Last Sunday’s New York Times Op-Ed Lead reminds us that the mortgage crises is far from over, but it still neglects to address what has always been the fairest and most viable option – permitting Federal Bankruptcy Judges to restructure first mortgages, including rate and principal reductions, in Chapter 13 bankruptcy proceedings.

Early in the financial crises, a few members of Congress were brave enough to draft bills to modify the bankruptcy laws to permit modifications. Their efforts were shot down by the bank lobby and quickly died – never to be brought back to life in any viable form. Now is the time to put this option back on the table on a National level.

Many States, including New York, have put procedures in place, as part of their foreclosure process, to force lenders to the table to try to modify mortgages before a foreclosure is allowed to proceed. The process in New York, while laudable, has done nothing more than to “kick the can down the road” in that there are no mandates for lenders to do anything but to participate in the process. State Court Justices have absolutely no authority to truly force the issue on any meaningful level.

If the Bankruptcy Laws were modified, Bankruptcy Judges would have the authority to act as the arbiter (subject to the appellate process) to (a) set fair and equitable principal reductions based upon current market conditions; and (b) restructure mortgage payments based upon a homeowners’ actual ability to pay.

One of the underlying principals in Chapter 13 bankruptcy is that a debtor must be able to establish that they have the financial ability to make the payments proposed in a Chapter 13 Plan. This standard has to be met to the satisfaction of both the Chapter 13 Trustee and the Court. This is a simple, straight forward, requirement that all parties have worked with for over 25 years.

Bankruptcy is financial triage – not every debtor can be saved. Chapter 13 bankruptcy has always been, and will continue to be, a process to weed out the homeowners who truly cannot afford a mortgage on any level. In many cases, the current State Court processes are being abused by homeowners who, perhaps, never had the financial means to support home ownership from the beginning. Unfortunately, State Court Justices have not been provided with the tools to do what is necessary in these situations.

It is still not too late to revisit first mortgage modifications in bankruptcy proceedings. The filing of a Chapter 13 petition for this purpose could even be conditioned upon a homeowner having applied for a modification within a certain number of days prior to filing bankruptcy and having been turned down by their lender.

Fannie and Freddie are not the answer…

Subprime credit cards are back….

The New York Times reported this week that credit card solicitations, particularly for those individuals who have tarnished credit or have previously filed bankruptcy, rose substantially during the fourth quarter of 2011. Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.

The reason for this trend is that it is becoming much easier to re-establish credit after bankruptcy, and the following outlines why:
1 You can now only obtain a discharge in bankruptcy once every eight (8) years
2. Lender’s bottom lines are suffering. They are constantly seeking new sources of business.
3. Most individuals who have filed for bankruptcy, unfortunately, have a craving for credit.
4. We live in a plastic society. Even if you have filed for bankruptcy, you must have at least one credit card, or a line of credit tied to a debit card, for emergencies.
5. Lenders know that if they extended a credit card offer to an individual after filing bankruptcy, and the offer is accepted, they love that individual because the lender knows that they cannot bail out again in bankruptcy for another eight years.
6. Unfortunately, despite everything that has been published on this topic, Lenders have already “built” a contingency into the pricing of credit cards. Lenders are not fools. They know that from day one, if they lender a dollar ($1.00), they are going to lose a nickel ($.05) – there will always be bankruptcies, slow payers, non-payers and the like. This is one of the reasons that many interest rates hover above 15-18% and higher.

Never say never in this world. Many of my clients say that they will never use credit again. This is an absolute fallacy . One of the goals of filing bankruptcy is to obtain a fresh start and begin to rebuild. Part of the rebuilding process is to re-establish credit. I am not advocating the re-establishment of multiple lines of credit but I do advocate obtaining at least one line of credit – just for emergencies.

Over the past few weeks, I have read and noted a number of blogs and other commentaries from respected economists and authors touting the growing concern about the student loan crisis as the outstanding balances on student loans approach the $1 trillion mark.

Many pundits have commented about the value of college education relative to its potential return of investment. Some have noted the strain it has caused, both emotionally and financially, on students who have obtained degrees in the “liberal arts” and have been forced to accept positions outside of their field of study at salary levels which may not even cover the servicing costs of their student loan obligations.

The one area that few, if any, have commented on is the growing relationship between the student loan crisis and the housing crises. No one can deny that the housing crisis has devastated our economy, and, even though we now appear to be heading in a positive direction, the economy will not pick up speed at the grass roots level until sales of existing homes return to at least 2004 levels.

