By JULIE SATOW
Published: December 23, 2008
When the New York developer Harry B. Macklowe acquired the Drake Hotel almost three years ago and began buying up surrounding properties, market specialists expected him to include the site in a mammoth luxury office development.
Robert L. Freedman’s firm in Manhattan is forming a group to handle loan sales. “We are expecting a flurry of deals,” he said.
After the downturn in credit markets, however, Mr. Macklowe defaulted on his loans, and bidders are now vying for the Park Avenue site at fire-sale prices.
But the Drake site is not for sale directly. What is available is a $200 million mortgage for the swath of land, which covers a third of a city block between Park and Madison Avenues and 56th and 57th Streets. The buyer of this note will own a majority of the most senior piece of the debt, and so will most likely be paid back first should Mr. Macklowe have enough funds. If he defaults, the owner of the note will be in the best position to take ownership of the underlying property through a foreclosure.
This deal highlights a shift in the commercial real estate market, away from brick-and-mortar properties and toward the buying and selling of debt. “We are expecting a flurry of deals like the Drake Hotel site, where it is the loan that is for sale, not the actual real estate,” said Robert L. Freedman, the executive chairman of Williams Real Estate, a New York firm. The company is now creating a distressed-property group to handle such transactions.
During the real estate boom of recent years, developers increasingly used debt to finance their acquisitions. Now, with the market cooling, some of these borrowers are beginning to default. This is leaving lenders — including banks, private equity firms and hedge funds — in the position of owning the real estate.
Many lenders are looking to offload these loans because they need to cash out quickly, or because they are not in the business of selling real estate and lack the necessary resources and expertise. This means that commercial brokers, who regularly negotiated the acquisition and sale of properties, are now marketing mortgages and other loans.
“I am being inundated with calls from banks who want to sell their loans,” said David Schechtman, a senior director at the commercial brokerage firm Eastern Consolidated. “In just the last few weeks, I have also collected a list of about 30 clients — primarily high-net-worth individuals, long-established real estate families and small opportunity funds — who want to buy up these loans.”
As the market tumbles, the delinquency rate for bonds backed by commercial properties has surged. It measured 0.71 percent as of Dec. 5, compared with 0.26 percent a year earlier, according to the research firm Trepp L.L.C. While the actual number of defaults is still quite low, it is expected to increase.
“Loans don’t typically go into default immediately when there is a downturn in the market,” said Robert Knakal, the chairman of the brokerage firm Massey Knakal. “In the beginning, owners continue to make payments on their loans, hoping things will turn around, or if the loan is relatively new, it may have a significant interest reserve that is still carrying the note. So defaults on mortgages are a lagging indicator of market conditions.”
Despite this delay, there are early indications of an increase in loan sales. “Clearly, there has been a pickup in sales volume,” said David F. Dorros, a managing director at CB Richard Ellis.
To handle this uptick, brokerage firms like Eastern Consolidated are expanding their distressed-debt teams. Some firms are also requiring that their real estate brokers get broker-dealer licenses, which allows them to sell financial instruments.
Cash-rich developers and wealthy individuals are maneuvering to take advantage of the shift. Some are buying performing loans, where the borrower is continuing to pay interest on the debt. In this case, the buyer acquires the loan at a discount, but continues to receive interest payments. Then, when the loan comes due, the buyer is paid back the full face value.
Others are snatching up nonperforming loans, where the borrower has defaulted on the payments. In this case, patient buyers, including developers and private equity firms, may acquire the debt at a discount and eventually take ownership of the underlying real estate — usually after court action.
This is the strategy that the New York developer Time Equities Inc. is pursuing. “Rather than buying properties from conventional owners, we are looking to buy discounted debt on nonperforming properties,” said Francis J. Greenburger, the founder of the firm.
Time Equities is establishing a joint venture with the KOR Companies of Jersey City to buy nonperforming loans on land in the New York area, with an emphasis on New Jersey. It hopes to take ownership of the vacant sites at a discount, and develop them.
While there is a noticeable increase in this type of vulture investing, the buying and selling of commercial real estate loans is not a new strategy. CB Richard Ellis, for example, began a national loan sale advisory group five years ago.
“The business has become more visible now, but lenders have always understood it as a viable option to proactively manage their loan portfolios,” Mr. Dorros said.
In the current environment, however, the volume and complexity of deals are expected to be much greater than in the past because so many of the loans were grouped together and converted into bonds.
“The cash bind that many lenders are in is much more acute today than in the early 1990s,” when the previous major downturn in commercial real estate occurred, Mr. Knakal said.
As the market grows accustomed to the sale of loans, many eyes will be trained on the Drake Hotel site.
“It will set a floor price, establishing new benchmark metrics for the new economic realities,” Mr. Freedman said. “The Drake is just the tip of the iceberg; stay tuned, there is more to come.”
Copyright 2008 The New York Times Company. All rights reserved.
Wednesday, December 24, 2008
Monday, December 22, 2008
WSJ: Burned Investors Won't Find Strong Safety Net
By JANE J. KIM
Investors who lost money with Bernard Madoff shouldn't count on the Securities Investor Protection Corp. riding to their rescue.
The federally mandated SIPC has a narrow requirement as to what it covers -- generally theft in brokerage accounts.
Furthermore, securities attorneys say the nonprofit organization, which is supported by brokerages' membership fees, has a miserly track record of paying out claims and its current reserves may not be nearly big enough to handle potential losses from the Madoff case.
On Monday, SIPC started the process of liquidating Bernard L. Madoff Investment Securities LLC. The case is by far, the biggest one that SIPC has ever handled. Madoff reported that it held more than $17 billion at the start of this year.
Indeed, since its creation by Congress in 1970, SIPC has had to spend only $508 million to reimburse investors after recovering assets. The Madoff case alone is likely to dwarf that.
Ceiling on Coverage
SIPC covers losses up to $500,000 per customer, which includes $100,000 on claims for cash.
Virtually all broker dealers registered with the Securities and Exchange Commission are required to have SIPC coverage, and most brokerage firms carry excess coverage for losses above this amount.
When a brokerage firm files for bankruptcy, SIPC will typically step in to help transfer investors' holdings to another firm. With Madoff's firm, however, it's not likely that SIPC and the trustee will be able to transfer the customers accounts to a solvent brokerage firm. That means that it could be months, even years, before SIPC starts paying out claims, experts say.
