Citi decides not to play Scrooge for the holidays, but in January all bets are off

Trying to repair an image that is pretty bad right now, Citi has decided not to pursue foreclosures for the Christmas holidays. But, because life does go on, they will start back up again in January. Citi estimates this will benefit about 2,000 homeowners, albeit temporarily. What if Citi got some real Christmas cheer and looked seriously at some of the 100,000 loan modification requests they have received? That would be something. Unfortunately, Citi has only modified 270 of those loans. Think about that--a 2.7% loan modification rate. That is pretty bad and brings us back to the point discussed on this blog many times: the only way lenders will make serious changes to their loan modification process is if Congress allows mortgages to be modified in Chapter 13 bankruptcy. Will it happen? Only time will tell.

AB 1046 Signed by Governor - $25,000 Increased Homestead Exemption

The Governor signed AB 1046 (click here for history) on October 11. The bill increases the homestead exemption by $25,000. The full bill can be found here. The homestead exemption is increased to $75,000 for an individual debtor, $100,000 for debtor who is member of a family unit, and $175,000 for debtors 65 and over and disabled debtors. The bill takes effect on January 1, 2010.

COP: HAMP Not Enough; Chapter 13 Mortgage Modification Needed

The Congressional Oversight Panel appointed to oversee the Home Affordability Modification Program (HAMP) has put out a very interesting 6-month report on the effectiveness of HAMP. The report first analyzes the current market and what has happened to date.

The report notes that the crisis has come in waves. The first was driven by speculators abandoning homes when the prices started falling. This drove the prices even lower and brought about the second wave with Option ARMs and other exotic mortgages resetting, homeowners were unable to refinance and faced the choice of whether or not to let the house go because they could not refinance to an affordable payment.

The next wave has been a little more subtle but has continued to grow unabated and is now the dominant factor in the residential market: negative equity. Life changes sometimes force relocation and debtors do not have the option of staying in a particular house. If the house has positive equity, it is easy to sell the house. But, if the house has no equity, it must either be foreclosed upon or sold at a short sale. Foreclosures and short sales almost always result in lower sales prices than market sales. Thus, market values have been driven lower and lower forcing more and more people into the negative equity situation and the cycle perpetuates itself. In California, approximately 35% of all homeowners have no equity in their home. In Nevada, approximately 60% of all homeowners have no equity. The negative equity loop was described as follows:

Homeowners with negative equity are also constrained in their ability to move, absent abandoning the house to foreclosure. There is a wide range of inevitable life events that necessitate moves: the birth of children, illness, death, divorce, retirement, job loss, and new jobs. When one of these life events occurs, if a homeowner has negative equity, the primary choices are between forgoing the move, finding the cash to make up the negative equity, or losing the house in foreclosure. Many have chosen the foreclosure route.

Unfortunately, as the Panel has previously observed, foreclosures push down the prices of nearby properties, which can in turn result in negative equity that begets more defaults and foreclosures.21 A negative feedback loop can develop between foreclosures and negative equity. To the extent that negative equity alone may produce foreclosures, progress in addressing loan affordability will have a limited impact on foreclosure rates over the long term.

The Panel noted that the only way to stop the negative equity foreclosure loop is to make a way for a substantial number of borrowers to fix their negative equity problem. HAMP currently provides an option for lenders to reduce principal balance to solve the negative equity problem, but lenders are almost never taking advantage of that option. One option would be to mandate principal reductions under HAMP, but the Panel noted this would create a perverse incentive for borrowers because there was little cost to the borrower to get the principal write-down. The Panel then noted that Chapter 13 revision might be the way to resolve that issue by authorizing mortgage modification in Chapter 13. That would involve significant cost to the borrower due to the rigor and negative credit effect of going through bankruptcy, but would allow a significant amount of principal reduction that would help to stabilize values. The Panel said:

Negative equity can only be eliminated through principal write-downs, but this raises a number of difficult and complex issues. When principal is written down, it impairs the balance sheets of the owners of the mortgages. In many cases, this means the impairment of the balance sheets of the very financial institutions whose stability is an essential goal of the EESA. To be sure, if principal write-downs actually increase the true value of the loans, by reducing redefault rates, then principal write-downs might cause more immediate losses, but they would produce more realistic, and therefore more confidence-inspiring, balance sheets.

One concern related to the idea of principal reduction is the incentives it may create. Witnesses at the Panel‟s foreclosure mitigation field hearing were asked about this matter. Dr. Paul Willen, Senior Economist at the Federal Reserve Bank of Boston, testified that the “problem with negative equity is basically that borrowers can‟t respond to life events.” Borrowers with positive equity simply have “lots of different ways they can refinance, they can sell, they can get out of the transaction.”330 He noted that although most borrowers with negative equity are likely to make their payments in the present or over the next couple of years, they still remain “at-risk homeowners” and may face more serious issues several years down the road should a life changing event, such as unemployment, occur.331 In that sense, Dr. Willen offered that principal reduction may have some virtue. He also noted, however, that most borrowers with negative equity make their mortgage payments, and that if principal reduction is provided as an option, one runs the risk of incentivizing borrowers, who would otherwise continue to make their mortgage payments, “to look for relief” even when it is not necessarily needed.332 In this sense, according to Dr. Willen, mandating a principal reduction option under HAMP could put additional pressures on the program, and ultimately reduce its overall effectiveness. However, in response to a question from the Panel, Dr. Willen agreed that revising bankruptcy laws to permit principal modification was a clear way to address the idea that there should be a cost for receiving a principal reduction.

Other witnesses at the hearing also argued that the incentive “to look for relief” may be reduced if the costs to the borrower of opting for principal reduction were significantly greater.333 For example, revising Chapter 13 bankruptcy to include a cramdown or a principal reduction component could be one way to impose more significant costs. Because of these costs, such a revision could provide borrowers with the option of principal reduction without creating the potential perverse incentives to other borrowers that may occur by mandating principal reduction as an option under HAMP. Filing for bankruptcy is not an appealing choice to any borrower; however, to the borrower facing certain foreclosure it may be the only choice. Whereas mandating principal reduction as an option under HAMP may attract a larger than desired group of borrowers, allowing principal reduction as an option under Chapter 13 is more likely to attract only those borrowers who are truly in need of such assistance. In this sense, Chapter 13 bankruptcy could be used as a tool to employ the benefits of principal reduction to borrowers in need without attracting other borrowers and putting any additional pressures on HAMP.

I think this makes a great deal of sense and that Chapter 13 mortgage modification could help to stabilize home values.

Where’s the note, who’s the holder: Enforcement of the promissory note secured by real estate | LoanWorkout.org

This is a very good article about finding a note holder for a real estate loan: Where’s the note, who’s the holder: Enforcement of the promissory note secured by real estate. It was written by Hon. Samuel Bufford out of the Central District of California. The article has some good information on standing:

Often, the servicing agent for the loan will appear to enforce the note. Assume that the servicing agent states that it is the authorized agent of the note holder, which is “Trust Number 99.” The servicing agent is certainly a party in interest, since a party in interest in a bankruptcy court is a very broad term or concept. See, e.g., Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th Cir. 2002). However, the servicing agent may not have standing: “Federal Courts have only the power authorized by Article III of the Constitutions and the statutes enacted by Congress pursuant thereto. … [A] plaintiff must have Constitutional standing in order for a federal court to have jurisdiction.” In re Foreclosure Cases, 521 F.Supp. 3d 650, 653 (S.D. Ohio, 2007) (citations omitted).

Also, some very good information on MERS:

For those of you who are not familiar with the entity known as MERS, a frequent participant in these foreclosure proceedings:

MERS is the “Mortgage Electronic Registration System, Inc. “MERS is a mortgage banking ‘utility’ that registers mortgage loans in a book entry system so that … real estate loans can be bought, sold and securitized, just like Wall Street’s book entry utility for stocks and bonds is the Depository Trust and Clearinghouse.” Bastian, “Foreclosure Forms”, State. Bar of Texas 17th Annual Advanced Real Estate Drafting Course, March 9-10, 2007, Dallas, Texas. MERS is enormous. It originates thousands of loans daily and is the mortgagee of record for at least 40 million mortgages and other security documents. Id.

MERS acts as agent for the owner of the note. Its authority to act should be shown by an agency agreement. Of course, if the owner is unknown, MERS cannot show that it is an authorized agent of the owner.

9th Cir BAP - "NO" to Stripped Mortgage and Surrendered Property Deductions on the Chapter 13 Means Test

The Ninth Circuit BAP ruled in two cases, In re Martinez and In re Smith, that Chapter 13 debtors may not take deductions for payments on stripped mortgages and surrendered property, respectively. They relied heavily on the "reasonable and necessary" language of 1325(b)(2), finding that the application of the means test as stated in (b)(3) was limited by the reasonable and necessary language in (b)(2).

Links:

http://www.fresnobklaw.com/Uploads/Martinez.pdf
http://www.fresnobklaw.com/Uploads/Smith.pdf

More analysis to come . . .

Elizabeth Warren Makes Timmy Geithner Squirm Over AIG and Goldman Sachs Bailouts

This is a very interesting video in which Elizabeth Warren Makes Timmy Geithner Squirm Over AIG and Goldman Sachs Bailouts.

Wells Fargo Exec - "We know we've fallen short of our customer service goals . . ."

Now there is the understatement of the year. In this article on The Business Journal, online version, Mike Heid, co-president of Wells Fargo's mortgage unit is quoted as saying, "We know we've fallen short of our customer service goals in some cases." The reason? Wells Fargo has only modified six percent (6%) of eligible loans under the HAMP program.

By comparison, Chase had modified 20% and Citigroup 15%. On the other end of the spectrum, Bank of America had only modified four percent (4%).

"We think they could have ramped up better, faster, more consistently and done a better job serving borrowers and bringing stabilization to the broader mortgage markets and economy," said Michael Barr, the Treasury Department's assistant secretary for financial institutions. "We expect them to do more."

Possibly. But these lenders have to add and train staff. That takes money and time and servicers are getting compensated very little for doing these modifications. The better resolution would have been to allow modifications in Chapter 13 bankruptcy. That would have required very little additional investment by servicers, but would have made it readily available to the most needy borrowers.

The lending industry is asking for patience, saying the industry needed time to implement the program.

Very interesting. Will these same lenders exercise patience waiting for borrowers to make unmanageable payments because the lender does not have the staff to process the loan modification? Call me synical, but I doubt it.

Are Foreclosures in Lenders' Best Interest?

Foreclosures Are Often In Lenders' Best Interest says a story from the Washington Post. But are they really?

But a study released last month by the Federal Reserve Bank of Boston was downbeat on the prospects for widespread modifications. The analysis, which looked at the performance of loans in 2007 and 2008, found that lenders lowered the monthly payments of only 3 percent of delinquent borrowers, those who had missed at least two payments. Lenders tried to avoid modifying the loans of borrowers who could 'self-cure,' or catch up on their payments without help, and those who would fall behind again even after receiving help, the study found.

The article goes on to quote industry insiders saying, essentially, "ergo, loan modifications don't make sense for lenders." That conclusion doesn't make a whole lot of sense itself. The reason that not a lot of loan modifications are being done is that not a lot of loan modifications offered by mortgage servicers make sense for borrowers. Most of the modifications don't actually decrease the cost of the loan very much and even in those that do, the total amount of debt on the property is still often $100,000 to $150,000 more than the property is worth, with no hope in sight (or 10 to 15 years, at least) for the property values to eclipse the loan amount.

The question I am asking myself constantly is "why aren't servicers doing more reasonable loan modifications?" I think there may be several reasons:

1. The old problem of who is really in charge with all of the mortgage backed securities and the conflicting interests of trustees, servicers, and bondholders in the trust. Servicers are the one's really calling the shots and it doesn't make a whole lot of financial sense for them to invest a lot in doing voluntary loan modifications, because they don't make a ton that way and open themselves to possible litigation if they do too many modifications.

2. I think that the financial services may be leery of doing too many modifications because it might encourage people who can actually pay the mortgage to ask for a modification. And they want those who can actually pay to keep paying the mortgage. If servicers had to rewrite everyone's loan that was underwater, half the mortgages in the country would probably have to be rewritten. I think they may want to keep these to a minimum, with no one getting a decent modification so that they don't go tell their friends what a great deal they got.

3. Probably most important--they don't have to. Because the prospect of modifying home mortgages in bankruptcy is now dead (at least for the time being), mortgage servicers can do whatever they want.

All of these problems create a real frustration for those watching homeowners who could afford a reasonable payment get washed out in the foreclosure deluge. I had a homeowner talk to me the other day who had worked out a loan modification with one of the larger mortgage servicers. Shortly thereafter, however, the loan was sold to another entity (of dubious distinction) that is insisting they will take nothing other than payment in full or they will foreclose and that they will not honor the servicers commitment to modify the mortgage. And there is little this person can do about it. The mortgage servicers hold all the cards.

Good Article from WSJ.com Regarding Benefits of Bankruptcy

This is a good article from the Wall Street Journal regarding filing for bankruptcy. A few important excerpts from the article:

There's a surge in personal bankruptcy filings at the moment, for obvious reasons. Some 30,000 Americans are filing each week, and the figures could top 1.4 million for the year.

But too many people are talking about bankruptcy as if it's a sign this country's social safety net has failed.

It isn't. Bankruptcy is part of the safety net. Other countries have welfare states, America has bankruptcy.

And some additional good advice:

Every middle class family should be aware of the risks of bankruptcy, and how to protect their assets if the sky falls.

Bankruptcy laws are complex and vary from state to state – if you want to make substantial plans you should probably talk with a lawyer in your state who specializes in the subject.

NBI | Nuts and Bolts of Bankruptcy Law | Live Seminar

Mr. Fear will be speaking at a Nuts and Bolts of Bankruptcy Law seminar sponsored by the National Business Institute on August 5, 2009.

Foreclosure rates up in Fresno

The Business Journal is reporting that foreclosure rates in Fresno are up from 2.1% of all single family residences in foreclosure last year at this time to 3.5% this year. That is an increase of 67% over last year's historically high foreclosures.