In past recessions, the housing market received “kick-starts” from first time home buyers. As a consequence of the growing student loan crisis, newly minted college graduates who, in the past, would have placed home ownership near the top of their financial priorities, have now replaced home ownership with the management of their student loan debts.

The more I read about this topic, the more I fear that we will end up with an entire lost generation – a generation that may never have the benefit of home ownership. Legislators must look at the relationship between the two and provide some relief in the student loan arena to provide a light at the end of the student loan debt tunnel – even if that comes in the form of partial relief through an amendment to the bankruptcy laws. This may be the only way that we may be able to fully emerge from the housing crisis….

Bank of America has announced that it is rolling out a test program in three states (including New York) in which the bank will accept a deed-in-lieu of foreclosure from homeowners in foreclosure and then rent the properties back to the homeowners for an unspecified period of time.

For those homeowners who have tried to modify, have been unable to do so, and remain too stubborn to file for bankruptcy, this may be an option – but it may come with strings attached.

First, BOA has not discussed anything about the tax consequences of the transaction. Even if a homeowner “surrenders” a property bank to a lender, the lender still has the right to issue a 1099C for that portion of the mortgage debt that it deems that it will be “forgiving.” Without having previously been discharged of the debt in bankruptcy, this could have crippling tax consequences – perhaps as high as $25,000-$50,000!!!

Second, BOA can only take a deed-in-lieu of foreclosure if there are no other liens on the property, including, but not limited to, second mortgages, home equity lines of credit (HELOCs) and judgment liens resulting from other, non-mortgage debt. The purpose of a deed-in-lieu is to save the bank the aggravation and expense of having to go through the foreclosure process. BOA is NOT going to deal with junior liens, unless, perhaps, THEY are the junior lien holder – and even then there is no guarantee

If this sounds appealing to you – CAVEAT EMPTOR!! In my estimation, if 10 homeowners in New York qualify for this program, I will be surprised…

The proposed settlement reached last week between the Federal Government and the five major banks may prove to be nothing more than smoke and mirrors for Long Island Homeowners.

Many Underwater Properties Will Still Remain Underwater

The major prong of the settlement that everyone has been awaiting is principal reductions on underwater mortgages. Under the terms of the settlement, homeowners who will qualify for principal reduction would be slated to receive up to $20,000.00 in principal reduction relief.

While $20,000.00 sounds like a large number, it will not solve the problem faced by most underwater homeowners. On Long Island, a majority of properties that are underwater have mortgage balances that are at least $40,000-$50,000.00 over the current market value. A principal reduction of $20,000.00 would still leave the average property at least $20,000.00 underwater. Underwater is still Underwater. Even if a homeowner becomes one of the chosen few, and the reduction is coupled with a mortgage modification, it could still take a homeowner with a $300,000.00 mortgage at least 3 to 5 years to get back to sea level (break even) – and this does not even account for any accrued interest and other changes that may be added back into the balance when the mortgage is modified.

What If Your Mortgage Has Already Been Modified?

While many of the details will become available over the coming months, this writer will venture to guess that any homeowner who has been already modified could be deemed ineligible for principal reduction. All we can do is wait, see and hope…

After months of wrangling, the long-awaited foreclosure settlement between the government and the banks appears to be at hand.

A $26 billion settlement was announced Thursday morning between the federal government, state attorneys general and the five largest banks in the mortgage market: Ally Financial (GMAC), Bank of America, Wells Fargo, JP Morgan and Citigroup.

While many of the details still have to worked out, the major points are fairly clear:
(a) The settlement will only impact mortgages that were held by the five banks. If a loan was sold to Fannie or Freddie it may not be part of the pool that may be eligible to share in the pot.
(b) Five ($5b) Billion has been earmarked for payments to homeowners who may have been improperly foreclosed upon between September 2008 and December 2011. Borrowers could receive up to $2,000.00, depending on the number of claims filed nationwide
(c) Seventeen ($17b) Billion has been earmarked for various principal writedowns and other relief up to $20,000.00 per household
(d) Three ($3b) has been earmarked for refinancing mortgages currently underwater.

According to various reports, there are at least 1.5-2 million households who could be eligible for the $2,000.00 payouts. In addition, there are an additional 1-2 million homeowners who could be eligible for some relief under the remaining prongs of the settlement.