"We don't have any faith or reliability in the firm's statements," says SIPC's president and chief executive Steve Harbeck.
"The individual victims will have to file claims asserting and proving what they gave to Madoff securities, and we'll have to compare that to records that we have on hand," Mr. Harbeck says. "We don't know how much people gave to this organization, and we don't know how much realistically they think they're owed."
Losses from theft and proven unauthorized trading are generally covered. Losses from fraud, churning or manipulation of stock prices are usually not. SIPC also doesn't cover investment losses or some holdings, such as currencies, hedge funds and limited partnerships not registered with the SEC.
"Our job is really elegantly simple: It's to return the contents of your account," says Mr. Harbeck.
Securities attorneys say SIPC often takes a narrow definition of what is covered by its statute, the Securities Investor Protection Act. "Literally, you have to prove that someone reached into your brokerage account and wrote a check to themselves," said Robert Uhl, a securities attorney in Beverly Hills, Calif.
Mark Maddox, an Indianapolis attorney, has represented about 300 investors from 1997 to 2001 who struggled to get SIPC to pay their claims after they lost money when the Stratton Oakmont brokerage firm filed for bankruptcy in 1997. Of those clients, he says that SIPC initially denied about 90% of his claims, forcing him to file appeals. In most cases, SIPC took the position that it would be responsible only for losses up to its $100,000 cash limit.
"SIPC doesn't like to pay claims and when they do pay a claim, they try to pay as little as possible," he says.
SIPC says only 349 customers through 2007 have failed to get their entire portfolios back.
Some industry watchers question whether SIPC has enough in reserves to cover potential claims in the Madoff liquidation. Currently, the SIPC Fund has about $1.6 billion to cover potential claims and SIPC can borrow up to $1 billion from an international consortium of banks and another $1 billion from the Securities and Exchange Commission.
"There are so many different things that we don't know that it's impossible to determine what the SIPC exposure is," says Mr. Harbeck.
Annual Fee: $150
SIPC's reserve is funded by its member brokerage firms, which all pay a flat fee of $150 a year. SIPC used to charge an assessment fee based on the firm's net operating revenues but moved to a flat annual fee of $150 in 1996 after its fund hit $1 billion.
SIPC's reserves are tiny compared to what's held by the Federal Deposit Insurance Corp., which covers bank deposits up to $250,000. The FDIC's reserves totaled $34.6 billion as of the third quarter. But SIPC says its coffers don't need to be big because brokerage firms are supposed to keep investors' stocks and bonds segregated from the firms' assets.
Banks, by contrast, lend out customers' money to other customers, who might default on those loans.
Now that SIPC has started the liquidation process, the court-appointed trustee will compile a mailing list of the company's customers. After the court has approved the claim forms and authorized the publication of notice, the trustee will mail out the claim forms to customers.
Investors will typically have six months to file their claims, which must be sent by certified mail, from the time the notice is published. Eventually, the trustee will set up a Web site with more information.
For now, any investors with brokerage accounts at Mr. Madoff's firm should save any documentation, such as monthly statements and investor reports going back as far as possible, says Steven Caruso, a securities attorney in New York.
"Those statements show what was supposed to be in your account or what the value was," says Mr. Caruso, who worked with about 500 investors to file claims with SIPC in the Stratton Oakmont case.
In many of those cases, his clients had to provide detailed paper trails -- such as documentation proving that they complained to the firm about unauthorized trades at the time of the trade -- in order to show that their trades were unauthorized.
Copyright 2008 News Corp. All rights reserved.
Investors who lost money with Bernard Madoff shouldn't count on the Securities Investor Protection Corp. riding to their rescue.
The federally mandated SIPC has a narrow requirement as to what it covers -- generally theft in brokerage accounts.
Furthermore, securities attorneys say the nonprofit organization, which is supported by brokerages' membership fees, has a miserly track record of paying out claims and its current reserves may not be nearly big enough to handle potential losses from the Madoff case.
On Monday, SIPC started the process of liquidating Bernard L. Madoff Investment Securities LLC. The case is by far, the biggest one that SIPC has ever handled. Madoff reported that it held more than $17 billion at the start of this year.
Indeed, since its creation by Congress in 1970, SIPC has had to spend only $508 million to reimburse investors after recovering assets. The Madoff case alone is likely to dwarf that.
Ceiling on Coverage
SIPC covers losses up to $500,000 per customer, which includes $100,000 on claims for cash.
Virtually all broker dealers registered with the Securities and Exchange Commission are required to have SIPC coverage, and most brokerage firms carry excess coverage for losses above this amount.
When a brokerage firm files for bankruptcy, SIPC will typically step in to help transfer investors' holdings to another firm. With Madoff's firm, however, it's not likely that SIPC and the trustee will be able to transfer the customers accounts to a solvent brokerage firm. That means that it could be months, even years, before SIPC starts paying out claims, experts say.
"We don't have any faith or reliability in the firm's statements," says SIPC's president and chief executive Steve Harbeck.
"The individual victims will have to file claims asserting and proving what they gave to Madoff securities, and we'll have to compare that to records that we have on hand," Mr. Harbeck says. "We don't know how much people gave to this organization, and we don't know how much realistically they think they're owed."
Losses from theft and proven unauthorized trading are generally covered. Losses from fraud, churning or manipulation of stock prices are usually not. SIPC also doesn't cover investment losses or some holdings, such as currencies, hedge funds and limited partnerships not registered with the SEC.
"Our job is really elegantly simple: It's to return the contents of your account," says Mr. Harbeck.
Securities attorneys say SIPC often takes a narrow definition of what is covered by its statute, the Securities Investor Protection Act. "Literally, you have to prove that someone reached into your brokerage account and wrote a check to themselves," said Robert Uhl, a securities attorney in Beverly Hills, Calif.
Mark Maddox, an Indianapolis attorney, has represented about 300 investors from 1997 to 2001 who struggled to get SIPC to pay their claims after they lost money when the Stratton Oakmont brokerage firm filed for bankruptcy in 1997. Of those clients, he says that SIPC initially denied about 90% of his claims, forcing him to file appeals. In most cases, SIPC took the position that it would be responsible only for losses up to its $100,000 cash limit.
"SIPC doesn't like to pay claims and when they do pay a claim, they try to pay as little as possible," he says.
SIPC says only 349 customers through 2007 have failed to get their entire portfolios back.
