Mortgages & Sub-Prime Mortgage Meltdown

 

A person’s house is usually their most valuable asset.  Understandably, one of the first questions my homeowner-clients ask me is “How will filing bankruptcy affect my home?”

 

 

The first thing you should know is that as soon as your petition is filed, the automatic bankruptcy stay kicks in.  

 

This means that if you were behind with your mortgage, it now becomes against federal law for the mortgagee to continue any foreclosure proceeding.

 

 

Every state has a homestead exemption statute that sets forth how much equity you can keep in your home, while eliminating debts in a Chapter 7 bankruptcy case.  In some states, the homestead exemption is based on federal law.

 

In New York, the homestead exemption is $50,000 per person.  This is based on New York State law.  See:  Bankruptcy Exemptions in New York .

 

A husband and wife who file jointly can pool that homestead exemption and protect a total of $100,000 worth of equity.  Sometimes Bankruptcy Exemptions Can Be Doubled .

 

 

Even if there is more than $50,000 of equity per person, then you can still keep you house if you file a Chapter 13 payment plan bankruptcy. 

 

In such cases, the total amount you will have to pay back to your creditors through the plan, which is usually over a period of 60 months, must be at least equal to the amount of unprotected equity.

 

Sometimes deciding whether to keep a home or not can be a difficult decision.

 

 

If you can no longer afford to keep your home and you have little or no equity in the home, then you may want to file for Chapter 7 bankruptcy in which case you can walk away from your obligation without any financial recourse from the lender.  See:  Strategic Mortgage Defaults Increasing .

 

In such cases, the lender still has the right to eventually foreclose on the home and take it back, but that can take an extended period of time during which you can continue to reside in the house without making any payments.  Bankruptcy Can Provide Way Out of Bad, Highly-Leveraged Real Estate.

 

When the lender eventually does take the property back, it cannot pursue you for any deficiency amount.  This is because the bankruptcy had the effect of discharging that debt.  One-Fourth of All U.S. Homeowners Are Underwater. What Should These Homeowners Do?

 

 

It is extremely rare that we recommend to a bankruptcy client that they file for Chapter 7 bankruptcy if they have a great deal of unprotected equity in their home.  Usually we recommend that they try to sell their home first.

 

However, we do see situations in bankruptcy court where a homeowner with substantial equity files for bankruptcy.  In such cases, the Chapter 7 trustee will seek to sell the home.  However, the trustee must pay the debtor the amount of the homestead exemption from the proceeds, which would be $50,000 per person.

 

 

Protecting real estate in bankruptcy can be tricky and must be done the right way.  When it comes to houses and homes, there are often many options when dealing with problematic debt situations.

 

It therefore makes sense to consult with a qualified and experienced Long Island bankruptcy attorney.

 

 

For several years I have volunteered for the mortgage foreclosure clinics put on by the Nassau County Bar Association.

 

Tonight, Gale Berg, Director of Pro Bono Activities for the Bar Association, will be discussing the Foreclosure Clinic Program on “Long Island Talks” tonight on News 12, between 7:00 and 7:30 p.m.

 

Pictured above right is our associate, Jason S. Leibowitz, Esq., who recently volunteered at one of the Clinic’s events in which he provided free foreclosure advice to Nassau County homeowners.

 

 

Recent figures show that only a small fraction of homeowners are seeing any kind of permanent relief under the federal Making Homes Affordable Program (HAMP), and fewer consumers are applying for the program, leading one well-known economics blog to suggest that the program is dying.

 

Thus, a major effort by President Obama’s administration to assist homeowners and keep them out of foreclosure appears to be failing.

 

On Monday, the government issued data showing that HAMP only helped 300,000 defaulting households obtain permanent relief by way of new loans.  Yet, there appear to be over four million households in danger of losing their homes through foreclosure. 

The government previously estimated that HAMP would help 1.7 million households.

 

 

Yesterday, I received the umteenth complaint from a Long Island homeowner, struggling to use HAMP to save their home. 

 

The homeowner, who lives in Medford (Suffolk County), complained that they applied for HAMP; they were approved for the trial program; they made regular monthly mortgage payments during the trial period for almost half a year while trying to provide all of the requested documentation; they did provide all of the docs; they were then turned down.