The interesting thing about this statistic is that a lot of mortgage companies are actually delaying foreclosures in some cases because they don't have the capacity to liquidate all of the properties and they don't want the liability of dealing with a lot of property on their hands. Consequently, I often have clients who want to surrender a property to the creditor where it will take 6 or even 12 months before the mortgage company will start the foreclosure process. Then, it takes another 6 months or so to complete the process. These numbers could be a lot higher.

1 out of 8 U.S. Homeowners in foreclosure or late on mortgage payments

Reuters is reporting that 1 out of every 8 homeowners (approximately 12% of homeowners) in the United States is late on mortgage payments or in the foreclosure process. That is a staggering statistic. In California, the problem is worse than the nation as a whole, so the number is probably even higher for California. I think we are close to where the bottom for home prices should be (based mostly on income ratios), but due to all of these foreclosures, I think home prices are going to continue to drop to a number lower than what prices should be. For people with cash (and maybe first-time home buyers who can get a loan), that will be an opportune time to buy. Everyone else is in for a difficult ride.

New York Bankruptcy Court: Debtors and Chapter 13 Trustees Should Object to Stale Proofs of Claim

One issue that frequently comes up in bankruptcy cases is the filing of "stale" (i.e., beyond the statute of limitations) claims. What happens is that debt buyers, such as LVNV, purchase a large volume of debt at pennies on the dollar. When a debtor files a Chapter 13 bankruptcy, they attempt to collect on that debt by filing a proof of claim. The debt, however, may be 10 years old and the debt collector could not have pursued the claim in state court. Confronting this issue, a bankruptcy court in the Southern District of New York had the following to say:

C. Debtors and Their Counsel, If They Are Represented, and the Chapter 13 Trustee Should Scrutinize and Object to Stale Claims

In most circumstances it would be enough for the Court to stop with its ruling sustaining the objections and expunging the claims. But these claims and objections highlight a larger problem for this and other bankruptcy courts across the country. Two of the three claims at issue here were filed by LVNV, one of numerous bulk-claims purchasers that regularly file stale claims in bankruptcy courts. As stated in In re Andrews, 394 B.R. at 387, “[t]he phenomena of bulk debt purchasing has proliferated and the uncontrolled practice of filing claims with minimal or no review is a new development that presents a challenge for the bankruptcy system.”

While agreeing that the practice of bulk-claims purchasers filing stale claims is a serious problem, the court rejected the debtor’s argument that the conduct was sanctionable, as had other courts before it. Id. (citing cases). As pointed out in Andrews:

Allowing claims based on unchallenged proofs of claim is efficient
and economical in most cases. However, requiring debtors to file
objections and to raise affirmative defenses to large numbers of stale
claims filed by assignees based on a business model rather than after
careful review and evaluation is both burdensome and expensive.

Id. The solution suggested by the court was rules amendments:

The court will ask the Advisory Committee on Bankruptcy Rules
to consider whether changes should be made to the Federal Rules of
Bankruptcy Procedure and to the Official Bankruptcy Forms to alleviate
the significant burden on individual debtors and on the bankruptcy system
caused by the large number of undocumented, stale claims being filed by
the bulk purchasers of charged-off debts. . . . Finally, because the federal
rule-making process typically takes no less than three years to produce a
new rule, this issue will also be referred, with the consent of the two other
judges of this district, to the Local Rules Committee . . . .

Id. at 389.

Unless and until local or national rules changes are made, it is incumbent on debtors, their counsel, and the Chapter 13 Trustee, carefully to scrutinize proofs of claims to identify and object, if appropriate, to stale claims. The Chapter 13 Trustee clearly has standing under Bankruptcy Code § 1302(b)(3) to object to stale claims. See Overbaugh v. Household Bank N.A. (In re Overbaugh), 559 F.3d 125, 129 (2d Cir. 2009). Particularly in cases with pro se debtors, the Chapter 13 Trustee plays a crucial role and has an important responsibility in assuring that only proper claims are allowed and paid from the debtor’s estate.

In re Hess, --- B.R. ----, 2009 WL 1285296 (Bkrtcy.S.D.N.Y. May 06, 2009).

How Do I Modify My Home Mortgage?

One question I get almost every day is "how do I modify my home mortgage?" This website, Making Home Affordable, is good place to start. It describes the Home Affordable Modification Program and has links to all of the servicers who have signed up under the program. Most of the servicers have some information as to what is needed. Hopefully, this program will provide the necessary motivation for servicers to make reasonable loan modifications.

Mortgage Modification in Chapter 13 Unlikely

Well, it looks like Chapter 13 Mortgage Modification is dead for now. (See House Likely to Pass Housing Bill This Week Without ‘Cramdown’.) This is unfortunate, because getting voluntary modifications from servicers has been well-nigh impossible. The new administration wanted to use a carrot and stick approach to loan modifications. They got the carrot, but no stick. Without the stick, I think loan modifications are going to be increasingly rare--everybody talks about them, but no one has ever seen one. (I have actually seen them, but they are few and far between and I have only seen one that really made sense for the debtor.)

U.S. judges debunk red herring in mortgage cramdown fear

Judge Keith Lundin, author of an authoritative treatise on Chapter 13 bankruptcy, has sounded off on the reaction to the mortgage modification bill from "chicken littles" in the mortgage industry.

Mortgage bankers are in knots over proposed U.S. legislation that allows loan contracts to be broken up in bankruptcy court, fearing it will taint the core of their business and raise interest rates.

But their fight against the bill gaining momentum in Congress is an overreaction, or a red herring to prevent the industry from realizing inevitable losses, some judges said.

"Judges aren't just going to run wild," said Judge Keith Lundin, of U.S. bankruptcy court in Nashville, Tennessee.

I have often wondered why mortgage bankers have been so virulently opposed to the mortgage modification bill. My guess is that they are more concerned about artificially propping up balance sheets filled with toxic assets so that they can continue to get their bonuses. Judge Lundin addresses that issue as follows:

Bankers are merely putting off the realities of the ailing housing market, Judge Lundin said.

"If these guys are worried about value, it's about what they did, not because of what I'm going to do," said Lundin, speaking of bankers' roles in offering risky loans. "They don't want someone with authority telling them what their securities are worth, that's what they're afraid of."

Judges in the mid-1980s used Chapter 12 of the bankruptcy code to rewrite farmland values, aiding farmers who were also faced with falling commodity prices. After a year or two, the real estate market adjusted, Lundin said.

"I guarantee you, that is exactly what will happen if you allow home mortgages into Chapter 13" bankruptcy, he said.

California 90-day Foreclosure Moratorium

On February 20, 2009, the Governor signed Senate Bill SBX2 7, which puts an additional 90-day hold on foreclosures to allow for loan modifications. In cases where the lender is not willing to do a modification, this will not force them to do so. They just have to wait another 90 days. However, it will provide a little breathing space for some people.

The bill is not in effect yet and does not go into effect until 14-days after certain regulations have been drafted. And even after it goes into effect, mortgage companies can apply for an exemption upon a showing that they have an acceptable loan modification program. My personal feeling is that this will do little to stem the flood of foreclosures.

Recipe for Disaster: The Formula That Killed Wall Street

This is a fascinating article about a formula used for measuring risk on collateralized debt obligations and credit default swaps and how the misuse of that formula led to many of the problems we are experiencing now.

Mortgage Modification Bill--How do I Prepare?

I get this question all the time: How can I take advantage of the mortgage modification bill going through Congres right now?

My first answer is a caveat: We have no idea what the final bill will look like (or if it will even pass), so any action we take right now is speculative. With that caveat in mind, however, we do know that there are several pre-filing requirements that will probably be in the mortgage modification bill. There are two pre-filing prerequisites under the current bill: (1) the debtor must have requested a loan modification from the lender at least 15 days before filing (unless the filing is within 30 days of a foreclosure sale) and (2) the debtor must have received a notice that a foreclosure may be commenced. The first is easy and most of my clients have done this on their own before they ever come to see me. The second is a little more complicated because (depending on what this means), debtors would likely have to get behind on their mortgage payments to make this an option. Some people have suggested that this could refer to the original deed of trust, but I don't think I would rely upon that. However, a letter mentioning foreclosure should be sufficient. That being said, I would not advise a client to do anything that might result in them getting a foreclosure notice until after this bill has been signed, because we still do not know (1) whether the bill will be signed and (2) what provisions will be in the final bill.

View the current text of HR 1106 here.

Finally, a Voluntary Loan Modification That Makes Sense

I have gone over numerous loan modification proposals sent to my clients recently. In almost every case, the proposed modification makes no sense and you know the client will end back in the same situation in about 6 months. (One exception is modifications obtained through litigation.) However, I just saw a loan modification from Wachovia that actually made sense. It had principal reduction of about 20%, interest only payments for about 10 years and then a fully amortized principal and interest payment for the next 30 years. Congratulations to Wachovia Mortgage for doing at least one reasonable loan modification.

Credit Suise Study: Bankruptcy Mortgage Modification Bill will cut foreclosures 20 percent

Credit Suisse came out with a new study finding that if the mortgage modification in bankruptcy bill passes, it would cut foreclosures by 20%.

WASHINGTON (Reuters) - A plan to let bankruptcy judges erase some mortgage debt will help lower foreclosures by 20 percent and stabilize the troubled housing market, a Credit Suisse report concluded on Monday.

The possibility that judges could lower, or 'cram down,' a loan amount will give mortgage companies an incentive to modify more failing loans on their own, the investment bank's researchers said.

"We expect the new bankruptcy reform will increase loan mods, particularly principal reduction mods, as it is likely to both pressure and also give justification to servicers to more actively pursue principal reduction mods," the report from Credit Suisse Fixed Income Research stated.

A two-year-old housing downturn has pushed foreclosures to record levels as more families struggle to make payments on properties that are slipping in value.

Many of those sour loans were bundled by Wall Street into complex securities that are difficult to modify.

Advocates for mortgage "cram-down" argue that bankruptcy judges are uniquely able to cut through mortgage contracts and rewrite loan terms.

Late last week, Democratic leaders who control the White House and Capitol Hill agreed to push a cram-down bill early this year.

"A large percentage of delinquent borrowers could benefit from cram downs," the report states. "We expect the bankruptcy plan will provide about a 20 percent reduction in foreclosures."

A separate report on Monday warned that redrafting bankruptcy rules could scare more lenders away from the housing market and damage banks that specialize in mortgage second-liens.

"(Cram-downs) will create long-term problems for the housing market through higher mortgage rates and reduced affordability, which will likely further destabilize home values and wreak havoc on second-lien and consumer lenders," the report from Friedman, Billings, Ramsey & Co said.

Second-lien holders would likely be wiped out by a bankruptcy judge, the report concludes, and lenders that specialized in those loans will be hurt.

Many troubled consumers will be enticed by the possibility of getting relief through the courts, and increased bankruptcy filings will mean more write-offs across the sector, the investment bank stated.

"A spike in bankruptcy filings would also cause a surge in credit card losses, as lenders are required to charge off the account upon receipt of the bankruptcy notice," the report states.

(Reporting by Patrick Rucker; Editing by Kenneth Barry)

JP Morgan Chase Analysts Admit Mortgage Modification Bill a "Necessary Evil"

In this article, JP Morgan Chase analysts admitted that the proposed bankruptcy legislation would stabilize home values through decreased foreclosures.

However, the bill may be "a necessary evil," JPMorgan Securities analysts said, and others agreed. Allowing bankruptcy cram-downs would force servicers to use principal forgiveness with loan modifications. "In the long run, cram-downs can help stabilize home prices through reducing distressed sales," the analysts said.

Indeed, while redefaults remain high - a generic 25% payment reduction results in a 50% redefault rate - a 25% balance reduction, which is the type of modification a cram-down would accomplish, makes for a lower 30% redefault rate, according to Merrill Lynch data.

This may ultimately be a better alternative for bond holders as compared with the growing number of defaults and foreclosures, which is where the trend line is going, Telpner said. He pointed out that these modifications could stabilize assets in the pool even if investors are getting paid less on the dollar. "For some ABS pools, cram-downs may provide greater recovery because they serve as an alternative to writing off an increasingly large portion of the pool," he said.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.
http://www.structuredfinancenews.com
http://www.sourcemedia.com/

Citigroup's Letter

This is a link to the letter sent by Citigroup stating that they will support the Helping Families Save Their Homes in Bankruptcy Act of 2009. The letter states that with three modifications, Citigroup supports the "swift passage" of the legislation with those changes. The changes requested are as follows: (1) mortgage modifications limited to loans made before date of enactment, (2) TILA provision in bill would only apply to claims where debtor has right to rescission (won't apply to most debtors anyway), and (3) debtor must contact lender to attempt to modify before bankruptcy is filed. Regarding the last item, I understand that this provision will not apply if a foreclosure is scheduled within 30 days after the filing of the bankruptcy.

Citi Backs Bill to Allow Mortgage Modification in Chapter 13

Financial titan Citigroup, Inc. agreed to support a bill that would allow mortgages on personal residences to be modified in Chapter 13. Citigroup is one of the most influential banks in the United States and its support will hold great sway among members of the Congress on both sides of the aisle. With this news, I believe it is now likely that we will get mortgage modification in Chapter 13. The only questions are when and what will it look like?

Why Bankruptcy Professionals Care About Credit Default Swaps

This is a great article from the American Bankruptcy Institute regarding credit default swaps and why they are important to bankruptcy professionals. (Membership required to access article.)

A credit default swap (CDS) (essentially) is a contract in which the holder of the indebtedness (the creditor) pays a third party to guarantee payment of the debt. When a "credit event" occurs (e.g., default in payment), the third party is required to purchase the debt from the original creditor with a given period of time. The parties (creditor and third party) are swapping risk for return. The creditor will get less interest on the debt, but is guaranteed full payment of the principal, so the risk goes down. The third party shoulders the risk of default, but gets the increased interest to compensate for the risk.

So why does this matter in the bankruptcy arena? If a debtor calls a lender trying to workout a loan modification and the lender has a CDS on the debt, they will tell the debtor: "Why should I work out a modification with you? I'm going to get paid in full for this debt." Now, once the debt is swapped to the third party, the third party may or may not be willing to work out a loan modification based on the reason the third party bought the CDS. However, in the confusing morass of figuring out who owns the debt and which of the possible owners might be willing to work with him, the debtor usually gets discouraged and figures there is no way to save his home.

