Articles Posted in Economic News

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nacba.jpgNACBA (National Association of Consumer Bankruptcy Attorneys) responded this weekend to the government’s latest approach to the foreclosure crisis with what I call the Principal Paydown Plan.

Rather than turn us into a nation of renters under the recent suggestion that Freddie and Fannie rent their foreclosed properties or sell them as rentals, NACBA suggests again that a Chapter 13 bankruptcy can be modified to help families avoid foreclosure on massively underwater property. Without more focus on prevention, our housing market is certainly facing additional downturns.

The Principal Paydown Plan would require the reduction of interest on a primary mortgage to 0% during a Chapter 13 Plan thereby relegating the entire payment to principal (plus escrow). At the end of the bankruptcy, the debtor would have paid down their mortgage in many cases to the approximate fair market value of the property helping to slow the foreclosure numbers for those homeowners who would otherwise strategically default believing that their home value will take 10 or more years to recover.

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Sheila Blair, FDIC chairman, announced Friday a new proposal to resolve the foreclosure fraud issues that have arisen, particularly in Florida, a judicial foreclosure state. It is being presented as a settlement of the fraudulent issues by the five major mortgage servicers. The nation-wide “cash for keys” program would provide homeowners up to $21,000 to voluntarily leave their home. I would presume that the program would require the homeowner to also waive any legal rights and claims against the mortgage company.

Interesting idea. Now the homeowner would have the funds to pay a down payment on a new performing loan on probably a less costly and more affordable home. Somehow they would be expected to qualify for financing despite the hit their credit will take giving up the present home.

Please note this is only a proposal (not a law or anything yet), and the banks strongly object to it. It is being targeted to only those homeowners who are 90 or more days delinquent. It is a step toward winding down HAMP which is expected to occur in the next year or two. Other proposals being discussed may include a menu of options available to a servicer including “cash for keys” or principal write down. There are a number of parties involved though for an agreement to be reached. The parties raising claims include the Department of Justice, all 50 state attorney-general, various banking regulators, the FDIC, the Treasury, and the new Consumer Financial Protection Bureau. You then have an industry full of banks and mortgage servicers on the other side.
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lifering.jpgCurrently, the Bankruptcy Code does not allow a bankruptcy court to modify a bankruptcy debtor’s first mortgage on his or her primary home. It does not prevent a mortgage company from modifying a loan if it voluntary agrees, but nothing allows the bankruptcy judge the power to force a principal reduction for an underwater home.

It has been this Tampa Bay law firm’s opinion that eventually principal reductions will become more widespread. It has been reported that banks now hold only 15% of the nation’s home mortgages, and that the remainder are now owned by Freddie Mac, Fannie Mae and numerous securitized trusts. When this mess first began, banks held a much larger percentage of home loans which have now been transferred to Fannie and Freddie. I believe the banks should have been forced to eat the loans they made, but I digress. At least now the nation is in a position to permit principal reductions because it is much less likely to crash the five major banks.

NACBA (National Association of Consumer Bankruptcy Attorneys) has announced a proposal to address the dilemma of underwater homes. This new proposal, the Principal Paydown Plan, would provide:

1) Interest rate reductions to 0% for the first mortgage to allow the entire monthly mortgage loan payment to go directly to principal;

2) During a five year plan, the borrower’s minimum monthly housing payment would be calculated similar to a HAMP modification payment at 31% of gross income;

3) At the end of the five year period, the remaining principal balance would be amortized over 25 years at the Freddie Mac survey rate (running approximately 4.75% now);

4) The bankruptcy judge and Chapter 13 trustee would approve of the eligibility of the borrower and feasibility of the payments, something that they presently do in all Chapter 13 cases;

5) The borrower agrees to a general settlement of all claims against the lender and servicer and avoiding title and loan litigation.
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Bank cracks.jpgOn March 9, 2011, Bank of America Corp. (BAC) announced it is segregating its good and bad mortgages into two separate entities. After swallowing Countrywide, Bank of America is America’s biggest lender with 13.9 million mortgages. Often referred to as being too big to fail, frankly it is also too big to manage its mortgage loans competently and effectively as shown time and time again in our foreclosure defense practice.

The riskiest and worst performing “legacy” loans total approximately 6.7 million loans and include those that are currrently 60 or more days delinquent. It also includes those loans often referenced as toxic loans (negative amortizing loans, interest only, Alt-A, and subprime loans). Roughly, this totals approximately $1 trillion dollars.

Keep in mind BOA has approxmately $148 billion in equity. This equates to 15% of the $1 trillion dolllars of impaired assets. BOA is obviously and unquestionably insolvent. The FDIC should have locked the doors already. Some enterprising person or entity should consider filing an involuntary bankruptcy petition for them.

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Our neighbors are considering buying a condominium in Tampa that was foreclosed by Wells Fargo (owned by Freddie Mac) and noticed two strange things in the paperwork this weekend. First, Freddie Mac is only offering insurable title not marketable title and they wanted to use their own title agent.

Fortunately, our neighbors were smart enough to notice the distinction. First, the possibility of fraud in the foreclosure or anything else wrong with the foreclosure appear to have been excluded from the insurance coverage. So if the prior homeowner comes forth and says I didn’t have notice of the foreclosure because I wasn’t properly served (this happens all the time) or a faulty affidavit or assignment was submitted in the foreclosure litigation to support the plaintiff’s claim that it owned or held the note (also a common occurrence), the homeowner can have the foreclosure sale reversed. Where does this leave the new buyer? Well they would have a claim for the failure of Freddie to provide good and clear title — or would they? With an insurance exclusion, depending upon how it is written, this could be a major dilemma.

Second, Freddie specifically noted that the purchaser was responsible for any unpaid homeowners association expenses. In Florida, there is Florida Statute Section 718.116 that provides that upon foreclosure, the plaintiff is required to pay the past one year of unpaid condominium association dues or 1% of the original principal balance whichever is less. (This is not necessarily true for all homeowners associations). If the plaintiff lienholder fails to do so, are all the delinquent assessments plus attorney’s fees, costs and interest due and owing, perhaps going back years? I wonder, how often does the bank or mortgage servicer actually make this payment by the thirty day deadline? These are the same parties that cannot look at mortgage modification paperwork within the first 30-90 days of submission because they are so overwhelmed.

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Retail sales are up 7.9% from December 2009 to December 2010. Although retail sales increased only .6% in December from November and were lower than expected, retail sales are now above the pre-recession peak in November 2007. Initially this appears good right? Bankruptcy rates in Florida and elsewhere should start to decline as consumers spend more and more people get back to work.

Not so fast. Much of these gains were in energy and food prices. Furniture and home furnishings rose a mere 2.3% year over year. Electronics rose only 2.6% year over year. Clothing sales will almost certainly rise significantly during this upcoming year but not due to an increase of demand, but rather due to cotton prices being in the stratosphere.

What does this mean for the average Floridian consumer? Well the middle class is being squeezed even more with declining wages and increasing costs of living. This leads to more debt to service when paychecks aren’t enough to pay the bills any more. Chapter 7 or 13 bankruptcy is no longer reserved for the divorced, injured, ill or unemployed. Now increasing numbers are filing bankruptcy when they just can’t pay the bills like in the old days.

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