That’s the question being asked by the folks over at Calculated Risk in light of a report issued today by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
More here:
Office of the Comptroller of the Currency and the Office of Thrift Supervision
I’ve written about it here before, and it’s worth repeating: the economy and the looming foreclosure crisis is affecting not only families. Pets are also feeling the effects.
The first wave of foreclosure-related pet surrenders arrived on [Boston's Animal Rescue League's] South End doorstep early last year, but soon after owners began just kicking pets out of the house, or driving away from foreclosed homes and leaving them behind.
If you’re facing financial difficulty, I implore you: please do not abandon your pet to fend for itself. They will not be better off if left behind. They will not be better off if dropped off at the side of the road. Call a local shelter and get help with adoption.
And please, if you can help the Animal Rescue League, please do.
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.
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:
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
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.”
Contrary to what you may hear in advertisements, 2009 may not be a good time to buy a home unless you are planning on living there for several years. This bit of news is not actually a huge shock for me, but it is not helpful for several of my clients whose success depends – at the very least – on people buying real estate in 2009.
This is again, another reason why we need meaningful reform out of Washington soon. Undoubtedly, the proposed changes to the Bankruptcy Code which would allow judges to reduce mortgages of consumers could help. But some contend that the reform will accelerate “lenders’ losses on home-equity, automobile and credit-card loans.” I’m not so that is a particularly bad thing.
About 10 years ago, I had abdominal surgery. As luck would have it, one of the sutures that was designed to dissolve didn’t. Instead, it got infected. It was very painful.
Admittedly, I’m a big baby when it comes to pain (my staff will back that up). This pain was far too much to handle….so my friend put me into a cab and we went to the emergency room. When the doctor came in, he examined the incision, looked at me square in the eye and offered these words:
The new Congress will be introducing legislation that will allow homeowners in bankruptcy to “cram down” their mortgages on their principal residences. When a home is worth less than the amount owed on the mortgage (or as I typically see, mortgages), a cram down will enable the homeowner to reduce the amount owed to the value of the property. Currently, debtors can only do this on investment property, and on property that is not solely the primary residence of the debtor (i.e., a multi-family dwelling).
Courts can generally cut through complex mortgage contracts more aggressively than the private sector, said Wade Henderson, head of the Leadership Conference on Civil Rights, who has testified before Congress on the issue.
“The continued erosion of the housing market has probably made adopting this proposal inevitable,” he said.
I also invite readers to check out Calculated Risk, and Tanta’s discussions on cram downs. You’ll find those links here.
The final version of what the new President will sign remains to be seen. However, any homeowner facing foreclosure should start exploring whether bankruptcy is an option now and plan ahead (and if you’re in bankruptcy, you should consider speaking with your attorney about whatever options you may have). I know that no one wants to file bankruptcy. But if it comes down to whether you can actually keep your home, you would be foolish to not keep all of your options on the table, including the option to file for bankruptcy protection.
FOR IMMEDIATE RELEASE
BOSTON – December 9, 2008 – As part of the Patrick-Murray Administration’s ongoing response to the foreclosure crisis, the Executive Office of Housing and Economic Development and the Office of Consumer Affairs and Business Regulation, with support from Massachusetts Housing Partnership, released a brochure outlining the rights and responsibilities of tenants living in foreclosed buildings. The guide empowers renters with information to ensure that they understand the foreclosure process and are not unfairly evicted after the building they live in is foreclosed upon.
Like homeowners, renters throughout the state and the nation are being affected by the foreclosure crisis in real and dramatic ways. Although there are no exact figures, statistics compiled by the Division of Banks show that approximately 30% of the 7,653 Massachusetts foreclosure sales in 2007 involved multi-family properties.
“Renters need to know their rights,” said Daniel C. Crane, Undersecretary of Consumer Affairs and Business Regulation. “Tenants shouldn’t be pressured to pack their bags because their apartment is in a building that is foreclosed on. This new resource provides information that will help families and individuals affected by foreclosure through no fault of their own.”
Many lenders or servicers try to evict all tenants from a property immediately after a foreclosure, even if the tenants have paid their rent on time and have not violated any terms of their tenancy. If tenants refuse to leave, they may be offered a small amount of money, commonly known as “cash for keys.” Tenants agree to these pay-outs under the assumption that they have no other option.
