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.

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.

The adjustable rate mortgage mess is with us: no amount of pussyfooting about whether a legislative change is necessary will make the problem vanish. The choice we have is whether we sit back and let hundreds of thousands of homes be foreclosed or whether we give bankruptcy courts the tools to soften the impact of the crisis.

Currently, the only mortgage that a bankruptcy judge cannot alter is a home mortgage; mortgages on vacation homes, apartment buildings, and commercial property can all be modified in bankruptcy. The ability to modify these mortgages in bankruptcy does not seem to have ruined the credit markets to date.

A provision of the bankruptcy code, inserted to encourage the home lending industry years ago, now ties the hands of a bankruptcy alternative to massive foreclosures.

If bankruptcy judges were empowered to write mortgages down to the value of the property when the case was filed, and alter the terms, within a Congressionally mandated standard, both homeowner and lender would benefit. The homeowner gets a shot at keeping his home and paying for it, based on today’s values; the lender gets just what he would get if he foreclosed: a house now worth less than the value at the inception of the loan. Plus the administrative costs of restructuring the mortgage have got to be less than either staffing an n house mortgage modification operation or foreclosing, maintaining and trying to sell the foreclosed house.

The only cost here to the taxpayers is perhaps some more court clerks for the bankruptcy system. We don’t bail out the lenders who made foolish (or deceptive) loans; we don’t provide amnesty to the borrowers who at best were overly optimistic, and at worst were sold snake oil that puts their homes at risk.

Surely, permitting the modification of home mortgages has to be a better solution than neighborhoods of empty, bank owned houses, and displaced families. Because that certainly seems to me to be the alternative.

The high cost of higher education and the non dischargeable nature of student loans have the capacity to ruin lives just as much as to improve them. We encourage kids to go to college and we make loans freely available to pay for it. We don’t tell them that this choice, made before they get educated, will be with them for the rest of their lives as the Supreme Court recently decided that Social Security can be garnished to repay student loans.

There are few other choices we allow 18 - 21 year olds to make with such inescapable consequences. Tuition alone at the University of California is $9,000 a year. Add books, health care, room and board and the figure is probably close to $20,000. Private schools are double or triple that number. Student loan balances of $60,000 to $100,000 are not uncommon.

In 1998, Congress decided that there would be no statute of limitations on government guaranteed student loans and no discharge of these loans in bankruptcy except under the direst of circumstances.

In 2005, Congress added privately funded student loans to the list of debts that could not be discharged in bankruptcy.

As the commercial says, “diamonds are forever”. So are student loans.

I understand the policy arguments: student loans can be made without regard to present ability to repay if there is no option but to repay them. Education becomes more widely available to all.

I don’t believe we are adequately advising our children before they take on huge debt. Payments on student loans can equal or exceed a typical mortgage payment. Defer payment on the debt and the interest is added to the principle of the loan, on which more interest is charged. Employment choices and family choices are dictated by the need to repay the loan.

Our current legal standard for discharge of student loan debt, the Brunner factors, permits only the most minimal standard of living if the borrower wants to discharge the debt. There is something perverse about encouraging graduate education, then telling the borrower that if he and his family live at anything much above the poverty level, they can afford to repay the student loan.

One of my clients was a recent graduate of a very expensive private university; her degree was in art history and her debt in today’s dollars was $150,000. She was finding it difficult to get a job that would pay her $30,000. She probably hadn’t made a very good economic choice when she chose either the school or the major. Yet she was stuck with that loan for the rest of her life.

Another client was a psychologist, with a doctorate, working in his field at 52. His student loans were approximately $250,000. When he chose his field, psychologists were typically self employed, fee based professionals with earning capacity akin to MD’s When he got out of school, the field had dramatically changed; managed care had replaced private practice and annual incomes cut by 75%. Yet he was obligated to pay for an education in a field that for all economic intents and purposes was not the one he selected as a freshman.

We owe our kids more flexibility in their lives. Whether it is the kid whose interest changes over a lifetime or the economy that changes, student loans should not shackle them for the rest of their lives.

California has a program to refund a portion of property taxes to qualifying seniors, including those who rent. The deadline for applying for this year’s refund is October 15.

To qualify, you must be 62 years of age or older; owned or rented in 2006, and have an annual income less than $42,770 in 2006.

The form is available online from the Franchise Tax Board.

My colleague Brett Weiss echoes my experience with those in financial trouble: they wait far to long to see a bankruptcy attorney. Many have long since passed the point where they can hope to pay off their debt. They have invaded or neglected their retirement savings in a futile struggle to keep up with their debts. The minimum payments have only postponed facing financial reality.

Those lobbyists and legislators who argued that too many people took the easy way out of financial trouble via bankruptcy clearly never met real debtors who would rather be anywhere else than talking with me about admitting financial failure.

An amazing number of clients are willing to spend the last penny in the bank making payments before declaring bankruptcy.

Those that say that consumers take bankruptcy too lightly simply haven’t talked to anyone in financial distress.

I can report that the “do not contact” letter works, at least with my creditor, ATT. I wrote earlier about my billing dispute with ATT and how I sent a letter citing California’s Rosenthal Act to ATT telling them not to contact me at home.

California’s Rosenthal Act gives consumers many of the rights they have against third party collectors under the Fair Debt Collection Practices Act against the original creditor as well.
Since the first phone call from ATT’s collector, NCO, we have heard nothing about this debt. In my letter, I invited ATT to have someone with authority to settle the matter call me at Moran Law Group to discuss. I have heard nothing at work.

They have also stopped calling at home. I’m cautious about declaring victory, but my bill, now consolidated ATT local service and long distance, doesn’t show the bill for the cancelled service. I just may have won.

See the beginning of this saga.

The elderly are a growing percentage of bankruptcy filers. The reasons are myriad: health care costs, inadequate retirement savings, and financial entanglements with family. The trend to market home equity loans as a way to live better makes it less likely the mortgage is paid off when retirement arrives.

The question, “Should I file bankruptcy?” is usually most easily answered for the elderly. Younger clients with a significant remaining working life may have options for avoiding bankruptcy. Those options are not generally available for those at the end of their working lives. Incomes will not increase over time. Minimum payments on credit cards are calculated to pay off even small balances over 20-40 years! Seniors don’t have 40 years.
The stress of being in the bill collectors’ cross hairs is less tolerable for the elderly, even if nothing they have would be available to satisfy a judgment.

Discussing money with a senior generation is not easy, but it needs to be done. I’ve seen a number of cases where it is not until there is a crisis that adult children learn that their parent has been living with unmanageable debt. Too often, the senior has stinted on food or medication in order to make the minimum payments on credit cards.

The rational choice may be bankruptcy and a debt free old age.

Jay Fleischman discusses whether the failure to correct a credit report after a bankruptcy discharge is really a violation of the discharge injunction. I have experienced two very real examples of how the continued reporting of discharged debt shadows a debtor’s fresh start.

The first is in the insidious use of credit scores for pricing of insurance. I find no linkage between credit worthiness and insurance claims. It appears to me to be a situation where Fair Isaacs, or other providers of credit scores, has sold insurers on the idea. Why should the insurers resist? It gives them a reason to increase premiums.

More distasteful in my mind is the situation where a homeowner has a refinance or home purchase in process. When the lender finds a credit report still studded with apparently unpaid debt, the would be borrower must chose between paying the discharged debt or losing the loan. Nice work for the creditor: do nothing, even when the law requires you to report correctly, and garner money to which you have no right.