The NBC Sunday morning new shows  were again talking about moral hazard as applied to efforts to stem the tide of foreclosures.  This concept looks at the message we send when we rescue a homeowner who took out a bad loan and give nothing to the prudent homeowner who didn’t take an exploding ARM loan.

Should I thwart efforts to bail out my next door neighbor who was foolish because it rewards the fool, and gives me nothing?

Personally, in these circumstances, I am not offended by mortgage bailouts.  Seems to me to argue that the improvident (or the simple) should pay the price by loss of their homes to preserve the high moral ground for those who didn’t succumb  is short sighted.

If my neighbors lose their homes in foreclosure, the value of my house goes down.  If several neighbors lose homes, I’m neighbor to the bank’s REO department and the neighborhood becomes at best less sociable, at worst, less safe.  I don’t count on the bank in the house next door to loan me a cup of sugar.

The beauty of the bill to permit judicial modification of home mortgages is that it costs the taxpayer nothing; preserves families and neighborhoods; and merely recognizes the loss in home value that the homeowner and the lender have already experienced.

I’m perfectly OK with that.

Stand back!  I’m on my soapbox again.

This blog got its start when bankruptcy “reform” legislation was under consideration in Congress and I had heartfelt views about the defects of the proposed changes.  Bankruptcy in Brief has attempted for 10 years to be objective and informative.   I needed to advocate, and thus on the Bankruptcy Soapbox was born.

Yesterday, S. 2136 was introduced in the Congress, which would enable bankruptcy judges in Chapter 13 to modify mortgages on people’s homes. The experience of most all professionals in the housing world is that voluntary loan modifications are infrequent and inadequate.  Extending  the mortgage cram down provisions to homes would utilize the existing infrastructure of the bankruptcy courts to make meaningful modification possible, under court supervision.

My colleague Carmen Dellutri recounted the history of the mortgage modification provision, which prior to the current meltdown, was defeated by the arguments of the mortgage bankers.  They asserted, falsely it appears, that to do so would increase everyone’s mortgage interest rate.  Prof. Adam Levitin of Georgetown University Law Center   analyzed that claim and found it baseless.

(One might also ask, why should the mortgage bankers, who had a large hand in bringing the American economy to its current strait, have any credibility on this issue?   But, it seems, they are wrong as well as guilty, so we can move on.)

So, once again I’m calling on the interested public to contact their representatives in Congress.  Voice support for this change and urge your Senators and Members of Congress to pass this bill immediately.  Every day without it, more families lose homes to foreclosure.

My newest colleague at Bankruptcy Law Network, David Leibowitz, summarized my view of bankruptcy law in the new year :

• Project calm
• Work hard to hone my skills
• Share what I learn
• Stay healthy since it will be a long haul

My hopes are that hard times will reset our personal and societal values, so that “things” and personal consumption will recede in importance in favor of family, friends, and community.

Perhaps we come to understand that the things that taxes buy us are, by and large, positives:  better schools, roads without potholes, bridges that don’t collapse, decent care for the unfortunate.

Maybe even we come to value living below our means and taking responsibility for retirement.

Since my magic wand is out for servicing this  week, maybe it’s enough to hope for clients who will come organized and prepared to help me help them.

The changes to credit card billing practices proposed by the FRB are welcome, but just scratch the surface of the crushing quality of credit card debt. My sense, talking to financially stressed people day after day, is that credit cards have merely postponed for many Bay Area residents the recognition that they cannot live a middle class life in this high cost region.

The cost of living in the Bay Area is some 150% of the national average; our salaries are higher, but not 150% higher. The vital, start up, high tech, high risk economic climate makes huge winners of some, and economic losers of others. The availability of credit cards and the energy with which those cards are marketed have made it easier to mask the fact that a middle class life is more expensive than some can afford.

The other issue that makes credit card debt so poisonous is that it bears interest that a generation ago would have been criminal. California concepts of usury generally prohibit individuals from charging more than 10% on loans, yet banks can regularly charge twice that to borrowers in good standing and twice that again to borrowers in default. The FRB proposed rules don’t deal with that issue.

At base, the problem with an indebted middle class is more profound than accounting rules on how payments are to be applied will solve.

My friend Kurt O’Keefe writes about the 6 trillion dollars in home equity than has evaporated in the mortgage meltdown. When I look around me in the Silicon Valley and environs, I question just how real that equity really was. Reckless lending practices made a vast pool of people potential buyers for a limited quantity of homes in a desirable part of the world. More buyers chasing fewer homes lead to huge increases in home prices.

This “equity”, the increased value in the surrounding homes, never would have existed had it not been for mortgage lenders passing out money like flyers at a rally. It was artificial from the beginning.

