Bankruptcy Bits

Understanding why more people don’t walk away from their underwater mortgages

A recent report from the University of Arizona Law School’s Professor, Brent T. White addressed how homeowners are dealing with foreclosures. It was reported that although the public media reports that homeowners are increasingly abandoning their homes due to their inability to afford their mortgage payments, in fact the majority of homeowners are somehow able to keep making their payments, even if their properties are worth significantly less than the amount of their secured debts.

While logic might suggest that these borrowers would be defaulting on their loan obligations, the reality is that two strong emotional forces come into play. First, most people desire to avoid the shame and guilt of losing their home to a foreclosure sale, and secondly, they fear the unknown consequences of an involuntary sale, which may be over-exaggerated by both the lenders and the government.

This is opined to be the result of the lenders wanting to reap maximum profits and suffer minimum financial loss, even if the market conditions and legal remedies indicate that the borrowers might be much better off financially to walk away from these obligations.

This is another example of why people facing financial problems should consult with a lawyer or financial advisor who is able to independently advise them of all of their legal options.


by: Michael B. Katz, Esq.

Victory for homeowners: the judge who rejects foreclosures when he finds fault in the loan

An article captioned A "Little Judge" Who Rejects Foreclosures, Brooklyn Style, that appeared in a recent edition of The New York Times, describes a judge in New York who, frustrated over the fact that many individuals against whom judicial foreclosure proceedings had been instituted, failed to appear to contest the proceedings, and therefore defaulted, allowing an uncontested order of foreclosure to be entered against the homeowner.

On a review of the pleadings filed in the cases, the Little Judge from Brooklyn discovered that many of the mortgages were defective and unenforceable. He then started to review the pleadings filed in each case, and when the papers clearly evidenced a defective mortgage, the violation of state and/or federal law, or that the foreclosing party lacked standing to commence the action, His Honor simply dismissed the foreclosure action.

The question to be asked is whether the action of the Judge was what some would decry as "judicial activism," or was it the pure rendition of justice? There are those who would either side of this question.

"But what is this esoteric question of judicial philosophy doing in a bankruptcy blog?" you might ask.

Well, to be just, the law must provide meaningful rights and remedies, and some firmly believe that a Court cannot be allowed to be a hand-maiden to unjust results. Being an attorney is a difficult task, all too frequently presenting philosophic, ethical and even moral dilemmas. One must ask one's self if it is ethical, moral or just for an attorney to institute an action to foreclose a real estate mortgage, for example, that he knows or has reason to believe is invalid or vocative of the law?

A good lawyer will question his own client, and in the interest of justice, pursue a course of action that is ethical, moral and just.

What do you think ?

by: Eugene B. Berman, Esq.

Photo Credit: Justice Arthur M. Schack, by: Nicole Bengiveno/The New York Times

Massachusetts foreclosure crisis – when banks refuse to fix the mess they caused

Lately, it seems as if housing news is just one bad thing after another, and the most recent information indicates that things have not yet begun to look up. According to Reuters, one in eight homeowners across the United States is either paying in arrears or is in foreclosure.

This is an astounding number for anyone to reconcile, despite the fact that this number is comprised largely of very concentrated geographical regions. As an attorney practicing both consumer bankruptcy and real estate law in western Massachusetts however, I am still seeing the issue arise nearly on a daily basis. Between both subprime and prime adjustable rate mortgages, and rising unemployment, staying on top of payments has quickly become a near impossibility for many, and for some reason, lenders are still resistant to modifying loans.

In instances where modification might actually be an effective remedy, this resistance on the part of lenders is a great problem. Their failure to modify loans before a borrower is at or near the point of foreclosure, coupled with the fact that consumers are facing less and less ability to come up with money owed in arrears, is creating a vicious cycle of foreclosure. This failure on the part of lenders is also leading to a greater exacerbation of consumers needing to file for bankruptcy protection and banks being forced to write uncollectible bad debt off of their books.

