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BANKRUPTCY NEWS:
12/11/2009
Mortgage "Cramdown" Canned on Capitol Hill
by Adam Quinones
In a win for the banking industry, the U.S. House of Representatives voted on Friday to reject a measure that would have allowed bankruptcy judges to change the terms of mortgages for distressed homeowners.
Known as "mortgage cramdown," the measure was defeated in a 188-241 decision as a proposed amendment to a broader financial reform bill expected to win House passage later on Friday.
The House had approved a mortgage "cramdown" measure in March over the objections of Republicans and bank lobbyists, but it died in the Senate.
Under present law, bankruptcy courts may reduce many forms of debt for struggling borrowers -- including for a boat, car, vacation home or family farm -- but not a primary residence.
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Rethinking Bankruptcy - Brett Arends
Bankruptcy is a key component of this country's safety net. If you plan ahead, it doesn't have to wipe you out.
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 so long as you plan ahead, it doesn't have to wipe you out.
If you are smart you could get through a bankruptcy filing and still keep your home, your retirement savings, the childrens' college funds, your car and your personal effects. Amazingly, according to a recent study by the Federal Reserve Bank of Boston, you may even get your credit cards back pretty soon -- whether that is a good thing is another matter.
I don't want to encourage irresponsible behavior. But I don't write the laws, and they are there for a reason.
Furthermore, although there is some dispute about the numbers (we'll get to that in a minute), it is certainly the case that sheer bad luck lands a lot of people in bankruptcy court. Yes, some people spend themselves into oblivion on Jacuzzis and trips to Lake Tahoe. But many others are walloped when their job is eliminated or when a child gets very sick.
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.
Some basics: Money in pension plans, including a 401(k), should be secure from creditors. The same is true for money in an IRA in amounts up to $1 million. If you have children or grandchildren, money in 529 tax-sheltered college savings plans becomes secure two years after deposit. You can contribute $65,000 per child to your 529 plan this year without triggering gift taxes, or $130,000 if you're a couple. You retain control of the money in the plan, too.
Life insurance products, including retirement annuities, may also be protected, though rules vary by state.
Many states have a homestead exemptions that shield your home from unsecured creditors (though your home's mortgage isn't shielded, of course). You usually have to file paperwork to obtain the exemption. Florida and Texas, famously, offer virtually unlimited homestead exemptions. "It's irresponsible not to have a homestead exemption on your house," says Frank Morrissey, who teaches bankruptcy law at Boston University.
Little known: In more than 20 states married couples can own their home as "tenants by the entirety," which affords substantial protection against a creditor of one spouse (though not of both). "In effect, neither party owns the property, it's owned by the marriage," explains Richard Nemeth, a bankruptcy lawyer in Cleveland.
There are other exemptions that vary by state, from a car and working tools to some other personal effects. Iowa exempts a family shotgun: An enterprising bankrupt several years ago bought a $10,000 antique gun on the eve of filing for bankruptcy to claim the exemption. He got away with it, too.
Such boldness is usually a bad move, however, as courts frown on naked greed. "When it comes to bankruptcy," says B.U.'s Mr. Morrissey, "the usual rule is, pigs get fat, but hogs get slaughtered." The earlier you shelter assets, the safer they should be.
As long the economy stays grim, bankruptcy filings will become increasingly common – which may diminish the stigma that accompanies bankruptcy. It is, in a sense, surprising that so many Americans should still feel ashamed of bankruptcy when those in a far more comfortable situation feel no such chagrin. Corporate bankruptcies are an accepted part of doing business from Wall Street to Silicon Valley. Executives who collect $30 million from a bank in the years before it collapses are not expected to give it back.
Bankruptcy gives people a fresh start, but the long-term effects vary. A study last year by researchers at the Federal Reserve Board in Washington, D.C., found that people who filed for bankruptcy were more likely than others to fall back into debt arrears, even many years later. But there may be complex reasons for that, and every case is different. (Here's a link to the study: http://www.federalreserve.gov/pubs/feds/2009/200917/200917pap.pdf)
As for the causes of bankruptcy: The widely reported statistic that nearly two-thirds of personal bankruptcies are caused by medical bills deserves a more skeptical eye. The number comes from a study by Dr. David Himmelstein, et. al, to be published next month in the American Journal of Medicine. Yet if you read the report you'll discover only 29% of those interviewed for the study actually said their medical bills caused their bankruptcy. And while the "medically bankrupt" claimed average medical bills of $17,943, that group's total net debt averaged $44,622, or more than twice as much.
Claire Ann Resop, a bankruptcy lawyer in Madison, Wisconsin, adds that medical debt may show up more in bankruptcy filings because it's often the last bill you pay when you get into trouble. Hospitals may be lenient on repayment and charge no interest, while the landlords demand cash and the credit card company charges 30% interest. "Medical facilities may simply be the best creditors to have," she says.
Senate Refuses to Let Judges Fix Mortgages in Bankruptcy
By STEPHEN LABATON
Published: April 30, 2009
WASHINGTON — The Senate handed a victory to the banking industry on Thursday, defeating a Democratic proposal that would have given homeowners in financial trouble greater flexibility to renegotiate the terms of their mortgages.
