Archive for February, 2009

HR 1106 is About Fairness (or “What About Bob?”)

Thursday, February 26th, 2009

Word out of Washington is that HR 1106 will be voted on next week.  Today’s debates and votes were procedural in nature.

Apparently, this gives more time for the highly-paid bank lobbyists to organize their “packs” and convince House Members that allowing Chapter 13 debtors to cram down the mortgage on their principal residences will bring their the world ever closer to financial ruin.  From The Huffington Post:

“We continue to be opposed to the bill and that hasn’t changed, but we do live in the real world, and we do understand that this is very likely to happen, and we owe it to our members to recognize that reality and to limit the damage as much as possible,” said Francis Creighton, a lobbyist for the Mortgage Bankers Association, which spent $4.2 million on lobbying last year. “We’re encouraged by the fact that the bill is moving to limit the damage of cram-down rather than make it worse.”

At the very least, you can see that my quip about them being “highly paid” was not altogether gratuitous.   But what is this about the “damage” of cram-down?  Give me a break.

Perhaps Mr. Creighton and his fellow highly paid lobbyists are not aware that cram-down is already happening in the bankruptcy system and so far, vast bread-lines have not formed because of it.  Indeed, if the facts justify it, I can propose a cram-down for anyone with the following: investment property; an owner occupied two or three family home; a family home that also has commercial space (such as a store front with living space above it – very popular in some towns on the Cape); a car (subject to certain limitations imposed by BAPCPA – which are not particularly relevant for this discussion); and a boat.  Actually, we can cram down any boat big or small provided the facts justify it.  I just cannot do it on people with single family residences.  Congress is trying to change that.

So why is the lending industry spending hoards and hoards of cash to stop it? Again, from The Huffington Post:

[T]he mortgage industry contends the measure will impose steep and unpredictable costs on its companies, which will be forced to pass them along to borrowers in the form of higher fees and interest rates. The industry spent millions last year on a successful lobbying effort to kill the bill….

Higher fees and interest rates? Perhaps they if spent less on lobbying, they would not need to charge higher fees and interest rates.  But putting my comedic skills aside for a moment….consider this illustration:

Bob and his wife live in West Roxbury.* He has worked as a State Employee for 15 years, and his wife took a job as a manager of a Circuit City after they had their third child, who is now 5.  His wife will soon be unemployed and will be trying to get back to work in retail which is (to put it mildly) struggling.  Bob is not sure he’s going to survive the the budget cuts his department is facing.  In 2004, they refinanced their home to pay bills and to get what they thought was a lower rate for a few years.  And it was…but for only two years, but they assumed (and in hindsight now see that they assumed incorrectly) that they could refinance their way out of it.  The house is now worth $250,000.  The mortgage totals $350,000.

If Bob lives in a single family home on a nice lot, he cannot currently cram down the mortgage in chapter 13.

If Bob lives in a two-family home, where he and his family reside in the larger of the two units and the second is rented out to tenants (who may, or may not be current on their rent), currently he can cram it down.

So this claim that “if bankruptcy judges can modify loans, the world and all you know and love will end as we know it” is really just fear-mongering.  Why do we know this?  Because cram downs are already allowed.  Just not for Bob and his family if he is living in a single family home.  The only question left: why the fear-mongering?

HR 1106 is not about cram downs – it’s about fairness in the bankruptcy system.  Please make sure your leaders know this.

*Fictional characters in a nonfictional town.  Any resemblence with actual people in West Roxbury (or anywhere else) is entirely coincidental…with that said though, if this is you, we should talk more about your options.

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Tell Congress: It’s Now or Never

Wednesday, February 25th, 2009

Tomorrow (February 26) the House will vote on HR 1106, a housing package that includes the judicial modification provision of HR 200. That provision would let homeowners turn to the bankruptcy courts to allow them to modify the mortgages securing their principal residence. Currently, bankruptcy provides no remedy for homeowners who are trying to save their home from foreclosure.

While there are a number of complicated issues affecting our economy, the housing crisis continues to devolve.  The Washington Times reports that there is no relief in sight from foreclosures and the falling home values that help fueling it.  We can encourage Congress to do nothing, while the economy continues a downward spiral. Or we can tell them to pass this bill and give homeowners the chance they deserve in bankruptcy.

