Wednesday, May 17, 2017

WSJ: U.S. Household Debts Hit Record High in First Quarter

By Ben Leubsdorf

The total debt held by American households reached a record high in early 2017, exceeding its 2008 peak after years of retrenchment in the face of financial crisis, recession and modest economic growth.

The milestone, announced Wednesday by the Federal Reserve Bank of New York, was a long time coming.

Americans reduced their debts during and after the 2007-09 recession to an unusual extent: a 12% decline from the peak in the third quarter of 2008 to the trough in the second quarter of 2013. New York Fed researchers, looking at data back to the end of World War II, described the drop as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.”

In the first quarter, total debt was up 14.1% from that low point as steady job gains, falling unemployment and continued economic growth boosted households’ income and willingness to borrow. The New York Fed report said total household debt rose by $149 billion in the first three months of 2017 compared with the prior quarter, or 1.2%, to a total of $12.725 trillion.

“Almost nine years later, household debt has finally exceeded its 2008 peak, but the debt and its borrowers look quite different today,” New York Fed economist Donghoon Lee said. He added, “This record debt level is neither a reason to celebrate nor a cause for alarm.”

The pace of new lending slowed from the strong fourth quarter. Mortgage balances rose 1.7% last quarter from the final three months of 2016, while home-equity lines of credit were down 3.6% in the first quarter. Automotive loans rose 0.9% and student loans climbed 2.6%. Credit-card debt fell 1.9%, and other types of debt were down 2.7% from the fourth quarter.

Americans' debt has returned to levels last seen before the recession in nominal terms, but the makeup of that debt has changed significantly. Change in total debt balance, by type, since its previous peak in 2008: The data weren’t adjusted for inflation, and household debt remains below past levels in relation to the size of the overall U.S. economy.

In the first quarter, total debt was 66.9% of nominal gross domestic product versus 85.4% of GDP in the third quarter of 2008. Balance sheets look different now, with less housing-related debt and more student and auto loans. As of the first quarter, 67.8% of total household debt was in the form of mortgages; in the third quarter of 2008, mortgages were 73.3% of total debt. Student loans rose from 4.8% to 10.6% of total indebtedness, and auto loans went from 6.4% to 9.2%.

Mortgages continue to account for the majority of overall U.S. household debt, though student and auto loans represent a growing share of the total.  Mortgage lending to subprime borrowers has dwindled since the housing crisis in favor of loans to consumers considered more likely to repay. In the first quarter, borrowers with credit scores under 620 accounted for 3.6% of mortgage originations, compared with 15.2% a decade earlier. Borrowers with credit scores of 760 or higher were 60.9% of originations last quarter, versus 23.9% in the first quarter of 2007. Auto loans have remained relatively available to subprime borrowers, helping fuel the record vehicle sales of recent years as interest rates have been low. Some 19.6% of auto-loan originations last quarter went to borrowers with credit scores below 620, down from 29.6% a decade earlier. The median credit score for auto-loan originations in the first quarter was 706, compared with 764 for mortgage originations.

The share of debt considered seriously delinquent — at least 90 days late — is down from recession-era levels, but varies widely by type of loan. Some 4.8% of outstanding debt was delinquent at the end of the first quarter, little changed from late 2016, with 3.4% at least 90 days late, known as seriously delinquent. Seriously delinquent rates have climbed recently for credit-card debt, 7.5% in the first quarter, and auto loans, 3.8% last quarter, and remained high—11% last quarter— for student loans, according to Wednesday’s report.

Copyright 2017 Dow Jones & Company, Inc.  All rights reserved.

