Nolo’s Bankruptcy & Foreclosure Blog

What HUD-Counselor Shortages Mean for Home Loan Modifications

2010-09-03T22:22:10Z

When the Making Home Affordable Program was launched, the Department of Housing and Urban Development (HUD) had a pretty good network of counselors in place. Not only were these counselors free of charge and highly trained in the ins and outs of mortgage modification procedures, but they would advocate for the homeowner in seeking the best available modification under applicable regulations and policies. Where banks might give modification seekers the cold shoulder, HUD-approved housing counselors had back channel connections that would push the request forward in a reasonable amount of time.

For these reasons, the second edition of The Foreclosure Survival Guide (which I wrote about the same time as the Making Home Affordable Program launched) strongly recommends that you hook up with a HUD-approved housing counselor to help you deal with your bank under its--and the Making Home Affordable--guidelines.

New Landscape: Not Enough HUD-Approved Counselors

Unavoidably, the number of people seeking assistance from HUD-approved housing counselors ballooned with the advent of the Making Home Affordable Program, and from all accounts HUD's housing counselor program has not kept pace. My clients have consistently reported that working with HUD counselors provides little or no advantage over working directly with the bank, and that counselors, like banks, lose paperwork and require redundant submissions over a long period of time without any tangible results.

Old Advice May No Longer Hold True

In short, my previous universal answer to people facing foreclosure ("call 1-888-995 HOPE and hook up with a HUD-approved housing counselor") may no longer be operative in all -- or even most -- cases. On the other hand, you have little or nothing to lose by starting with a HUD-approved counselor, provided you approach the relationship with a tad of skepticism. And my advice in The Foreclosure Survival Guide about not paying for modification help still holds. In most cases it won't help you to hire a lawyer or real estate broker to assist with your modification request. The fact is, too many people are seeking modifications for most banks to respond in any reasonable time frame.

Why Hasn't the Make Home Affordable Program Worked?

2010-08-27T22:18:08Z

In my previous blog, I talked about how the Making Home Affordable programs have not been particularly successful in keeping families in their homes, especially given the amount of money thrown at the problem. (See More Money for Foreclosure Prevention: Will It Help?) So this brings me to the next inquiry: Why haven't these programs worked?

There are three overarching reasons why the Making Home Affordable program has failed in its primary mission, which is to keep people in their homes.

First, the program has erroneously depended on the good faith of the American mortgage lending industry, a mistaken approach for many lenders.

Second, many people facing foreclosure lack an income stream to support even a radical modification.

Third, even if good faith among the banking industry was widespread and unemployment wasn't so high, the Making Home Affordable program was still doomed to fail because of the sheer number of people applying for modifications. As a whole, the banking bureaucracy has not been up to the task of processing this flood of modification requests, which has resulted in many applicants giving up out of disgust and despair.

More Money for Foreclosure Prevention: Will It Help?

2010-08-25T17:30:07Z

A recent announcement by the Obama administration provides an additional two billion dollars worth of foreclosure prevention assistance in seventeen of the hardest hit states. This is on top of 1.5 billion dollars allocated earlier in the year for the five hardest hit states. And HUD will kick in one billion dollars for foreclosure prevention efforts in the additional states. The programs target unemployed homeowners and will implement by the states to fund locally originated foreclosure-prevention programs. These programs typically help homeowners reduce their principal mortgage, deal with second mortgages, and, where appropriate, facilitate short sales and deeds in lieu of foreclosure by providing assistance to move or find rental housing.

But will the additional money and new programs help? It's not likely.

For starters, two billion dollars (or 3 or 4 billion) doesn't seem like an overwhelming number given the many billions of dollars that have already been spent in mostly fruitless efforts to halt the foreclosure epidemic. Of course those who successfully get help to stay in their homes will benefit, which has been the thinking all along for the basic Making Home Affordable programs. However, the Making Home Affordable programs have been in place for well over a year, and have only resulted in several hundred thousand mortgage payment modifications (and far fewer refinancings) out of the seven to eight million foreclosure filings on record. And even where modifications have occurred, the homeowner has defaulted anew in more cases than not. Simply put, the Making Home Affordable program has failed to make homes affordable for most of the people who have tried to benefit from its provisions, and there is no reason to think these new programs will be any different.

Next up: Why haven't the Making Home Affordable programs worked?