The House of Representatives, meanwhile, overwhelmingly approved a bill backed by the Obama administration that would limit the ability of credit card companies to charge high fees and penalties. The bill, approved 357 to 70, still faces obstacles in the Senate, where — as the action on Thursday illustrated — the industry has more clout, particularly among Republicans and moderate Democrats. In recent days the White House, partly in response to polls showing the significant public outrage over high fees charged by credit card companies, has begun to work for its passage.
The mortgage provision garnered only 45 votes in the Senate, falling well short of the 60 votes necessary to break a threatened filibuster to a measure sponsored by Senator Richard Durbin, Democrat of Illinois, that would give bankruptcy judges greater flexibility to modify mortgages. In recent weeks, major banks and bank trade associations worked closely with Senate Republicans to stop the measure. Twelve Democrats joined all the Republicans in voting against it.
The defeat clears the way for a final vote as early as Friday for the legislation, which has several features that the banking industry has sought. One provision would have the effect of reducing a proposed special premium the banks would owe the Federal Deposit Insurance Corporation later that year by more than 50 percent — a $7.7 billion saving. A second provision would make permanent the temporary increase in deposits guaranteed by the F.D.I.C., to $250,000, from $100,000.
Once the Senate completes its action on the legislation, it will have to be reconciled with a similar measure already adopted in the House before it can become law.
The House bill contains the bankruptcy provision. But the Senate’s defeat of the so-called bankruptcy cramdown measure all but makes certain it will disappear from the final bill.
It also demonstrates that, even though Democrats are close to gaining 60 votes in the Senate with the recent decision by Senator Arlen Specter to leave the Republican Party, the increasing number of Democrats does not prevent the Republicans — with the support of a handful of moderate or conservative Democrats — from blocking legislation. Mr. Specter voted against the provision.
Bank lobbyists had maintained that the legislation, if adopted, would have resulted in higher rates for all mortgage holders. A letter signed by 12 industry organizations this week to senators warned that the legislation would “have the unintended consequence of further destabilizing the markets.”
“Though interest rates today are at all-time lows, this legislation would result in higher costs for future borrowers,” the letter said.
But supporters of the legislation disputed that argument. President Obama sought the cramdown provision during the election, although the White House has done virtually nothing to move it through Congress.
Jeffrey Young, Washington, 26 February 2009
President Barack Obama has unveiled a plan to reduce the growing number of home foreclosures. While the plan does not cover every homeowner in trouble, some analysts say the plan is a positive step toward stabilizing a declining real estate market.
Millions of Americans are losing their homes to foreclosure because they cannot pay the mortgage. Merilee Maybee of Phoenix, Arizona is among the estimated two million whose homes have been seized by lenders.
"It's just gone," she said. "Everything we did, every wall we painted, every plant... we planted. Everything we did, you know, it's just not - it's gone."
Recently President Barack Obama launched his $275 billion mortgage rescue plan to help homeowners in financial distress:
"The American dream is being tested by a home mortgage crisis that not only threatens the stability of our economy, but also, the stability of families and neighborhoods," he said.
The Obama plan could help up to nine million homeowners in two groups. One is made up of people who now owe more on their mortgage than the house is worth. Another includes homeowners who cannot afford the monthly mortgage payment.
In January of this year, one in every 466 U.S. houses was already in some stage of foreclosure. That's according to Realty Trac, an industry monitor.
When foreclosed homes go on sale, they flood an already bloated real estate market. At the National Association of Realtors, Chief Economist Dr. Lawrence Yun describes the cascading effect.
"Too many sellers, too few buyers, and home prices are falling," he explained. "So, if we can reduce the number of homes reaching the market from foreclosures, then it will help bring stabilization to home prices."
Because there are eligibility limits to the Obama plan, not every homeowner in trouble will be helped.
Sharon Price is an analyst with the National Housing Conference, a consumer advocacy group.
"They are not going to be able to save everyone," she noted. "There are still going to be millions of families that end up in foreclosure."
Under current law, homeowners facing foreclosure cannot go to court to declare bankruptcy and then change the terms of their mortgages.
But Congress is considering rewriting that law so that judges would have authority to work out a settlement or help people stay in their homes. President Obama supports these changes.
The Mortgage Bankers Association, a trade group representing lenders, warns that changes in the bankruptcy law could have expensive consequences. The association's vice president Francis Creighton says international investors might be scared away from buying U.S. mortgages.
"If you give bankruptcy judges the ability to change the value of the mortgage, then the international investor is going to require, in effect, a higher price for those mortgages going forward," he explained. "It is either that, or maybe they will not make those loans anymore. "
Bankrupcy lawyers and consumer protection groups say the mortgages are often sold and resold to investors, who either cannot or do not want to change the terms even when it is in everybody's best interests.
The Obama mortgage plan is limited to people who live in their homes. Vacation homes, or houses bought to generate income as rental properties are not covered.
National Housing Conference analyst Sharon Price explains why there also needs to be foreclosure protections for people who rent.
"Renters make up between 25 and 40 percent of the foreclosures that are taking place across the country," she noted. "So when an investor owns a property, and they [the lenders] foreclose, the renter then gets evicted."
Some people apparently cannot pay their mortgages even after the terms are changed. A December 2008 U.S. government report said nearly 20 percent of the people who had their mortgages modified in the first quarter of last year were behind in their payments later.
Credit Suisse, an international financial services company, has predicted that more than eight million foreclosures are expected in the next four years.