To prevent renters from being unfairly displaced and coerced into leaving their homes, Governor Patrick signed into law last November a measure ensuring that a tenancy will not be terminated by a foreclosure sale.
According to state law, a tenant is entitled to at least 30 days written notice if the owner wants them to vacate the property. A tenant is then entitled to a court hearing if they wish to remain in their home after receiving the proper 30 days written notice. A judge will determine how much time the tenant will be allocated to vacate the apartment. Without court approval, owners do not have the right to evict their tenants. If a tenant receives state or federal rental subsidies, the terms of their rental agreement will not be affected by a foreclosure sale and the tenant should contact the agency that provided the subsidy to understand their specific rights with the subsidy.
New owners are also legally responsible for posting their contact information on the property and for properly maintaining the building. Tenants are encouraged to contact the building owner in writing if they encounter maintenance issues, and to contact their city or town’s housing inspector if they believe their building to be in disrepair.
Tenants with questions or concerns should contact one of the legal resources listed in the brochure or the state’s Consumer Hotline at (617)-973-8787 or (888)-283-3757. The brochure, which is available in several languages, can be found online at mass.gov/foreclosure. It is also being distributed statewide to housing agencies and foreclosure prevention organizations.
There’s been some press about a proposed change to chapter 13 that would permit debtors to modify the mortgages on their primary residence. Yesterday, I attended the briefing at the State House given by Rep. William Delahunt where the need for the legislation was discussed. He has co-sponsored a bill that would modify the anti-modification restrictions imposed by Section 1322(b)(2). Among the presenters were Massachusetts Attorney General Martha Coakley, Secretary of State William Galvin, and Harvard Law Professor Elizabeth Warren.
Currently, a chapter 13 debtor cannot modify the mortgage on their home if the note is secured by the debtor’s primary residence. This does not apply if the debtor has a multi-family dwelling, such as a two-family. This does not apply if the note is secured by the house and other property (although this may vary from state to state). This also does not apply if a debtor has a vacation home or other investment property. It applies only to those chapter 13 debtors who reside in single family homes and who have a mortgage that is secured by that single family home that they use as a primary residence.
Notwithstanding those restrictions, a chapter 13 debtor may “strip off” a second mortgage (or in some cases, a third), if the mortgage is “wholly unsecured.” A simple illustration: if the value of the property is so low that if the property were sold, there would not be funds to pay the second or third mortgage. However, if that second or third mortgage is secured by even a penny, it cannot be stripped off.
The Boston Herald quoted Kevin Cuff, Executive Director of the Massachusetts Mortgage Banks Association:
You’re opening up a Pandora’s box, a precedent to haul every mortgage back into court…Many people who got these loans should not have received them in the first place. Now you go to the courts to modify the sacred contract between homeowner and lender? It’s socialized housing.
I might agree with that position if chapter 13 debtors could not modify their vacation homes or investment properties. I might agree with that if city dwellers who reside in a unit in their multi-family home could not modify their vacation homes. But that’s not the case. The current system has a disparate impact on those chapter 13 debtors who reside in single family homes, and those who do not, and for many, those who do not reside in non-urban/rural areas. It also has a disparate impact on those middle-class debtors who do not have vacation homes or investment properties.
In addition, the legislation is being proposed because voluntary modifications are not happening. It is argued that if there is a “threat” of filing bankruptcy and modifying a mortgage in chapter 13, the lender may be more apt to modify the loan voluntarily so that the homeowner does not need to file chapter 13. It sounds like a good argument, but I honestly cannot say one way or another whether that would be the case. Of course, if the law were passed, then it would be really up to the lender to decide if they wanted to be hauled into court to be forced into a modification. The only way I think any of us can know for sure is if we give it a try. But before anyone makes a decision one way or another on this proposal, I think it’s important to know what the law currently provides, and why I do not think it is necessarily a “Pandora’s box” or “socialized housing.”
What’s Your House Worth?
When I confer with a client who is facing the prospect of bankruptcy to protect their home, I have many important questions. One of them is “what is the value of your home?” The answers are usually varied, and in most recent situations, clients have only old or not useful information. Regardless of the source however, determining the value of the home is a necessary step in any pre-bankruptcy analysis I need to do. And unfortunately, getting that accurate information is not always easy, and it is not always grounded in reality.
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Tags: Bankruptcy, Commentary, Homes, homesteads and real estate, Housing News, Mortgages and Foreclosures, Yep. We're in trouble.
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