Tuesday, May 09, 2017

Taxi medallion litigation updated

In our continuing posts about issues related to the decrease in the value of taxi medallions in New York City, this month we are covering two lawsuits regarding the dramatic drop in taxi medallion values. The first lawsuit involves two taxi medallion owners who have filed lawsuits against the New York City and the Taxi and Limousine Commission (“TLC”). This lawsuit was reported in the New York Daily News on May 3, 2017. The plaintiffs, driver Marcelino Hervias and medallion owner William Guerra argue that: (1) the apps for hailing cars and burdensome rules have made taxi medallions practically worthless and have created unfair competition; (2) New York City and the TLC are bound by a rule to create standards ensuring medallion owners remain financially stable; (3) New York City allows the apps to dominate the streets and provide rides similar to taxis, but with none of the financial and legal burdens that medallion owners and drivers face; and (4) the driver has to work harder and longer to cover his monthly medallion loan payments and expenses. Mr. Hervias estimates that his business is down 30% and that he must work extra shift hours each day to make up the difference. Mr. Hervias also states that there is no market for medallions because financial institutions will not lend money to buy a medallion. The attorney for the plaintiffs indicated that this is the first suit of its kind as it pertains to the taxi industry. The article states that Mayor de Blasio and the City’s Corporation Counsel (the entity that defends the City against lawsuits) did not return requests by the Daily News reporter for comments.

The second case involves New York City credit unions that manage more than 2 billion dollars in taxi medallion loans are appealing a court ruling that rejected their argument that the TLC treatment of medallions violates the equal protection clause under the United States Constitution. (information about this lawsuit can be found in a May 4, 2017 post on cutimes.com). The credit unions’ legal argument was that medallion owners are required to comply with state regulations, while Uber, Lyft, Gett and other ridesharing services operate without being required to comply with the same regulations. The credit unions argue that such disparate treatment violates the equal protection clause of the 14th Amendment of the U.S. Constitution. However, on March 30, 2017, United States District Court Judge Alison J. Nathan ruled that there was no disparate treatment because a mobile app is not the same as hailing a medallion on the street. The judge wrote that “[q]uite simply, medallion taxicabs are not similarly situated to hire vehicles because medallion taxicabs… have . . . a monopoly over one particular form of hailing.” The ruling also notes that several courts around the country considering similar Equal Protection claims also came to the same holding. The original lawsuit was filed in November 2015 by Melrose Credit Union (‘Melrose”), Progressive Credit Union, LOMTO Federal Credit Union (“LOMTO”) and taxicab industry organizations and individual investors. The credit unions filed a notice of appeal on April 27, 2017 with the Second Circuit Court of Appeals in New York City.

It is this author’s opinion that individual lawsuits like that described in the Daily News article are expensive, could take years to conclude and the outcome or result is uncertain. With respect to Judge Nathan’s ruling, many taxi medallion owners would argue that “this is a distinction without a difference”. But Judge Nathan’s ruling is the law, unless it is reversed on appeal.

The cutimes.com article noted that Melrose was placed into conservatorship in February by the New York State Department of Financial Services. The article also states that LOMTO is undercapitalized, with a net worth of 5.87% according to the National Credit Union Administration.  

These two lawsuits would seem to suggest that litigation will not assist medallion owners whose medallions have dramatically decreased in value.

Many taxi medallion owners who’ve consulted with Shenwick & Associates own medallions, which, to use a finance term, are “underwater.” Underwater means that the value of the asset is less than the loan collateralized by the asset. In simple terms, many medallion owners have loans against the medallions totaling $700,000-$900,000 (or more) and the medallions presently are worth approximately $240,000. As Mr. Hervias noted in the Daily News article, if banks are not providing loans to medallion purchasers, in the future it will become increasingly difficult for buyers to buy medallions because of the lack of financing (unless they are all cash buyers).

What options are available for medallion owners? One possible solution may be for medallion owners and their organizations to lobby the City of New York and Mayor de Blasio to create a fund to compensate medallion owners due to the disparate treatment faced by medallion owners and the ridesharing services. Another solution is for the city or state to create an entity or mechanism to provide funding or financing for future medallion purchases. The city or state could also look to the ridesharing services to contribute to those funds, though the ridesharing services would argue that their technology is merely “disruptive” and that competition has decreased the value of medallions, not inappropriate actions on their part. Recent articles about the Uber culture would seem to suggest that Uber would not voluntarily contribute to such funds.

The issue for medallion owners is: (1) whether they should continue to make loan payments on their medallions, if the value of the loans exceeds the value of the medallions; (2) competition from the ridesharing services has reduced their earnings; and (3) banks are not lending money to finance medallion purchases. If a medallion owner stops making loan payments, he or she will be in default under their loan(s) and the banks can commence litigation to foreclose on the medallions and/or seek repayment of their loans.

