned for their no-document, easy-money loans stopped lending. Layoffs led to notices of default; foreclosure brought bankruptcy.

How does a community recover from economic meltdown? That is the central question I am trying to answer about Bend. I start my inquiry at the offices of Economic Development for Central Oregon (EDCO), an organization formed to diversify the economy after the last major recession in the region, in the 1980s. My meeting is with executive director Roger Lee, marketing manager Ruth Lindley and business development manager Eric Strobel. I turn on my digital recorder and say, “I’d like to hear your take on how the recession impacted Bend’s economy.”

Silence. I read their expressions: Not this again.

It takes some time, but over the course of the interview they paint a sharp portrait of what went wrong and why. A local housing boom “fueled by speculation, not solid economics,” in Lee’s words, crashed. The local crash coincided with a national housing slump that devastated Bend’s major traded sector of building supplies. The final blow was the collapse of the local general aviation industry. Cessna shut down its local plant in April 2009. Epic Aircraft, the other major employer at the airport, went bankrupt.

“Aviation was our diversification away from construction and wood products,” says Strobel. “We had thousands of employees out at Bend Airport. It was the largest aviation cluster in the state… It just completely fell apart in six months.”

Read more: Bend’s economy is coming back to life – Oregon Business


Oregon economy climbs higher, by Suzanne Stevens, Portland Business Journal

Oregon‘s economy showed continued growth in February, led by employment services payrolls, strong U.S. consumer sentiment and an increase in the interest rate spread.

The University of Oregon Index of Economic Indicators rose 0.7 percent to 91.3 in February from January. The index has a benchmark of 100 set in 1997.

While unemployment claims edged up, they remain well below 2010 levels and overall labor market trends are strong. Employment services payrolls, largely temporary employment, were up 3.2 percent and non-farm payrolls were also up, adding about 9,800 new jobs last month. Since October, the Oregon economy has added about 5,900 jobs each month.

Other Oregon data reflected in the UO Index include:

Initial unemployment claims rose slightly to 8,551 in February, up from 8,487 in January.
Residential permits inched up to 629 from 627.
U.S. consumer confidence rose to 73.1 from 71.2.
New manufacturing orders for non-defense, non-aircraft capital goods dipped to 39,402 from 39,728.
The interest rate spread between for 10-year treasury bonds and the federal funds rate widened to 3.42 from 3.22, a signal of investor confidence in the U.S. economy.
The index has continued to climb since October 2010, when it was 88.9.

Read more: Oregon economy climbs higher | Portland Business Journal

Help Us Save The Housing Industry

Dear Reader,

 I wanted to make you aware of an important petition that is being circulated in support of a new plan to save the housing industry. It was developed by a mortgage industry insider and we, at the Originator Times, believe it’s the only current plan to restore faith in the housing market and create profitability within our industry once again.

If you are sick of getting calls from potential customers you can’t help because they are upside down on their mortgages; tired of loan programs that are here today and gone tomorrow; frustrated with volatile rates and increasing credit score requirements; and angered by plans that bail out the wealthy and powerful and do nothing to fix the real problem then join mortgage industry veteran Scott Messina and the Originator Times in making our voices heard in Washington.  

Now is the time to act!  Sign the petition to support Messina’s “Save the American Dream” plan – the only plan that solves the root of the housing problem and sets the wheels in motion for a 2009 refinance boom similar to 2003 levels. 

Click here to sign the petition, or visit to read about the complete plan, or scroll down to read a summary, then forward this e-mail to everyone you know in the industry.



Melissa Sike



Save the American Dream Plan


The banks on Wall Street got their bailout. Now, what about all of us in the housing industry and those who work on Main Street?   