The correction is painful to those who bought or borrowed at the top, but the top was a man- made illusion.

As I look over the mortgage rescue legislation the Senate is considering, I conclude they are clueless about what it takes to keep families in their homes. No foreclosure is going to be prevented by counseling. No home is saved by giving buyers at foreclosure sales a tax credit. Measures to prevent this mess from occurring again don’t help today’s sufferers an iota.

The one provision in the proposed bill that might help today’s homeowners facing foreclosure was the provision that allows bankruptcy courts to perform the loss mitigation that the lenders talk about but don’t do. Let bankruptcy courts write secured claims down to the value of the property today; let the court excise the indexed increases in interest rates. Provide some meaningful help to real, live families who may otherwise be homeless.

If Congress can’t do that (and they show few signs of willingness to buck the bankers who brought us this mess) they should at least refrain from claiming they are doing anything to keep people in their homes. Would you say that’s likely?

I’ve often commented on the pressures in our society to spend. The US economy is fueled by consumer spending. The whole economic stimulus package is predicated on the recipients immediately spending the governmental windfall rather than saving it.

Marshall Loeb was spot-on with his Six Lies We Tell Ourselves About Our Spending. The excuse that I find most pernicious is ‘I work hard, I deserve it”. Ads fan the flames of a sense of entitlement to fine things and instant gratification. Few voices are heard suggesting that fine living comes after setting aside money for emergencies and retirement.

I see all too many clients at retirement age with absolutely nothing to live on but Social Security. The lucky ones have family that is financially stable. The unlucky are alone and living on the edge.

Read Loeb’s article, banish those excuses from your thinking, and start saving something today.

My inquiries among other bankruptcy lawyers nationwide has yet to unearth a real, live homeowner who has been able to meaningfully rework a bad mortgage into a tolerable one. Not one homeowner.

From where I sit, I cannot tell whether it’s because the lenders are unwilling to do anything significant or because the homeowners are not effective in asking for enough to make a difference. Which ever it is, the foreclosure avalanche continues.

I suspect that the lenders (or their agents, the mortgage servicers) haven’t committed to making meaningful changes and haven’t staffed their loss mitigation departments with sufficiently empowered employees. It isn’t enough to allow a delinquent borrower to make a payment and a half til they catch up, or to tack the arrears onto the end of an ever adjusting ARM.

Which makes it more imperative that Congress pass, and the President sign, the Foreclosure Prevention Act with its provision allowing the modification of existing mortgages on family homes in bankruptcy.

My colleague Jonathan Ginsberg pointed out the play that the bankruptcy filing numbers are getting in the press: his local paper reports that bankruptcy filings are soaring.
In looking at the filing numbers, it is important to remember that 2006 was an aberrational year in consumer bankruptcy. The bankruptcy “reform” act became effective mid October, 2005. Huge numbers of people rushed to file bankruptcy before the law changed.

After the law changed, there was a lull in bankruptcy filings. I think two things are behind the low filing numbers in 2006. People who were on the fence about filing bankruptcy accelerated their decision to file because of the consumer-hostile provisions of BAPCPA, so those folks who normally would have filed in 2006, filed in 2005 to beat the change.

Secondly, after the amendments became effective, it took a while for the public to realize that bankruptcy relief was still available and for bankruptcy lawyers to master the changes in the law. Some bankruptcy lawyers left the practice and debt collectors told debtors that bankruptcy was not longer available to them or for the kind of debt that collector was trying to collect.
Certainly, there was no drop off in 2006 of people up to their ears in impossible debt; prosperity did not break out because we erected barriers at the bankruptcy court door. People’s ability to deal with the debt they had remained unchanged.

So, one should be cautious in drawing conclusions from a comparison between bankruptcy filing numbers between 2006 and 2007. That said, my experience suggests that there will be an onslaught of bankruptcy filings in 2008: the mortgage meltdown, slowing economy, and higher awareness of bankruptcy’s continuing availability will make debt relief look good to the consumer.

I find a real irony in discussion of the economic stimulus package under consideration to give out money to consumers in the expectation that they will immediately spend it, to our general benefit. Prof. Elizabeth Warren started a discussion of the economy’s reliance on consumer spending.

Commentators and economists consider a stimulus dollar that is saved to be wasted in the equation of avoiding recession. Yet the people I see daily need some savings more than any material thing you can name. They live from paycheck to paycheck, they have nothing for emergencies much less retirement.

While I don’t buy the canard that most people in bankruptcy recklessly overspent, there is something wrong with an approach to the economy that is dependent on continuous consumer spending.

Savings needs a better publicity agent.