 

Understandably, the homeowner was not happy.  Yet, this seems to be a regular occurrence with HAMP applicants — they apply; they make their payments; many encounter difficulties with their lender; they are ultimately turned down. 

 

This led me to write a blog post over two months ago — WARNING: HAMP Can Drive Homeowners Into Bankruptcy .  Sometimes it doesn’t even make sense to try to make the program work when you can just stay in the home for a period of time and eliminate all liability on the mortgage through a Long Island bankruptcy filing.

 

 

The New York Times just reported yesterday that the number of homeowners that enrolled in the trial phase of the HAMP program in April 2010 was only a about a third of the number who signed up in September 2009.

 

The article suggested that a key reason for the reduced interest in HAMP may be that many homeowners are feeling that it is more financially advantageous to default, pay nothing to live in their home for a substantial period of time, and then just walk away from the home. 

 

This is what’s called ’strategic default” — which I wrote about at length just last week — Strategic Mortgage Defaults Increasing .

 

 

Yesterday, the Calculated Risk Blog reviewed the slow-down in HAMP applications and came to the conclusion that HAMP is dying. 

 

The above-chart is courtesy of the Calculated Risk Blog.

   

 

It seems that a lot of homeowners applied for the program, only to be declined later on — after their income was verified.

 

Apparently, many mortgage servicers who were administrating the HAMP program on behalf of the mortgage company did not bother to verify income at the beginning of the trial period, and only did so towards the end.

 

Had they done so early on, they would have learned that a good number of applicants did not have sufficient income to make the program work, and they could have alerted those applicants right away, rather than giving them false hope.

 

Consequently, the administration is now requiring mortgage loan servicers to verify income at the beginning of the application process, rather than at the end.

 

 

Even if a homeowner gets approved for a permanent HAMP modification, they only stand to save $500 a month.  For those living on Long Island where the cost of living is high, saving just $500 a month can be just a nominal amount.

 

Any homeowner considering a HAMP remedy should be very wary about slightly lowering their monthly mortgage payments if they will nevertheless continue to struggle under a very high debt load.

 

For those homeowners who would still like to explore HAMP and get additional information, please see this post:  Seeking HAMP (Homes Affordable Mortgage Program) in Bankruptcy — Eight Things to Know.

 

 

Three economists recently concluded that the Bankruptcy Reform Act of 2005 was a significant cause of the mortgage crisis and current recession because it had the effect of greatly increasing mortgage delinquencies.

 

The economists suggested that the new bankruptcy laws, frequently referred to as BAPCPA, “squeezed homeowners’ budgets by raising the cost of filing for bankruptcy and reducing the amount of debt discharged in bankruptcy.  It therefore increaased mortgage default by closing off a popular procedure that previously helped financially distressed homeowners save their homes.”

 

The increase in mortgage default rates were certainly an unintended consequence of bankruptcy reform.  However, this smacks of a situation of be-careful-what-you-wish-for, as lobbying efforts by the banking industry were the main reason why Congress agreed to change the laws.

 

The report by the economists was published by the National Bureau of Economic Research.  The three respected economists consisted of Wenli Li of the Federal Reserve Bank of Philadelphia, Michelle J. White of the University of California at San Diego and Ning Zhu of the Graduate School of Management at the University of California, Davis.

 

 

The economists theorized that the new bankruptcy laws made it more difficult for homeowners to avail themselves of bankruptcy to save their homes.

 

They concluded that BAPCPA was a factor in an additional 159,000 mortgage defaults a year.

 

In addition, they concluded that the bankruptcy means test created difficulty for some homeowners, making them unable to file for Chapter 13 relief.  They believed that this  contributed to an additional 36,000 defaults per year.

 

 

Despite these conclusions, the great majority of clients that we meet with in our Long Island bankruptcy law offices are able to utilize bankruptcy to get relief from their debts and address foreclosure issues.

 

Written by Craig D. Robins, Esq.

 

Many homeowners who have lost all of the equity in their homes are making the decision to simply walk away from their home on a voluntary basis, even though they can afford to remain.

 

Why would they do that?  Because it is no longer economically feasible to keep the home when they can rent a similar home for much less.

 

 

A recent Morgan Stanley report reveals that about 12 percent of all mortgage defaults are now “strategic” which is a great increase from mid-2007, when the level was only 4 percent.