As we discussed in a prior article dated February 2nd, medallion owners who stop paying their loans have four options: (1) arrange their financial affairs so that they are “judgment proof”; (2). negotiate an out-of-court settlement with the banks that financed their medallion purchases; (3) file for bankruptcy protection or (4) litigate with the banks that loaned them money to purchase their medallions (an expensive and often times losing proposition). The option that is best for an individual medallion owner depends on his or her facts and circumstances.

Medallion owners who need such counseling are urged to contact Jim Shenwick.

Monday, May 01, 2017

Men's Fitness: 5 reasons filing for bankruptcy could save you from life-crushing debt

By Damon Trent

Whether you’re drowning in debt because of unemployment, medical bills, or just good old-fashioned spending—in 2016, almost 772,000 Americans found themselves in one of those situations—you’ve probably considered declaring personal bankruptcy, an option designed to allow people in financial distress to hit the reset button. But does it work? And should you consider it? Here’s what you need to know.

When should I consider bankruptcy?

Anytime you find yourself with more debt than you can handle, bankruptcy is an option worth exploring. Bruce Weiner, a New York bankruptcy attorney, says that in nearly 40 years of practice he’s found “a good thumbnail is when the amount you owe starts to approach what you make in a year.” (Note: Some debts—like taxes, child support, and mortgages—aren’t usually eligible for bankruptcy relief, so if you owe those, you’ll have to pay them even if you file for bankruptcy.)
The U.S. offers a half-dozen forms of bankruptcy to choose from, each named for the chapter of the law that established it. The most popular for individuals are Chapters 7 and 13.

Chapter 7

Also known as “liquidation” bankruptcy, Chapter 7 is by far the most common form of personal bankruptcy in the United States (versus Chapter 11 for businesses).
After you file your paperwork, the judge appoints a “trustee,” whose job it is to sell (“liquidate”) any assets you have and distribute the proceeds among the people to whom you owe money.
Luckily, this won’t leave you naked and homeless. Part of the trustee’s job is to ensure that you’re left with the resources you need to live and work. Plus, any money you earn from that day forward is yours to keep.

Chapter 13

If you have a steady income, Chapter 13 offers a somewhat gentler solution. Instead of selling your assets, a Chapter 13 trustee works out a legally binding plan for paying back your debts, or a percentage of them, over a fixed time period, usually three to five years.
Along with letting you keep your stuff, in some cases Chapter 13 can apply to common types of debt that Chapter 7 doesn’t cover.

What happens when I file?

Different kinds of personal bankruptcy all share one glorious feature: the “automatic stay.”
The day you file your paperwork, your creditors are legally barred from trying to collect their debts. That means no more lawsuits. No more “Final Demand” on red-trimmed envelopes. No more voicemails demanding you call the sinister “Mr. Peterson” back “immediately.” Instantly, those headaches are gone for good. And soon your debts are also gone—or “discharged,” in legal terms.

What’s the catch?

There’s one great reason not to file for bankruptcy: Your credit score takes a hit. Of course, if you haven’t paid a bill for a year or two, your score may already be in the basement. If not, you can expect a drop of several hundred points. And that black mark stays on your record for eons—a decade for Chapter 7, eight years for Chapter 13.
In many cases, though, declaring bankruptcy will actually leave you with a higher credit score than if you simply allowed your debts to fester. Weiner says that many of his clients are shocked to start receiving offers for credit cards and mortgages only months after filing for bankruptcy.

So, going bankrupt is good?

No. Bankruptcy is unpleasant, and intrusive, and creates an indelible record of a low point in your life.
“Nobody wants to end up here,” says Weiner. But it beats the constant, crushing stress of unpayable debt.
Not only that, but, well, bankruptcy is also fundamentally American. That’s why it’s in the Constitution. The Founding Fathers knew that if this land was going to be a place where citizens could dream big and take risks, they also had to have what Weiner calls “the freedom to fail.”
That freedom is yours to enjoy— if you’re ever unlucky enough to need it.