Were still hurting because the big Wall Street bailout did nothing to address the root cause of the housing crisis.   We need a real solution instead of a band-aid.  The Save the American Dream plan is the correct solution and it isn’t being heard in Washington because the people on Main Street – whom would be helped – aren’t donating millions of dollars to a particular political campaign, and therefore, have no economic representation in Washington.  For two reasons, it’s our responsibility as mortgage industry professionals to speak for those that have no voice and make Washington listen to the plan that will save struggling homeowners …and ourselves.  It’s our responsibility because we were a part of the problem (along with many others, including borrowers) and because we are the ones that have the industry knowledge and expertise to really do what needs to be done.  We are in a unique position here to really solve this crisis.  Click here to join us in support of the Save the American Dream plan .

The Save the American Dream plan will empower those millions of Americans who because of foreclosure and financial chaos have been living out their worst nightmares and provide them with viable refinance options to wake up and restore their dream. 

By providing millions of Americans with a refinance option as an alternative to foreclosure, we’ll in turn create a refinance boom within the industry. 

The Save the American Dream plan will save Wall Street by lending Main Street a hand and will rescue the U.S. housing market in the process.

Betty Jung’s Blog: Market Update: Building Permits 2007 vs. 2008

And, here are some more numbers:

According to the Construction Monitor and the Home Builders Association of Metropolitan Portland, here is the 2008 Year-to-Date Building Permit activity by county.  It is at its lowest since 1991.

Many small builders haven’t built anything new in several months and in some cases more than a year.  If you read my recent post Market Update:  New Construction, you will see there is still a large inventory of new homes that builders need to unload.  Remodeling is also lagging.

In addition, many of the local builders here have filed for bankruptcy protection as I reported in my “Top 50 Builders in Oregon” post.  This weekend, I happened to notice another one of our larger local builders, whom I won’t name, is selling some of his lot inventory.  Is he in trouble or is he just making sure he won’t be? 

2008 Year-to-date Building Permit Activity by County








Single Family




Duplexes/Twin Homes




Other Residential Structures




Residential Remodels








Single Family




Duplexes/Twin Homes




Other Residential Structures




Residential Remodels








Single Family




Duplexes/Twin Homes




Other Residential Structures




Residential Remodels








Single Family




Duplexes/Twin Homes




Other Residential Structures




Residential Remodels




Source:  Construction Monitor ( and David Nielsen, Home Builders Association of Metropolitan Portland.

Copyright ©Betty Jung 2008.  All Rights Reserved.

Disclaimer: All information in this post is subject to change without notice. Subject matter is an opinion, is not guaranteed, may be time sensitive, and may be based on information collected from several sources which may or may not be reliable at the time of sourcing.  

(For more local and national real estate news, click on my monthly newsletter – JUNG’S JOURNAL – on my website
Betty Jung
RE/MAX equity group, inc.
503-495-5220 or

Portland Tribune: Mortgage losses mounting, Steve Law

More area homeowners at risk as foreclosure proceedings double


Uncle Sam is bailing out Wall Street wheeler-dealers who invested in home loans, but there’s no relief in sight for the homeowners on Main Street.

On Southeast Main east of 144th Avenue, stretching from outer Southeast Portland into Gresham, 14 homeowners have been hit with foreclosure filings in the past year, plus scores more in nearby blocks.

• Judy Myer pawned her wedding ring and stopped taking prescribed medicines in a futile bid to save her Southeast Main Street home of 18 years, after husband Mark Myer lost his job and his unemployment benefits expired.

• Judy’s son, Steve, who lives down the street, got socked with foreclosure after his 7-year-old daughter required heart surgery. Steve took out a second mortgage to cover the medical bills, then fell behind on house payments after suffering an on-the-job injury.

• Across the street from the Myers, Ron Zitzewitz just got a six-month notice to vacate his mother’s home – one month after she died. Zitzewitz, 51, isn’t old enough to assume his mother’s reversible mortgage, and can’t refinance the loan because he’s permanently disabled.

Portland is no real-estate basket case like Las Vegas or Phoenix. But the national foreclosure crisis that initially spared Portland has arrived here in a big way, bringing more human suffering and dampening housing prices.