Some industry watchers question whether SIPC has enough in reserves to cover potential claims in the Madoff liquidation. Currently, the SIPC Fund has about $1.6 billion to cover potential claims and SIPC can borrow up to $1 billion from an international consortium of banks and another $1 billion from the Securities and Exchange Commission.
"There are so many different things that we don't know that it's impossible to determine what the SIPC exposure is," says Mr. Harbeck.
Annual Fee: $150
SIPC's reserve is funded by its member brokerage firms, which all pay a flat fee of $150 a year. SIPC used to charge an assessment fee based on the firm's net operating revenues but moved to a flat annual fee of $150 in 1996 after its fund hit $1 billion.
SIPC's reserves are tiny compared to what's held by the Federal Deposit Insurance Corp., which covers bank deposits up to $250,000. The FDIC's reserves totaled $34.6 billion as of the third quarter. But SIPC says its coffers don't need to be big because brokerage firms are supposed to keep investors' stocks and bonds segregated from the firms' assets.
Banks, by contrast, lend out customers' money to other customers, who might default on those loans.
Now that SIPC has started the liquidation process, the court-appointed trustee will compile a mailing list of the company's customers. After the court has approved the claim forms and authorized the publication of notice, the trustee will mail out the claim forms to customers.
Investors will typically have six months to file their claims, which must be sent by certified mail, from the time the notice is published. Eventually, the trustee will set up a Web site with more information.
For now, any investors with brokerage accounts at Mr. Madoff's firm should save any documentation, such as monthly statements and investor reports going back as far as possible, says Steven Caruso, a securities attorney in New York.
"Those statements show what was supposed to be in your account or what the value was," says Mr. Caruso, who worked with about 500 investors to file claims with SIPC in the Stratton Oakmont case.
In many of those cases, his clients had to provide detailed paper trails -- such as documentation proving that they complained to the firm about unauthorized trades at the time of the trade -- in order to show that their trades were unauthorized.
Copyright 2008 News Corp. All rights reserved.
Friday, December 19, 2008
New York Times: Tax Rules for Theft Losses Could Help Some Investors
By LYNNLEY BROWNING
Published: December 18, 2008
For the legions of investors who appear to have been swindled by Bernard L. Madoff, there could be some relief.
Tax rules allow investors who fall prey to criminal theft perpetrated by their investment advisers or brokers to claim a tax deduction stemming from their losses.
The rules, which are intended to aid investors cheated through embezzlement, pyramid schemes, extortion or robbery, could potentially put hundreds of millions or even billions of dollars back into the pockets of Mr. Madoff’s stunned investors. They include the publishing magnate Mort Zuckerman; the owner of the New York Mets, Fred Wilpon; a foundation run by the filmmaker Steven Spielberg; and wealthy clients and banks from Palm Beach to Switzerland.
But it is unclear whether the Internal Revenue Service will see things that way. “We are aware of the situation, but beyond that, we have no comment,” Bruce Friedland, an I.R.S. spokesman, said on Thursday.
Gary A. Zwick, a tax lawyer at Walter & Haverfield in Cleveland, said, “It’s fair to say that many people will take the position that the theft loss rules will apply, but the government may not take that approach.”
Investors who can prove they were cheated may also be able to claim a refund for federal taxes paid over the last two years on “phantom” interest income from their investments with Mr. Madoff. But they cannot claim a refund for taxes paid on any capital paid back to them. Mr. Madoff, who was arrested last Thursday, ran what prosecutors contend is history’s largest Ponzi scheme.
On the tax front, a formal declaration that Mr. Madoff’s investment funds are bankrupt would help investors. “Embezzlement followed by bankruptcy is a pretty good indication that you’re not going to get your money back and will have a theft-loss claim,” said D. Matthew Richardson, a tax lawyer at Sheppard Mullin Richter & Hampton in Los Angeles. Mr. Madoff’s firm, Bernard L. Madoff Investment Securities, is currently being liquidated by a court-appointed trustee.
But before investors can claim the deduction, they have to clear a tall hurdle: they have to be reasonably certain that they will not recover their money. Proving that could take years, as investigators and regulators pore over Mr. Madoff’s books and a wave of lawsuits emerges.
It is unknown whether Mr. Madoff used investors’ money not just to pay early investors but also to stash in his personal bank accounts overseas or to underwrite a lavish lifestyle. Any such assets, as well as insurance, could be a source of recovery for investors — and could dilute any tax write-offs. The charities that fell victim to Mr. Madoff would not be eligible for any relief because they are exempt from taxes.
“I think it’s 100 percent certain that investors will get the theft-loss deduction, but nobody’s going to get it right away, and it may take five years,” said Alvin Brown, a tax lawyer and former manager in the I.R.S.’s chief of legal department.
Under theft-loss rules, investors can generally deduct 90 percent of their losses against their adjusted gross income, according to Robert Willens, a tax and accounting authority. Investors who argue that the loss arose from a for-profit transaction — the point of investing — may be able to deduct 100 percent. “Investors in programs sponsored by Mr. Bernard Madoff may find that their losses will be mitigated by certain ameliorative provisions of the tax code,” Mr. Willens said.
The rules permit losses stemming from theft to be deducted in the year in which the loss is discovered by the investor, even if it took place earlier. They also allow investors to carry back theft-losses for three years — one more year than under the rules for capital losses — and to carry losses forward for 20 years. Investors compute losses according to the adjusted basis in their investment, not the current fair-market value.
The theft-loss deduction is not the same as the more commonly used capital loss deduction, which applies to securities that decline in value.
In 2006, the I.R.S. processed more than 206,000 claims for theft-loss and casualty deductions — the I.R.S. groups the two — worth more than $5.1 billion. Claims filed under the Madoff scheme would most likely dwarf that dollar figure.
Copyright 2008 The New York Times Company. All rights reserved.
Published: December 18, 2008
For the legions of investors who appear to have been swindled by Bernard L. Madoff, there could be some relief.
Tax rules allow investors who fall prey to criminal theft perpetrated by their investment advisers or brokers to claim a tax deduction stemming from their losses.
The rules, which are intended to aid investors cheated through embezzlement, pyramid schemes, extortion or robbery, could potentially put hundreds of millions or even billions of dollars back into the pockets of Mr. Madoff’s stunned investors. They include the publishing magnate Mort Zuckerman; the owner of the New York Mets, Fred Wilpon; a foundation run by the filmmaker Steven Spielberg; and wealthy clients and banks from Palm Beach to Switzerland.
