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Why Has the Sub-Prime Mortgage Crisis Been so Toxic to the United States Economy

By Jonathan on February 25, 2009

In my last post, I attempted to offer a simple explanation about how the housing market in the United States got into trouble. In this post I want to discuss some of the highlights (or lowlights) of what this crash means to you.

Let’s start with some of the financial institutions that invested so heavily in those profitable subprime mortgages and securities that were created to allow investors to sell and resell parts of these mortgages. When you hear the term “securitization” it means that an investment banker has created a security (think share of stock) from a package of loans. Lenders and investment bankers got fat and greedy.

Remember the old line, solid mortgage lenders like Countrywide, Chase and Bank of America? Remember the investment banking giants like Merrill Lynch and Lehman Brothers. These institutions had made so much money lending, servicing and selling subprime loans and securities derived from those loans that they took outrageous risks. [Read more…] about Why Has the Sub-Prime Mortgage Crisis Been so Toxic to the United States Economy

A Simple Explanation of the Sub-Prime Mortgage Meltdown

By Jonathan on February 23, 2009

The U.S Federal Reserve anticipates that in fiscal year 2009, the Unites States’ economy may shrink between 0.5% and 1.3%. By historical standards, this means that we are in a serious recession. This slowdown may be attributed to many factors – an increase in unemployment, a lack of consumer confidence, a lack of confidence in the investment community and an overall reduction of the amount of liquid assets in our banking system. Perhaps the biggest factor that has hurt the American economy (and the world economy as well) is what can only be called a collapse of the housing market in the United States. Many lenders have gone bankrupt, housing values have diminished and many homeowners are in trouble. Because the housing market is so big it affects every facet of the American economy and when the housing market is in trouble the entire financial foundation of the United States will be in trouble as well. How did we get here and what are the solutions?

Why is the housing market in the United State in trouble? A big part of the problem arises from a collapse of the so-called “subprime” mortgage market. Until just a few months ago, subprime lending – or lending to credit challenged borrowers was a big profit center for many banks and mortgage lenders. Subprime lending was so profitable that many lenders changed their business models to accommodate the demand for subprime credit. Subprime loans, or more accurately, pieces of subprime loans, were sold off by loan originators as securities in the stock market. [Read more…] about A Simple Explanation of the Sub-Prime Mortgage Meltdown

Are Mortgage Modifications in Bankruptcy a Good Idea – Part Two

By Jonathan on February 17, 2009

Earlier this month, I wrote a post on this blog setting out the question of whether Congress should enact legislation empowering bankruptcy judges to modify the terms of mortgages within a Chapter 13 bankruptcy.

Several of my colleagues in the Bankruptcy Law Network have argued that adding this power to the authority of bankruptcy judges will help stem the foreclosure crisis we are seeing in many cities and towns and that so called “voluntary” mortgage modification programs created by mortgage lenders has not and will not work.

Bankruptcy Law Network founding member Cathy Moran, who I respect greatly, has created a special advocacy page on her website that you can use to encourage your elected representatives to support mortgage modification in bankruptcy. At the same time Cathy notes that the judicial mortgage modification legislation now circulating in Congress leaves many unanswered questions.

North Carolina bankruptcy attorney Adrian Lapas, writing on the Bankruptcy Law Network blog, makes a compelling case in favor of judicial mortgage modification – click on the link to read Adrian’s post.

What, then, are the arguments against judicial mortgage modification. A thoughtful and well reasoned argument against modification comes from Andrew Grossman of the Heritage Foundation. Mr. Grossman argues that judicial mortgage modification will impose uncertainty and financial loss on mortgage lenders, thereby increasing the cost of mortgage loans in the open market. Credit, therefore, would further tighten, causing additional limits on mortgage availability. [Read more…] about Are Mortgage Modifications in Bankruptcy a Good Idea – Part Two

You are Responsible for Your Chapter 13 Trustee Payments

By Jonathan on February 10, 2009

I have probably written about this subject before, but I am going to raise it again because it creates so many unnecessary problems and it arises month after month and year after year.

If you are a Chapter 13 debtor, you and you alone are responsible for making your trustee payments.

Pre-confirmation

In the Northern District of Georgia, all Chapter 13 cases must be funded by payroll deduction. An employer deduction order (“EDO”) should be filed in your case at the time your case is filed. Until the money starts coming out of your check, however, do not assume that your employer knows what to do or knows how to do it right. Further, you should assume that your employer may need 1 to 3 payroll cycles to implement the payroll deduction. Until the money starts coming out, you have to make the payments directly.