The major questions still to be answered are:
(1) How does the pot get split up between the states – rumors have been circulating that California alone could get up to eight (8%) percent of the pool; and
(2) What are going to be the eligibility requirements – who will be lucky and who will not?

Stay tuned – The banks have up to three (3) years to implement and fulfill the requirements of the settlement. It will still take another couple of months at a minimum to begin to get clear direction on how it will be implemented.

Bloomberg News reported earlier today that regardless of any resolution reached between the Attorneys General and the major banks servicing distressed mortgages in the next few days, a threat still looms over whether various investors will commence litigation to block the deal. If such an impediment is put in place, it will once and for all show which entities truly control the mortgage markets.

See Full Article

Most individuals or couples filing for protection under either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy are required to meet certain income eligibility requirements under the “Means Test.”

Under the Means Test, you must first determine if your average monthly income for the last six months is below the median income for your state, based upon the size of your household.

If your average monthly income for the past six months is below the median income in New York, you have passed the first hurdle, and so long as you meet the other eligibility requirements, you can file for protection under Chapter 7 Bankruptcy.

If your average monthly income for the past six months is above the median income in New York, you must proceed to the second hurdle – do you have the ability to repay a portion of your debt?

The second hurdle is the determination of your ability to repay a portion of your debt. Under the law, you are required to perform an analysis of your income and expenses (based upon certain Internal Revenue Service guidelines) – the Means Test..

With respect to expenses, some expenses are deducted on a dollar for dollar basis, others on an allocation basis, based upon family size and county of residence. The largest single deduction on an allocation basis for renters has always been housing/shelter expense.

Prior to November 1, 2011, renters who reside in Nassau and Suffolk Counties were required to deduct a ridiculously low amount for shelter expense as compared to homeowners who have mortgage obligations.

As of November 1, 2011, the playing field for Long island renters has now been leveled. Housing allowances for Nassau and Suffolk County residents have increased by 30% on average

The following is a chart of comparing the allowances:

Household              1                         2                         3                      4
                             Pre     Post      Pre     Post       Pre     Post        Pre      Post
Nassau County    1545   2027    1814    2300    1911    2508     2131     2796
Suffolk County     1385   1806    1626    2121     1715    2235     1911     2492

The net effect of this change is that, even if your income is above the median for the State, residents of Nassau and Suffolk Counties has been provided with an additional $6,000.00 allowance based upon the cost of housing on Long Island. This can make the difference between qualifying for Chapter 7 Bankruptcy and discharging all of your dischargeable debt and filing for Chapter 13 Bankruptcy and having to devote all of your net disposable income to a repayment plan of up to five years.

If you have been previously advised that you are “on the border” to qualify for Chapter 7 Bankruptcy, it’s time to look again and see if you qualify under the new housing allowances.

Special Note: Means Test Allowances are updated every six months.  The above allowances will only apply to cases for between November 1, 2011 and April 30, 2012.

In bankruptcy, you are allowed to protect various assets, such as cash or cash equivalent assets such as the right to receive a tax refund. This is called exempt property or exemptions.

When the exemption laws were overhauled in New York in January 2011, it proved to be a major benefit to homeowners and renters alike. Homeowners are now allowed to protect up to $150,000.00 in equity in their primary residence. Renters are now allowed to protect up to approximately $12,000.00 in any personal property, including tax refunds.

Despite the above benefits, there has always been, and still remains, a tradeoff for homeowners. If a homeowner must declare the “homestead” exemption, they can only protect $1,000.00 in cash or cash equivalent assets, such as a tax refund.

As we approach the end of the current tax year, homeowners must be wary of the timing of their Chapter 7 bankruptcy filing. Although the tax year has not yet ended, many Chapter 7 Trustees have taken the position that a pro-rata share of the current year’s tax refund may be considered property of a bankruptcy estate under Section 541 of the Bankruptcy Code. For example, if a homeowner filed on November 1st, the Chapter 7 Trustee may claim that approximately 83% of the tax refund for 2011 is property of the estate, and a homeowner may be required to be turn over that portion of the refund, when received, to the Trustee for distribution to creditors.

If you are a homeowner with equity in your primary residence and have traditionally received a substantial tax refund, you must ensure that this issue is discussed with your attorney. Your attorney’s job is to provide you with guidance to obtain the maximum protection under the law. It is hard enough to make the decision that a bankruptcy filing is necessary. You should not lose an asset that could be protected. Only an experienced bankruptcy attorney will raise this issue and help you work it through.