But it is unclear whether the Internal Revenue Service will see things that way. “We are aware of the situation, but beyond that, we have no comment,” Bruce Friedland, an I.R.S. spokesman, said on Thursday.
Gary A. Zwick, a tax lawyer at Walter & Haverfield in Cleveland, said, “It’s fair to say that many people will take the position that the theft loss rules will apply, but the government may not take that approach.”
Investors who can prove they were cheated may also be able to claim a refund for federal taxes paid over the last two years on “phantom” interest income from their investments with Mr. Madoff. But they cannot claim a refund for taxes paid on any capital paid back to them. Mr. Madoff, who was arrested last Thursday, ran what prosecutors contend is history’s largest Ponzi scheme.
On the tax front, a formal declaration that Mr. Madoff’s investment funds are bankrupt would help investors. “Embezzlement followed by bankruptcy is a pretty good indication that you’re not going to get your money back and will have a theft-loss claim,” said D. Matthew Richardson, a tax lawyer at Sheppard Mullin Richter & Hampton in Los Angeles. Mr. Madoff’s firm, Bernard L. Madoff Investment Securities, is currently being liquidated by a court-appointed trustee.
But before investors can claim the deduction, they have to clear a tall hurdle: they have to be reasonably certain that they will not recover their money. Proving that could take years, as investigators and regulators pore over Mr. Madoff’s books and a wave of lawsuits emerges.
It is unknown whether Mr. Madoff used investors’ money not just to pay early investors but also to stash in his personal bank accounts overseas or to underwrite a lavish lifestyle. Any such assets, as well as insurance, could be a source of recovery for investors — and could dilute any tax write-offs. The charities that fell victim to Mr. Madoff would not be eligible for any relief because they are exempt from taxes.
“I think it’s 100 percent certain that investors will get the theft-loss deduction, but nobody’s going to get it right away, and it may take five years,” said Alvin Brown, a tax lawyer and former manager in the I.R.S.’s chief of legal department.
Under theft-loss rules, investors can generally deduct 90 percent of their losses against their adjusted gross income, according to Robert Willens, a tax and accounting authority. Investors who argue that the loss arose from a for-profit transaction — the point of investing — may be able to deduct 100 percent. “Investors in programs sponsored by Mr. Bernard Madoff may find that their losses will be mitigated by certain ameliorative provisions of the tax code,” Mr. Willens said.
The rules permit losses stemming from theft to be deducted in the year in which the loss is discovered by the investor, even if it took place earlier. They also allow investors to carry back theft-losses for three years — one more year than under the rules for capital losses — and to carry losses forward for 20 years. Investors compute losses according to the adjusted basis in their investment, not the current fair-market value.
The theft-loss deduction is not the same as the more commonly used capital loss deduction, which applies to securities that decline in value.
In 2006, the I.R.S. processed more than 206,000 claims for theft-loss and casualty deductions — the I.R.S. groups the two — worth more than $5.1 billion. Claims filed under the Madoff scheme would most likely dwarf that dollar figure.
Copyright 2008 The New York Times Company. All rights reserved.
New York Times: In Madoff, Winners May Still Lose Out
By ALEX BERENSON
Published: December 18, 2008
Amid the thousands of people caught up in the apparent multibillion-dollar fraud of Bernard L. Madoff, some investors stand out.
They made money.
One client said he invested more than $1 million with Mr. Madoff over a decade ago. As his portfolio rose in value, he took out several million dollars. While his statements showed several million dollars in his Madoff account when the fund collapsed last week, the client still ended up ahead.
How many clients of Bernard L. Madoff Investment Securities profited unwittingly on what Mr. Madoff described as a big Ponzi scheme isn’t known. But given the structure of Ponzi schemes, which use money from later investors to pay early investors, many longtime clients may actually have wound up ahead.
“In a Ponzi scheme, not all investors lose,” said Tamar Frankel, a law professor at Boston University who has written on Ponzi schemes. “Those who manage to get out in time retain their investments and some of their gains.”
But previous court rulings regarding financial frauds suggest the winners could be forced to give up some of their gains to losers.
One of the unanswered questions so far is precisely how much investors lost over all.
When Mr. Madoff confessed and was arrested last week, he told F.B.I. agents that the losses might be $50 billion, according to court filings. Various institutions and individuals so far have reported losses totaling more than $20 billion, but it is unclear how much of that is cash they actually invested and how much represents paper profits based on the falsified returns Mr. Madoff said investors were earning.
Mr. Madoff regularly delivered returns of 10 to 17 percent to investors, a very good year-in, year-out return but on the low end of the 10 to 100 percent a year typically dangled by promoters of Ponzi schemes.
But assets that can guarantee those returns year after year without risk simply do not exist. Instead of profitable investments, Ponzi schemes repay initial investors by raising more money from new investors. The schemes typically collapse when the promoter cannot bring in enough money to pay existing investors seeking redemptions.
Joel M. Cohen, the deputy head of litigation for the Clifford Chance law firm and a former federal prosecutor who specialized in business and securities fraud, said that payments to early investors were an integral part of any Ponzi scheme.
“You need to deliver returns in the range that you promised to attract investors,” Mr. Cohen said.
Yet even Mr. Madoff’s most fortunate clients may wind up having to give back some of their gains, as investors might have to do in another recent financial fraud, the collapse of the hedge fund Bayou Group in 2005.
In the Bayou case, in which investors lost $400 million, a bankruptcy judge ruled that investors who withdrew money even before Bayou collapsed might have to return their profits, and possibly some of the initial investments, to the bankruptcy trustee overseeing the unwinding of Bayou.
The returned money is to be distributed among all investors, who are expected to receive only about 20 to 40 percent of their original investments.
Mr. Madoff’s winning clients are likely to face similar legal challenges. In fact, the Madoff client who profited from his investment spoke on the condition that he not be identified, out of concern that he might be sought out to repay some of his gains to the receiver or bankruptcy trustee for Mr. Madoff.
Jay B. Gould, a former lawyer at the Securities and Exchange Commission who now runs the hedge funds practice at Pillsbury Winthrop Shaw Pittman, said the client was correct to be concerned. New York State law may allow the receiver or bankruptcy trustee to demand that Mr. Madoff’s investors return money they received from the scheme any time in the last six years, Mr. Gould said.
Such so-called clawbacks may occur even if the client had no idea that the gains were fraudulent, he said.