California, North Carolina, Wisconsin increase bankruptcy exemptions

2010-01-05T23:29:49Z

Debtors in three states will enjoy larger exemption amounts in 2010, thanks to legislation passed late last year.

The California homestead exemption increased by $25,000 as of January 1, 2010. The current amounts are $75,000 for individuals, $100,000 for couples, and $175,000 for seniors (over 65), disabled or over 55 with limited income, effective January 1, 2010, thanks to legislation signed by Governor Schwartzeneger in late last year. (See articles about the new law, AB 1046, here and here.)

North Carolina homestead exemption increased from $18,500.00 to $35,000.00, and to $65,000 if you are 65 years of age and your spouse (or possibly life partner) with whom you owned the property as tenants by the entirety (for spouses only) or Joint Tenants With Right of Survivorship (JTWROS), and your spouse or partner passed on before you. The changes became effective December 1, 2009. See information about the changes here and here.

Wisconsin bankruptcy exemptions increased in December 2009. The homestead exemption was at $40,000 and is now at $75,000, and, even better for married debtors, that amount can now be doubled to $150,000 when filing jointly. More details here and here.

Other changes to Wisconsin exemptions include:

Consumer goods exemption raised from $5,000 to $12,000

Motor vehicles exemption raised from $1,200 to $4,000

Tools of trade exemption raised from $5,000 to $12,000

Personal injury exemption raised from $25,000 to $50,000

These changes mark a trend recently for states to revisit their exemption laws and increase them as a way of helping people hang on to a minimal amount of property as they struggle to regain their footing in this tough economy.

If you know of any big changes we've left out, please let us know! Thanks!

To learn more about what happens if you own a house and file for Chapter 7 bankruptcy, see Nolo's article Your Home in Chapter 7 Bankruptcy.

The Foreclosure Survival Guide: Read it Online for Free!

2009-08-31T19:15:17Z

If you're one of the more than 1.5 million U.S. families that may face foreclosure this year, you need information you can trust and use -- now. That's why Nolo has built a website where you can read and browse the entirety of my book, The Foreclosure Survival Guide, for free.

Don't waste time or money on dead-end solutions to your pending foreclosure. Take a look at this free version of The Foreclosure Survival Guide on Nolo.

Beware of Commercial Mortgage Modification Services

2009-07-17T01:14:14Z

Nothing gets my blood boiling faster than when I see struggling homeowners pay thousands of dollars to hire someone to represent them in a mortgage modification negotiation. My advice is always the same: attempt to hook up with a non-profit HUD-approved housing counselor and dump the commercial service. I also suggest they demand their money back and consider reporting the service to their state's attorney general and the Federal Trade Commission since these services are increasingly illegal.

From the time the foreclosure rates started skyrocketing, self-styled foreclosure-rescue operations landed on at-risk homeowners like locusts on wheat fields. When people still had equity in their homes, the operators of these scams would find ways to separate the mark from his or her home ownership -- supposedly as a temporary means of dealing with the foreclosure. It didn't take long for the home's equity to end up with the scammers and the homeowners to end up on the street.

As home values continued to plummet and homeowners were increasingly underwater on their mortgages, the foreclosure rescue operations turned to charging an up-front fee -- typically in the low thousands -- to replace their previous equity-stripping practices. When modification results were not forthcoming in the face of looming foreclosures, homeowners were told to be patient and that everything was on course. At some point, the homes would be sold in foreclosure and calls to the "rescue" company would go unanswered.

Quick to respond to these obvious scams, many states have passed new legislation that, among other things, prohibited the collection of "foreclosure rescue" fees prior to the delivery of the service. In addition the Fair Trade Commission recently announced lawsuits in 23 states against perpetrators of these scams. Unfortunately, as is generally true with consumer protection legislation, lawyers have for the most part been exempted from their provisions -- and law firm ads on radio, cable TV and the Internet exhorting people to hire them to handle their modification activities have mushroomed.

Although I have no proof, the timeline of these developments tells me that at least some of these attorneys are simply fronting for the same companies that were scamming homeowners all along. But even if the attorneys are not fronting for foreclosure rescue scams, they might as well be -- as I point out below.

