February 2009 Archives

February 20, 2009

The Homeowner Affordability and Stability Plan

On Wednesday, February 18, President Obama announced his intention to spend up to $75 billion for direct aid to forestall (hopefully) millions of foreclosures, and to make available $200 billion additional dollars to support refinancing of loans owned or guaranteed by the two giant federal housing agencies, Freddie Mac and Fannie Mae. The guidelines for these programs are expected to hit the press on March 4th. Here's my take on the basics of what has been announced so far.

You might qualify for a refinance at a 15- or 30-year fixed-market-interest-rate (currently a little over 5%) if all of the following are true:

  • The loan to be refinanced is a conforming loan.
  • Your loan is owned by Fannie Mae or Freddie Mac, or it has been sold by Fannie or Freddie as part of a mortgage-backed security (that is, it's been "securitized").
  • You have a history of being current on your payments.
  • The mortgage to be refinanced is on your principal residence.
  • Your first mortgage is 5% or less over the current value of your home. (For instance, if your home is worth $300,000, you can't qualify if you owe more than $315,000.)
  • If you have a second mortgage, the mortgage holder voluntarily agrees to continue to play second fiddle (which may be a hard sell).
A separate part of the plan speaks to homeowners who are in default on their loans or who are at risk of defaulting. If all of the following are true, you might qualify for a program that will bring your mortgage-related payments down to a total of 31% of your gross income:
  • Your mortgage loan is conforming.
  • Your mortgage-related payments exceed 31% of your gross income (which, by definition, will put you at risk of defaulting if you aren't already in default).
  • If your current debt-to-income ratio (mortgage debt over gross income) is higher than 38%, your lender will agree to changes that will bring this number down to 38% or lower.
  • The mortgage being modified is on your principal residence (in other words, investors and flippers not welcome here).
The plan has certainly brought out the cynics. The populist response seems to be that the plan doesn't adequately protect against "moral hazard," meaning that some undeserving people will benefit. On the other hand, many criticize the bill for precisely the opposite reason, claiming that it doesn't go far enough. The last major government attempt at foreclosure prevention -- the Housing and Economic Recovery Act of 2008 -- fell flat, primarily (in my opinion) because it asked too much of lenders and offered inadequate incentives to get the lenders to cooperate. Also, many mortgages have multiple owners -- often in other countries -- and then, as now, there is no current theory as to how to get these owners to voluntarily agree to changes that will reduce the sums contractually due to them. Still, there are important differences between this program and the last one that offer some basis for hope.

Perhaps most importantly, incentives are being offered to the various parties to do their part. Especially important are the incentives to the mortgage servicers (the folks you make your payments to and negotiate with if you get into trouble). Under current contracts between lenders and the servicers, the servicers make more money off foreclosures than they do off keeping you in your home. Under the new plan, the servicers will be incentivized to keep you from defaulting in the first place and to arrange for a workout designed to keep you in your home for the long haul.

In addition to announcing how he will use existing authority and appropriations to prevent foreclosures, President Obama also announced:

Despite what's good in the bill, there are some major unanswered questions which await the March 4th guidelines. For example, in a penetrating article in the San Francisco Chronicle on February 19th, business writer Kathleen Pender has raised some vexing questions about how the bill will play out, especially the requirement that the applicants for relief be "responsible borrowers".

Personally, my biggest problems with the bill are: 1)  in the heavily impacted parts of the country, people are underwater much more than 5% over the value of their house, and in many of the impacted coastal urban areas, the loans are non-conforming (that is, jumbo) loans, and 2) I strongly believe that making the mortgage modification power available to Chapter 7 as well as Chapter 13 bankruptcy judges would greatly expand access to that remedy by homeowners who have no other option.  

Again, we'll know more on March 4th and have a better view of  the devils lurking in the details. Look to the Nolopedia's Bankruptcy & Foreclosure resource centers for more comprehensive articles in the weeks following March 4th. And for now, take a look at the Q&As published on the U.S. Treasury's website (PDF) to get more information.
February 16, 2009

Keeping Up With the Foreclosure Prevention News

In earlier blog posts, I've tried to keep up with the various foreclosure prevention programs offered by major mortgage lenders. Every major mortgage lender has some sort of policy in place to handle requests for mortgage modifications. Some polices require that you be at least three months behind on your mortgage -- Fannie Mae and Freddie Mac among them. Other lenders -- Bank of America and Indy Bank among them -- don't require that you be delinquent. Some lenders will work with you if you are in bankruptcy (FHA-insured mortgage holders among them) while others won't. Unfortunately, there is no standard, across-the-board modification policy.

As statistics mount regarding the lasting effect of modifications, it's clear that many people simply cannot afford their house, even at the level of payment provided for by the modification. In fact, according to information published by the National Association of Consumer Bankruptcy Attorneys in December 2008, payments actually increase under many modification arrangements and, overall, voluntary mortgage modification programs just don't work for a variety of reasons. A recent article in BusinessWeek makes a persuasive case that the banking industry has made the foreclosure situation worse through its lobbying efforts to stall for time in the hope that home values would recover on their own.