I have an elderly client, for example, who has been referred to me to modify a negatively amortizing mortgage on her home. She is less than thirty days behind on payments and not yet approaching foreclosure, but she lives on a very small fixed income and will undoubtedly default if she cannot get into a fixed rate, traditional mortgage. I have made multiple phone calls and have spent hours researching how I might assist this woman. Yesterday, I finally reached a call center for Wachovia that recognized my client’s loan number. I was told that Wachovia is not doing any loan modifications until further notice and there is currently no procedure for applying to modify the very loans that are jeopardizing our banking system. As is the case with many other big lenders, Wachovia is sitting on its hands, ostensibly waiting for the next infusion of federal bailout money.

Many homeowners are unable to sell because of the slow real estate market or because they owe more on their mortgage than the house is worth. Most are also ineligible to refinance for credit reasons because lenders have become understandably and necessarily conservative since the subprime crisis came to light, or because they lack sufficient equity in their homes. And to compound all of this, lenders seem to often prefer foreclosures to the reasonable modification of completely unreasonable mortgages.

In the meantime, one in eight homeowners waits to see what the future holds, while consumer attorneys continue trying to pave a road that lenders seem to want to plow up right behind us.

By: Greta LaMountain, Esq.

Some thoughts on the Residential Mortgage Cramdown proposal

A recent opinion in the Wall street Journal was most critical of the plan presently being proposed to allow Bankruptcy Judges to modify residential home mortgages. This is commonly known as the “Cram Down” provision. In that opinion, Professor Todd Zywicki raised several perceived problems with the proposed legislation that would provide homeowners facing foreclosure with a remedy short of losing their homes.

The first objection he raised was that mortgage modification would provide a windfall for troubled homeowners but raise the costs of credit of any kind from car loans to credit cards. Professor Zywicki cites the lessening on car loan rates since 2005 after congress eliminated the ability of bankruptcy judges to modify auto loans.

Nowhere in his argument does he cite the dire economic straits of the automobile industry as a factor in this lowering of the average rate, which surely is the prime reason for this reduction.

His second point is that the allowance of mortgage modification could unleash a torrent of bankruptcies. While this is so, our experience to date is that anyone in the process of losing their home is presently resorting to bankruptcy anyways, as in virtually every case, debt has built up on credit cards, medical bills and other creditors in what usually turns out to be a failed attempt to make payments on the home mortgage until there is simply no more ability to make any payments at all. The result is not only a bankruptcy that wipes out all unsecured debt to those creditors, but also a foreclosure on the home, and all payments made in attempts to retain the home are gone at great expense to other creditors. The home mortgage lender gets back the home at a depressed price and is forced to take the loss anyways, while displacing entire families from their homes.

A third argument is that this rewards bankruptcy abuse, as it allows homeowners to retain their homes and make reduced payments, while reaping the benefit of any increase in value that may occur in the future. The fallacy here is that in virtually every case, the homeowner is unable to make the contract payments, and a foreclosure is going to result in a loss to the lender in any event and possibly create the windfall to a purchaser at foreclosure. The only unfortunate result is displacement of a family.

It is clear that the current economic downturn is in good part blamed on the lax credit and underwriting standards of those lenders. They now seek to take advantage of homeowners who although also should share the blame, are mostly unsophisticated about the ways of the credit industry. They have relied on opinions of so called experts in the field either as mortgage brokers or bankers, who ignored longstanding credit requirements and got caught up in the hoopla of unlimited rising prices in the real estate industry. Those so called experts or professionals are equally if not more to blame that the borrowers and should be called to task by assuring that they share in the losses by writing down their notes to no less than the amounts that they could recover in a foreclosure.

The net result of this will be to keep many families in their homes and alleviate the current inventory of unsold homes that are presently a glut on the market further depressing prices.

Yes, there are inequities in this proposal, but not to the extent that Professor Zywcki sets forth. There are certain protections that will be built into the proposed bill in the way of partially repaying some of the gains to homeowners, should they later be in a position to sell their homes in excess of the mortgage balances, however those feared inequities are far less damaging to the economy than allowing the present rate of foreclosure to continue.

Let’s also not forget that bankruptcy judges still have the power to rewrite and recast all other secured debts, and this has not resulted in any dire results to lenders. Why single out homeowners to bear the burden of resolving any bad lending decisions for the lenders?

By: Paul R. Salvage, Esq.

Chapter 11 filings up 49%

Under the amended bankruptcy laws (BAPCPA), Chapter 11 is far more restrictive, costly and burdensome, but those factors have not prevented growing numbers of business bankruptcy filings over the past year.