]]> In recent weeks, some of my clients have reported paying law firms between $3000 and $4000 to help them obtain a mortgage modification. They have been told they'll get a refund if the modification doesn't materialize but when they asked for their refund after weeks of no results, they've been told that the modification is still "in the works" and to be patient. A couple of clients who did receive a modification (and who were denied a refund on that basis) were dissatisfied because the modification they received was conversion of their payments to an "interest-only" loan that will reset at an atrocious rate within a year. In answer to their request for a refund, they were told that they got what they wanted -- lower payments in the short term -- and that they would hopefully be able to afford the higher payments that would be waiting for them down the road. Sound familiar?

Of course, some of the attorneys who provide these services may believe that they provide a good service for the fees they charge. However, to justify taking thousands of dollars away from distressed homeowners for mortgage modification assistance, these attorneys have the moral, if not ethical, burden of explaining to their clients what services they offer that the clients can't get for free from a highly trained, HUD-approved housing counselor. If they can't, it's my opinion that what they are selling amounts to a high-priced scam.

As stated in many of their ads, debt modification attorneys argue that they have more clout than the HUD-approved counselors because they can threaten litigation in appropriate cases. Perhaps there are a few instances where this is true and as a result the homeowner gets fair value of the lawyer's high fee. But in my experience, most banks are hip to this sort of threat and, if anything, will more likely dig in their heels than cave in and agree to do a major modification. Lawyers also often argue that HUD-approved counselors are overwhelmed and therefore not available. Again, this is largely not so. Just get in line and be patient and you'll get quality free help long before a foreclosure occurs.

So to conclude, my advice is to avoid all mortgage modification services, including those hyped by lawyers, that charge an upfront fee -- instead, contact a HUD-approved counselor to help you with your modification. (Simply call 1-888-995 HOPE or click the "Find a counselor" button at the top of the page at www.makinghomeaffordable.gov.)

Linking Healthcare Costs to Bankruptcy -- More Spin Than Truth?

2009-06-08T14:26:24Z

A recent Harvard law school study indicates that health care costs are "behind" roughly 60% of bankruptcy filings. My personal experience gleaned from counseling close to 1,500 bankruptcy debtors since 2005 would suggest a much lower figure, at least under the commonly accepted definition of "behind." For example, according to my experience, in a typical bankruptcy case the credit card debt load alone comes in around $30,000 whereas the actual medical debt is usually less than $1,000. Does this mean that my clients' medical debt is "behind" their bankruptcies? I wouldn't think so, but add a relatively small portion of the credit card debt that may be pushing their bankruptcies, and the word "behind" becomes somewhat more credible. Still, not counting mortgages, car loans, student loans and tax debts, a large majority of the debt (in my cases at least) has come from purchases and personal loans for living necessities, family vacations, car and home maintenance, "toys" and, not insignificantly, from penalties and interest for late payments and overcharges.

Are my clients healthier than the norm? I don't think so, but almost all of them receive their primary health care through Medicare, Medi-Cal (a state-specific variant of the federal Medicaid program), or employment-related benefit programs. To be sure, some of them have gone without while others have been left with residual debts due to co-payments and the occasional uncovered treatment or prescription -- a relatively insignificant part of their overall debt load. There are, of course, exceptions to this -- an uncovered trip to the emergency room with a $15,000 price tag or the like has provided the bankruptcy filing trigger more than a few times.

So, if I were issuing a report based on my cases, I could honestly say that health care debts have been part of the mix, but I wouldn't want to insinuate that medical costs were the most important factor. Of course, since I only serve California debtors, their experience may be way different than that attributed to bankruptcy debtors in other states -- and the Harvard poll may be perfectly accurate outside of the Golden State.

Still, the timing of the report -- derived as it is from a poll taken some two years earlier -- is suspicious given the fact that the national health care debate is about to begin in Congress. It makes me suspect that the poll is being reported in a manner to serve an agenda -- one that is tilted towards significant health care reform. Simply put, someone is wagging the dog, but don't get me wrong. That's my agenda too. I just wish that polls and the statistics that are drawn from them were not so consistently used to manipulate public opinion in a particular direction rather than to tell "just the facts, ma'am" and let those who read them draw what conclusions they will. Jeez, I know, my naïveté runneth over.

Determining Mortgage Modification Eligibility on the Web

2009-05-16T19:36:21Z

In an earlier blog entry and Nolopedia article, I explain the basic requirements for refinancing a mortgage and having your payment reduced under the Obama administration's implementation of the Homeowner Affordability and Stability Plan.