Foreclosure forum

Oregon’s presumed next attorney general, John Kroger, along with state lawmakers and community leaders, will host a town hall for people facing foreclosure or who think they were victimized by deceptive lending practices.

The event, called There’s No Place Like Home, takes place 9 a.m. to 2 p.m. Saturday, Nov. 22, at Portland Community College’s Cascade campus, Moriarty Auditorium, at the corner of North Killingsworth Street and North Albina Avenue.



The number of Multnomah County residents in jeopardy of losing their homes has nearly doubled in the last year, based on the number immersed in foreclosure proceedings. Over the spring and summer, 300 Multnomah County homeowners a month got slapped with foreclosure notices – topping the peak levels reached in the last recession of 2001-02.

In August 2007, the Portland area had an enviable 332nd-highest foreclosure rating among the nation’s 383 metropolitan areas. But by August 2008, Portland jumped to 254th-highest, according to First American CoreLogic, which provides real estate data services.

“There’s a shakeout right now, and we’re failing on all cylinders,” said Portland real estate economist Jerry Johnson.

Portland took longer than most cities to emerge from the last recession and didn’t get as overbuilt as other markets, Johnson said.

But Portland home prices kept rising during the last recession, he noted. If banks and besieged homeowners try to dump too many discounted properties, he said, “you could swamp the market and kill the guys who are OK.”

Home prices are sliding in large swaths of the metro area, especially in overbuilt sectors such as Portland’s condo market and suburban Happy Valley. In early October, in the 97086 ZIP code that includes Happy Valley, there were 247 homeowners facing foreclosure on top of 95 homes seized by banks, according to VisionCore, a division of First American CoreLogic.

Short sales drive down prices

Many overburdened homeowners, anxious to avoid foreclosures that soil their credit ratings, are resorting to “short sales,” in which they sell quickly for less than their home loan if the lender agrees to accept the lower amount. Banks also are auctioning off seized homes to investors looking for sweet deals.

Dumping all those distressed properties on the market, sometimes at fire-sale prices, is depressing home values for neighboring residences.

In a half-block stretch of Liebe Street southeast of Holgate Boulevard and 118th Avenue, four homes went into foreclosure in recent months. Investor Mark Bordcosh snapped up one of them, a three-bedroom townhouse appraised at $217,000, and offered it in an auction, with a minimum bid of $137,500.

“I’m basically getting the house at a discount and I’m selling it at a discount,” he said.

All parts of the city are seeing some foreclosures, though they are less common on the west side and close-in east-side neighborhoods, according to VisionCore. Portland working-class neighborhoods, especially in North Portland and the outer east side, are getting more than their share, as residents lose jobs or get burned by escalating interest rates on subprime loans.

Main Street doesn’t necessarily have the highest proportion of foreclosures. But it is representative of the outer east side – meaning it is seeing plenty of angst and misery.

Adversity is magnified

Southeast Main east of 144th Avenue, dotted with modest one-story homes and towering firs, has long been known as an affordable place to buy a home. But it’s no longer affordable to many longtime residents.

Mark Myer, 57, who lost his computer tech job after his company was sold, doesn’t expect any of the $700 billion Wall Street bailout approved by Congress Oct. 3 will trickle down to his end of the food chain.

“The people that are stomping on the individuals are the ones that got bailed out,” Myer said. “If they share and start helping out some people, fine. History shows they’ll just turn around and stomp on us again.”

Myer landed part-time work, but said employers have been reluctant to hire him now that there’s a foreclosure on his record. That’s despite 22 years’ service in the Navy.

Judy Myer stopped taking medicines a year ago for her anxiety attacks, high blood pressure and cholesterol. After two heart attacks, two back surgeries and anxiety problems, she’s not in good shape to work outside the home.

“I don’t know what’s going to happen. It’s just scary,” she said. “We’ll never be able to go out and have dinner and a movie.”