This is yet another reason why allowing mortgages of personal residences to be modified in bankruptcy makes a great deal of sense.

Modern Money Mechanics

Modern Money Mechanics is a workbook originally published by the Federal Reserve Bank of Chicago. (First publication in June 1961; last updated June 1992; now out of print.) This little pamphlet does a fantastic job of describing exactly how our money system works in the U.S. Most people have no clue how this works, but the effect of monetary policy on our everyday lives is a hot issue right now and for those who want to know, this is a good resource. (For a link to the PDF version of the workbook, click here.)

Particularly fascinating is the expansion and contraction of the monetary supply made possible by the fractional banking reserve system. You could end up with $90,000 worth of assets and liabilities based on $10,000 in deposits.

New Bill Introduced to Allow Mortgage Modification in Bankruptcy

Senator Durbin recently introduced S. 3690 that would allow modification of mortgages in Chapter 13 bankruptcy. The operative text of the legislation is as follows:

SEC. 103. HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY.
(a) Special Rules for Modification of Loans Secured by Residences.--
(1) IN GENERAL.--Section 1322(b) of title 11, United States Code, is amended--
(A) in paragraph (10), by striking ``and'' at the end;
(B) by redesignating paragraph (11) as paragraph (12); and
(C) by inserting after paragraph (10) the following:
``(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law--
``(A) modify an allowed secured claim secured by the debtor's principal residence, as described in subparagraph (B), if, after deduction from the debtor's current monthly income of the expenses permitted for debtors described in section 1325(b)(3) of this title (other than amounts contractually due to creditors holding such allowed secured claims and additional payments necessary to maintain possession of that residence), the debtor has insufficient remaining income to retain possession of the residence by curing a default and maintaining payments while the case is pending, as provided under paragraph (5); and
``(B) provide for payment of such claim--
``(i) in an amount equal to the amount of the allowed secured claim;
``(ii) for a period that is not longer than 40 years; and
``(iii) at a rate of interest accruing after such date calculated at a fixed annual percentage rate, in an amount equal to the most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk; and''.

As I have opined before (and here and here), there are many reasons why allowing mortgage modification in Chapter 13 makes a great deal of sense. Here are a couple more reasons:

1. Almost all of the mortgages in this country are held in trusts. Each of these trusts has a whole panoply of parties responsible for various aspects of the mortgage, many of which have conflicting interests. Often, the various parties to the trust don't want to act for fear of being sued or don't want to act in a way that is in the interest of the investors because that is against that parties' interest.
2. These trusts are known as REMIC trusts and are given special tax treatment. That tax treatment can be threatened if too many of the mortgages are modified.

By allowing mortgages to be modified in Chapter 13, both of these sticky conflicts are avoided and the Bankruptcy Code can accomplish what it was intended to do: give the debtor a fresh start and treat all creditors fairly.

Mortgage Companies Afraid to Modify Mortgages Because of Securitization Mess

This article from the New York Times has an interesting quote:

So far, many companies have been reluctant to aggressively reduce payments because they are afraid that borrowers might default again or that investors in mortgage securities might file suit.

Almost all of the mortgages out there have been securitized. Click here for a colloquial explanation of mortgage-backed securities. This means that the mortgages have been pooled and sold to a trust, and shares of the trust have been sold to investors. The trusts hire servicers to interact with the borrowers. Those servicers are bound by a pooling and servicing agreement, which usually provides a maximum amount of mortgages that can be modified in any particular trust. Usually, the number is around 5%. Default numbers for many of these trusts are climbing over 30% now, so there are a lot more than 5% of the mortgages that need to be modified.

However, the lenders are afraid to modify, because they might get sued by the investors. So, they are sitting pat, doing nothing, while millions of homeowners are losing homes that could have been saved with a reasonable loan modification. This is another great reason to allow modification of mortgages in Chapter 13 bankruptcy. This would remove the whole servicer/investor dynamic and would rely entirely on the value of the house. The investor couldn't sue the servicer, because it was the bankruptcy court that modified the mortgage

Bloomberg: It's Easier to Keep a Second Home in Chapter 13 than your Primary Residence

Interesting analysis on Bloomberg.com stating that it is easier to keep your rental or beach house than your primary residence. Unfortunately, this is true and, in my opinion, should be changed. Currently, the law allows you to modify mortgages on real property if the real property is not the principal residence of the debtor. If, however, the residence is the principal residence of the debtor, you can't modify it and are stuck with the terms, however horrific. Following is the story from Bloomberg:

Buy a Beach House for Shelter When Going Bankrupt: Ann Woolner

Commentary by Ann Woolner

Oct. 17 (Bloomberg) -- Say an absentee landlord owns the house next to yours. Neither of you keep up your mortgage payments.

If you both declare bankruptcy, chances are better that he would keep his place than you yours. However beloved your home or settled your family is in the neighborhood, you can't force your mortgage holder to change its terms to escape foreclosure.

The landlord can.

Bankruptcy law favors the landlord over the homeowner when it comes to modifying mortgages. It's easier to hold onto a second home at the beach -- and a boat to go with it -- than your home sweet home.

Backward? Absolutely.

A speculator with slum properties all over the city, who owns a place in Manhattan and a house at the Hamptons, gets better treatment under bankruptcy law than a salaried worker's family with only one, modest bungalow.

``Current law permits modification of any type of debt in bankruptcy except for a single-family principal residence,'' says Adam Levitin, who teaches law at Georgetown University.

``You can modify credit-card debt. You can modify student loans. You can modify debt on a yacht,'' points out Levitin.

The one item that bankruptcy can't force a creditor to alter is the loan on the roof over your head. And yet, that's the debt most deserving of modification to help the economy recover and to offer some sense of stability to the debtor.

Vacant Houses

As vacant houses scar neighborhoods and each day brings 10,000 new foreclosure filings, the surplus of empty abodes drags down an economy made sick by reckless lending.

The housing bubble's burst deflated home values below what some folks owe on them. But they still owe it, unless the lender agrees to alter the mortgage.

Otherwise, even in bankruptcy, homeowners still must meet those monthly payments toward the full principal and interest or find themselves out of their home and into somebody else's rental property, if they can afford the rent.

As foreclosures soar, so do bankruptcy filings -- almost 29 percent more in September than the year before, according to the American Bankruptcy Institute.

``We expect 1.1 million new cases by year end,'' the institute's executive director, Samuel Gerdano, said in a statement earlier this month.

Same Treatment

Why not give the primary home mortgage the same treatment in bankruptcy that goes to the second home and to every other debt obligation?

Presented with the chance to do that in April, the U.S. Senate rejected it 58-26, refusing to make it part of the housing bill. The yeas were all cast by Democrats; most of the nays came from Republicans. (Neither of the senators running for president cast votes, although Barack Obama co-sponsored it and has a similar proposal as part of his economic revival plan.)

``If the federal government is going to ride to the rescue of investment banks on Wall Street, it should also provide some relief to those who are about to lose their homes on Main Street,'' said the bill's sponsor, Democrat Richard Durbin, Illinois's other senator.

Way back then, the only rescue the government rode in for was that of Bear Stearns Cos., which was sold in March to JPMorgan Chase & Co. with help from the Federal Reserve.

Unimaginable in April were all the subsequent bailouts. But bankrupt homeowners are still waiting for help.

When Congress was voting on the super-duper, $700 billion bailout plan early this month, Democrats tacked the Durbin amendment onto it, where it stayed for days until it finally was sacrificed to woo Republican votes in the House.

Industry Opposition

The opposition stems from the mortgage industry, which says if lenders never know whether the original terms of the loan could be changed by a bankruptcy judge, interest rates on primary homes would soar by 1.5 percentage points.

``That's just laughable on its face,'' Levitin says. He says interest rates on loans for investment property tend to be only 0.38 percentage points higher than for primary homes mainly because of the extra risk that the borrower won't repay.

It will take a law to undo the restrictions imposed on home mortgages by the 1978 bankruptcy code.

``The sad thing is we've been pushing for this for about a year and a half, two years,'' says Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys.

``It probably could have somewhat ameliorated the crisis we are facing now,'' says Sommer, who practices in Philadelphia.

Maybe next year.

In the meantime, if you find yourself in bankruptcy and have two homes, don't expect your lender to cut you a deal on the one where you live.

But you just might be able to get a break on the beach house. And wouldn't that be more pleasant than that rental property next door?

(Ann Woolner is a Bloomberg news columnist. The opinions expressed are her own.)

To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net.

Forrest Gump Explains Mortgage-Backed Securities

O. Max Gardner, III, one of (if not the) premier consumer bankruptcy lawyers in the country apparently spoke with Forrest Gump recently and got the following explanation of the mortgage mess:

Mortgage Backed Securities are like boxes of chocolates. The criminals on Wall Street stole several chocolates from the boxes and replaced them with turds that looked liked chocolates. Their criminal buddies at Standard & Poors, Moodys, and Fitch rated these boxes AAA Investment Grade gourmet chocolates, fit for a king so they could obtain the highest price and worldwide distribution. The boxes were then sold all over the world to investors and kings who loved gourmet chocolate. Eventually while eating their gourmet chocolates, the Kings and investors picked a "chocolate" out of the box to eat; bit into the chocolate and discovered it was a turd instead of a gourmet chocolate and thus, the fraud is exposed! Word spreads fast amongst the world's kings and investors who enjoy gourmet chocolates and suddenly no chocolate lover, loves or trusts American chocolates anymore around the world or wants to buy a box of American chocolate. The fear of eating turds spreads to Belgian and Swiss chocolates too. No one wants to eat turds! Suddenly, there is no market for gourmet chocolates and the fear spreads to chocolate milk, covered strawberries, and anything mixed with or made of chocolate!

Hank Paulson now wants the American taxpayers to buy up and hold all of the boxes of the turd-infested chocolates for $700 billion dollars until the worldwide market for chocolates return to normal. Yet, the turds are still in the boxes waiting for someone to bite into them again. Meanwhile, Hank's buddies who helped him make a billion dollars on turd infested boxes of gourmet chocolates, the Wall Street criminals who stole all the good chocolates, are not being investigated, arrested, or indicted.

Forrest's Mama always said: "Sniff the chocolates first, Forrest".

Surprise!! Bankruptcy Filings are Up Again.

Last year (2007), bankruptcy filings for the Eastern District of California were up almost 100% over the previous year. This year (2008), they will be up almost another 100% over last year (i.e., about 400% over 2006). Here are the nitty gritty numbers. This doesn't show any sign of cooling off anytime soon.

Application of Mortgage Payments

The First Circuit recently decided the In re Nosek appeal. The case involved a lady who suffered substantial damages because a mortgage company misapplied payments received during the bankruptcy case. The Bankrtuptcy and District Judges both held that she was entitled to substantial damages under the Bankruptcy Code. The First Circuit agreed that it was a difficult circumstance for the debtor, but found no part of the Bankruptcy Code that provided a remedy for her. In doing so, the First Circuit stated as follows:

Morever, even if such a threat had been demonstrated by those practices, there was no language in Nosek's Plan, as it was confirmed, or in § 1322(b), that addressed how Ameriquest was to apply the payments it received from Nosek or from the trustee. Under such circumstances, the Plan would have to be amended to prescribe the accounting practices necessary to protect Nosek's right to cure before Ameriquest could be sanctioned for a violation of an order of the bankruptcy court.
In the absence of such specificity, there was no violation of § 1322(b) or the Plan and therefore no basis upon which to award Nosek damages under § 105(a). Because the bankruptcy court's judgment in the adversary proceeding is vacated, the order confirming Nosek's Third Amended Plan, which was based on the erroneous damages award, also must be vacated.

The court also acknowledged that new code section 524(i) was relevant to the discussion at footnote 15: "Congress's enactment of § 524(i) of the Bankruptcy Code
confirms the widespread nature of these problems and the difficult
issues that courts have faced addressing them."

Section 524(i) creates a new remedy for a debtor where the plan provides that mortgage payments are to be applied in a particular fashion and the creditor fails to do so. That section provides as follows:

The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.

I think the Nosek case gives a prime example of why it is important to include language in a plan that explains how payments should be applied. I will post langauge I am currently using below, but I would note that at least one judge has rejected this language and I do not make and recommendation or warranty regarding these plan provisions:

7.11 - Application of Payments. Confirmation of the plan shall impose a duty on the holders and/or servicers of claims secured by liens on real property (1) to apply the payments received from the trustee on the pre-petition arrearages, if any, only to such arrearages; (2) to apply the direct mortgage payments, if any, paid by the trustee or by the debtor(s) to the month in which they were made under the plan or directly by the debtor(s), whether such payments are immediately applied to the loan or placed into some type of suspense account; (3) to notify the trustee, the debtor(s) and the attorney for the debtor(s) of any changes in the interest rate for an adjustable rate mortgage and the effective date of the adjustment; (4) to notify the trustee, the debtor(s) and attorney for the debtor(s) of any change in the taxes and insurance that would either increase or reduce the escrow portion of the monthly mortgage payment; and (5) to otherwise comply with 11 U.S.C. Section 524(i).

7.12 - Notice of Additional Charges. The holder and/or servicer of a mortgage claim ("Mortgage Creditor") shall provide to the debtors, debtors' attorney and trustee a notice of any fees, expenses, or charges which have accrued during the bankruptcy case on the mortgage account and which the Mortgage Creditor contends are 1) allowed by the note and security agreement and applicable nonbankruptcy law, and 2) recoverable against the debtors or the debtors' account. The notice shall itemize the fees, expense or other charges. The notice shall be sent annually, beginning within 30 days of the date one year after entry of the initial plan confirmation order, and each year thereafter during the pendency of the case, with a final notice sent within 30 days of the filing of the trustee's final account under Bankruptcy Rule 5009. The failure of a Mortgage Creditor to give such notice for any given year of the case's administration shall be deemed a waiver for all purposes of any claim for fees, expenses or charges accrued during that year, and the Mortgage Creditor shall be prohibited from collecting or assessing such fees, expenses or charges for that year against the debtors or the debtors' account during the case or after entry of the order granting a discharge.