Now the government has put up a user-friendly website dedicated to helping you determine whether you are eligible to have your mortgage refinanced or your mortgage payment reduced under this new law In addition to eligibility determinations, the website helps you find a HUD-certified housing counselor and, in a resource section, provides calculators to help you determine your debt to income ratio and your likely payment if you qualify for the program. If you are wondering whether the Obama Administration's mortgage modification programs will help you out, this is definitely the website of choice.

Stay Away from Debt Management Plans

2009-05-15T18:48:11Z

In a brief article found on the Debt Law Network, the author notes:

The FTC has found that some organizations that offer debt management plans (DMPs) have deceived and defrauded consumers, and recommends that consumers check their bills to make sure that the organization fulfills its promises. If you are paying through a DMP, contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the organization handling your DMP. Once the creditors have accepted the DMP, it is important to:
Make regular, timely payments.
Always read your monthly statements promptly to make sure your creditors are getting paid according to your plan.
Contact the organization responsible for your DMP if you will be unable to make a scheduled payment, or if you discover that creditors are not being paid.

The article goes on to explain what can happen if you are late with a payment. What it doesn't say as clearly as it might, however, is that your plan will most likely go up in flames if you fall short on your payments. In my humble opinion, you should stay away from debt management plans for this reason alone. But there is more.

First, as confirmed by the FTC, the company you choose may be a scam. In addition to not delivering on its promises, it may be taking your money under circumstances where it's clear you can't afford the plan. Second, by paying a "middle man" to do something that you could do yourself (negotiate a payment plan with your creditors), you are wasting precious resources. And third, none of the plans that I've seen are willing to open their books and publish their success/failure ratios. Since I don't know what those ratios are, I can only guess that they would likely scare off future customers and bring the FTC down on them even faster than is already the case.

Perhaps my biggest reason for being so negative about DMPs is that they divert your income from you and your family to the DMP company and your creditors. Assume, for example, that your plan requires you to pay $300 a month for three years, and after the first year you are unable to continue making the payments. During that first year you will have paid $3,600 under your DMP for no good reason. Had you deposited that $3,600 into a savings account, you would be in much better shape to rebuild your finances.

Of course, you will still have to deal with your debt in some way. My way is bankruptcy. If you are guided by a morality that compels you to repay your debt, file under Chapter 13 and throw as much money as you can into your Chapter 13 plan. If you, like many, feel justified in getting a fresh start within several months rather than several years under a Chapter 13, file under Chapter 7. Unlike Chapter 13, you can probably handle your own Chapter 7 bankruptcy without a lawyer, which means that for several hundred dollars you can be rid of your credit card debt no matter how much you owe.

"But," I hear you say, "my credit will be ruined if I file bankruptcy." Yes it will, at least for a while, but your credit may likely already be in the tank. More importantly, in the new economy, we will all be required to live within our means. If you are able to save every penny you would use to pay off all or a major percentage of your credit card debt yourself rather than under a DMP, your savings account will be large enough to replace the financial cushion that good credit provides.

To learn more about debt management plans and how to avoid scams, see Nolo's article Debt Management Plans.

The New Federal Housing Plan: A Good Start

2009-03-11T21:04:46Z

On February 17, the Obama Administration announced its new homeowner affordability and foreclosure prevention plan. On March 4th, the Treasury Department issued guidelines as to how the new plan would be implemented. Despite criticism from all sides, I think the plan is about as good an approach as is possible in the current political and economic climate.

Many articles and blogs that are critical of the program have pointed out the obvious -- that the plan won't apply to many who could use the help, or even to the majority of people at risk of foreclosure, especially those who are losing their jobs at such a rapid rate. There will be widespread injustices in that many people who deserve to get help will fall outside of the guidelines and an equal number of people who get help may arguably not deserve it. The plan is structurally insufficient given the lack of adequate funding. The mortgage modification part of the plan will crash and burn when (not if) the investors sue because they feel it favors the banks and homeowners and neglects their interests. And so on and so forth.

The fact is, there is no way to create a massive housing relief and foreclosure prevention program without its share of problems -- big problems. Still, the Administration's plan appears to successfully thread a very thin needle by making large and hopefully permanent improvements in the home mortgage landscape while avoiding the worst of the moral hazard bunkers -- a political necessity.

