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.