 

The report also stated that strategic defaults tend to increase based on how much more the borrowers owe in house debt over and above what their homes are worth.  In other words, the worse the investment, the greater the chance the homeowner will walk away.

 

 

According the Morgan Stanley analysts, a default is “strategic” only when the homeowners who hadn’t been previously delinquent were making on-time payments one month, then skipped them for the next three, even while staying current on other consumer debt of at least $10,000.

 

 

If a homeowner stops paying the mortgage, he or she will often be able to stay in the home with their family for an extended period of time — all without having to make any further payments.  In New York, which is a judicial foreclosure state, the foreclosure process now rarely takes less than a year.

 

A good foreclosure defense attorney can often come up with genuine defenses, which, if asserted, can extend the time that the homeowner has in the house even more.

 

However, at some point, there will inevitably be a foreclosure sale at which time the lender can obtain a deficiency judgment against the homeowner in certain states such as New York, Florida and New Jersey.

 

However, if the homeowner’s strategy is to file a Chapter 7 bankruptcy in conjunction with the strategic default, the homeowner can also discharge the deficiency debt.

 

So if home ownership becomes more of a nightmare than a dream, remember that there are options out there.

 

That decision was very newsworthy, as it permitted homeowners whose homes were underwater to “strip-off” and remove a wholly-unsecured second mortgage.

 

However, we have since heard from our two other Long Island Bankruptcy Court judges.

 

 

The decision granting this relief was In re Lavelle, No. 09-72389-478, 2009 WL 4043089 (E.D.N.Y. November 25, 2009).  In that case, Judge Eisenberg determined that a Chapter 7 debtor may avoid a subordinate mortgage lien if that lien is wholly unsecured, based on an analysis of Bankruptcy Code section 506.

 

Judge Eisenberg, in her decision, also commented on the seminal Supreme Court case of  Dewsnup v. Timm, 502 U.S. 410 (1992), stating that she found no authority in it that prevents a Chapter 7 debtor from cramming down a second mortgage in a Chapter 7 case.

 

 

Judge Eisenberg focused a large part of her decision on Dewsnup which held that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property.   However, she pointed out that there is a difference between “stripping down” a mortgage and “stripping off” a mortgage.

  

Stripping-down refers to removing that portion of a mortgage that is unsecured, which is done pursuant to § 506.   On the other hand, “stripping off” is essentially cramming down a mortgage, which means removing its lien status altogether.  She determined that stripping-off was permissible in Chapter 7 cases.

  

  

Once Judge Eisenberg released the Lavelle decision, the Long Island bankruptcy bar was abuzz about the possibility of being able to cram-down undersecured second mortgages for their Chapter 7 debtor clients.  However, there was no guarantee that our other two bankruptcy judges would follow Lavelle.  Now we know that they will not.

  

  

Just last month, Judge Robert E. Grossman issued a decision in a case involving a somewhat similar set of facts and denied the debtor’s application to cram-down and strip-off the second mortgage – even though the mortgage lender defaulted and failed to file any response whatsoever.  In re Pomilio, —B.R.—, No. 09-72389-reg, 2010 WL 681300 (E.D.N.Y. February 23, 2010).

 

Judge Grossman discussed Judge Eisenberg’s Lavelle decision, stating that she set forth a “well reasoned argument which finds support in a number of scholarly articles.” However, he felt constrained to apply her argument to the facts of his case.

 

In Pomilio, Judge Grossman began his analysis with Bankruptcy Code Sections 506(a) and (d), and the Supreme Court’s holding in Dewsnup, that a Chapter 7 debtor cannot bifurcate a secured creditor’s claim into a secured claim to the extent of the fair market value of the subject real property, and an unsecured claim for the remaining balance

  

He reached a different conclusion than Judge Eisenberg, determining that the  “stripping down” process was simply not available to a Chapter 7 debtor.

  

 

Last week, Judge Alan S. Trust issued the Caliguri decision in which he expressed his position against Chapter 7 cram-downs.  In re Caliguri, No. 09-75657-ast, slip op. (E.D.N.Y. March 16, 2010).  In that decision, Judge Trust referred to both the Lavelle and Pomilio decisions and stated, “This Court adopts the analysis in Pomilio and concludes that a Chapter 7 debtor may not avoid the lien of a wholly undersecured, consensual mortgage lien holder.”