According to statistics recently released by the Administrative Office of the U.S. Court, in fiscal year 2008, (which is the 12 month period ending 9-30-08,) Chapter 11 filings rose 49% from the prior 2007 fiscal year. The actual numbers were an increase to 8,799 from 5,888 cases.

In reviewing all types of business cases that were filed, the numbers show a jump from 25,925 cases to 38,651, which is a 49% jump.

The same increased filings are found in almost every type of bankruptcy filing, except for the rarely used Chapter 12 farm filings. Nationally, Chapter 7 liquidation cases were up 40%, while consumer wage plans under Chapter 13 were up 14%, but likely to continue rising with the continued foreclosure problems facing many people trying to save their homes.

In Massachusetts, there were a total of 15,636 filings, of which 11,525 were Chapter 7, 3957 were Chapter 13, 149 were Chapter 11 and 4 were for Chapter 12 cases.

It appears that bankruptcy filings are on pace to increase over the 2008 filings, so more record filings can be expected.

By: Michael B. Katz, Esq.

Foreclosures – placing blame where blame is due

There are some who believe that amending the Bankruptcy Code to once again allow the Bankruptcy Court to modify residential mortgages is the most expeditious and efficient method to provide equitable relief to homeowners facing foreclosure. Those of us who support and urge immediate action on legislation to grant such jurisdiction to the Bankruptcy Court are of the opinion that real relief will be available to the beleaguered homeowners, and the real value of the "toxic" loans will be established. We believe that those who gambled in the derivative market will be the ones who will appropriately suffer the resulting losses, and perhaps the existence of recourse to relief will both encourage lenders, et al, to negotiated meaningful refinancings and bring sound lending practices back to the mortgage industry.

There are others who oppose the amendment contending that a result would be an increase in the costs of obtaining a mortgage.

This blogger respectfully suggests that legitimate lenders who apply sound lending principles will not be adversely affected by the proposed amendments. Additionally, it is suggested that the amendment will appropriately place the risk of loss where it should be: on the predatory lenders and speculators whose greed precipitated the mortgage foreclosure and financial crisis. The granting of authority to the Bankruptcy Court to recast residential first mortgages will not adversely affect legitimate lenders but will discourage those who prey on the unsuspecting.

By: Eugene B. Berman, Esq.

Surviving the credit crunch storm

As with most financial issues, money is cyclical. Most anticipate things will eventually turn around and the crunch will ease. In the meantime, there are steps that can be taken to minimize the impact of the current conditions.

Minimizing the Impact - The Residential Market

 

• Delay Selling - If not essential, consider postponing the sale of your home. As there is less mortgage money available to buyers, the pool of potential buyers begins shrinking, thus resulting in fewer and lower offers to buy.
  
• Delay Buying - As real estate values depreciate, if you are not in need of mortgage financing, it may be a good opportunity to consider purchasing real estate at values that have been reduced; however if you are in need of financing, the time may not be right to purchase until the mortgage markets stabilize. In addition, avoid adjustable rate mortgages, as indicators appear to show a likelihood of increasing interest rates. In addition, the ability to refinance out of an adjustable rate mortgage is no longer a guarantee.
• Loan Reformation - As many homeowners recently refinanced with adjustable rate mortgages, intending to refinance again, the loss of mortgage money may make another refinance difficult. Some lenders may be open to re-writing some of the terms of your current mortgage in order to make them more favorable and in order to allow you to avoid a foreclosure.
• Second Mortgages - During times of falling equity, avoid using a second mortgage to pay off unsecured debts and to make small home improvements. Not only does this put your house at increased risk of foreclosure due to the increase in your monthly mortgage obligation, but it also may make your house more difficult to sell, as now any selling price must include the payoff for the first and second mortgage.

 

 

By: Justin H. Dion, Esq.

Judicial oversight - potential alternative to amending Bankruptcy Code Sec. 1322(b)(2)

The United States Constitution grants to Congress the jurisdiction to make laws relating to Bankruptcy. It is suggested that the grant of authority evidences that bankruptcy law is the safety valve that protects the citizenry from the pressures of financial indebtedness that could otherwise oppress honest debtors. Indeed, bankruptcy has its roots in the concept of a Jubilee Year found in the Old Testament.