7.13 - Mortgage Current Upon Discharge. Unless the Court orders otherwise, an order granting a discharge in this case shall be a determination that all prepetition and postpetition defaults with respect to all Class 1 mortgages have been cured, and that the mortgage account is deemed current and reinstated on the original payment schedule under the note and security agreement as if no default had ever occurred.

Is the Proposed Bailout Good . . . Or Really Bad?

For average Americans watching from the sidelines, the proposed mortgage bailout looked like something straight out of the Communist Manifesto. Perhaps that is why it was so unpopular everywhere but Wall Street and Washington, D.C. As this author describes, the bailout does look like something Karl Marx would have approved.

In his Communist Manifesto, published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.”

If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.

The author goes on to point out that only the Austrian School of economics realistically opines that the boom cannot go on forever. Interestingly, I have been reading a history and analysis of the Great Depression by Murray N. Rothbard, called America's Great Depression. You can download a PDF copy of the book from the Mises Institute (which embraces the Austrian School of economics) here. Rothbard was (and may still be) with the Mises Institute. The essential premise of the book is that there will always be a boom and bust cycle in the economy and that government intervention can lengthen the boom cycle, but when the bust cycle comes around it will be much worse. That is what we saw with the Great Depression and it looks like that may be what is happening now.

CCBA Institute - September 18 & 19, 2008

The Central California Bankruptcy Association 22nd Annual Institute will be held this week, September 18 & 19. The Institute brings bankruptcy professionals together from all over central California to discuss various bankruptcy issues. You can download the Institute flyer and program here. There is also a golf tournament held in conjunction with the Institute. Check out the website for more information about the Institute and how to join the CCBA.

Goodbye Negative Equity!

One of the changes under the 2005 BAPCPA is that car creditors' claims cannot be valued (i.e., paid only the value of the car or other collateral) if the car was purchased within 910 before the bankruptcy filing. This cut down significantly on the amount of cars that could be valued in Chapter 13.

One problem that came up was the problem of "negative equity," i.e., when a car is traded in and is worth less than what is owed on it, the dealership will often roll the extra debt into the new purchase. So, for example, if you trade in your 2002 car worth $5,000 when you owe $10,000 on it, your new car loan would be $5,000 more than it would have been otherwise. I will frequently see clients with $5,000, $10,000 or even $15,000 in negative equity on a vehicle. The question is whether the "negative equity" can be valued at its true worth (zero) or whether the whole amount of the loan has to be paid.

The Ninth Circuit addressed this question in In re Penrod, adopting the dual status rule. The dual status rule means that the portion of the debt allocable to negative equity may be valued because it is not "purchase money" and the portion of the debt that is not for "negative equity" cannot be valued. This ruling makes the most sense practically, because in most of those situations, the Debtor would not be able to afford the car with negative equity, whereas the Debtor could afford the car if the "negative equity" could be removed from the amount of the debt.

Bankruptcy Filings in Fresno are up 100% YTD

Bankruptcy filings in Fresno are up almost 100% year-to-date over 2007. I know that I am incredibly busy and it looks like everyone else in the bankruptcy field is too. Interestingly, Chapter 7 filings are up 115.7% and Chapter 13 filings are up only 44.1%. This is probably because more people are just letting the house go instead of trying to save it in a 13.

Judges Scrutinize Mortgage Docs, Deny Foreclosures

The Wall Street Journal's Law Blog has an interesting article entitled, "Subprime Legal: Judges Scrutinize Mortgage Docs, Deny Foreclosures." The article addresses one of the most common problems in mortgage lending and more specifically in foreclosures: who owns the note? These notes are transferred around so much, there is a significant question as to who owns the note and as to whether the foreclosing party has the right to be foreclosing on the property. The article also addresses several other common problem with many of these foreclosures. The full text of the article follows:

It’s been about nine months since several federal judges in Ohio issued the
widely-read foreclosure dismissals that shined a light on sloppy paperwork
done by companies that specialize in handling foreclosures.

Since then, the WSJ reports tonight, other judges across the country have
caught on and are carefully scrutinizing mortgage documents filed as part of
foreclosures and dismissing cases based on mistakes they’re finding, which
borrowers might be able to exploit when facing foreclosure. (For another good
read on judges and lawyers working to staunch foreclosure, click here for a
recent NLJ story.)

Among the issues hitting snags among the judges, according to WSJ:

“Backdated” mortgage assignments: Assignments, documents that transfer ownership of the mortgage, are executed after the foreclosure process has begun but state that they are “effective as of” a date prior to the foreclosure action. Some judges are dismissing those cases, saying attempts to retroactively assign the mortgage aren’t valid.

Suspicious multiple hats: Employees for mortgage companies are signing affidavits stating
they are employees of one company, but other mortgage documents say they work at
another firm. In some cases, an employee claims to work for companies on both
sides of a transaction, prompting one skeptical judge to ask for that person’s
work history for the last three years.

Shared office space: In foreclosure filings, one judge has found that numerous mortgage-related companies, including units of Wall Street banks, all claim to share the same address: a suite of a West Palm Beach, Fla., building. “The Court ponders if Suite 100 is the size of
Madison Square Garden to house all of these financial behemoths or if there is a
more nefarious reason for this corporate togetherness,” the judge wrote in a
recent decision.

Brooklyn Crusader: The judge making Madison Square Garden references is Brooklyn’s own Arthur M. Schack (pictured) of Kings County Supreme Court, who has dismissed dozens of foreclosures sua sponte because of shoddy documents or suspicious patterns he notices in the filings. Schack, 63, a former counsel to the MLB Players Association who is known for peppering his rulings with pop culture references such as Bruce Willis movies, says barely any of the foreclosures he has denied eventually are completed.

In one of his foreclosure dismissals, Schack (Indiana, New York Law School) cited the film
“It’s a Wonderful Life” to make the point that homeowners now deal with “large
financial organizations, national and international in scope, motivated primarily by their interest in maximizing profit, and not necessarily by helping people.”

In an interview, Schack, a Brooklyn native, told WSJ: “Taking away someone’s home is a serious matter. I’m a neutral party and in reviewing papers filed with the court, I have to make sure they’re proper.”

Fresno No. 9 Nationally in Foreclosures

According tothis report from RealtyTrac.com, Fresno has the 9th highest foreclosure rate in the nation for the last quarter.

NACTT Mortgages Best Practices

The National Association of Chapter Thirteen Trustees put together a committee of Chapter 13 trustees, mortgage servicers, mortgagees and creditors' and debtors' counsel to come up with best practices for servicing mortgages in Chapter 13. Click here for the NACTT Mortgages Best Practices on the NACTT's website. The best practices are repeated below:

MORTGAGE BEST PRACTICES

NACTT Mortgage Committee

The NACTT Mortgage Committee is comprised of Chapter 13
trustees, mortgage servicers, mortgagees and creditors' counsel. The committee's
mission is to foster communication between the parties, resolve differences and
to recommend best practices of conduct for all stakeholders. Our goal is to
improve the bankruptcy system. Although the committee recommends the practices
set forth below, we recognize that there may be other acceptable procedures.
Therefore, we remain open to further discussion and review.

BEST
PRACTICES FOR TRUSTEES and MORTGAGE SERVICERS IN CHAPTER 13

If
servicers/mortgagees include a flat fee cost in the proof of claim for review of
the Chapter 13 plan prior to confirmation and for the preparation of the proof
of claim, it should be reasonable and fairly reflect the attorney's fee
incurred.

If Servicers/mortgagees include attorney fees for pursuing
relief from stay, such fees should be clearly identified as well as how such
fees are to be paid in any agreed order resolving a Motion for Relief from Stay
or any other matter before the court.

Servicers/mortgagees should
analyze the loan for escrow changes upon the filing of a bankruptcy case and
each year thereafter. A copy of the escrow analysis should be provided to the
debtor and filed with the Bankruptcy Court by the servicers/mortgagee or their
representative each year.

Servicers/mortgagees should not include any
pre petition cost or fees or pre petition negative escrow in any post petition
escrow analysis. These amounts should be included in the prepetiton claim amount
unless the payment of such fee or cost was actually made by the servicer.

Servicers/mortgagees should attach a statement to a formal notice of
payment change outlining all post petition contractual costs and fees not
previously approved by the court and due and owing since the prior escrow
analysis or date of filing whichever is later. This statement need not contain
fees, costs, charges and expenses that are awarded or approved by the Bankruptcy
Court order. In absence of any objection or challenge to such fees, the trustee
should take appropriate steps to cause such fees to be paid as part of Debtor's
Chapter 13 plan.

Servicers/mortgagees should supply and maintain a
contact for debtor's counsel and trustee's for the purpose of restructuring,
modifying a mortgage, or other loss mitigation assistance including a short sale
or deed in lieu of foreclosure. The contact should be an individual or group
with the ability to implement or assess with objective criteria a loss
mitigation modification after filing of a chapter 13 petition with the goal of
keeping the Debtor in the house and the success of the bankruptcy.

Mortgage servicers should provide a dedicated phone line and contact for
Chapter 13 Trustee inquiry use only.

Mortgage servicers should monitor
post petition payments. If the mortgage is paid post petition current then the
servicers/mortgagees should not seek to recover late fees. No late fees should
be recovered or demanded for systemic delay but should be limited to actual
debtor default.

Pre petition payments should be tracked as applied to
pre petition arrears, post petition payments should be tracked as applied to
post petition ongoing mortgage payments.

Servicers/mortgagees should
file a notice and reason of any payment change with the court and provide same
to the Debtor

Servicers are required to file with court a notice of any
protective advances made in reference to a mortgage claim, such as non escrow
insurance premiums or taxes. Such notice should be provided to the debtors and
filed with the court.

Servicers/mortgagees should review the Trustee web
site or NDC for payment discrepancies with their system prior to the filing of a
Motion for Relief from Stay in Trustee pay jurisdictions.

Servicers/mortgagees should review the Trustee web site or NDC at the
close or discharge of the bankruptcy for payment discrepancies with their system
in Trustee pay jurisdictions.

Servicers/mortgagees should clearly
identify if the loan is an escrowed or escrowed loan and break out the monthly
payment consisting of Principal, Interest, Escrow and PMI components.

Servicers/mortgagees should identify nontraditional mortgage loans in
their proof of claims. Loans with options should identify on the proof of claim
the type of loan as well as the various contractual payment options available
during the bankruptcy to the borrower/Debtor.

Trustees should initiate a
communication with mortgage servicers when questions arise in a review of a post
petition escrow analysis.

United States Trustees and Trustee Education
Network should modify the requirements of the financial management class
regarding adjustable rate mortgages, the calculation of mortgage escrows and, in
particular, the potential of increased mortgage payments resulting from
increased taxes, interest rate hikes and/or mortgage premiums.

Trustee
voucher checks, check stubs or vouchers provided with any other form of payment
contain the following information, except to the extent prevented from doing so
by local rule:


1. The Name of the debtor and case number.


2. The trustee's claim number.


3. The mortgagee's
account number (to the extent provided on the proof of claim).


4. If
the mortgagee account number is not available, e.g. not contained on the proof
of claim, at least one other piece of identifying information e.g., property
address.


5. The amount of the payment.


6. Whether the
payment is for the ongoing mortgage payment or the mortgage arrearage.


7. If for the mortgage arrears, the balance owing on the arrears
claim after application of the payment.


8. If the trustee has set up
a separate claim for post-petition charges of the mortgagee, that the voucher
clearly identify that fact.


9. If any portion of the payment on
arrears is intended to pay interest on the mortgage arrears, the amount of that
interest portion of the payment.


10. If the mortgage is to be paid
off during the bankruptcy under the confirmed plan through payments by the
trustee, e.g., a total debt claim, the portions of each payment which represent
principal and interest, and the balance owing on the claim after application of
the payment.

There is a movement among servicers to redact all but the
last four numbers of the mortgagors' loan numbers on proofs of claim, because
those claims are public records. While mortgage servicers in general want as
much information as possible on the vouchers, the mortgage servicers on the
Working Group felt that if the voucher had the bankruptcy case number, the name
of the debtor and the redacted loan number from their filed claim, they would be
able to post the payment. Using the account number to the extent provided in a
filed proof of claim also insures that trustees are not disclosing information
on their website that is not already disclosed in the public record.

Voucher Narrative re Payments: The Working Group places particular
emphasis on No. 6 above. The voucher should identify if a payment is for the
regular mortgage payment or for the mortgage arrearage in consistent language.
While Chapter 13 trustee disbursement applications focus on the claims to be
paid, mortgage servicer computer systems focus on their mortgagor account
number. Posting of receipts, whether or not the account is in bankruptcy, is
typically handled by a Cash Processing group or department of the mortgage
servicer. Those departments focus on the account number on the voucher and the
narrative on the voucher for that account number to determine if the payment is
for the regular mortgage payment or the mortgage arrearage.

Mortgage
Arrearage Claims: When filing their initial proofs of claim, mortgage servicers
should state their mortgage arrearage up to the date of the filing date of the
bankruptcy petition, unless the plan or trustee indicates otherwise, or local
rule provides otherwise. The Chapter 13 Trustee will use the mortgage arrearage
claim to set up the arrearage balance on the claim, which in turn will show up
as the "balance" on the voucher check, absent objection to the claim.

Thorough Servicer Analysis

In In re Stewart, ___ B.R. ___ 2008 WL 2676961 (Bankr.E.D.La. July 9, 2008) (Westlaw access required), Judge Magner did a thorough review of Wells Fargo's mortgage servicing procedures in bankruptcy. These procedures are probably similar to those of most servicers and are instructive for dealing with mortgage servicers. That analysis is below:

Loan Administration

Ms. Miller explained that Wells Fargo administers 7.7 million home mortgage loans. [FN16] The management or administration of these loans is accomplished through several computer software packages, some owned by Wells Fargo, some licensed from third party vendors. Entries on the loan account are tracked with a licensed computer software platform commonly known as Fidelity Mortgage Servicing Package or Fidelity MSP. Fidelity MSP provides extremely sophisticated computer software for the management of home mortgage loans and is one of the largest providers of this service nationally. When a payment is received on a mortgage loan, it is entered into the Fidelity MSP system and then deposited. Fidelity MSP applies the payment to a borrower's account; in this case, satisfying outstanding fees and costs first.