I cannot tell you how many confirmation hearings have been held up because a Chapter 13 debtor was one or two bi-weekly payments behind. In fact, I advise my clients to send in the first one or two bi-weekly or semi-monthly payments under the assumption that the employer will not withhold accurately the first time.

The pre-confirmation period in a Chapter 13 functions as a kind of probation period for your Chapter 13. If we drafted an “aggressive” plan, there is a good chance that we may have to amend the plan and increase the payment to the trustee. If this happens, your attorney will file an amended EDO. But guess what. Some payroll office employees don’t recognize that the amended EDO is different than what they received 4 weeks previously. When you plan is amended to increase the payment you need to verify that the correct amount is being withheld.

Post-confirmation

Five years is a long time. And during that five years you may experience an interruption in your employment causing an interruption in your pay and therefore an interruption in payment received by the trustee. Do not ignore this interruption and hope that no one will notice. The trustee uses a computer program to track payments. If you fall behind, the lapse will eventually trigger a trustee Motion to Dismiss. If that Motion to Dismiss occurs in year three, leaving you, for example 22 months left in your plan, any delinquency needs to be cured in that 22 months. This may require a substantial increase in your monthly payment or a large lump sum.

Bankruptcy Bill Explains Secured Transactions in Bankruptcy

By Jonathan on February 6, 2009

From our friends at BankruptcyBill – a graphical explanation of how creditors get paid in a bankruptcy.

Strip #10 – Natural Order

bb_scavengers-02-06-09

Are Mortgage Modifications in Bankruptcy a Good Idea – Part One

By Jonathan on February 2, 2009

There has been a lot of chatter on bankruptcy blogs and bankruptcy lawyer forums about the possibility that Congress will amend the bankruptcy laws to give judges the power to modify mortgages. To offer some perspective, bankruptcy judges have long had the power to modify vehicle loan contracts and other secured debt claims but never mortgage debt.

When I first started practicing bankruptcy law some 20 years ago, I was introduced to the term “cram down” which is a kind of bankruptcy lawyer slang for the process of forcibly changing the terms of a contract against a creditor’s interests. In a typical car loan cram down, you might enter into bankruptcy with four years remaining on a five year note, a monthly payment of $530 per month, an interest rate of 12% and a total outstanding balance of $28,000. After cram down the interest rate might be 6% and the outstanding balance may be $18,000 (which represents that approximate value of the vehicle) and the monthly payment to the creditor within a Chapter 13 plan might be $250 per month.

As you can see from this example, the purpose of a cram down is to bring a debtor’s obligation more in line with the value of the collateral and prevailing interest rates. I suspect that Congress allowed cram downs on car loans because it saw a problem in the market place whereby consumers with poor credit were ending up with unreliable used cars at unreasonable terms in the secondary market.

Debtor’s attorneys also included cram down provisions in Chapter 13 plans to modify the terms of other secured loans, such as furniture and jewelry. However, home loans were specifically excluded from cram down.

In 2005, with the enactment of the BAPCPA changes to the bankruptcy laws, Congress added restrictions to the power of judges to cram down vehicle purchase loans. In other words the era of freewheeling bankruptcy cram downs was over. Under the amended law, vehicles purchased less than 910 days prior to the filing of a bankruptcy case were not subject to cram downs.

These new restrictions on the authority of a judge to forcibly modify the contractual terms between a debtor and his car finance company were the result of extensive lobbying on the part of the automobile industry who argued that market forces, not bankruptcy judges ought to set the terms of vehicle purchase financing.

There has been no organized effort to change the rules regarding vehicle cram downs. Instead, Congress has turned its attention to mortgage loans. Perhaps this is not surprising since the federal government, through its mortgage guarantees, now owns or controls a fairly significant chunk of mortgages owed by Americans.

Legislation is now circulating in Congress that would allow a bankruptcy judge to change the terms of a mortgage, which would involve such things as:

reducing the outstanding balance to line up with the current market value
modify the terms (monthly payments)
change the interest rates

The sense among bankruptcy lawyers is that if this legislation makes it into law, Chapter 13 bankruptcy will become a viable and attractive option to middle class families who might never have considered bankruptcy relief. Mortgage debt is often a family’s largest obligation and an opportunity to “re-write” one’s mortgage at more favorable terms while at the same time reducing credit card debt and canceling unfavorable leases and service contracts may very will put the bankruptcy option on the table.

Is it a good idea to enable mortgage loan cram downs? If you have a mortgage and have been contemplating bankruptcy should you wait? We’ll explore those questions next….