This was first posted in March 2008. More than two years later, the housing market is still in the pits, and more folks are opting to simply walk away from real estate they can no longer afford. Little has changed. And I dare say, it’s getting worse (although those seeking relection this year might want to disagree). If you own a condo or are in a homeowners association, the 2005 changes to the Bankruptcy Code force you to take some new issues into consideration.
Posts Tagged ‘homesteads and real estate’
Staying Out of the Valley of Disappointment
Tuesday, August 17th, 2010
Some Massachusetts homeowners have this peculiar belief that a homestead declaration is the legal equivalent of a real Chinese fire wall (i.e., with flames). That it keeps creditors at bay, allowing you to live in bliss in your home until you die or get sick of it and want to move on to a greener patch of grass. That’s not entirely the case. Not all debts are covered and not all creditors can be kept at bay. If you’re up to your eyeballs in debt, relying on the Homestead Declaration and only on the Homestead Declaration to keep your home from creditors will lead you to an unhappy and mythical place I call the Valley of Disappointment.
I came up with the Valley of Disappointment because I thought it seemed like a humourous metaphor But then, just to be safe, I did a websearch and just want to caution my readers not to confuse my mythical and metaphorical Valley of Disappointment, with Disappointment Valley which is: (1) a real valley located in Colorado; as well as (2) a documentary which according to IMDb “examines the plight of America’s wild horses and the rapidly deteriorating condition of our wild Public Lands.” Any similarity between my imaginary Valley and the real thing or the movie is totally unintentional and accidental…and kind of scary.
I envision the Valley of Disappointment as a place where none of the stores are open when you need them to be, and those that are all have the products you don’t want at prices you can afford, and products you need at prices that shock the conscience. I envision it as a place where the traffic lights stay green for only three seconds before they jump to red, where they stay for 3 minutes. It’s a place where things just don’t go your way, and you feel pretty powerless to do anything about it. It’s generally always cloudy or rainy. The street signs are all confusing, and it can be tough to navigate your way through it or out of it. Sometimes you just don’t know how you got there. Other times you do, and that knowledge can sometimes make it all worse. But enough about what I envision about the Valley of Disappoitment… I was talking about Homestead rights:
Under Water, Walking Away & My Two Cents
Tuesday, December 1st, 2009
Over the holiday weekend, there were a number of press reports about a discussion paper, Under Water and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis. Reportedly Brent T. White, an Associate Professor at the University of Arizona’s James E. Rogers College of Law advocates that homeowners who are underwater (meaning, the outstanding mortgage balance[s] is more than the value of the home…is now, or in some cases, will ever be) should simply walk away from their obligations and not look back without feeling a bit of guilt. Obviously this all got my attention, but before I took to this here blog and declared “You Have Got to be Kidding Me!” (which at first glance seemed like the most expedient way to address it), I opted to read the discussion paper (rather than just the abstract). Before you click the link below, pour yourself a fresh cup of tea.
Here’s my take:
Lending to Unemployed: Frankly, There’s Got to be a Better Way
Tuesday, November 17th, 2009
Yesterday I tweeted about Barney Frank’s idea of giving unemployed homeowners access to low interest loans. The theory is that it help fills a gap in the Obama Administration’s plan to address foreclosures caused by unemployment. I think this is a bad idea (and a bit of mid-term election posturing). And I think there’s a sounder way to help unemployed homeowners. (more…)
Property Insurance and Chapter 13
Wednesday, July 8th, 2009
If you’re thinking about Chapter 13, it’s important for you to know that your real property (real estate) must be insured. Increasingly, I am finding that homeowners are allowing their policies to lapse. This poses a problem – especially for debtors who wait until the last minute to file.
If real estate is not insured, this will pose problems for any debtor hoping to reap the benefits of Chapter 13. It’s also important to know that not only is insurance required, but a Massachusetts Local Bankruptcy Court rule mandates that evidence of insurance be filed with the Bankruptcy Court along with the petition. If it is not filed, the Court can dismiss the case.
Sometimes, the mortgage payment also includes an amount that’s held in escrow for taxes and insurance. When a homeowner stops making monthly mortgage payments, the lender may – or may not – continue paying taxes and insurance. If the lender doesn’t pay the insurance, the lender will obtain Force Place insurance. This policy protects the lender. It does not protect the homeowner, the homeowner’s family, or the contents of the home and it is not acceptable for Chapter 13 purposes.
If you’re contemplating a Chapter 13 – check on the homeowner’s insurance. Be sure it is current and up to date. Be sure that the premiums are paid. Be sure that any special riders that you want are included, such as special protections for jewelry, electronics, and other items. Keep those documents handy and in a safe place – because you will need them if you’re thinking about filing Chapter 13. The time to do this is now, not on the eve of a foreclosure auction – which will only cause delay, increase anxiety and perhaps even be more expensive.
‘20 Months Too Late’: Let’s Start Rethinking Mortgage Modifications in Chapter 13
Wednesday, June 24th, 2009
I’ve been thinking about yesterday’s blog entry. When I first read the First Circuit decision, I wondered why the case was brought. Here was a homeowner arguing that a mere technical violation of TILA would enable him to rescind a mortgage that he signed 20 months prior. Based on the facts cited by the Court, it seemed a bit disingenuous. But then, as I was thinking about it more, it occurred to me that what did not sit well with me was not what I knew from the court decision. It was what I didn’t know. I knew nothing about the homeowner.
I don’t know if the homeowner knew exactly what he was doing when he was at the closing. I don’t know if the homeowner was honest when he was applying for the loan, but knew that he could not afford the mortgage unless he was able to refinance. I don’t know if he was banking on rates going down, his property value going up, or both.