“The idea is that the whole thing was a fraudulent undertaking, so nobody should profit from it, and everybody should be put on equitable footing,” Mr. Gould said.
But in a sign of the complexity of securities law, Mr. Cohen said he did not agree with Mr. Gould’s interpretation.
“I don’t think it’s that easy to claw back money from something that happened six years ago,” Mr. Cohen said. “There’s no level of fiduciary duty between investors. If someone put in a million dollars five years ago, and made 11 percent, and took their money out after one year, are they required to give back the 11 percent? I think that’s inaccurate.”
Even determining which investors made money will be enormously complicated.
Mr. Madoff’s practices appear to have gone on for many years and entangled thousands, perhaps tens of thousands, of clients, who invested both directly with him and through third-party hedge funds. Some of those investors never took out a cent, while others took out only a fraction of what they invested and a few took out more than they put in.
Jesse Gottlieb, a life insurance broker in New York, said his account statements show that he had about $17 million at the Madoff firm when it collapsed.
Mr. Gottlieb declined to say how much cash he had invested, but he said he had taken out only a small amount of money from his investments with Mr. Madoff, which were held in trusts for his sons.
Mr. Gottlieb said he knew of other investors who regularly cashed out portions of their accounts. In most cases, they were retirees who left their principal with Mr. Madoff, but lived off the annual 10 to 17 percent returns he provided, Mr. Gottlieb said.
The complexity of situations like the one that Mr. Gottlieb described means that investors may wind up suing each other, as well as the hedge funds and banks that brought them into Mr. Madoff’s funds and the auditors who worked for those hedge funds.
“This is so big, and there are so many people situated differently,” Mr. Gould said. “Everybody is potentially averse to everybody else.”
Copyright 2008 The New York Times Company. All rights reserved.
Published: December 18, 2008
Amid the thousands of people caught up in the apparent multibillion-dollar fraud of Bernard L. Madoff, some investors stand out.
They made money.
One client said he invested more than $1 million with Mr. Madoff over a decade ago. As his portfolio rose in value, he took out several million dollars. While his statements showed several million dollars in his Madoff account when the fund collapsed last week, the client still ended up ahead.
How many clients of Bernard L. Madoff Investment Securities profited unwittingly on what Mr. Madoff described as a big Ponzi scheme isn’t known. But given the structure of Ponzi schemes, which use money from later investors to pay early investors, many longtime clients may actually have wound up ahead.
“In a Ponzi scheme, not all investors lose,” said Tamar Frankel, a law professor at Boston University who has written on Ponzi schemes. “Those who manage to get out in time retain their investments and some of their gains.”
But previous court rulings regarding financial frauds suggest the winners could be forced to give up some of their gains to losers.
One of the unanswered questions so far is precisely how much investors lost over all.
When Mr. Madoff confessed and was arrested last week, he told F.B.I. agents that the losses might be $50 billion, according to court filings. Various institutions and individuals so far have reported losses totaling more than $20 billion, but it is unclear how much of that is cash they actually invested and how much represents paper profits based on the falsified returns Mr. Madoff said investors were earning.
Mr. Madoff regularly delivered returns of 10 to 17 percent to investors, a very good year-in, year-out return but on the low end of the 10 to 100 percent a year typically dangled by promoters of Ponzi schemes.
But assets that can guarantee those returns year after year without risk simply do not exist. Instead of profitable investments, Ponzi schemes repay initial investors by raising more money from new investors. The schemes typically collapse when the promoter cannot bring in enough money to pay existing investors seeking redemptions.
Joel M. Cohen, the deputy head of litigation for the Clifford Chance law firm and a former federal prosecutor who specialized in business and securities fraud, said that payments to early investors were an integral part of any Ponzi scheme.
“You need to deliver returns in the range that you promised to attract investors,” Mr. Cohen said.
Yet even Mr. Madoff’s most fortunate clients may wind up having to give back some of their gains, as investors might have to do in another recent financial fraud, the collapse of the hedge fund Bayou Group in 2005.
In the Bayou case, in which investors lost $400 million, a bankruptcy judge ruled that investors who withdrew money even before Bayou collapsed might have to return their profits, and possibly some of the initial investments, to the bankruptcy trustee overseeing the unwinding of Bayou.
The returned money is to be distributed among all investors, who are expected to receive only about 20 to 40 percent of their original investments.
Mr. Madoff’s winning clients are likely to face similar legal challenges. In fact, the Madoff client who profited from his investment spoke on the condition that he not be identified, out of concern that he might be sought out to repay some of his gains to the receiver or bankruptcy trustee for Mr. Madoff.
Jay B. Gould, a former lawyer at the Securities and Exchange Commission who now runs the hedge funds practice at Pillsbury Winthrop Shaw Pittman, said the client was correct to be concerned. New York State law may allow the receiver or bankruptcy trustee to demand that Mr. Madoff’s investors return money they received from the scheme any time in the last six years, Mr. Gould said.
Such so-called clawbacks may occur even if the client had no idea that the gains were fraudulent, he said.
“The idea is that the whole thing was a fraudulent undertaking, so nobody should profit from it, and everybody should be put on equitable footing,” Mr. Gould said.
But in a sign of the complexity of securities law, Mr. Cohen said he did not agree with Mr. Gould’s interpretation.
“I don’t think it’s that easy to claw back money from something that happened six years ago,” Mr. Cohen said. “There’s no level of fiduciary duty between investors. If someone put in a million dollars five years ago, and made 11 percent, and took their money out after one year, are they required to give back the 11 percent? I think that’s inaccurate.”
Even determining which investors made money will be enormously complicated.
Mr. Madoff’s practices appear to have gone on for many years and entangled thousands, perhaps tens of thousands, of clients, who invested both directly with him and through third-party hedge funds. Some of those investors never took out a cent, while others took out only a fraction of what they invested and a few took out more than they put in.
Jesse Gottlieb, a life insurance broker in New York, said his account statements show that he had about $17 million at the Madoff firm when it collapsed.
Mr. Gottlieb declined to say how much cash he had invested, but he said he had taken out only a small amount of money from his investments with Mr. Madoff, which were held in trusts for his sons.
Mr. Gottlieb said he knew of other investors who regularly cashed out portions of their accounts. In most cases, they were retirees who left their principal with Mr. Madoff, but lived off the annual 10 to 17 percent returns he provided, Mr. Gottlieb said.