House approval is not guaranteed. The American Banks Association and the Financial Services Roundtable have sent letters to house leaders urging that the bankruptcy modification provisions be removed from the “Helping Families Save Their Homes Act of 2009.”  The “buzz” I am hearing is that the lender lobbyists are showing up in “packs” in Member offices urging opposition to the judicial loan modification proposals.  “Packs.”  What the hell are they so scared of that they have to travel in packs?  According to a report from CNN, two-thirds of mortgage servicers have agreed to the foreclosure mitigation plan outlined by the Secretary of the Treasury.

[T]he prospect of a law amending the bankruptcy code to allow judges to dictate new terms on mortgages in the event of an individual filing bankruptcy, was also likely a significant factor in the companies’ willingness to cooperate with the administration’s plans.

The House is working on legislation which would be aimed at helping people in bankruptcy to hang on to their primary residences. It could see bankruptcy judges compelling mortgage-servicing companies to accept new terms on an individual’s mortgage.

Other than Citigroup, other large banks remain opposed to the bankruptcy-law change, arguing that it would lead to borrowers to seek bankruptcy at the first sign of trouble, rather than consider other options that might be more costly.

I don’t buy that – mainly because when I meet with clients, they are the first to tell me that filing bankruptcy is the last thing they wanted to do.   So to the lenders and their servicers, I say this: if the remaining one-third of you do not want bankruptcy judges modifying their loans, modify the loans so that the homeowner doesn’t have to file bankruptcy.  And for those two-thirds who have expressed a willingness to modify the loans, do it.  Let’s cut the crap and just do it.

Will it increase bankruptcy filings?  The Congressional Budget Office says yes.  But they also say that more than 1 million homeowners facing foreclosure could benefit from this legislation.  I view that as 1 million less people who will lose their home if this bill fails.  These people are our neighbors, our friends and our colleagues.

So what can you do?  Contact your member of Congress by phone or fax.

Email your friends and family.  Ask them to contact their congressional representative by phone or fax.

What do you tell them?  Try something like this:

We cannot end the financial crisis without stemming the rising tide of foreclosures. Court-supervised loan modification is an essential component of an effective and comprehensive plan to meet that challenge.  And unlike every other solution being considered in Washington, it comes at no cost to U.S. taxpayers.

If we are successful tomorrow, we move over to the Senate.  If we are not, that is it.  No second chance.  So please don’t wait.  Support HR 1106.

And if you do not support it, I’ll remember.  I’ll remember it when my friend loses her home because she lost her job.  I’ll remember it when my house value plummets because the home next door is vacant and abandoned because the previous owner could not afford the payments.  I’ll remember it on election day.

Ok, so maybe that last bit is a little over the top, but you get my point.  It really is now or never.  And Congress really needs to know this now.

For more thoughts, check out Real Clear Politics:  Let Bankruptcy Courts Change Mortgages

Previous posts on the subject:

The President’s “Plan”

Mortgage Modification Legislation Update: Citigroup Supports the Bill

Keep the Bankruptcy Option On the Table

Changing Chapter 13: Some Facts on the Pandora’s Box

Mortgage Modification Update: Not So Hopeful

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The President’s “Plan”

Thursday, February 19th, 2009

I am no economist, but there’s something about the President’s mortgage foreclosure rescue plan that just has not been sitting well with me.  I have not been able to put my finger on it and do the research to put together a thoughtful article.  Fortunately, I can stay focused on my clients and share with you this article from BusinessWeek by Peter Coy and Theo Francis who point out that the plan doesn’t address the danger of negative equity, and that homeowners with negative equity “might just walk away.”

Even for those who want to keep their homes at the moment, reducing monthly payments without addressing negative equity may just postpone the inevitable. “The reality is, people lose jobs, especially in a recession. People get transferred, people have to move at some point,” says Sean O’Toole, founder and CEO of ForeclosureRadar.com, which tracks California foreclosures. “By lowering payments and not principal balance, you’re guaranteeing the extension of this crisis for years to come.”

More here.

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Who Really Files Bankruptcy?

Wednesday, February 18th, 2009

What leads a person to the steps of the bankruptcy court seeking relief from debt? That is not an easy question to answer – although there are some out there who may think they know the answer. But as I was digesting a recent opinion out of the Bankruptcy Court in the Northern District of Texas, I read the following:

Anecdotally, this court notes that it sees all sorts of consumer debtors come through the bankruptcy system. At one end of the spectrum, there are individuals who have been plagued with many bad circumstances that have led to their financial demise-such as health problems, injuries, medical bills, job loss or instability, divorce, or death of a bread winner. At the other end of the spectrum, there are individuals who have been blessed with good health and adequate jobs and resources, and yet have somehow created a mountain of consumer debt that they (and probably their creditors) should have known could never be repaid. Some of these latter individuals have even engaged in some sort of fraud along the way-perhaps in a loan application at some point, or with intentional avoidance and nonpayment of taxes, or by hiding assets before entering into bankruptcy.