In this Court's experience, virtually every home mortgage executed in the United States contains provisions that determine when payments are due, when they are considered late, what fees or charges may accrue if late, when a default can be declared, the remedies available on default, and which collection fees or charges are recoverable after default. In addition, most notes and mortgages provide fairly clear directives regarding the application of payments between principal, accrued interest, fees, costs, and amounts due to satisfy insurance and property taxes. Mercifully, most home mortgage loans have relatively standard, predictable language. However, the right to assess certain charges or fees on late payment or default is often at the discretion of the holder of the note. How this discretion is exercised is subject to guidelines not contained in the note or mortgage.

In this Court's opinion, the exercise of that discretion may be impacted by the relationship between the holder of the note and the party that administers its collection. In the present financial market, almost every home mortgage loan is packaged with thousands of other loans and sold to investors assembled on Wall Street. The securitization of mortgage loans allows the original lender to immediately recover the amounts lent, providing it with liquidity and reducing its risk of default. The investors that acquire these bundled loans or portfolios are most often not banks or credit unions, the traditional members of the lending community. Instead, they are investment or brokerage houses; insurance companies; hedge, pension, or mutual funds; and other investment groups. They then hire a loan service provider to administer the loan portfolio.

*6 The securitization of home mortgage loans has divorced the lending community from borrowers. Not only are the new holders of the mortgage notes nontraditional lenders, but a mortgage service provider is a buffer in the relationship between lender and borrower. The holders of notes do not see themselves as lenders, but investors in an asset. They have little interest in the relationship between lender and borrower except as it might affect their return on investment.

Mortgage service providers administer notes for a fee. The terms of their agreements with investors, as well as the guidelines the investors set for administration of the loan, have ramifications for the borrower. Most servicing agreements allow the service provider to charge a flat fee, usually stated as a percentage of the portfolio under administration. All principal and interest payments collected are paid to the note holder. Usually, fees are additional income to the service provider while costs are simply a pass through, or reimbursable items. In addition, servicers invest the "float," or funds held on deposit, and retain earnings on that investment. Therefore, amounts held in escrow or in debtor suspense are an addition source of revenue for the servicer. While a mortgage service provider and note holder's interests are closely aligned, they are not perfectly aligned. It is in a mortgage service provider's interest to collect fees and hold funds, both of which generate additional income for its account. Conversely, a note holder or investor is interested in the collection and application of payments to principal and interest.

Since many fees and charges are imposed at the discretion of the lender and must be "reasonable" under the law, servicing agreements may establish guidelines for the exercise of that discretion. [FN17] In this case, Wells Fargo did not produce its servicing agreement. Therefore, the exact terms of its relationship with Lehman Brothers and the financial incentives available to Wells Fargo are not in evidence.

In any event, Ms. Miller testified that once the guidelines for management of a loan are determined by the loan's investor, Fidelity MSP imports the guidelines into its internal logic. [FN18] For example, if investor guidelines suggest the assessment of a late charge every time a payment is fifteen (15) days past due, the Fidelity MSP system will automatically assess a late charge if payment is not posted to the account within fifteen (15) days of its due date.

Other charges or fees are assessed against the account by virtue of "wrap around" software packages maintained by Wells Fargo. These software packages interface with Fidelity MSP and implement decisions based on their own internal logic. For example, if a borrower is delinquent in making a payment, Wells Fargo's computer system may automatically send a demand letter to the borrower. Guidelines might also recommend a property inspection if a loan is past due. If such an event occurs, the computer system will automatically generate a work order for an inspection, allow the vendor to upload the completed report, generate a check to the vendor for the inspection, and charge the customer's account--all without human intervention.

*7 When a loan is involved in foreclosure, bankruptcy, or other litigation, Wells Fargo manages that loan through its Bankruptcy Department located in Fort Mill, South Carolina. Ms. Miller is the Vice President who oversees this department of 375 people.

The transfer of loans involved in a bankruptcy to Ms. Miller's department begins with America InfoSource ("AIS"), a third party vendor hired by Wells Fargo to provide daily information regarding new bankruptcy filings that may potentially involve Wells Fargo loans. At the inception of this relationship, Wells Fargo supplied AIS with a listing of every credit relationship it held or serviced, as well as certain fields of information (debtor's name, address, social security number, etc.) on each borrower. The information is updated daily as Wells Fargo acquires new relationships and old ones are closed.

AIS scans the electronic databases of all the bankruptcy courts in the country and attempts to match debtors to any of the information supplied by Wells Fargo. If a match is made for one field of information, Wells Fargo is immediately notified. The notification provides Wells Fargo with the debtor's name, address, social security number, the bankruptcy court, case number, chapter type, and judge assigned. Once notified, Wells Fargo verifies that the debtor is a borrower. To verify the "match," Wells Fargo scans the information supplied by AIS against its own records. Ideally, three fields or pieces of information will be verified and matched. [FN19] If a three field match is not secured by Wells Fargo's internal computer system, the system will reject the borrower and a manual match will be attempted. This is one of the few times any human being touches or reviews a loan's electronic record.

Once Wells Fargo's computers have verified the AIS borrower match, the program automatically activates a system within the Fidelity MSP software platform called a Bankruptcy Work Station ("BWS"). This sub-part of Fidelity MSP is allegedly infused with computer logic designed to manage a loan during a pending bankruptcy. The supervision of that loan then falls to Ms. Miller.

Once a borrower's status as a bankruptcy debtor has been confirmed, the Fidelity MSP/BWS automatically advises counsel for Wells Fargo when a loan is referred for legal action. Who is selected to represent Well Fargo is dependent on who owns the loan. If a loan is owned by Wells Fargo, it is automatically referred to one of its national counsel; either Brice or McCalla Raymer. If held by one of the federal agencies, Wells Fargo will refer the loan to a firm on an approved list supplied by the agency. If held by a private investment group, that group can specify counsel or can delegate the responsibility to Wells Fargo as the service provider. If the loan is managed by national counsel, local counsel are retained to physically file pleadings and make court appearances when necessary. Local counsel are not given access to either the electronic files or accounting history but receive all of their information from national counsel. They typically do not have direct client access and may even be prohibited from contacting the service provider or note holder by their retainer agreements. [FN20]

*8 Once the BWS notifies Brice that it has been retained, Brice is given immediate access to Wells Fargo's mainframe computer platform. In addition, the computer automatically searches different parts of Wells Fargo's multiple software packages and compiles a storage file where counsel can obtain all the information necessary to perform his or her duties. For example, when a loan is owned or serviced by Wells Fargo, the documents evidencing the initial loan transaction are kept in pdf format under a software platform called FileNet. FileNet is scanned for copies of the note, mortgage, recordation certificate, and other relevant closing documents. Those electronic files are then assembled in a storage file for counsel's use. The Fidelity MSP system, containing the loan's account history, is open to review by counsel. iClear, another computer program, contains copies of the invoices that represent costs billed to the loan. [FN21]

The first task of counsel, once a bankruptcy is filed, is to prepare a proof of claim. Because counsel has direct access to Wells Fargo's complete loan accounting, as well as the documents that support its debt and security interest, national counsel prepares the proof of claim without ever speaking to a Wells Fargo representative. In fact, Wells Fargo testified that it does not review any proof of claim prior to its filing. Wells Fargo's testimony was that only after filing was the proof of claim reviewed for accuracy. [FN22] Other legal assignments are executed in a similar fashion.

For example, when a loan goes into postpetition default, the BWS automatically notifies legal counsel of this fact. Legal counsel then prepares a motion for relief utilizing information obtained from the Fidelity MSP system and BWS, including attaching any necessary documents to support the motion and the financial allegations of the default. The motion is typically filed without Wells Fargo's input or review. Wells Fargo testified that it does not maintain records of the legal documents filed on its behalf but relies exclusively on counsel for this service.

The logic utilized by the BWS in its decision making process is both detailed, court, and even judge specific. For example, if under local rules, or even local custom of a particular district or judge, a motion for relief may not be filed until the loan is at least ninety (90) days past due, the computer can be adjusted to notify counsel of the need to file a motion for relief when the debtor's account is past due ninety (90) days rather than the typical sixty (60). Other adjustments to the system can be made to eliminate fees or charges prohibited by a particular jurisdiction or judge within a jurisdiction. In summary, Fidelity MSP and BWS allow Wells Fargo to input the individual demands of a particular investor or note holder as well as a court district or even judge.

Mr. Fear Will Be Presenting at Two Local Bankruptcy Seminars This Summer/Fall

Mr. Fear has agreed to speak at two local bankruptcy seminars this fall. The first is sponsored byNBI, and is entitled "Nuts and Bolts of Bankruptcy Law." It is scheduled for August 22, 2008. The second is sponsored by Sterling Education Services on Landlord-Tenant Law and is scheduled for October 30, 2008.

Indymac--Exhibit A of What Went Wrong in the Mortgage Lending Business

This is a good piece from the Center for Responsible Lending on what went wrong with IndyMac Bank. Most people have blamed brokers for these kinds of shenanigans, but it looks like the banks were involved too, or at least they knew what was going on.

Lenders create a bankruptcy monster - MSN Money

Here is a good article from MSN Money on lender abuses. The author points out the paradox that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") was intended to curb debtor abuses, but the real abuses that needed to be curbed were creditor abuses.

Good Information on Life After Bankruptcy from Consumer Credit Counseling Services

Consumer Credit Counseling Services is one of the few legitmate debt counselors out there. They have a good post on Life After Bankruptcy that you can access here.

One of the things they mention is your credit report after bankruptcy. Debts that are discharged in banrkuptcy must be reported on the credit report as "$0" in the balance column and they are allowed to put "Discharged in Bankruptcy" in the notes column. If creditors are continuing to report a balance, that could be a violation of the Fair Credit Reporting Act. A nationwide firm called the
National Consumer Bankruptcy Litigation Center is attempting to rectify this problem by bringing suits all over the country for violation of the discharge injunction by these lenders for failing to report a $0 balance.

Home Prices Down 26% in CA; Really, It's a Good Thing!

L.A. Land : Los Angeles Times : California freefall: Home prices down 26% in February: "In the San Fernando Valley, losing a home to foreclosure is now almost as common for families as buying a home." That is a shocking statement. However, the drop in home prices is a good thing.

The California real estate market was going up too fast to support home ownership for the average person. At the peak, homes in the Fresno area were averaging around $290,000 and incomes were around $45,000/year. There is no way someone making $45,000 a year can pay a $290,000 mortgage. Now, that same house is selling for $140,000-175,000. It might be possible for someone making $45,000 to pay a $140,000-175,000 mortgage, or at least it is in the realm of possibility. My thought is that the prices will stabilize around that level and then will begin their gradual drift upward, probably no more than 2-3% a year. That will allow for a healthy economic situation where the housing market opens up for a lot of people.

The other side of the coin, however, is that a lot (and I mean a lot) of people bought or refinanced their houses to the max within the last 5 years. Consequently, there are a lot of people out there who owe $300,000 on a house that is now worth about $200,000. And it won't be worth $300,000 for ten years or more. So, what are those people going to do? Some of them might have taken out unsecured loans in that amount and have the income to pay the loans. But many of them are not going to have the income to swing the payments on those loans for the long haul. I predict that many of them are going to walk away from their homes, unless the mortgage companies agree to write down the loan amount. I think we will see a steady stream of these folks for the next 5 or 6 years, many of whom will need to file bankruptcy if they can't get a mortgage modification.

For consumers caught in this trap, the only good thing is that everyone's credit will be in the tank, so if banks want to lend, they will have to lower their standards in the future and it will be easier for these people to purchase a house in the future (at the new lower values).

Debtor Audits Suspended

The United States Trustee's office has suspended Debtor audits because the most recent budget provides no funding for debtor audits. More information can be found at http://www.usdoj.gov/ust/eo/bapcpa/debtor_audit/.

Stunning jump in California foreclosures

In the fourth quarter of 2007, there were 31,676 residence foreclosures in California. During the same quarter in 2006, the number was 6,078. That is an increase of 421.2 percent and is the most number of foreclosures since DataQuick began tracking foreclosures in 1988.

The main reason for the number of foreclosures is that everyone shut their eyes and held on for the ride during the crazy housing inflation from 2001-2006. If more lenders had been questioning the ridiculous increase in values (especially when compared to incomes), the level of inflation might not have occurred. There is no doubt that housing prices needed to climb (they had been stagnant for about 10 years before that), but 25% a year for 5 years is ridiculous. There is no way the median house value can be $250,000 in an area where the median income is $40,000 ($3,333/mo.), because the majority of those people cannot realistically afford a $2,000/mo. house payment. That is equal to 60% of the gross wages. After taxes are taken out and the mortgage is paid, the family would only have about $800/mo. to live on. There is no way our incomes in the Fresno area could support that.

Modifying Mortgages in Chapter 13

Interesting article in the Kansas City paper. This quote from the article, however, does not comport with reality:

Joseph Mason, who teaches finance at Drexel University, said Durbin’s bill "is
akin to taking away real value from the lender and giving that value to the
borrower."

Taking away "real" value. What real value? There is no real value there to support many of these loans. Durbin's bill would allow the Court to put a "real" value on the house (not some inflated value by an appraiser who is a friend of the loan broker) and then allow the court to fix reasonable terms for the mortgage. If this bill is not passed, most of the homes that would have been saved will go to foreclosure. Quere, Mr. Mason: what do you think the "real" value will be when 25-50% of real estate listings are REO (listed by bank after foreclosure)?

Dealing with this problem in bankruptcy is the best place to do it for the following reasons:

1. Bankruptcy is a last resort. Nobody wants to file bankruptcy. So only those who are most desparate for the relief will file, thus limiting the number of people taking advantage of this relief.
2. Bankruptcy provides a built-in mechanism to determine if people should be eligible for the relief of modifying the loan. There is no better mechanism out there for determining what people should qualify for a modified loan.
3. All of these modifications would be supervised by the bankruptcy court. The bankruptcy court is pre-equipped with the knowledge and resources to properly vet requests to modify loans. The bankruptcy court does it all the time in contexts other than home loans. (And in Chapter 12, it even supervises modification of home loans.)
4. A Chapter 13 plan takes a lot of doing to finish. Debtors would have to comply with every provision and make every payment on time for 5 years to get the relief of a modified loan. Anything else would result in dismissal of the case and vitiation of the relief requested.