One of the issues confronting contemporary American society is the sub-prime mortgage crisis, in which the existing Bankruptcy Code does not provide an acceptable way for an individual to address the issues of a mortgage induced by the predatory lending practices of the lender, the reality that the property is worth less than the amount of the mortgage and that interest rates are substantially in excess of those “advertised” or existing market rates.

One suggestion advanced to provide relief to the victims of predatory lending practices is the amendment of Sec. 1322 of the Bankruptcy Code and to allow the Bankruptcy Court to modify first mortgages on residential real estate.

Another suggestion being advanced is to amend Massachusetts law to provide judicial oversight to the residential foreclosure process. The Commonwealth is among a minority of jurisdictions that does not require judicial oversight or provide the owner of real estate notice of hearing and an opportunity to be heard before a foreclosure can proceed. Legislation bringing MA into conformity with the practices of the majority of the states would assure due process to those facing the foreclosure of their homes.

A question to be addressed is whether the imposition of judicial oversight would obviate the need for amending Section 1322 of the Bankruptcy Code. Evidence of the experiences in other jurisdictions indicates that the remedies are not mutually exclusive.


By: Eugene B. Berman, Esq.

Amending Bankruptcy Code Sec. 1322(b)(2) can help homeowners who are in over their heads

During this time of rising defaults and foreclosures of sub-prime mortgages initiated as a result of predatory lending practices, objective studies and empirical evidence demonstrate that lenders and the holders of such mortgages have been unwilling to enter into meaningful loan modifications.

Massachusetts Attorney General Martha Coakley testified before a briefing of the U.S. of Representatives Financial Services Committee that the results of asking lenders and servicers of troubled mortgages to modify loans to avoid foreclosures “are dismal.”  In her statement to the Committee, the Attorney General observed that even, “…when so-called loan modifications are completed, too often they fail to provide an affordable monthly payment, and therefore fail to result in a sustainable loan.”

There are those, including the local Alliance of Providers of Legal Services to Individuals Facing Foreclosure and the Commercial Law League of America, as well as members of Congress, who contend that the only solution to the present Mortgage Foreclosure Crisis is to amend the Bankruptcy Code to allow bankruptcy judges to modify residential first mortgages. The change proposed is the amendment of Sec. 1322(b)(2) of the Code by eliminating the special exception that prevents homeowners from having the same right to deal with partially secured mortgages that vacation homeowners, rental property owners, and business owners have always enjoyed.

While mortgage lenders have opposed such an amendment arguing that it would substantially limit the availability of mortgage loans, proponents of the amendment have suggested that the elimination of the exception would encourage lenders to revert to sound lending practices based upon the value of the property and the borrower’s ability to make the mortgage payments.

The issue of amending Sec. 1322 is one that will command the attention of Congress and the public until finally resolved.


By: Eugene B. Berman, Esq.

The Housing and Economic Recovery Act of 2008

The Housing and Economic Recovery Act of 2008, (HERA,) which was reluctantly signed into law by the President, is anticipated by the U.S. of Housing and Urban Development (HUD) to be implemented on October 1, 2008. The law permits the Federal Housing Administration (FHA) to insure up to $300 billion in new loans...which is estimated to assist 400,000 households.

The statute applies only to mortgages originated on or before January 1, 2008. The law does not require the holder of an existing mortgage to participate in what is an entirely voluntary process. All existing mortgage holders - mortgage companies and/or servicing companies - must voluntarily consent to the refinancing of the existing loan that would have a thirty (30) year term with a fixed rate and would be FHA insured. To participate in the program, the mortgagee must consent to reduce the entire principal of the loan(s) to an amount that is 90% of the fair market value of the real estate.

The potential relief available under the HERA is but one of the options that both the borrower and counsel must consider in evaluating a course of action for those facing the possibility of a foreclosure for reason of a sub-prime mortgage or resulting from predatory lending practices.

The present foreclosure crisis is but a first wave, with a second inundation resulting from interest only mortgages maturing soon to follow. The development of a course of action to provide relief to the victims of these crises requires an experienced knowledge and understanding of the realistic remedies that are available. A misstep may result in the homeowner loosing his/her home when there were options available to prevent a foreclosure.


by: Eugene B. Berman, Esq.