 

Judge Trust pointed out that post-Dewsnup courts have generally interpreted Dewsnup to prohibit Chapter 7 debtors from avoiding (stripping off) liens which are wholly undersecured for the same reasons that a Chapter 7 debtor may not reduce a secured mortgage claim to the fair market value of the property.

 

He further pointed out that such a reading of Dewsnup is a proper and consistent application of Section 506.
 
Practical Tips

 

A debtor has a one in three chance of having his or her case land in Judge Eisenberg’s Court, in which event, the debtor will likely be able to successfully bring a Chapter 7 cram-down proceeding.  If the case is pending before Judges Trust or Grossman, their position is clear that the debtor cannot.

  

However, at some point down the road, there will certainly be a higher court decision establishing the issue for sure, at which point all of our judges will be obligated to follow it.

  

 

Written by Craig D. Robins, Esq.
 
Steven J. Baum, P.C. is a foreclosure Factory.  It is Long Island’s largest foreclosing law firm.

 

If you live in New York, and you are in foreclosure, then there is a very high chance that the foreclosure law firm suing you is Steven J. Baum, P.C., located in Buffalo, New York.
 
Over the past several years, the Baum law firm has become one of the largest foreclosure factories in the country, representing dozens of banks in foreclosure cases.
 
Last year they filed a staggering 12,551 foreclosure lawsuits, which comes out to about 50 a day.  Many of the foreclosure cases we defend for our Long Island clients were brought by Steven J. Baum, P.C.
 
More Foreclosure Cases Mean More Complaints
 
It seems that as foreclosure firms expand and become literal foreclosure factories, they tend to do sloppy work and make frequent mistakes.
 
There have been a multitude of complaints against the Baum law firm.  Here are some complaints as revealed in a recent New York Post article:
 
Failing to Divulge Mortgage Payments
 
Blanca Garcia filed for bankruptcy In the White Plains Bankruptcy Court.  Baum’s firm filed papers claiming Garcia was in arrears.  However, Garcia demonstrated that she actually made payments and showed the court her receipts which had not been credited to her account.  Even though Garcia’s bankruptcy attorney provided this proof of payment, Baum’s firm still ignored the receipts and sent an attorney to bankruptcy court to argue that the mortgage was in arrears.
 
Creating Questionable Assignments

 

I’ve written extensively about mortgage companies that bring foreclosure proceedings when then they do not have proper legal standing to do so.  See Many New York Foreclosure Suits Are Dismissed Because They Are Defective.  Here, the Baum firm has brought numerous actions when their mortgage clients failed to have proper legal standing.    See also:  Mortgage Companies Entitlement to Bring Foreclosure Proceedings: Prove It or Lose It .
 
Judge Jeffrey Arlen Spinner, sitting in Suffolk County judge took it upon himself to investigate a filing by Baum’s firm when it attempted to foreclose on the home of Gloria E. Marsh. “A careful review,” the judge wrote in a four-page order, “reveals a number of glaring discrepancies and unexplained issues of substance.”
 
Judge Spinner determined that the Baum law firm filed the action before the date it claimed its client took ownership of the mortgage  To see a copy of the decision, click:  GMAC Mortgage v. Marsh — Decision of Judge Spinner Denying Order of Reference.

 

For another highly publicized decision written by Judge Spinner, see:   Judge Cancels Mortgage Due to Mortgagee’s Shocking Behavior in Long Island Foreclosure Action.

 

 

In the bankruptcy of Matthew Austin, Baum’s firm tried to prove that its client owned the mortgage to Austin’s house by filing an assignment of that mortgage from a Florida company signed by an executive of that company — but it was notarized in Buffalo, NY.

 

“To the extent assignor flew to upstate New York to appear before a notary in the law offices of Steven J. Baum, PC, defies all logic,” the lawyer said in court papers. “Clearly this is a manufactured document intended to defraud the Court.”

 

 

Earlier this year, a New York Bankruptcy Court judge said he has “probably cause” to believe that lawyers for the Baum law firm acted inappropriately.

 

 

In assisting clients with Long Island mortgage foreclosure defense, we routinely come across situations where the paperwork submitted by the foreclosing bank is not in order.

 

However homeowners have rights afforded by the law.  A bank cannot foreclose unless they do it the right way and all of their papers were prepared properly.  If they are not, then the homeowner has a meritorious defense to the foreclosure action.