The plan consists of two components: a $400 billion refinance program and a $75 billion mortgage modification program (all to be paid out of previously allocated funds). Setting aside the details for a moment, the programs will likely accomplish two important goals:

The refinance program will potentially transform millions of funny-money loans with uncertain interest rate futures into stable, 15- or 30-year fixed-rate low-interest mortgages. Payments on the refinanced loans will increase in some cases, but the homeowner's participation will depend on his or her ability to afford the new loans. And even though their payment may be higher in the short term, it will be stable in the long term -- no more fear of interest resets. While the refinance program only applies to mortgages owned or backed by the two large federal housing finance agencies -- Fannie Mae and Freddie Mac -- we're talking about half of the nation's mortgages. Overall, the program is bound to have a substantial -- and positive -- effect on the mortgage default rate and the stabilization of home prices.
Equally important, the mortgage modification program creates a workable approach to modifying mortgages so that payments for many will be brought within the affordability range. Also, for the first time, homeowners can get an objective fix on whether they are eligible for a modification. It's impossible to say what the future holds for the real estate industry, but it makes sense to believe that once mortgage lenders become comfortable with the very idea of modifying loans, only good things will follow. Whether or not the number benefiting from this program will be in the millions -- as predicted by the Administration -- or in some lesser amount doesn't really matter. The overall numbers are sure to be large.

Getting back to the details, let's continue with the refinance program: Even if you have a shot at this program because your mortgage is owned or backed by Fannie Mae or Freddie Mac, you will only qualify if what you owe on the mortgage is within 105% of the home's current value. For example, if your property is valued at $200,000, you won't qualify for refinancing unless you owe $210,000 or less on your first mortgage. This means you probably won't benefit from this program if you live in the areas most heavily impacted by the housing crisis -- home values in these areas are frequently 25% or more below what's owed on the mortgage. You also will probably be disqualified if your loans are jumbo rather than conforming (over $417,000 in most areas, and $729,750 in higher-cost areas like New York and California).

But suppose you're lucky and live in a part of the country where you're just a little upside-down, within the 5% range. Even then you'll need a good payment history (some say good credit is also required) and an income that is adequate to afford the payments under the new loan, which, as mentioned, may be higher than under your current loan, at least for a little while.

In the final analysis, the homeowners who least need a refinanced mortgage are the most likely to get one, and vice versa of course. And this says something very important about both of the new programs: They were carefully crafted so that the Obama Administration could credibly assert that only responsible homeowners would be helped. They didn't want to defend themselves against the allegation that we taxpayers were rewarding bad behavior -- the moral hazard quandary. In the case of the refinance program, only homeowners who have a good payment history and who aren't very much upside down are getting to play. Homeowners who somehow got in way over their head or who have shirked their payment duties will likely not be invited to the party.

The Administration's attempt to only help responsible homeowners is also evident in the mortgage modification part of the program. To qualify for a modification you have to show:

financial hardship caused by change of circumstances, such as loss of a job, a medical emergency, or an interest-rate reset (if you were in over your head from the beginning, it's unlikely you'll qualify for help)
risk of foreclosure, meaning you have missed at least two payments, or your debt to income ratio (your DTI) is higher than 31%, and
sufficient and provable steady income (by way of a tax return and wage stubs) to make the payments required under the modified loan.

The ball starts in the mortgage servicer's court. All participating mortgage servicers (so far, most of the big ones have signaled their willingness to play along) must perform an initial "net present value" (NPV) analysis on all loans in their portfolios that are either at least two months delinquent or that are in "eminent risk" of default. Although the guidelines don't define what "eminent risk of default" means, I assume it means loans with a debt to income ratio in excess of 31%. A loan's NPV is what it would cost (in cash flow) to modify the mortgage relative to the cost of foreclosure and is to be calculated according to parameters set out in the guidelines. Based on past practices, most NPV analyses will favor modification and in those cases the servicer will be required to notify you, proceed with modification discussions with you, and modify the mortgage, assuming you meet the other eligibility requirements.

The ultimate goal for the modification program is to adjust the interest rate and duration of the mortgage so that the homeowner has a debt to income ratio (DTI) of 31% (meaning the payment on the first mortgage, including taxes and insurance, will be 31%of the homeowner's gross income; the mortgage debt that goes into this DTI ratio doesn't include payments on a second mortgage, installment payments, or mortgages on other houses).