The complexity of situations like the one that Mr. Gottlieb described means that investors may wind up suing each other, as well as the hedge funds and banks that brought them into Mr. Madoff’s funds and the auditors who worked for those hedge funds.
“This is so big, and there are so many people situated differently,” Mr. Gould said. “Everybody is potentially averse to everybody else.”
Copyright 2008 The New York Times Company. All rights reserved.
Wednesday, December 17, 2008
Season's Greetings
President John F. Kennedy said “Change is the law of life.” And 2008 has been a year full of change-in the markets, in politics and in all of our lives.
In these uncertain and changing times, everyone at Shenwick & Associates wishes you and your family happy holidays. Wherever the changes of life take you, we will be there to help guide you through.
We hope you enjoy the warm spirit of this season with much joy in the coming year.
Wishing you the very best during the holidays and throughout the New Year.
Jim & Staff
In these uncertain and changing times, everyone at Shenwick & Associates wishes you and your family happy holidays. Wherever the changes of life take you, we will be there to help guide you through.
We hope you enjoy the warm spirit of this season with much joy in the coming year.
Wishing you the very best during the holidays and throughout the New Year.
Jim & Staff
Wednesday, December 03, 2008
New York Times: Manhattan Awash in Open Office Space
Square Feet
By J. ALEX TARQUINIO
Last year, when the New York real estate market was still frothy, large blocks of office space were hard to come by. Not anymore.
Almost 16 million square feet is currently listed as available in large blocks in 68 office buildings in Manhattan, according to Colliers ABR, a commercial brokerage firm. That is nearly double the space available a year ago, both in terms of the number of large office blocks — which in New York usually means 100,000 square feet or more — and in terms of total square feet.
Those figures are widely expected to go much higher, said Robert L. Sammons, the managing director of research for Colliers ABR. He said it was difficult to get a handle on exactly how much space financial companies alone might put back onto the Manhattan office market over the next year or so.
“Honestly, I don’t think any of these financial firms know how this is going to play out,” he said. “They are trying to figure out how many people they will need on staff, and in some cases how they are going to stay in business.”
Pending layoffs in the financial industry certainly account for some of the space on the market. But there are other factors. Some companies are moving into new headquarters — which were first planned years ago — while others are disposing of real estate that they came into through acquisitions.
By far the biggest increase in availability has been in the sublease market. Currently, at least 16 large office blocks are being marketed for sublease in Manhattan, up from just 3 listed at this time last year, according to Colliers ABR.
Michael Colacino, the president of Studley, a real estate brokerage firm that specializes in representing office tenants, said the sublet space that had come onto the market recently was attractively priced.
He said some tenants might do better by shopping the sublet market rather than trying to renegotiate a better rent with their current landlords. “A lot of landlords are still in denial,” Mr. Colacino said, “but the sublease space is priced realistically for the actual market conditions.”
Mr. Colacino estimates that the actual rents on deals signed in the last three months are down by as much as 20 to 30 percent from the going rents at the end of the summer — to around $75 to $80 a square foot annually in Midtown and around $45 a square foot downtown.
Among current offerings — including both subleases and direct leases from owners — roughly a quarter of the space in the Midtown and downtown office markets became available because a financial company either did not renew its lease or decided to market the space for sublet.
But the picture could become much starker next year. Among large office blocks that brokers expect to hit the market, Mr. Sammons estimates that the financial industry will account for roughly one-third of the new space coming on the market in Midtown and more than half of the new space downtown.
Lehman Brothers, Merrill Lynch and Deutsche Bank all have leases that Mr. Sammons counted among the potential new listings of large office blocks. And that list does not include Citigroup — although the banking giant has announced that it will lay off more than 50,000 employees worldwide — because Mr. Sammons said it was too soon to know if Citigroup would give up any large office blocks in Manhattan.
So far this year, brokers say, the main event in Midtown has been the completion of One Bryant Park, a 54-story office tower that recently opened at the corner of 42nd Street and the Avenue of the Americas.
As the main tenant, Bank of America, which is based in Charlotte, N.C., moves employees into this new building, it is giving up earlier leases for hundreds of thousands of square feet in other prominent Midtown office buildings, like 9 West 57th Street. Brokers also widely expect the bank to offer for sublet more than 300,000 square feet that it currently leases in 50 Rockefeller Plaza.
JPMorgan Chase has already put some large blocks of space on the sublet market near its world headquarters, at 270 Park Avenue, between 47th and 48th Streets. Chase is marketing sublets for 140,000 square feet at 320 Park Avenue, and 195,000 square feet at 237 Park Avenue. The bank acquired the lease at 237 Park Avenue when it bought Bear Stearns in March.
Chase plans to keep the former Bear Stearns headquarters, though, which is at 383 Madison Avenue, between 46th and 47th Streets. Chase plans to move its investment banking unit into that building, which is just one block from its own headquarters.
“We are looking to make the most economical use of the space that we have for our employees, businesses and shareholders,” said Darlene Taylor, a spokeswoman for JPMorgan Chase.
Downtown, some large blocks of space are expected to become available late next year, when Goldman Sachs completes its new 2.1-million-square-foot 43-story world headquarters at 200 West Street in Battery Park City. When Goldman starts moving into its new building, it plans to allow earlier leases for more than 1.5 million square feet in Lower Manhattan to expire. The bank is also marketing for sublet 600,000 square feet of space that it leases at 77 Water Street.
There is also a great deal of speculation swirling around the ultimate destination of Merrill Lynch, which is to be acquired by Bank of America. The merger could close this month or early next year.
Some brokers suggest that Bank of America might decide to move Merrill Lynch from its headquarters at 4 World Financial Center, where Merrill leases 2.1 million square feet, to be closer to the bank’s new Bryant Park headquarters. If that happens, it would shift even more of the financial industry from Wall Street to Midtown, following what has been a long-term trend.
Copyright 2008 The New York Times Company. All rights reserved.
By J. ALEX TARQUINIO
Last year, when the New York real estate market was still frothy, large blocks of office space were hard to come by. Not anymore.
Almost 16 million square feet is currently listed as available in large blocks in 68 office buildings in Manhattan, according to Colliers ABR, a commercial brokerage firm. That is nearly double the space available a year ago, both in terms of the number of large office blocks — which in New York usually means 100,000 square feet or more — and in terms of total square feet.
Those figures are widely expected to go much higher, said Robert L. Sammons, the managing director of research for Colliers ABR. He said it was difficult to get a handle on exactly how much space financial companies alone might put back onto the Manhattan office market over the next year or so.