Many consumer-oriented commentators, including NACBA, make the case that Chapter 13 bankruptcy judges should be allowed to modify mortgages on a case-by-case basis. The Heritage Foundation, on the other hand, makes a strong argument against bankruptcy-originated mortgage modifications. While I reject much of the reasoning in the Heritage Foundation article, for reasons stated in a previous post, I don't think Chapter 13 cram-downs alone will provide much of a solution; I do think that allowing cram-downs in Chapter 7 bankruptcy would go far to prevent foreclosures.

In an article published in the New York Times on Friday February 13, Alan Zibel reports that the major mortgage owners have put a hold on foreclosure evictions, pending the much-anticipated announcement of the federal foreclosure mitigation policies. According to Zibel, Fannie Mae and Freddie Mac, JPMorgan Chase & Co., Morgan Stanley, and Bank of America Corp. have all extended non-eviction policies originally put in place shortly before Christmas until sometime in early or mid-March. Or, for some lenders, at least until President Obama announces the new federal policy -- currently expected to take place on Wednesday, February 18th.

Details of the new policy have been hard to come by in advance, except that the program is expected to cost up to 50 billion dollars and will not require that eligible homeowners be behind on their mortgages. One leak has it that the program will involve direct payments by the federal government to effect reduction of mortgage payments to 31% of the homeowners' income. The answers to the big questions -- who will be eligible for these payments and how eligibility will be determined -- are still wrapped in mystery, except that the program is expected to only apply to homeowners who have acted in good faith when acquiring their troubled mortgage. Good luck on that one. Any policy that attempts to discriminate between the deserving and the undeserving is bound to create immense resentment among those who are left out. And, at least in some cases, the resentment will be well-founded.

February 3, 2009

Why People Don't File Bankruptcy Sooner: It's the Attorney Fees, Stupid

In a January 24th New York Times article entitled "Bankruptcy as a Step to Solvency," "Your Money" writer M.P Dunleavey quotes several bankruptcy "stars" (including Elizabeth Warren and Katherine Porter) about why people wait so long to file for bankruptcy. They point out that people suffer for an unreasonably long time under oppressive debt loads and that in many cases filing bankruptcy would restore already-trashed credit sooner than trying to rebuild the credit by avoiding bankruptcy in the first place.

All fine and good. I agree. People should file sooner rather than later, and their credit score should not hold the sway that it does. But the reason why people wait is not primarily because of credit concerns. People aren't stupid. They know their credit is in the toilet. So what's the real reason? It's primarily because attorney fees roughly doubled as a result of the 2005 changes, now in the neighborhood of $1500 and $2000 for the most basic Chapter 7 bankruptcies. In a word, bankruptcy attorneys have become unaffordable.  

This would be tragic but for the fact that there is seldom a good reason to use an attorney in a consumer Chapter 7 case. The procedures are almost exclusively administrative -- that is, there is no appearance before a judge, or any advocacy involved. The forms are all (with very few exceptions) pre-printed in plain English, intended for the bankruptcy filer's use and easily available in fillable format on the official U.S. Courts website. There are good plain English guides available, including How to File For Chapter 7 Bankruptcy written by this blog's authors, now in its 15th edition. There are plenty of bankruptcy attorneys afoot who are more than happy to provide pre-bankruptcy counseling for little or no money for people who want to check in with a professional.

What's tragic is that people think they have to have attorney representation. This belief stems in part from the fact that articles such as the one in the Times continually misrepresent the nature of Chapter 7 bankruptcy. For example, the article states: "Because bankruptcy is so complex, and because bankruptcy laws underwent a major overhaul in 2005, many people are not only wary of filing, but also confused about their options and what the possible outcomes are." People may be confused but the assertion that the confusion is justified by the complexity of the subject is flat out wrong in most cases. Yet, the exception becomes the rule, and anyone reading this article believes they can't handle their own bankruptcy. The bankruptcy bar can only smile at this intentional or unintentional piece of attorney marketing propaganda.

The article ends with a recommendation by Professor Katherine Porter that a lawyer can help you decide on the best type of bankruptcy to file (Chapter 7 or Chapter 13) and that you can find a lawyer on the website for the National Association of Consumer Bankruptcy Attorneys. And that's where the article ends. Not a word about the fact that over 20% of Chapter 7 bankruptcy filings are accomplished without a lawyer and not a peep about the resources offered by Nolo and other publishers of self-help law books.

By failing to acknowledge the possibility of self-representation and delivering its readers to attorneys they can't afford, the article becomes part of the problem. Ironically, self-representation is the one approach that may produce the very result the article recommends -- that is, get thee into a bankruptcy court sooner rather than later.