I don’t know if the mortgage broker lied, if the notary was drunk, or the closing agent fled to Columbia after the closing. I don’t know if the homeowner was warned every step of the way, but heard and saw only what they wanted to.
I don’t know if the homeowner simply misgauged what the future might hold. I don’t know if he was motivated by greed. I don’t know if he was motivated by someone else’s greed, like family member’s, fueled further by his reluctance or his refusal to urge restraint.
I don’t know if his inability to afford the payments is based on what they could have controlled, but for whatever reason, did not. I don’t know if he had the ability, the choice or the wherewithal to do everything he could to avoid heading into the financial minefield he now finds himself in.
I don’t know if it was a father trying to refinance their home because of a child – a new child to be born, an older child to be schooled or a sick child to be healed. I don’t know what was going through his mind. I don’t know what was going through his heart.
I also don’t know if the homeowner himself or his spouse was ill. Assuming they were, I don’t know if he was ill because of something he couldn’t control, or if his quart-of-gin-and-two-pack-a-day lifestyle was finally catching up with him.
I don’t know if the homeowner was employed, was under employed or was unemployed. I don’t know if the homeowner one day went to work only to find the office doors locked or if he came home to find his spouse gone.
I don’t know if the homeowner refinanced to pay for a new roof, new wiring or a new septic system. I don’t know if it was for a man-cave for him or an addition for his ailing mother.
Nor do I know if the homeowner was a scoundrel. I don’t know if he overestimated his income to such a degree that it reflected a hope for a better, brighter and richer future than any rational person would think possible. I don’t know if this is just one more thing he had already assumed he was going to get away with.
Regardless of the one or the combination of any of the above things that I do not know, I do know that the homeowner cannot go to bankruptcy court to modify the loan secured by the mortgage on their principal residence. If you simple replace the words “I don’t know” with “What if you knew that…?” in each of the above situations or with a combination of any, and was able to consider what you did know, it would not change anything because the homeowner still could not modify the loan secured by the mortgage on their principal residence in bankruptcy. But more simply stated: for the homeowner before the First Circuit Court of Appeals seeking to change the terms of a promise he made 20 months prior, I don’t know the reasons why.
Section 1322(b)(2) of the Bankruptcy Code of the United States won’t allow any homeowner in chapter 13 to seek modification of a loan secured by their principal residence regardless of the reason. Congress has determined that the reason for the requested modification is irrelevant. They have determined that no one, no judge, and indeed, not even me or my readers need ask why the modification is needed in chapter 13. From the perspective of Congress (and frankly that of the Mortgage Bankers Association and their ilk), “why” is irrelevant. (Actually, I’m not entirely correct on that point. Lenders can choose to voluntarily modify the mortgages on a debtor’s principal residence. They alone can consider the reasons “why.”)
Our country is embroiled in an economic crisis of historic proportions. It’s bad out there, and for many may get worse. If I’m eventually (i.e., within several months) proven wrong then you can all paint me crazy and I’ll find myself my own “Plan B.” Until then, let’s all help each other find answers to the questions that start with “What if you did know…?” And let’s start a meaningful discussion that may result with an amended Section 1322(b)(2) that will let homeowners prove in our forum of last resort (the Bankruptcy Court) the desperate financial situations they find themselves in, and will let judges consider and weigh the reasons why they should get a second chance to keep their family home. If for no other reason because it defies logic that the same standards be applied to someone who has been dealt a bad hand versus someone who is gaming the system.
The Cramdown Bill is Dead
Thursday, April 30th, 2009
From MSNBC:
A dozen Democrats joined Republicans in the 45-51 vote to scuttle the bill, which Obama had said was important to saving the economy and promised to push through Congress. But facing stiff opposition from banks, Obama did little to pressure lawmakers who worried it would encourage bankruptcy filings and spike interest rates.
I remind everyone that next year, 2010, is an election year. If you want to know who to blame, here’s the roll call vote.
Mortgage Modification/Cramdown Bill Update
Tuesday, April 28th, 2009
From Today’s Washington Post:
Days before an expected vote, Senate leaders yesterday touted their version of a proposal to allow bankruptcy judges to modify mortgages, but have yet to secure the support of the financial services industry and face fierce opposition that could derail the proposal again.
The characterization of the opposition being “fierce” is unfortunate, but it appears to be accurate:
“I hope we can muster the courage and find the votes, although I know it will be hard,” (Senate Majority Whip) Durbin (D-Ill) said on the Senate floor yesterday. Durbin has been pushing the measure for more than two years. “It’s hard to imagine that today the mortgage bankers would have clout in this chamber, but they do.”
For more on the President’s Foreclosure Prevention Plan, click here.
Does the Cramdown Bill Have a Chance of Passing?
Wednesday, April 22nd, 2009
A report from Housing Wire suggests that the answer may be ‘no’.
“[Senator Richard] Durbin [D-Ill] had a hell of a time coming up with a bill that’d pass the Senate,” said Burt Ely, a banking expert and principal of Ely & Co. “He’s watered it down so much that his proposal now limits the accessibility or intention of the bill. Even if he got it passed, the gulf is so big it wouldn’t even get out of [the House] conference committee to be enacted into law.”
Not surprisingly, consumer advocates are seeing red.
“With Durbin, Dodd and Reid doing the bidding for the banks, this current state of the cramdown bill will have virtually no impact for at-risk borrowers,” says Bruce Marks, CEO of Neighborhood Assistance Corp. of America, a mortgage broker and consumer activist. “The Senate Democrats have made no measurable actions this year to help the housing crisis.”
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.