 

Even if the bank eventually corrects the problems, a homeowner can usually add many additional months or years to the time that they can stay in their home.  It therefore pays to meet with an experienced Long Island foreclosure defense attorney.

 

 

Mr. Baum, only 41 years old, took over his father’s sleepy Buffalo law practice several years ago, moved it to Amherst, New York, and then super-sized it with a 500 employees — truly making it into a factory.

 

He also started his own legal document processing company — Pillar Processing.

 

 

The list goes on and on.  Bank of America, Chase, Wells Fargo, HSBC, US Bank, GMAC Mortgage, Deutsche Bank, Sovereign Bank, Citibank, OneWest, M&T Bank, Bank of New York Mellon, to name just a dozen, according to court records.

 

 

Steven J. Baum’s law firm filed 12,551 foreclosure actions in the New York area last year.

 

Long Island
Nassau 2,210
Suffolk 3,083

 

New York City Boroughs
Queens 2,231
Brooklyn 1,592
Staten Island 692
Bronx 678
Manhattan 119

 

Upstate Suburbs
Westchester 796
Rockland 444
Orange 706
  

Totals: 12,551 or 241/week or 48/day

 

That’s a lot of foreclosures!

 

This is the final part of a three-part series of articles about HAMP and bankruptcy that I wrote after attending a seminar of the National Association of Chapter 13 Trustees .  Part One was:  Bankruptcy Issues Involving HAMP (Home Affordable Modification Program) — Part One .  The second part was:  WARNING: HAMP Can Drive Homeowners Into Bankruptcy.

  

 

Debtors in active bankruptcies are eligible for HAMP but it is up to the discretion of the servicer.  This is a significant concern because Chapter 13 debtors have no guarantee of getting their mortgage company to cooperate.

 

Some attorneys have reported instances in which the lender refused to cooperate with the debtor after the debtor filed for bankruptcy relief.

 

What can the homeowner do in such instances?  Ask the servicer what their policy is.  However, absent them putting it in writing (which is unlikely), the homeowner probably has little leverage against a lender that changes its mind or fails to follow through.

 

This is a continuation of my previous article:  Bankruptcy Issues Involving HAMP (Home Affordable Modification Program) — Part One , that I wrote after attending a seminar of the National Association of Chapter 13 Trustees. 

  

 

 

You cannot be turned down just because you are actively involved in foreclosure litigation.

 

 

 

I just attended a seminar last week offered through the National Association of Chapter 13 Trustees about HAMP.  Here’s some useful information.
 

Today’s post is Part One.   I will continue tomorrow with a detailed discussion of bankrutpcy issues.

 

 

HAMP (Home Affordable Modification Program) is one of President Obama’s initiatives to make a dent in home affordability by using the economic bailout program.

 

It’s a quasi-voluntary program to modify home mortgages with the goal of getting the monthly payment to 31% of gross (pre-tax) income. 

 

The program seeks to provide taxpayer-funded incentives to mortgage servicers and lenders to voluntarily modify mortgages.  The program was created in March 2009.  This government program earmarked $75 billion for this purpose.

 

 

 

To date, results for HAMP have been very disappointing.  I wrote about this at length two months ago:  Obama’s “Making Homes Affordable” Mortgage Modification Program Failing. 

 

The program has only resulted in 116,000 permanent modifications in the entire country, in which each borrower is saving about $500 per month. 

 

Incidentally, these homeowners typically went from paying 45% of their gross income towards their mortgage, down to 31%, which is the goal of the program.

 

To date, only 110 mortgage servicers have signed participation agreements.  All Fannie Mae and Freddie Mac loans are automatically eligible.

 

 

Here are the requirements:

 

1.    You must be the owner and occupant of the home and utilize it as your primary residence

2.    You must have a maximum principal balance of $729,750

3.    You must have a monthly mortgage payment that is greater than 31% of pre-tax monthly income

4.    You must be unable to afford your current payment

5.    You must not have applied for HAMP before

 

 

Many homeowners applied for HAMP assistance because they thought it would help them avoid bankruptcy. However, a great many mortgage servicers were unprepared to handle HAMP applications and were not able to process the mortgage modification requests quickly enough to offer any real relief.

 

Some problems were highly publicized.  For example, there have been lenders who refused to even acknowledge receipt of mortgage modification documents, and other lenders who lost these documents numerous times for the same homeowner.