But the vast majority of debtors this court sees fall somewhere between the two extremes. They are individuals who probably cannot honestly blame “bad luck” as the cause of all of their woes. And many of them have made more poor choices than wise ones, and such choices have finally caught up with them.

So what does this mean, and why am I sharing it with you?  The easiest answer is that it is my experience that the court is right. However, there’s a rather significant “but…”

Unless we’re talking about a nefarious character with no sense of right and wrong, most people do not cheerfully enter the bankruptcy process. By the time they enter bankruptcy, or are at least considering it, they regret decisions they made. They know some of their choices were unwise. However, that does not mean that a debtor is not deserving of a chance to start over.

As I continued to read the Texas decision, I learned that the debtors had inconsistent income, high expenses, and some peculiar explanations for their debt.  Also, the facts seemed to indicate a bit of ambivalence as to how they came into the financial predicament they were in, and why they sought bankruptcy relief. T heir case was dismissed because the court deemed it to be an abuse of Chapter 7. I did not summarize the case because I do not want people to read more into the facts but also because I want to assure readers who are facing bankruptcy that there’s something far more important in this case than the kind of car the debtor was driving or when they bought it.  What’s more important is that they have a sense of who files bankruptcy and who is entitled to the relief afforded by the code.

Far too many talking heads (and readers know who they are) characterize people who file bankruptcy as buffoons with entitlement complexes. Making bad decisions is not evidence of an entitlement complex. Making bad decisions, standing alone, is also not evidence of fraud or other unscrupulous activity.  Making bad decisions is evidence of being human (which by all appearances, some of those talking heads might be similarly viewed as such…although I often wonder).

Of course, whether a decision is so bad that it would effectively rule out bankruptcy as an option can only be determined after a careful review of the facts by someone who knows the law. As this court decision points out, there is no one cause that pushes people into bankruptcy and there is no bright line profile of a person who files bankruptcy. Those that attempt to convince the masses otherwise only breed prejudice and fear where it need not exist.

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Posted in Bankruptcy, Chapter 7 | 1 Comment »

This is Suze Orman…

Tuesday, February 10th, 2009

Last fall I shared my thoughts about Dave Ramsey. The blog article brought in more comments than I usually get. I’ve had my eye on Suze Orman ever since I happened to catch her CNBC show over the holidays. James Scurlock has written an article over at Slate.com that puts Orman in a new light. Here’s an excerpt:

Although study after study has shown that personal bankruptcies are caused primarily by catastrophic events like divorce, job loss, and, above all, medical bills and that most of us are struggling with a gap between our income growth and the soaring cost of necessities like housing, Suze tends toward psychological causes that invariably blame the victim. Who is struggling these days, according to Suze? “People who grew up without much money and later earn a comfortable living sometimes spend too much to make up for what they didn’t get as children. … People who feel entitled to the good life, or are unconsciously copying a mother or father who lived beyond her or his means. … If you feel the need to impress people with what you have rather than with who you are, you are at high risk for credit card abuse.”

There’s more here. It’s a good read, but prepare your stomach for the shock and awe of what this financial guru thinks of people who struggle with debt while at the same time offering financial advice that makes me cringe.

I’ve had some limited exposure to Orman. I a CNBC show where callers ask for her blessing to buy expensive things: a camera, a trip with family, or in the particular show I watched, running stilts. After a quick drive-buy glance at some financial information, the caller then says “I really want these running stilts.” Then, the caller waits for either the blessing to buy it, or the chastisement for not knowing better to think otherwise.

I read the article, and decided to take a few minutes and spend some time on her website. The one thing that caught my eye was the promo for the Valentines Day CNBC show (9PM and Midnight ET, 2/14/2009) titled: “Marriage & Money.”

On this Valentines Day, the financial pluses to being married. Should a man pay down his fiancée’s Student loans? Viewers ask if they can afford a puppy, a trip to the 2010 Olympics.

Let me first start by saying that if you want to adopt a pet and can handle the responsibility, please do so.

With that said, why does the promo not say this: “Should you pay down your fiancée’s Student loans?” I can guess that the show’s demographic is primarily women. But still…even so, why shouldn’t the same question be posed to both parties who are planning a life together regardless of their gender? Perhaps I’ll have to watch the show to find out. And if I watch the show, I’ll probably have more to write about.

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