The modification is to be accomplished by first reducing the interest rate to as low as 2% and then by extending the term of the mortgage (from its inception) to a maximum of 40 years. Once the payment (through this process) reaches a DTI of 38%, the government will share the cost of the rest of the reduction down to 31%. The servicer also has the option of modifying a mortgage loan by reducing its principal -- with government participation and backing. Last but not least, the program provides monetary incentives to servicers for keeping people in their homes and to lenders for agreeing to modify the mortgage.

Both programs are designed to operate without the need for homeowners to come forward with a request for assistance. Rather, the servicers will be contacting people for a follow up after their initial eligibility for a modification or refinance has been established. Nevertheless, it would be a good idea for you to consult with a HUD-Certified Housing Counselor to see whether you are being treated fairly under the new plan. To find a counselor, call 1-888-995 HOPE.

Under no circumstances should you pay a counselor for his or her services. A bevy of mortgage brokers have been retrained to modify mortgages under the new plan (in fact, a new trade organization has been created just for "loan-modification experts") and are charging outrageous fees for doing absolutely nothing that a HUD-certified housing counselor won't do for free. Some new mortgage modification companies are hiring lawyers to be front-people for them so that fees can be collected in advance (something that many state laws prohibit). And it's true that lawyers can sometimes be very helpful in preventing foreclosures as such. But, as with mortgage brokers, lawyers have no magic keys to the kingdom of mortgage modifications. Again, for that purpose, you and your wallet will be better off with a HUD-certified counselor.

Cars in Chapter 7 Bankruptcy -- What Happens?

2009-03-04T16:06:01Z

People often ask me about how Chapter 7 bankruptcy will affect their ability to keep their car. If you aren't making payments on a car, then it's just a matter of using whatever exemptions are available to keep it, just like any other asset. However, if you are making payments on your car, it's not so simple. As part of your bankruptcy you must decide how you want handle the note. You do this by filing an official form called the Statement of Intention (SOI) with your other bankruptcy papers as well as mailing a separate copy of the SOI to your lender. I go into more detail on this in a new article on Nolo's website: What Happens to Your Car in Chapter 7 Bankruptcy?

Lobby Your Congressional Representative in Favor of HR 1106

2009-03-02T23:38:12Z

Sometime this week, the House is expected to vote on H.R. 1106, the bill that would allow Chapter 13 bankruptcy judges to modify residential mortgages. Right now, judges cannot modify mortgages attached to the bankruptcy filer's principal residence.

Without question, an enormous number of homeowners facing foreclosure would be able to keep their homes now and in the future if the principal owed on their mortgage could be crammed down to the home's current market value in a Chapter 13 bankruptcy (and the interest rate reduced to the bare minimum). Not only would foreclosures be avoided, but Chapter 13 itself would become much more available as a remedy, since many Chapter 13 plans fail because of the non-affordability of the filer's mortgage payments.

Previously, I've argued that Chapter 7 judges should also be allowed to modify mortgages, since so many more people file Chapter 7 than Chapter 13. However, half a loaf is better than none, and allowing Chapter 13 judges to bring mortgages into line with the value of the home would not only benefit the filer but would also provide a powerful brake on the deterioration of the residential real estate market.

You can lobby your representative by calling 1-877-354-4958 between 9AM and 6PM Eastern Standard Time only. You will be given specific suggestions for the substance of your phone conversation and prompted to enter your zip code, but the basic idea is that you favor passage of the bill.

Depending on your Congressional district, your call will be routed to the office of your Senator, your House Rep, or the White House.

The Homeowner Affordability and Stability Plan

2009-02-20T19:04:01Z

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:

his support for legislation that would allow Chapter 13 bankruptcy judges to modify residential mortgages on a case-by-case basis
his intention to require all future recipients of federal money to comply with the modification procedures and standards that are being established in his plan, and
his plans to piggyback this most recent plan on top of the HOPE for Homeowners Act (part of the up-to-now failed Housing and Economic Recovery Act of 2008).

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.

Keeping Up With the Foreclosure Prevention News

2009-02-16T20:54:42Z

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.

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

2009-02-03T23:23:14Z

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.