Daniel Gross recently reported on Yahoo Finance that there is one ray of light in the mortgage modification mess – Boston Community Capital. Here are some excerpts from his report…

Five years after the housing market peaked, the mortgage mess remains a significant drag on the economy. Banks, policymakers and investors have yet to figure out a way to stop the cycle of massive foreclosures and the fire sales that inevitably ensue. In September, foreclosures and short sales accounted for 30 percent of existing home sales.

The calls are rising, from all points of the political spectrum, for mortgage modification — i.e., figuring out a way to let people stay in their homes even if they can’t afford the current mortgage payment. While banks, the Obama Administration and the taxpayer-owned mortgage giants Fannie Mae and Freddie Mac dither, one non-profit lender is taking matters into its own hands.

Boston Community Capital, which has been active in the region for 30 years, last year set up the Stabilizing Urban Neighborhoods (SUN) initiative. The plan? Buy properties back from banks who aren’t willing to modify, then resell them to the owners who were in danger of defaulting or who had already defaulted —- at a much lower price and with a better mortgage. And all while delivering 4.25 percent annual returns to investors. The goal, aside from keeping people in their homes, is to stabilize neighborhoods.
Since 1985, BCC has invested more than $650 million in low-income communities, and financed more than 11,100 affordable homes. To raise funds, BCC in May 2010 sold $20 million in five-year bonds that pay 4.25 percent annual interest. Of the $20 million raised in the bond, $4 million immediately went into loan loss reserves.

In other words, of the $20 million raised, BCC will lend out only $16 million, at 6.25 percent. BCC also takes other steps to ensure repayment. BCC takes a diametrically opposed approach. It approaches the bank and offers to buy it at the market price. Here is an example:

In 2006, Lydia Smith and her husband, who were both full-time workers, bought a two-bedroom cape in Hyde Park, Massachusetts. Upon closing, they had two mortgages for a total of $329,000. “We didn’t know we were getting two separate loans,” Smith says. “When I asked about it at the closing, they gave us a runaround.” One of them had a large balloon payment. The couple was able to make the $2,550 monthly payments for a couple of years, but when Lydia’s husband, a custodian, got injured and was unable to work, they began to fall behind. America’s Servicing Company, the Wells Fargo unit that serviced the loan, wasn’t particularly responsive to efforts to modify.

BCC bought the house from the bank in February 2010 for $165,932. Then it turned around and wrote a new mortgage to the Smiths for $214,000 —- the price of the home plus a 25 percent loss reserve, plus a several thousand dollar reserve for repairs. The upshot: The Smiths now pay $1,685 per month for the mortgages, taxes and insurance, a 44 percent reduction.

The house is still underwater, but the homeowner —- and hence the neighborhood — is more stable. And while it gives borrowers a break, BCC also asks plenty of them. It requires people to make 26 bi-weekly mortgage payments instead of 12 monthly ones. The 26 weekly payments force borrowers to make an extra month’s payment each year, which they can use either to write down the principal or place in a reserve for a rainy day.
There’s a final piece that helps protect BCC from some of the charges that it is simply encouraging and abetting moral hazard. If the homes appreciate over time, the mortgage agreement provides that BCC received 50 of the gains. BCC has committed to use any such gains to spruce up neighborhood parks, or fund college scholarships.

Of course, to a degree, such efforts can be seen as rewarding irresponsible behavior. But proponents insist we take a broader view, and think less about the individual and more about the impact of foreclosure on neighborhoods.

Mortgage modification is a messy, complicated business. Groups like BCC are trying to solve a problem that was created on a wholesale level – mortgages shoveled out by machines – on a retail level. Serious obstacles remain. The first is scale. So far, BCC has returned 125 homes to owners through its SUN program, with only one default. It would like to expand in Boston, and in other cities, but there’s a funding issue. BCC is only borrowing for five years and lending for 30, so there will be a need for match funding/recapitalization down the line. The second problem is more daunting. It will come as no surprise that one of the institutions with the most to gain from mortgage stabilization simply isn’t interested in BCC’s effort. Freddie Mac will not modify any of its guidelines to accommodate the SUN program at this time. As a result, only 13 of the 125 homes have been funded through Freddie Mac programs..

Kudos to Boston Community Capital and simply another bad for Freddie Mac….