The Durbin bill makes a lot of sense. We will see if it gets enough traction in Congress.

Gambling Debts Unenforceable in Bankruptcy Court

In a refreshing and insightful opinion, the Wisconsin Bankruptcy Court determined that gambling debts could not be recovered in a bankruptcy court context. The case is In re Jafari --- B.R. ----, 2007 WL 4276535 (Bankr. W.D.Wis. Oct 16, 2007). (Westlaw subscription requred.)

The debtor had incurred debts on gambling markers at a casino in Nevada. The court determined that it was against public policy to enforce debts to gaming institutions.

I have had many clients come in with gambling addiction problems and I think this ruling makes good sense. Such debts should be unenforceable.

Ninth Circuit BAP: Means Test is Starting Point for Chapter 13

One of the raging debates in Chapter 13 bankruptcy circles is whether projected disposable income for above-median debtors (the amount to be paid to unsecured creditors) is determined using figures from Form 22C (commonly known as the means test) or Schedules I and J (actual income and expenses).

The Ninth Circuit BAP has weighed in on this argument with a Solomon-esque (splitting the baby) opinion. The case is In re Pak. Some courts have held that projected disposable income is whatever Schedules I and J say, just like under the old law. In my opinion, that argument does not make any sense because Congress intended something to happen when they changed the law in 2005. The other extreme says that projected disposable income is taken from Form 22C, end of story. This argument is more logical, but probably goes too far.

In Pak, the court determined that Form 22C is a starting point. If there has been a substantial change since the figures in Form 22C were used, then the court can take those figures into account. The rationale is that the word "projected" must mean something. Form 22C only uses income figures in the past. So, if the income significantly changes, the "projected" income would also change. This case at least makes some sense and gives some guidance. Unfortunately, however, there is another case at the Ninth Circuit Court of Appeals that will be decided soon that could overrule Pak. So, we cannot fully rely on the Pak decision in formulating Chapter 13 plans.

Hearings on Allowing Mortgage Modification in Chapter 13

The House Judiciary Committee is holding hearings on "Straightening Out the Mortgage Mess". The question is whether Sec. 1322(b)(2) should be amended to allow modification of home mortgages. Currently, that section does not allow modifications. The reason this prohibition was originally added was because without it, mortgage banks argued that the credit market would dry up for home mortgages.

Predictably, the bankrutpcy folks from NACBA and the National Bankruptcy Conference argued in favor of allowing modification and the Mortgage Banking Association argued against allowing modification.

Interestingly, however, an economist from Moody's, Mark M. Zandi, testified that "there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise" and that "[p]roperly designed, the legislation could reduce the number of foreclosures through early 2009 by at least 500,000." This has always been my biggest question: (1) would allowing mortgage modifications dry up credit and (2) if not, can Congress be convinced enough by this so that they are willing to pass legislation allowing modification of mortgages? I think that the answer to (1) is "no" for several reasons: (1) before the credit crisis, there was no problem getting a loan in the non-primary residence home mortgage market, (2) there has already been a tightening of credit across all sectors, so we should probably expect a loosening of the lenders want to make money in the future. With some solid data from economists concurring on this point, I think the legislation is in much better shape than it would have been otherwise.

Wells Fargo Agrees to Ground-Breaking Order Effective in All Districts

Wells Fargo, one of the larger mortgage servicers in the nation, agreed to an order in Louisiana Bankruptcy Court that requires Wells Fargo to take substantial steps to make sure that unauthorized fees and expenses are not tacked onto Chapter 13 cases. The full decision is In re Jones, No. 06-01093 (Bankr. E.D. La. Aug. 29, 2007), and can be found here.

The relevant text of the agreement ordered by the Court is as follows:

1. Upon the filing of a chapter 13 bankruptcy petition, the amounts outstanding on a debtor’s loan will be divided into two new, internal administrative accounts. The first account will contain the sums to be paid under debtor’s plan by the Chapter 13 Trustee; typically the pre-petition past due amounts including past due interest, costs, charges, and fees (“Account One”). The opening balance on Account One should directly correlate to the amounts reflected on Wells Fargo’s proof of claim. Account One will also include any amounts added by subsequent court order to the plan for payment by the Trustee during the case’s administration. All payments made by the Trustee will be applied to the reduction of the amounts owed on Account One.

The second account will reflect the principal amount due on the petition date (“Account Two”). No other sums should be owed on Account Two at the start of the case. Account Two will include post-petition interest accrual, post-petition property insurance or property tax expenditures, and other court authorized postpetition charges as provided in paragraph 2 below. A debtor’s regular monthly note payments will be posted to this account, reducing post-petition interest accrual, postpetition property and tax expenditures, and principal. The account’s first posting will typically be the first installment payment due on the loan following the petition date.

Wells Fargo may maintain, post-petition, its customary records on the loan provided that the two new internal accounts shall control the loan’s administration during the pendency of the case.

2. With the exception of post-petition property taxes and property insurance expenditures, Wells Fargo may provisionally accrue, but not assess or collect, any post-petition charges, fees, costs, etc. allowed by the note, security agreement and state law. Post-petition property tax and insurance expenditures may be assessed against debtor’s account and collected after the delivery of a ten day written notice to debtor, debtor’s counsel, and the Trustee. The assessment and collection of expenditures for post-petition property inspections and taxes will not require approval of the bankruptcy court unless a written objection is filed within ten days of the notice of assessment and collection. If authorized by Wells Fargo’s note, security agreement, and state law, the collection of amounts necessary to pay postpetition insurance and property tax expenditures may be made in advance through the use of escrow accounts. If escrows are utilized, Wells Fargo must give a written accounting of the amounts collected at the time it seeks to apply the escrowed funds to payment of the insurance or property tax expenditures.

As to Post-Petition Charges, annually, between January 1 and February 28 of each year during a case’s administration, Wells Fargo shall file with the Court and serve
upon the debtor, debtor’s counsel, and the Trustee, notice of any Post-Petition charges (which do not include property taxes or insurance), accrued in the preceding calendar year. The notice shall contain an itemization describing the charge, amount provisionally incurred, the date incurred, and if relevant, the name of the third party to whom the charge was paid. The notice will also provide a direct reference to the provisions of the note, security agreement, or state law under which Wells Fargo asserts its authority to assess each type of charge.

The notice shall also state that debtors, the Trustee, and any other interested party, shall have 30 days within which to object to any or all assessments outlined in the notice. It shall contain a statement to the effect that debtor may elect to add the charges to his plan with approval of the bankruptcy court, satisfy the charges directly outside the plan, or defer repayment until the conclusion of his case. If no objection to the amounts provisionally assessed is filed, or if filed, upon entry of an order approving some amount of the provisional charges, Wells Fargo may submit a proposed ex parte order authorizing assessment of the Post-Petition Charges as set forth in its notice or as approved by the court, as applicable. However, Wells Fargo may not collect on any approved Post-Petition Charges unless the debtor voluntarily delivers payment separate and above from that due as a regular monthly installment or obtains approval of the court to modify the plan and satisfy the amounts due through periodic payments by the Trustee. If the approved Post-Petition Charges are to be paid through the modified plan, they will be added to Account One and satisfied by the Trustee. If to be paid by the debtor, they may be added to Account Two.

If no provision for payment is made by a debtor, the collection of the approved Post-Petition Charges must be deferred until the close of the case or relief from the stay is obtained.

3. If Wells Fargo does not issue a notice of Post-Petition Charges, in accordance with paragraph 2, for any given year of the case’s administration, then Wells Fargo shall be prohibited from collecting or assessing any charges accrued against the debtor for that year and shall treat the debtor as fully current at the time of discharge.

4. Upon the issuance of a discharge, Wells Fargo shall adjust its permanent records to reflect the current nature of debtor’s account. Provided however, that if debtor elected to defer the payment of approved Post-Petition Charges until the conclusion of the case’s administration, then Wells Fargo shall be authorized to collect said sums in accordance with the provisions of its note, security instrument, and state law.

The court was deciding whether to impose massive punitive damages (in the millions of dollars). Wells Fargo said, "we'll agree to an order like this if you agree not to impose massive punitive damages." So, this order was entered. The order further states: "Wells Fargo also offered to memorialize this agreement into an order of the Court, enforceable in any case pending or subsequently filed before any court in the country." The court took them up on this offer and agreed not to impose a multi-million dollar punitive damage award.

If Wells Fargo fails to abide by this order in any case in the country, they could be subject to punitive damages, because they are disobeying a court order, and more than that, an agreed court order, and even more than that, an agreed court order entered for the purpose of avoiding multi-million dollar sanctions. Wells Fargo better comply or there will be a deluge of suits alleging violation of this agreement.

Bankruptcy Filings Are Increasing

I have noticed that I am getting quite a few new bankruptcy appointments now and I am wondering if that means bankruptcy filings will be picking up. So, I went to the stats page to see what the trends look like. I compared the 12 month period ending June 30, 2005 with the 12 month period ending June 30, 2007. The reason I used the June 30, 2005, date is that was before the unnatural surge in filings that we saw before October 17, 2005.

A couple of interesting points: (1) the filings for Sacramento have actually gone up (8051 for 2005 and 8313 for 2007); (2) the filings for Fresno are down significantly (5258 for 2005 and 3379 for 2007). Not including Fresno's filings, the total filings for the district would be equal. This leads us to ask a few questions. Why are the filings for Sacramento back to 2005 levels and the filings for Fresno not? Is this going to be a continuing trend or will it even out eventually?

My opinion is that the rise in filings for Sacramento is an indication that filings will eventually rise in Fresno. Sacramento is bigger than Fresno and is often ahead of Fresno on economic issues. Consequently, I don't think this will be a trend that is continuing and I think it is very likely that Fresno will see the same increase back to 2005 levels of filings within the next 6 months.

Stripping Off Junior Liens

One of the commonly known facts about bankruptcy is that in general you cannot modify a mortgage secured by your principal residence. This means that if you have an adjustable rate mortgage and the rate is going from 5% to 13% and your payment is going from $1500 to $2500, you generally can't change that by filing a bankruptcy. However, there is one option that has been irrelevant for the last several years due to the hot real estate market.

If a junior mortgage is wholly unsecured, i.e., there is no equity for that mortgage, the wholly unsecured mortgage may be stripped off and treated as an unsecured claim. Thus, if a house has a value of $200,000 and there are two deeds of trust, one on which there is $205,000 owing and one on which there is $40,000 owing. The second deed of trust with $40,000 owing could be stripped off and treated as an unsecured claim. In a Chapter 13 plan, this might mean that the $40,000 deed of trust could get nothing if the plan pays 0% to unsecured creditors.

With real estate values rising by 25% a year in the first five years of this decade, there were no opportunities to strip off mortgages, because all mortgages were at least partially secured. With some of the risky lending practices that were being used (100% financing and even 125% financing), however, that is changing now. A house that was 100% financed with two mortgages (80% and 20%) might be worth 80% of what it was worth when it was financed. Thus, the 20% mortgage might be stripped off and treated as unsecured.

This is an important right for debtors to consider in deciding whether they will be able to keep their home.

N.D Cal. - Applicable Committment Period is a Multiplier, not a Time Period

One of the requirements in a Chapter 13 case is that a debtor contribute all of his "projected disposable income" to unsecured creditors during the "applicable commitment period." The applicable commitment period is 3 years if the debtor's income is below median or 5 years if the debtor's income is above median. The projected disposable income is determined (primarily) by subtracting certain allowed expenses (based on IRS formulas) from the current monthly income (which is determined by looking at the last six months of income and averaging it). That gives the amount that is required to be paid. Sometimes, debtors are actually able to pay more than their projected disposable income every month and so the question arises. Let's say an above median debtor has projected monthly income of $100/mo. However, the debtor could pay $150/mo. If the debtor pays for 5 years at $100 per month, the total amount paid in will be $6,000. May the debtor pay $150 per month for 40 months (also $6,000), instead?

In In re Swan, --- B.R. ----, 2007 WL 1146485 (Bkrtcy.N.D.Cal., April 18, 2007) (Westlaw subscription required to view link), the Court said "yes." In that case, the total projected disposable income for 60 months would have been $3,570. The debtor proposed a plan that would pay a total of $18,900 over 36 months. The court allowed the debtor to pay the higher amount and finish the plan in 36 months.

The court recognized that there is a split of authority on this issue. The court's rationale is as follows:

Section 1325(b)(1)(B) states that a court may not confirm a plan unless it "provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan." 11 U.S.C. § 1325(b)(1)(B). According to the Code, the "applicable commitment period" that applies to Debtor is "not less than 5 years." 11 U.S.C. § 1325(b)(4)(A)(ii). Creditor contends that Debtor's Plan may only be shorter than 5 years if Debtor pays all allowed unsecured creditors in full, pursuant to § 1325(b)(4)(B). It is undisputed that the Plan does not provide for full payment of all allowed unsecured claims. Debtor argues that the statute does not require a fixed plan term, and that, because the Plan proposes to pay, over 36 months, an amount greater than Debtor's projected disposable income multiplied by 60 months, the Plan should be confirmed as proposed.

This issue has been described as a distinction between a "monetary" requirement and a "temporal" requirement. In re Brady, 361 B.R. 765, 2007 WL 549359, *9 (Bankr.D.N.J. Feb.13, 2007), citing Alane A. Becket and Thomas A. Lee, III, Applicable Commitment Period: Time or Money?, 25-MAR Am. Bankr. Inst. J. 16 (2006). Creditor espouses the view that the phrase "applicable commitment period" imposes a temporal requirement that Debtor must commit to a plan for a specific amount of time--in this case, five years. Some courts have adopted this position. Slusher, 359 B.R. at ----, 2007 WL 118009 at *11; In re Casey, 356 B.R. 519, 527 (Bankr.E.D.Wash.2006); In re Cushman, 350 B.R. 207, 212 (Bankr.D.S.C.2006); In re Davis, 348 B.R. 449, 458 (Bankr.E.D.Mich.2006); Dew, 344 B.R. at 661; McGuire, 342 B.R. at 615.

