Audit Notes: Seattle paywall, private equity taxes, mortgage security fraud

The Seattle Times will charge online readers beginning next month

The Seattle Times is the latest paper to join the paywall movement. It looks like it’s basically copying The New York Times’s digital subscription model, which is the industry standard. One difference: At $207 a year for a digital-only subscription, it will actually cost more than an NYT subscription, although The Seattle Times will include access to tablets and smartphone apps, which cost more at the NYT.

It looks like The Seattle Times isn’t aiming to get a big number of all-digital subscribers. It will actually be considerably cheaper to subscribe to the Sunday paper, which gets you digital access for free, than to go digital-only. Expect the paper to get a small boost in Sunday circulation.

Here’s Editor David Boardman on the reasoning:

Since its launch in 1996, access to has been free. We have charged our readers only for distribution of the printed newspaper, and at a price that only partially covered the costs of the ink, paper, trucks and carriers.

The expenses of the newsroom — reporters, editors, photographers, columnists, graphic artists, page designers, researchers, bloggers, digital producers — and of all of the supporting departments necessary to operate this place (Finance, Human Resources, Information Technology, etc.), were covered by advertising revenue.

The math no longer adds up. We need to evolve in the way we do business, just as we have in the way we deliver our content to you.

— The New York Post’s Josh Kosman reports that the private-equity industry is gearing up its lobbyists to fight tax changes that would drain their profitability.

The tax code perversely incentivizes PE firms to load up companies with debt because they can deduct interest payments.

PE firms, which own companies employing 1 out of 10 Americans, have sidestepped about $127 billion in US taxes since 2000 via this deduction.

“I basically believe [the tax break] will be affected in tax reform,” a well-placed DC source who works for the PE industry said.

Interest deductibility may end for junk bonds and mezzanine loans, although lobbyists might persuade legislators to keep the exemption for bank loans, the source added.

I’ll believe it when I see it.

The Wall Street Journal Nick Timiraos flags research looking at how often Wall Street misrepresented what was in the mortgage securities it was selling.

In the sample of loans reviewed by the authors, more than 6% of mortgages that were reported for owner-occupants were actually given to borrowers with a different residence. Those loans had a default rate that is 60% higher relative to the default rate for owner occupants over that period…

The study found that between 7% and 13.6% of loans that stated a junior lien wasn’t present actually had a second lien. Those loans resulted in default rates of around 70% higher relative to the average default rate of loans without those second liens. Those misrepresented loans accounted for a disproportionately high share of defaults—around 15% of all defaults, compared to 10% overall.

And this is just a sliver of overall fraud, which also involved things like false income levels, inflated appraisals, and creating products intended to fail without telling buyers. Blame the borrowers isn’t going to work here:

Isn’t it possible that all of the misrepresentation took place at the borrower level—that is, either the borrower or the loan officer lied? That certainly happened to some extent, especially when it came to the borrower’s occupancy status. But they conclude this explanation is only part of the story because while banks might not have been able to ferret out misrepresentation at the closing table, they should have been aware of second-lien mortgages, because that misreporting happens “later in the supply chain,” the paper says. As a result, the lender likely had to be aware of at least some of these loan-classification abuses.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,