Her son, Steve, an automotive technician, was denied workers’ compensation benefits after his 2006 on-the-job injury. The injury was deemed connected to a pre-existing condition. He qualified for short-term disability payments, but that only covered 60 percent of his salary. It wasn’t enough to make full mortgage payments and pay his $10,000 hospital bill.

When his home lender demanded full payments on his mortgage, Steve threw up his hands. “I pretty much said, ‘Come and get it, there’s nothing I can do.’ ” he said.

The lender backed down and offered him a payment plan, Steve said. He was able to save the house for now, but said he’s still tapped financially.

A few doors down from the Myers, Trinidad Monje’s former Main Street home sits vacant, months after going into foreclosure. Judy Myer said it’s been languishing on the market at least two years.

Down Main Street near 148th Avenue, Maxsim “Max” Lysack said he was forced into foreclosure after his roommate died. He wound up doing a short sale – selling the home for less than his mortgage – in a deal worked out with the lender.

“I buy it for $285,000, and I sell it for $250,000,” Lysack said.

Ron Zitzewitz has lived on Main Street off and on since childhood. He doesn’t earn much from disability payments and income from a knife-sharpening business, and moved in with his mother.

Under her reverse mortgage, the lender takes a greater stake in the home’s equity each month, in lieu of mortgage payments. Zitzewitz can’t qualify for a new loan to refinance the $160,000 his mother owed.

The house should be worth about $225,000, he said. But Zitzewitz doubts he can sell it for anything close to that because the market is so sour.

Zitzewitz got married a few months ago, but so far his wife has been unable to find work.

“We’re going to have to find somewhere else to live.” Crisis Hits Main Street as Employers Cut More Jobs

By Shobhana Chandra and Rich Miller

Oct. 3 (Bloomberg) — U.S. payrolls plunged in September, signaling the economy may be heading for its worst recession in at least a quarter century as the 13-month-old credit crisis on Wall Street finally hits home on Main Street.

Employers cut the most jobs in five years in September as cash-squeezed companies pulled back in an effort to bolster pinched profits. In its last employment report before Americans choose their next president, the Labor Department said the unemployment rate was 6.1 percent, a climb of 1.4 percentage points from a year before.

“If credit markets remain dysfunctional, the current recession could turn out to be as severe as any in the postwar period,” said former Federal Reserve governor Lyle Gramley, now senior economic adviser at the Stanford Group Co. in Washington.

The spreading crisis is also having reverberations on the campaign trail, as polls show anxious voters increasingly see Democrat Barack Obama as the candidate best placed to see the U.S. through its economic travails. The unemployment rate has only risen twice in the year leading up to elections since World War II, and in each case the incumbent party lost.

`This country can’t afford Senator McCain’s plan to give America four more years of the same policies that have devastated our middle class and our economy for the last eight,” Obama, 47, said in a statement.

McCain’s Reaction

Arizona Senator John McCain, 72, took the opportunity to paint his opponent as a tax-and-spend liberal, whose prescriptions would exacerbate the crisis.

“Unlike Senator Obama, I do not believe we will create one single American job by increasing taxes, going on a massive spending binge, and closing off markets,” McCain said in a statement. “Our nation cannot afford Senator Obama’s higher taxes.”

Job losses accelerated as the credit crisis deepened last month, forcing the failure or government takeovers of Lehman Brothers Holdings Inc., Fannie Mae, Freddie Mac and American International Group Inc.

The figures came hours before a scheduled vote in the House of Representatives on a $700 billion rescue plan for the U.S. financial industry pushed by Treasury Secretary Henry Paulson. The Senate approved the legislation two days ago after the House rejected an initial version of the bill Sept. 29.

Market Reaction

Stocks rose and Treasury securities fell on optimism the rescue plan would pass the House. The Standard & Poor’s 500 index rose 2.9 percent to 1,146.1 at 11:08 a.m. in New York. The yield on the benchmark 10-year note rose to 3.72 percent from 3.63 percent late yesterday.

