on the Bankruptcy Soapbox

My clients sometimes ask for advice about financial management for their life after bankruptcy. I’m often reduced to two rather bald thoughts: live beneath your means and save for retirement. But this month’s AARP magazine had some sound real world advice about slashing your food bill.

The bit of advice that was new to me had to do with how supermarkets are laid out, with the staples along the outer perimeter of the building. AARP’s expert suggests cruising the edge of the store first for staples that should make up the bulk of your purchases before venturing into the interior where the pricier, prepackaged food lurks.

The article also talks about managing your food purchases to reduce waste and spoilage.

Then you can take the financial advice my plain spoken partner delivered recently to a bankruptcy client: learn to cook!

Usually, I try to be the voice of common sense, conservation of energy, and moving on after a debacle. The client I saw the other day had the warrior side of me overwhelming the lawyer’s logic.

The facts: the client, an immigrant carpenter with limited English literacy, “invested” in a rental house with partners who bailed on him. The loan was the typical sub prime, adjustable rate loan where the rents on the house could never have covered the debt service.

Then the “friendly” real estate professional helped him borrow some money on the rental to pay the closing costs on a no-money-down purchase of a home for himself. Realtor gets a real estate commission on the purchase and a fat commission on the two loans to buy the house. Again there were supposed to be partners who would contribute to the debt service and own some interest in the property. None of it was in writing, others bail, and again my client is left holding the mortgage “bag”.

Meanwhile, the home’s value goes down and the mortgage payments go up. While the client is willing to walk away from the rental, some self interested “expert” tells him that if he defaults on the rental mortgages, he will lose his home, on which he is current, even though the property is upside down. He works huge amounts of overtime, loses sleep, figures he will lose everything. He’s near tears when he sees me.
The good news in this scenario is, such as it is, that all the client has invested in these deals is about $15,000, and a year and a half of inflated mortgage payments on “investments” that are worthless now, and probably when purchased.

When I analyzed the first loan on the home, I calculated what the mortgage payment would be if, instead of an exploding ARM, it were a conventional, 30 year fixed rate note at 6.5%. The answer was that the monthly mortgage payment on a loan of that size, if it could be restructured, equaled his gross monthly income! What lender makes such a loan?
The rational part of me wants to tell the client, take your lumps, be glad you didn’t lose any more than you did, following the American dream. The warrior side of me says, who were this guy’s friends who engineered these “deals”, with commissions to themselves? Who gets away with misrepresenting the consequences of a foreclosure on the rental? Who were the lenders who participated in exploiting a simple man who couldn’t read the relevant documents?

Again, my advice will probably be to live in the property payment free til the lender forecloses . But my personal inclination is to sue the assorted bastards involved in this mess.

Carmen Dellutri looked at the effect of the mortgage modification bill in Congress and the claims of bankers that interest rates will rise if bankruptcy judges can modify residential mortgages. He pointed out that the mortgage industry has not offered any proof that interest rates would rise.

Enter Prof. Adam Levitin. He has looked at data from a time when mortgages on a borrower’s principal residence could be modified in bankruptcy. Guess what he found? The risk of judicial modification made no discernible difference in interest rates.

So perhaps there is a very good reason, Carmen, that the bankers offer no proof to back up their scare mongering. Perhaps, there is no such evidence.

Dana Wilkinson wrote about questions to ask a bankruptcy lawyer you are considering engaging. The questions are absolutely on point. What she didn’t address is the quality of the answers.

Bankruptcy is stressful. People considering bankruptcy are stressed. It’s complex (more so and needlessly so after the 05 amendments to the bankruptcy law). You need answers that you can understand. After all, both the decision to file and many decisions after that are decisions that only the client can make.

So, one of the criteria for selecting a bankruptcy lawyer ought to be the clarity of the answers you get and the willingness of the lawyer to restate or further explain things you didn’t get the first time through.

Know, too, that there are many questions about how the “new” law works that we simply don’t know yet. The law is poorly written and judges are just beginning to make decisions and write about how they think the new law ought to be applied. Ask about whether there are undecided points of law presented by your case.

Get a lawyer you are comfortable with; disclose everything; and move forward. While sometimes scary, bankruptcy relief can make all the difference in the world about your financial situation.

As each week brings a new wave of clients who have mortgages they can’t afford even before the loan resets, I ponder what happened in the Northern California real estate market.

While it has been practically a law of nature that California real estate only increases in value (despite not so recent evidence to the contrary), the increases over the past couple of years have been eye popping. With median home prices around $700,000, first time home buyers should be a very small subset of the population.

Yet the clients in my door have been middle income at best, yet they bought one or more properties with mortgages in the $700,000-$800,000 range. Almost invariably, they were told that the “friendly” mortgage broker would get them a better mortgage before the miserable one on the table reset. The ability to do that, of course, was predicated on a rising real estate market which would lower the loan to value ratio.

When you think about it, of course the real estate market was rising, when housing in the Bay Area is a limited commodity, and easy mortgage money has made practically anyone with a pulse eligible for a home loan and therefore a potential buyer. More people chasing fewer goods=price increase.

Of course the housing mania was also dependent on these buyers never having to make a fully amortized payment on a $700,000 mortgage. In most cases, the illusion of affording the house was dependent on mortgage “products” that required payments less than even the interest alone.

So, consider that the loss of value we are seeing, at least here in the Bay Area, merely represents the market wringing out the “value” created by mortgage madness.

For all of the administration hype, I’ve found it hard to get details on the President’s negotiated plan with the mortgage industry to prevent foreclosures. I’ve found a link to the plan.

Elizabeth Warren, Harvard law professor and bankruptcy expert, isn’t impressed. She calls it the Sandbag Plan . I find her conclusion, that the plan was put forth only to derail the pending bill to empower bankruptcy judges to address loan modifications, absolutely plausible.

In my practice I see no evidence that the lenders are interested in voluntarily modifying these loans. My letters on behalf of clients don’t even get a response. My clients seem to have no feasible option but to walk away from exploding ARMS. I’ve likened it to working in a financial emergency room.
I’m rooting for the passage of legislation like Senator Durbin’s bill, S. 2136, which would remove the bar to altering a mortgage secured only by the debtor’s principal residence in a bankruptcy proceeding. Hearings on the bill were held this week and the prepared statements of the witnesses are available.