“Honestly, I don’t think any of these financial firms know how this is going to play out,” he said. “They are trying to figure out how many people they will need on staff, and in some cases how they are going to stay in business.”
Pending layoffs in the financial industry certainly account for some of the space on the market. But there are other factors. Some companies are moving into new headquarters — which were first planned years ago — while others are disposing of real estate that they came into through acquisitions.
By far the biggest increase in availability has been in the sublease market. Currently, at least 16 large office blocks are being marketed for sublease in Manhattan, up from just 3 listed at this time last year, according to Colliers ABR.
Michael Colacino, the president of Studley, a real estate brokerage firm that specializes in representing office tenants, said the sublet space that had come onto the market recently was attractively priced.
He said some tenants might do better by shopping the sublet market rather than trying to renegotiate a better rent with their current landlords. “A lot of landlords are still in denial,” Mr. Colacino said, “but the sublease space is priced realistically for the actual market conditions.”
Mr. Colacino estimates that the actual rents on deals signed in the last three months are down by as much as 20 to 30 percent from the going rents at the end of the summer — to around $75 to $80 a square foot annually in Midtown and around $45 a square foot downtown.
Among current offerings — including both subleases and direct leases from owners — roughly a quarter of the space in the Midtown and downtown office markets became available because a financial company either did not renew its lease or decided to market the space for sublet.
But the picture could become much starker next year. Among large office blocks that brokers expect to hit the market, Mr. Sammons estimates that the financial industry will account for roughly one-third of the new space coming on the market in Midtown and more than half of the new space downtown.
Lehman Brothers, Merrill Lynch and Deutsche Bank all have leases that Mr. Sammons counted among the potential new listings of large office blocks. And that list does not include Citigroup — although the banking giant has announced that it will lay off more than 50,000 employees worldwide — because Mr. Sammons said it was too soon to know if Citigroup would give up any large office blocks in Manhattan.
So far this year, brokers say, the main event in Midtown has been the completion of One Bryant Park, a 54-story office tower that recently opened at the corner of 42nd Street and the Avenue of the Americas.
As the main tenant, Bank of America, which is based in Charlotte, N.C., moves employees into this new building, it is giving up earlier leases for hundreds of thousands of square feet in other prominent Midtown office buildings, like 9 West 57th Street. Brokers also widely expect the bank to offer for sublet more than 300,000 square feet that it currently leases in 50 Rockefeller Plaza.
JPMorgan Chase has already put some large blocks of space on the sublet market near its world headquarters, at 270 Park Avenue, between 47th and 48th Streets. Chase is marketing sublets for 140,000 square feet at 320 Park Avenue, and 195,000 square feet at 237 Park Avenue. The bank acquired the lease at 237 Park Avenue when it bought Bear Stearns in March.
Chase plans to keep the former Bear Stearns headquarters, though, which is at 383 Madison Avenue, between 46th and 47th Streets. Chase plans to move its investment banking unit into that building, which is just one block from its own headquarters.
“We are looking to make the most economical use of the space that we have for our employees, businesses and shareholders,” said Darlene Taylor, a spokeswoman for JPMorgan Chase.
Downtown, some large blocks of space are expected to become available late next year, when Goldman Sachs completes its new 2.1-million-square-foot 43-story world headquarters at 200 West Street in Battery Park City. When Goldman starts moving into its new building, it plans to allow earlier leases for more than 1.5 million square feet in Lower Manhattan to expire. The bank is also marketing for sublet 600,000 square feet of space that it leases at 77 Water Street.
There is also a great deal of speculation swirling around the ultimate destination of Merrill Lynch, which is to be acquired by Bank of America. The merger could close this month or early next year.
Some brokers suggest that Bank of America might decide to move Merrill Lynch from its headquarters at 4 World Financial Center, where Merrill leases 2.1 million square feet, to be closer to the bank’s new Bryant Park headquarters. If that happens, it would shift even more of the financial industry from Wall Street to Midtown, following what has been a long-term trend.
Copyright 2008 The New York Times Company. All rights reserved.
Tuesday, December 02, 2008
Unsecured Mortgages in Chapter 13 bankruptcy
In our current falling real estate market, Shenwick & Associates has been receiving many calls regarding saving homes from foreclosure. One possible solution may be Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, an individual with regular income can retain their property and make installment payments to their creditors over a period of three to five years, if they have unsecured debt of less than $336,900 and secured debt of less than $1,010,650.
Due to declining real estate values, many homeowners (over 7.5 million, according to a recent CNN Money report) are “underwater”-in other words, the value of their property (the collateral) is less than the balance due on their mortgages. In 2001, the Second Circuit Court of Appeals held in Pond v. Farm Specialist Realty et al. (In re Pond), 252 F. 3d 122 (2d Cir. 2001), that an unsecured mortgagee’s interest in a Chapter 13 debtor’s principal residence is voidable where there is insufficient equity in the property to cover any portion of their lien.
The debtors, Richard and Lorrie Pond, filed for bankruptcy under Chapter 13 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of New York. The Court held a hearing and determined that the debtors’ residential property was valued at $69,000. The Court also determined that there were four liens on the property, which had to be discharged in the following order of priority: (1) $1,505.18 for real property taxes; (2) $48,995.63 for the mortgage of the Farmers Home Administration; (3) $20,000 for the mortgage of the New York State Affordable Housing Corporation; and (4) $10,630.58 for the mortgage of Farm Specialist Realty and Charles Livingston, Jr. (the Defendants). The first three liens amounted to an encumbrance of $70,500.81, so the Ponds’ property had insufficient equity to cover any portion of the Defendants’ lien.
The Ponds then commenced an adversary proceeding to dissolve the Defendants’ lien under Section 1322(b)(2) of the Bankruptcy Code, which provides:
“A Chapter 13 plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence . . . .” (emphasis added)
The Ponds argued that the Defendants' lien was wholly unsecured under Section 506 of the Bankruptcy Code, which provides:
“An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.”
The Bankruptcy Court held that defendants' lien could not be modified because, even though there was insufficient equity to cover any portion of the lien, the underlying security interest was the Debtors’ principal residential property, and, therefore, the lien was protected from modification under Section 1322(b)(2).