*10 Debtor takes the position that "applicable commitment period" constitutes a monetary requirement such that, in order to be confirmed, Debtor's three-year Plan must provide for payment of her projected disposable income multiplied by the applicable commitment period. In this case, the relevant calculation is $59.50 projected disposable income according to Form B22C multiplied by the 60 month applicable commitment period equals $3,570. Debtor argues that the Plan satisfies the requirements of the Code, and therefore may be confirmed, because it proposes to pay $18,900 over 36 months, which is over five times more than Debtor's projected disposable income over the applicable commitment period of $3,570. Cases supporting Debtor's position include Brady, and In re Fuger, 347 B.R. 94 (Bankr.D.Utah 2006). Bankruptcy Judge Keith M. Lundin takes the same view in his chapter 13 treatise. See 5 Keith M. Lundin, Chapter 13 Bankruptcy §§ 500.1 at 500-2 (3d ed. 2006)("The applicable commitment period does not require that the debtor actually make payments for any particular period of time. Rather it is the multiplier in a formula that determines the amount of disposable income that must be paid to unsecured creditors.")

The logic of Debtor's position is straightforward. Unsecured creditors will receive more under the Plan than is required by the Code. Specifically, in this case, unsecured creditors will receive more than five times what the Code requires ($18,900 compared with $3,570), and they will receive it more quickly under Debtor's three-year Plan than they would if the Court were to adopt Creditor's position, and require a five-year plan term. This is clearly to the benefit of all creditors. The unsecured creditors are not being paid interest, so the time value of money makes the disparity between what Debtor is offering to pay under the Plan--$18,900 over three years--and what unsecured creditors would be entitled to under Creditor's position--$3,570 over five years--even greater than it appears at first blush. Debtor's position also furthers the Code's fresh start policy, allowing Debtor to fulfill the obligations imposed by the Code in a shorter amount of time, receive a discharge, and move on.

In light of the extreme monetary disparity between the two positions, it is difficult to comprehend why Creditor has taken this position. Practically speaking, Creditor must be hoping for one of two events to occur. Creditor wants the Plan term extended to five, rather than three, years because the longer time period increases the likelihood either that (1) the Plan will be modified upward; or (2) Debtor will default on the Plan and Creditor will maintain an entitlement to the full amount of its claim. In this Court's experience of over sixteen years on the bench, the former is extremely rare. Accordingly, Creditor's reason for supporting this position appears to be its hope that the Plan will fail. The Court finds such reasoning unpersuasive. This reasoning contravenes the Code's fresh start policy. It also delays payment to other creditors, most of whom would likely prefer to receive payment over three years, rather than five. Moreover, if Debtor cannot keep up her Plan payments, she will likely convert to chapter 7--which would deprive creditors of a substantial portion of Debtor's Plan payments.

*11 [7] One court has held that the phrase "applicable commitment period" does not come into play where the debtor has no disposable income, but that, where the debtor has positive disposable income, the phrase mandates a specific plan length. In re Alexander, 344 B.R. 742, 751 (Bankr.E.D.N.C.2006). However, this is a distinction without a difference. Construction of the phrase "applicable commitment period" as a monetary requirement renders this distinction meaningless. The Code requires debtors to pay their projected disposable income over the applicable commitment period into the plan. Whether that amount is zero or greater than zero makes no difference, because in the end the effect is the same. Just as it makes no sense for a debtor to remain in chapter 13 where he has no disposable income and has paid his secured, administrative and priority claims in full, it likewise makes no sense for a debtor with some disposable income to remain in chapter 13 after he has paid the full amount required by the Code to his unsecured creditors. In both cases, the absurdity is having a debtor remain in chapter 13 awaiting discharge where, after a certain point, he has fulfilled all of the Code requirements and his plan payment is reduced to zero. The purpose of the Code is to provide debtors a fresh start and to ensure that creditors are paid as much as possible as soon as possible. It is not to incentivize people to remain in bankruptcy at the continued expense of their creditors, who could have received their plan payments much earlier, and at the expense of the bankruptcy system as a whole.

Some courts adopting Creditor's position have held that the language of § 1325(b)(1)(B) "clearly indicates" that, where there is an objection to confirmation and the debtor does not propose to pay unsecured creditors in full, above-median debtors must perform a plan of reorganization for 60 months. Cushman, 350 B.R. at 212; In re Schanuth, 342 B.R. 601, 607 (Bankr.W.D.Mo.2006). However, the statute does not specify a minimum plan term. The statute merely states that, in order to be confirmed, a plan must apply all of a debtor's projected disposable income during the applicable commitment period to make payments under the plan. Brady, 361 B.R. at ----, 2007 WL 549359 at *9. Accordingly, the Plan meets the requirements of the statute in that it applies all of (in fact, much more than) Debtor's projected disposable income ($59.50) during the applicable commitment period (60 months) to make payments under the Plan.

The rationales supporting the conclusion that the "applicable commitment period" is a temporal requirement are unpersuasive to this Court. In McGuire, the bankruptcy court cited three reasons for its conclusion. First, it reasoned that, because the disposable income calculation on Form B22C is "merely a starting point," and is not dispositive such that a court need not confirm a plan that proposes to pay the amount reported on Form B22C, "it follows that a court is not required to confirm a plan because it proposes to pay a total sum equal to the Form B22C amount multiplied by the applicable number of months." McGuire, 342 B.R. at 615. This reasoning is unhelpful because, while the Court need not reach the question of whether departure from Form B22C is permissible under the law, under the facts of this case, the amount of disposable income reported by Debtor on Form B22C in fact satisfies the requirements of the Code. [FN9] Therefore, the statement that a court "is not required to confirm a plan simply because the debtors propose a plan payment in the Form B22C amount," does not help answer the question of whether a court may do so when the amount of the Form B22C payment is not challenged as being too low.

*12 The second reason cited by the McGuire court was that "a monetary interpretation of ACP renders § 1325(b)(4)(B) meaningless." Id. That section states that the applicable commitment period "may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period." The contention that this section is rendered superfluous by a monetary interpretation of "applicable commitment period" assumes that it is inherent in the Code that a debtor who pays unsecured claims in full may complete a chapter 13 plan in less than 36 months. See Davis, 348 B.R. at 455: "Under this interpretation of ACP, § 1325(b)(4)(B) doesn't really state anything more than that a debtor does not have to pay more than 100% on his unsecured claims." The fact that the Code specifically provides that if a debtor pays 100% of his claims with interest that the court must confirm the plan regardless of the plan's length does not mean that a debtor may not do what the Debtor's Plan does here, i.e., pay the same amount to unsecured creditors that would be required over five years, in three years. Accordingly, the Court is not persuaded by this argument.

The third and final rationale used by the McGuire court to support its conclusion was that Congress did not express any intent to alter pre-BAPCPA practice on this issue by enacting the BAPCPA. McGuire, 342 B.R. at 615. Prior to BAPCPA, § 1325(b)(1)(B) required all of the debtor's projected disposable income received during the three-year period, beginning on the due date of the first payment, to be applied to the plan, and according to McGuire, debtors were not allowed to exit chapter 13 early unless they could establish extraordinary circumstances or creditors were paid in full. Id. Noting that the BAPCPA amendments in this regard only changed the phrase "the three year period" to "applicable commitment period", the McGuire court, following Schanuth, 342 B.R. at 608, discerned no clear intent on the part of Congress to alter the pre-BAPCPA practice. Id. The Court disagrees with McGuire's characterization of pre-BAPCPA law, particularly as it existed in this Circuit. Several pre-BAPCPA cases permitted debtors to payoff the plan balance and exit chapter 13 in less than 36 months without paying unsecured creditors in full. Fuger, 347 B.R. at 101, citing In re Sunahara, 326 B.R. 768 (B.A.P. 9th Cir .2005)(court may approve a plan modification allowing a debtor to complete plan in fewer than 36 months without paying unsecured claims in full); In re Richardson, 283 B.R. 783 (Bankr.D.Kan.2002); In re Forte, 341 B.R. 859 (Bankr.N.D.Ill.2005); In re Miller, 325 B.R. 539 (Bankr.W.D.Pa.2005). Accordingly, the lack of a clearly expressed Congressional intent to alter pre-BAPCPA law on this issue is at best an ambiguous rationale, since an interpretation of "applicable commitment period" as a monetary, rather than temporal, requirement is not necessarily inconsistent with pre-BAPCPA law. In the Ninth Circuit where, under Sunahara, debtors could modify their chapter 13 plans to pay off the plan balance in less than 36 months, this rationale actually lends additional support to Debtor's position.

*13 Some of the cases take a theoretical, but impractical approach to this issue that divorces the language of the Code from the realities of the debtor/creditor relationship. See e.g., Slusher, 359 B.R. at ----, 2007 WL 118009 at *8. There can be no question that in the vast majority of cases, creditors will be far better served under the monetary, rather than the temporal, approach. Creditors will be paid sooner under the monetary approach. This is of tremendous financial advantage, especially since unsecured creditors normally receive no interest on their claims. The present value of payments over three years is much greater than payment of the same amount of money spread out over five years. Plus, the risk of plan default is lower on a shorter plan--which means the creditors are much more likely to actually get paid, rather than having the debtor convert to chapter 7, in which case creditors are unlikely to receive any further payments. In sum, everyone benefits under the monetary approach in the vast majority of cases. More debtors will receive fresh starts more quickly. Creditors will be paid more money, more quickly, on their claims, and the entire bankruptcy system will be easier to administer and much more efficient.

This Court agrees with the Fuger court that "where the debtor's projected disposable income is consistent with the calculations on Form B22C, it makes little sense to hold the debtor hostage for 60 months where the debtor can satisfy the requirements of § 1325(b)(1)(B) in a shorter period." Fuger, 347 B.R. at 101. Accordingly, the Court holds that the phrase "applicable commitment period" does not dictate a minimum plan term, but requires only that the Debtor's projected disposable income be computed over that amount of time-- at least where, as here, Debtor's Plan provides for a term of at least three years. The Court finds that the Plan proposes to pay all of Debtor's projected disposable income over the sixty-month applicable commitment period to unsecured creditors, and therefore satisfies the requirements of § 1325(b)(1)(B). Alternatively, if this Court has the discretion to confirm Debtor's three-year Plan because it pays creditors what they would receive--in fact much more than what they would receive--under a five-year plan, the Court exercises its discretion to do so for the reasons set forth in this Memorandum Decision. Creditor's objection on this basis is overruled.

Ride-through is Still Alive, With a Twist

Before the advent of BAPCPA (2005), Chapter 7 debtors in the Ninth Circuit (which includes California) did not have to reaffirm a car loan in order to keep the car. As long as the debtor was current on payments, the debtor could keep the car, even if the installment contract stated that bankruptcy was an event of default. Things are different under BAPCPA, however. One of the sweeping changes made by BAPCPA was to require debtors to require debtors to reaffirm if they wish to keep a car.

Almost all car installment purchase agreements provide that bankruptcy is an event of default, thus allowing the creditor to repossess the car. Under prior law, these "ipso facto" (by the very fact) provisions had no effect. However, BAPCPA allows these provisions to have effect if the Debtor fails to either (1) timely file a statement of intention, or (2) timely fulfill that statement of intention. What this means is that if the debtor fails to timely file the statement of intention or follow through on the statement of intention, arguably, the creditor can repossess the car, even if the debtor is current.

This presents a significant conundrum often to debtors who are current on their car payments. The effect of reaffirmation is harsh. If you reaffirm, you probably can't discharge the debt in a subsequent bankruptcy, even if your car blows up or you lose your job and can't make the payments.

A recent case, however, indicates that the "ride-through" is still alive, if the debtor does everything he is supposed to do and the court declines to approve the reaffirmation agreement. The case is In re Moustafi, --- B.R. ----, 2007 WL 1592965 (Bkrtcy.D.Ariz.,2007). (Must have Westlaw to view.) In that case, the debtor timely filed the statement of intention and timely signed a reaffirmation agreement. The court declined to approve the reaffirmation agreement, because it was not in the debtor's best interest. Then the court stated that because the debtor had done everything that was required, 11 U.S.C. Sec. 521(d) does not allow the ipso facto clause to be valid. If the ipso facto clause is not valid, then there is no default and the creditor cannot repossess the car.

Negative Equity Does Not Count for 910 Claims

In In re Acaya, --- B.R. ----, 2007 WL 1492475 (Bkrtcy.N.D.Cal.,2007) (must have Westlaw subscription to view), the Northern District of California Bankruptcy Court determined that negative equity does not qualify as "purchase money" to protect what would otherwise be a 910 day creditor.

This is a situation that often happens. A debtor trades in his car, but he owes more than it is worth. The dealer allows him to take his "negative equity" with him to the next car he purchases. It is kind of like a reverse down payment. Instead of putting money down for the car, you take more debt with you that you add on to the car.

Under the old (pre 2005) law, debtors could cram down, i.e., pay only what the car is worth, in a Chapter 13 plan. Under the new law (2005 to present), if a car was purchased within the last 910 days, you have to pay the full amount owed on the car, not just what it was worth. However, you have to pay the full value of a "purchase money" loan. The court in Acaya determined that this roll-over of negative equity was not "purchase money" and therefore, it could be stripped off if the value of the car was less than what was owed.

Sale While in Foreclosure Rescinded 18 months After Contract and 14 months After Close of Escrow

In this case, In re Lloyd, --- B.R. ----, 2007 WL 1346553 (Bkrtcy.N.D.Cal.,2007), out of the Northern District of California, the Court held that a rescission of a home purchase contract was valid 18 months after the contract was signed and 14 months after close of escrow. The reason is that under the Home Equity Sales Contracts Act (HESCA), if a sale of a home in foreclosure is going to be completed, the seller needs to be given notice (next to his signature) stating that he has a 5-day right to rescind (cancel) the contract. That was not done in this case and the court found that the seller/debtor could rescind the contract and get his house back, even though the rescission was done over a year after close of escrow on the property.

Kansas Case Determines that 910 Claims Are Not Entitled to Interest!