Today’s report showed that hours worked — considered a good proxy for the state of the overall economy — matched the lowest level since records began in 1964. That indicates the likely current recession may be at least as severe as the 1981-82 slump, during which gross domestic product shrank by 2.7 percent.

Payrolls fell by 159,000 in September, the Labor Department said in Washington. Aside from a 9,000 gain in government payrolls, all major categories showed declines except education and healthcare.

“The really bad news here is that job losses are now widespread,” said Nariman Behravesh, chief economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm. “The problems in housing and manufacturing are now spreading everywhere. We are in a recession, there is no debate about that.”

Health Services

Even the vibrant health-services industry is showing signs of succumbing to the economy’s troubles. Health care employment rose 17,000, about half the average monthly gain for the prior 12 months.

Walgreen Co., the largest U.S. drugstore chain, reported Sept. 29 that its profits rose less than analysts estimated after it posted its smallest sales increase in a decade.

A private report today showed that services-industry growth remained stagnant in September. The Institute of Supply Management’s non-manufacturing index slipped to 50.2 from 50.6 the month before. Fifty is the dividing line between growth and expansion.

Total payrolls were forecast to drop 105,000 after declining by a previously estimated 84,000 in August, according to the median of 76 economists surveyed by Bloomberg News. The jobless rate was projected to remain at 6.1 percent.

Rate Forecasts

Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said the unemployment rate may eventually rise to more than 7 percent as the credit crunch takes its toll on the economy. If that happens, that would make the overall rise in unemployment the biggest since the early 1980’s.

Workers’ average hourly wages rose 3 cents, or 0.2 percent, to $18.17 from the prior month. Hourly earnings were 3.4 percent higher than September 2007. Economists surveyed by Bloomberg had forecast a 0.3 percent increase from August and a 3.6 percent gain for the 12-month period.

After today, the total decline in payrolls so far this year has reached 760,000. The economy created 1.1 million jobs in 2007.

Americans will go to the polls on Nov. 4 and the October jobs report is due Nov. 7.

`Angry’ Voters

“Voters are extremely angry, and they want someone to blame,” said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis.

Obama has opened up a lead over Republican rival John McCain in the aftermath of their first debate and amid growing concerns about the economy, according to a Pew Research Center survey taken Sept. 27 to Sept. 29. A mid-September poll from Washington- based Pew had shown the candidates were in a statistical tie.

Earlier in September, a Bloomberg/Los Angeles Times poll showed more respondents said Obama would do a better job handling the financial crisis than McCain, and almost half of the voters believed he had better ideas to strengthen the economy than his rival.

Factory payrolls fell 51,000 after decreasing 56,000 in August. Economists had forecast a drop of 57,000.

Today’s report also reflected the housing slump. Payrolls at builders declined 35,000 after falling 13,000. Financial firms decreased payrolls by 17,000, the most since November last year.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 82,000 workers after eliminating 16,000 in the previous month. Retail payrolls slid by 40,100 after a 25,400 drop.


In the past month, Hewlett-Packard Co., the world’s largest personal-computer maker, announced it will cut 24,600 jobs, and auto-parts maker Federal-Mogul Corp. said it would eliminate 4,000 positions globally.

Marriott International Inc., the world’s largest hotel chain, yesterday reported third-quarter profit fell 28 percent as U.S. companies and consumers cut back on travel.

Without action from Congress, “the resulting credit squeeze could threaten businesses,” Chief Financial Officer Arne Sorenson said on a conference call. There are “tens of thousands of jobs at stake in our company alone, and we are typical.”

Mounting job cuts will further limit consumer spending, which accounts for more than two-thirds of the economy. A Bloomberg survey in September predicted spending will be unchanged this quarter, the weakest performance since 1991.

The ISM on Oct. 1 said manufacturing shrank in September at the fastest pace since the last recession in 2001. The odds the central bank will lower its benchmark rate by a half percentage point, to 1.5 percent, were almost 100 percent today, up from 32 percent a week ago.

To contact the reporter on this story: Shobhana Chandra in Washington