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.
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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.