This bankruptcy case out of Kansas, In re Kinsey, states that 910 car claims are not entitled to interest, because they are not "allowed secured claims" which would otherwise be entitled to interest under the Code. The case substantially relies on the Dewsnup v. Timm Supreme Court case. I am not aware of any other jurisdictions that have taken the same stance and I know that this issue has not been decided by the Fresno Bankruptcy Court. As a matter of practice, most Chapter 13 plans in the Fresno division contain the contract or Till interest rate.

New Chapter 13 Debt Limits

The new debt limits for Chapter 13 have been published. The new limit for unsecured debt is $336,900 and the new limit for secured debt is $1,010,650. These debt limits will go into effect on April 1, 2007. The old limits were $307,675 and $922,975, respectively. Click here for a link to the federal register with all of the new dollar amounts.

Part of New Bankrtupcy Law Ruled Unconstitutional

One of the provisions of the new bankruptcy law (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA")) places limits and requirements on what an attorney may and may not say to clients considering bankruptcy. Some of these requirements are quite onerous. For example, 11 U.S.C. Sec. 526(a)(4) states as follows:

A debt relief agency shall not . . . advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.

There are many legitimate instances where an attorney might advise a client to incur additional debt before filing bankruptcy. For example, courts have held that it is okay for a debtor to take steps to maximize his exemptions before filing bankruptcy. That might involve borrowing against a car to maximize the available homestead exemption. It does not hurt the lender on the car, because the borrower will have to reaffirm the debt and it allows the debtor to maximize the value of the exemption.

In Zelotes v. Martini, Case No. 3:05cv1591 in the United States District Court for the District of Connecticut, the Court recently ruled that these limitations on attorney speech are facially unconstitutional. The Court stated as follows:

Rather than changing the bankruptcy system by closing the loopholes, eliminating the incentives for opportunistic action or enacting penalties for those who take on such debt prior to filing for bankruptcy, Congress enacted § 526(a)(4), a prophylactic rule which prohibits attorneys from advising their clients to take on any additional debt in contemplation of bankruptcy, even when doing so would be lawful. As Plaintiff argues, and as both the Hersh and Olsen courts found, there are instances whereby taking on more debt in contemplation of bankruptcy would not constitute abuse of the bankruptcy system. Without delving too deep into the complexities of bankruptcy law, it is clear that the prohibition in § 526(a)(4), while addressing opportunistic abuses, could also ensnare lawful, financially prudent actions. The Hersh and Olsen courts noted examples where the prohibition could reach lawful and beneficial actions, including (1) “refinancing at a lower rate to reduce payments and forestall or even prevent entering bankruptcy,” (2) “taking on secured debt such as [a] loan on an automobile that would survive bankruptcy and also enable the debtor to continue to get to work and make payments,” (3) “taking out a loan to obtain the services of bankruptcy attorney, to pay the filing fee in a bankruptcy case or the conversion of a non-exempt asset to an exempt asset which is still allowed under the Bankruptcy code,” and (4) “refinanc[ing] a mortgage that allows a debtor to pay off the mortgage and other debts, such as credit card debt, in a chapter 13 where failure to refinance may only allow the debtor sufficient funds to pay off one or the other but not both.” Hersh, 347 B.R. at 24; Olsen, 2006 U.S. Dist. LEXIS 56197, at *20. Plaintiff cited these and other examples of lawful, financially prudent actions, including: (1) borrowing money from friends and family or taking out a secured loan to obtain the services of a bankruptcy attorney or to pay a filing fee, in order to (a) prevent a wage garnishment or attachment, (b) prevent a home foreclosure, repossession or associated costs or (c) avoid a preferential payment or fraudulent transfer to insiders; and (2) borrowing from friends and family or taking out a secured loan to finance the purchase of a new vehicle in order to (a) purchase a less expensive vehicle with lower monthly payments in order to maintain transportation, (b) obtain transportation and secure employment, (c) avoid the higher rate of interest—and therefore, potentially higher likelihood of default—which the debtor would face after filing for bankruptcy, (d) obtain a more economical and/or reliable vehicle in order to reduce average monthly expenses.

By prohibiting lawyers from advising clients to take a course of action that is lawful and in the client’s best financial interest, albeit a counterintuitive one, § 526(a)(4) prevents lawyers from giving clients the best and most complete advice. As Plaintiff argues, “[s]ection 526 chills the attorney’s very exercise of the advice and counsel function that is the defining feature of our profession.” (Pl.’s Opp. 11.) By prohibiting lawyers from advising clients to take lawful, prudent actions as well as abusive ones, § 526(a)(4) is overbroad and restricts attorney speech beyond what is “narrow and necessary” to further the governmental interest. Gentile, 501 U.S. at 1075; Hersh, 347 B.R. at 25 (citing In re R. M. J., 455 U.S. 191, 203, 102 S. Ct. 929, 71 L. Ed. 2d 64 (1982) (Even under intermediate scrutiny, “[s]tates may not place an absolute prohibition on certain types of potentially misleading information . . . if the information also may be presented in a way that is not deceptive.”); Conant v. Walters, 309 F.3d 629, 638-39 (9th Cir. 2002) (finding that government could not justify policy that threatened to punish a physician for recommending to a patient the medical use of marijuana on ground that such a recommendation might encourage illegal conduct by the patient)); Olsen, 2006 U.S. Dist. LEXIS 56197, at *21. Accordingly, the Court finds 11 U.S.C. § 526(a)(4) facially unconstitutional.

Click here for a PDF version of the decision.

Sue up or Shut up!

Have you ever received a letter threatening to sue to collect $388? Those fortunate souls who are unfamiliar with the court system might believe someone would actually sue to collect $388. But it is just not worth it and debt collectors know it. Here's an interesting article from Time regarding debt collectors who threatened to sue even when they knew suit was unlikely.

A class action was brought against the debt collectors alleging violation of the Fair Debt Collection Practices Act ("FDCPA"). The FDCPA prohibits debt collectors from making false or misleading statements in attempting to collect a debt. The debt collectors' letter stated that failure to pay the debt "could" result in a lawsuit. Thus, they claimed, the letters did not speak of an imminent lawsuit and did not violate the FDCPA. The District Court agreed with this reasoning and dismissed the claims. The Third Circuit Court of Appeals, however, did not agree and reversed the District Court, holding that the District Court must use a "least sophisticated debtor" standard of review in determining whether the statements were misleading.

Wall Street Journal on New Bankruptcy Law

The Wall Street Journal posted an article claiming (or at least inferring) the new bankruptcy law is a success and denigrating those who opposed the law.

Henry Sommer, president of the National Association of Bankruptcy Attorneys (and co-editor of Collier on Bankruptcy) posted the following response:

"I was not surprised to see the Journal's editorial page echo the financial services industry's talking points on the recent bankruptcy legislation. Unfortunately, you have your facts wrong. You don't state the source of your figures supposedly showing a decline in debtors' incomes, but the numbers most frequently being reported for debtors who have
filed in the last year reflect those debtors' "current monthly income," a new statutory term that excludes various types of income and therefore cannot meaningfully be compared to the income reported in cases filed before the legislation was enacted.

"In fact, our members report that the vaunted new means test is having negligible effects in terms of pushing higher income debtors into chapter 13 for the simple reason that there were never many debtors who could afford to pay their debts. The same types of debtors are filing chapter 7 cases as before the legislation. Consumer credit counselors, to whom every individual debtor must go before filing a bankruptcy case, also report that virtually
no debtors they see are able to pay their debts.

"The truth is that the biggest effect of the new law is the substantially increased cost of filing bankruptcy cases, borne by all debtors and acknowledged by everyone. These costs have limited access of lower income families to much-needed relief from financial problems caused by medical expenses, unemployment, and divorce. They are the result of unnecessarily
increased government bureaucracy and onerous new paperwork requirements, and would have been condemned by the Journal had they been imposed on businesses instead of struggling families."

My own view is that those who prophesied the end of bankruptcy before the bill took effect were engaging in a bit of hyperbole. The law has some serious problems and doesn't really fix a whole lot. It does make it harder and more expensive for people to file bankruptcy, simply because it creates more hoops to jump through. But (speaking from my own experience) the means test that the WSJ is boasting about in this article results in wildly inconsistent results. For example, let's say a salesman is paid on commission only. He usually makes about $12,000 a month. However, his commissions go down to about $6,000/month for five straight months before going back up to $12,000. The means test says he has to use $7,000 as his monthly income, even though he might make $12,000/month for the next year. Most likely, he will have expenses over $7,000/month and would satisfy the means test for Chapter 7 or have a low payment for Chapter 13. The WSJ's claim that the new law is successful is premature.

But, as anyone knows who has read something in the papers about their profession, newspaper reporters usually don't get deep enough into a topic to really understand it and consequently, they usually have at least some level of inaccuracy in their reporting.

Foreclosure Consultants Are Bad News

I have people come in my office frequently who have had this happen. They defaulted on their home loan and the house is going into foreclosure. They were contacted by someone who offered to help them get out of the default. They offer to help in different ways: (1) buying the house, (2) assuming the loan, (3) making payments until the borrower can refinance, and (4) getting a new loan for the borrower. Most of the time, however, they charge high (and hidden) fees and/or they buy the property for a fraction of what it is worth.

This is a group that was caught by the California Attorney General, but there are many more out there. Consumers need to know that there are laws protecting them against these predators. California Civil Code Sec. 2945, et seq. severely restricts what a foreclosure consultant can do and provides extensive remedies when a foreclosure consultant does not comply with the law. The Better Business Bureau provides an explanation of this law here.

If a foreclosure consultant has taken advantage of you, please call our office to arrange a free consultation (559.436.6575) or visit my website to schedule an appointment online.

QWR's and RESPA

One thing I have been seeing a lot of recently is mortgage companies hiding the ball on consumer loans in bankruptcy. For example, a mortgage company might allocate certain payments from a Chapter 13 Trustee to a "suspense account" and not to principal and interest as they should. Or maybe there is a substantial "escrow shortage" when there was no escrow account to begin with. If you try to get information from the companies just by calling them, it is often like a shell game and sometimes, you just need documentation of what happened. And mortgage companies are required to provide such information under the Real Estate Settlement Procedures Act ("RESPA"). The procedure to request such information is by means of a "qualified written request." You can see a sample request here.

Fool me once, fool me twice . . . but not three times

Bankruptcy Judge Whitney Rimel (of Fresno) issue an interesting opinion (In re Gay, No. 06-10472) recently on the issue of the circumstances under which the automatic stay can be reinstated. By way of background, the automatic stay goes into effect immediately upon the filing of a bankruptcy case. It prevents creditors from taking any action to collect a debt.

The new bankruptcy law (BAPCPA) made some changes to the automatic stay, including a provision that if you filed one bankruptcy within the year preceding the current filing and that filing was dismissed for any one of several reasons, the automatic stay expires after 30 days and another provision that if you filed had two bankruptcy cases dismissed within the last year, there is no automatic stay upon the filing. It can be reinstated upon a showing by clear and convincing evidence that the case was filed in good faith.

In In re Gay, there had been two previous dismissals. In considering whether the new case was filed in good faith, Judge Rimel looked primarily to the issue of whether there had been a change in circumstances. The debtors presented evidence that their income had stabilized since the previous filings. However, the court found this unpersuasive and determined that the debtors did not rebut by clear and convincing evidence the presumption that the third filing was not in good faith. Consequently, the stay was not reinstated and the debtors probably lost their home.

This should give anyone pause who is considering filing a bankruptcy case. If the case is dismissed, you may lose the automatic stay if you have to file again. This is especially a problem for debtors who represent themselves in bankruptcy. I had that issue with a client recently. He filed in pro per (without an attorney), did not comply with all of the requirements, and his case was dismissed. He immediately refiled and then hired me to get the automatic stay reinstated (which we did). He could have avoided a lot of problems by hiring an attorney to help him with the first case.

12 myths about bankruptcy

This article entitled 12 myths about bankruptcy has some good information. For additional myths, go to
http://www.fresnobklaw.com/myths.php.

New Bankruptcy Law: Credit Cards Before God?

Here is an article about a bankruptcy ruling out of New York that said a religious debtor was not allowed to use chartiable contributions as an expense; ergo, the debtor had to pay credit card debt for 5 years before he could again donate to the church. Click here for the full text of the decision. Most of the news articles on this don't do a very good job of explaining what actually happened.

Many people have heard of the "means test" that is part of the new bankruptcy law (BAPCPA). Essentially what happens is that a debtor's income is examined and if the debtor is above the median income for his state, the debtor has to use a set of IRS guidelines to determine whether the debtor has any disposable income that could be used to pay creditors. Debtors who are under the median income do not have to use the IRS standards. They use their actual expenses. The importance of what set of expenses you use is that if your expenses are more than your income, you qualify to file Chapter 7, and even if your expenses are less than your income, your expenses determine how much you have to pay per month in a Chapter 13. (This is a great oversimplification, but it states it in concise terms.)

Because of a furor over decisions like the Diagostino decision before BAPCPA, Congress enacted a law that allowed religious contributions to be counted as an expense. The Diagostino decision essentially says that by enacting BAPCPA, Congress undid that allowance for any debtor who is over median. So, now over-median debtors are not allowed to make charitable contributions while in a Chapter 13 case. Just for example, a single debtor in California is over median if he makes about $50,000 a year.

UPDATE: Orrin Hatch, a proponent of BAPCPA and senator from Utah, issued a press release stating his disagreement with the opinion. Then, he got a bill (Senate Bill 4044) passed by the Senate changing the law so that the Court's ruling would be overturned. The bill has been sent to the house, but probably will not be considered soon do to the impending election. But to hear Senator Hatch talk about it, he's saved the (tithing) world.

Payday Loan Companies Prey on Military Personnel

Here is an interesting article on a new report issued by the Department of Defense finding that payday loan companies are taking advantage of military personnel.

These companies generally prey on more than just military personnel. I often have people come into my office and tell me they took out a $300 loan that will result in $350 being taken out of a paycheck in 2 weeks. That's over 400% interest. One other thing that bothers me is that the payday loan people often tell my clients "you can't file bankruptcy on a payday loan." This is completely false. First, payday loans are not exempt from the bankrputcy process. Second, the whole idea of filing bankruptcy "on" a debt is one of the bankruptcy myths. You have to list ALL of your debts in a bankruptcy.