The U.S. District Court for the Northern District of New York reversed, holding that the statutory prohibition against modification does not apply to a holder of a wholly unsecured lien under Section 506, because such a lien is not "secured" by a residential property within the meaning of Section 1322 (b)(2). According to the District Court, the Defendants' lien was wholly "unsecured" under Section 506(a) because there was no equity in the Ponds’ property to cover the lien; therefore, the lien was not protected under the antimodification exception of Section 1322(b)(2) and could be voided.
The Defendants challenged this holding on appeal, and the 2nd Circuit Court of Appeals affirmed the District Court.
In its discussion of its holding, the Court reviewed the Supreme Court’s holding in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), in which a Chapter 13 debtor sought to split a creditor's undersecured residential mortgage lien into a secured lien and an unsecured lien, so that only the secured portion of the mortgage was protected under the antimodification exception of Section 1322(b)(2).
The Supreme Court rejected that proposal, holding that, as long as some portion of the lien was secured by the residence, the creditor was a holder of "a claim secured only by . . . the debtor's principal residence," and its rights in the entire lien were protected under the antimodification exception. Accordingly, the debtors' Chapter 13 plan could not void the unsecured component of the creditor's mortgage lien.
However, the Nobelman opinion left open the issue presented in this case- namely, whether its holding extended to a holder of a wholly unsecured homestead lien. The issue has sharply divided Bankruptcy and District Courts, but the majority view (which the District Court adopted in this case, and the Second Circuit Court of Appeals affirmed) is that the antimodification exception of Section 1322(b)(22) applies only where a creditor's claim is at least partially secured under Section 506(a).
For more information about how Chapter 13 bankruptcy can protect your home, please contact Jim Shenwick.
Due to declining real estate values, many homeowners (over 7.5 million, according to a recent CNN Money report) are “underwater”-in other words, the value of their property (the collateral) is less than the balance due on their mortgages. In 2001, the Second Circuit Court of Appeals held in Pond v. Farm Specialist Realty et al. (In re Pond), 252 F. 3d 122 (2d Cir. 2001), that an unsecured mortgagee’s interest in a Chapter 13 debtor’s principal residence is voidable where there is insufficient equity in the property to cover any portion of their lien.
The debtors, Richard and Lorrie Pond, filed for bankruptcy under Chapter 13 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of New York. The Court held a hearing and determined that the debtors’ residential property was valued at $69,000. The Court also determined that there were four liens on the property, which had to be discharged in the following order of priority: (1) $1,505.18 for real property taxes; (2) $48,995.63 for the mortgage of the Farmers Home Administration; (3) $20,000 for the mortgage of the New York State Affordable Housing Corporation; and (4) $10,630.58 for the mortgage of Farm Specialist Realty and Charles Livingston, Jr. (the Defendants). The first three liens amounted to an encumbrance of $70,500.81, so the Ponds’ property had insufficient equity to cover any portion of the Defendants’ lien.
The Ponds then commenced an adversary proceeding to dissolve the Defendants’ lien under Section 1322(b)(2) of the Bankruptcy Code, which provides:
“A Chapter 13 plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence . . . .” (emphasis added)
The Ponds argued that the Defendants' lien was wholly unsecured under Section 506 of the Bankruptcy Code, which provides:
“An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.”
The Bankruptcy Court held that defendants' lien could not be modified because, even though there was insufficient equity to cover any portion of the lien, the underlying security interest was the Debtors’ principal residential property, and, therefore, the lien was protected from modification under Section 1322(b)(2).
The U.S. District Court for the Northern District of New York reversed, holding that the statutory prohibition against modification does not apply to a holder of a wholly unsecured lien under Section 506, because such a lien is not "secured" by a residential property within the meaning of Section 1322 (b)(2). According to the District Court, the Defendants' lien was wholly "unsecured" under Section 506(a) because there was no equity in the Ponds’ property to cover the lien; therefore, the lien was not protected under the antimodification exception of Section 1322(b)(2) and could be voided.
The Defendants challenged this holding on appeal, and the 2nd Circuit Court of Appeals affirmed the District Court.
In its discussion of its holding, the Court reviewed the Supreme Court’s holding in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), in which a Chapter 13 debtor sought to split a creditor's undersecured residential mortgage lien into a secured lien and an unsecured lien, so that only the secured portion of the mortgage was protected under the antimodification exception of Section 1322(b)(2).
The Supreme Court rejected that proposal, holding that, as long as some portion of the lien was secured by the residence, the creditor was a holder of "a claim secured only by . . . the debtor's principal residence," and its rights in the entire lien were protected under the antimodification exception. Accordingly, the debtors' Chapter 13 plan could not void the unsecured component of the creditor's mortgage lien.
However, the Nobelman opinion left open the issue presented in this case- namely, whether its holding extended to a holder of a wholly unsecured homestead lien. The issue has sharply divided Bankruptcy and District Courts, but the majority view (which the District Court adopted in this case, and the Second Circuit Court of Appeals affirmed) is that the antimodification exception of Section 1322(b)(22) applies only where a creditor's claim is at least partially secured under Section 506(a).
For more information about how Chapter 13 bankruptcy can protect your home, please contact Jim Shenwick.
Monday, December 01, 2008
New York Times: An End Run Around Realogy's Lenders
By FLOYD NORRIS
It was as badly timed a takeover as there was during the private equity boom.
At the end of 2006, Apollo Management, the private equity firm headed by Leon Black, agreed to buy Realogy, a conglomerate with a number of franchised real estate businesses, among them Century 21 and Coldwell Banker, for $7 billion in cash.
That was a few months after house prices peaked. By the next spring, when the deal closed, subprime mortgage lenders were starting to go broke. The great housing bubble was bursting, and that was very bad news for a company whose revenue was based on how many homes it could sell and how high the prices were.
Now a struggle is emerging over how the unfortunate lenders should be treated. Realogy, under the direction of Apollo, is using a classic divide-and-conquer strategy. Bondholders are screaming that the tactics are illegal.
The strategy is simple: Just tell one group of bondholders that they can move up in the capital structure (and thus be more likely to be paid if the company goes broke). But first, they have to agree to forget about collecting most of the money they are owed. They are being asked to trade in old bonds for new loans with much smaller face values.
Overindebted consumers can only look on with envy, wishing they could pull off something similar, perhaps by telling one credit card company that they will pay another card company first unless the first company agrees to forgive most of what it is owed.
No owner of Realogy bonds has to make the exchange, of course. But if a bondholder turns it down, and others do make the exchange, that bondholder may find that he is much farther back in line, with even less probability of being paid anything.
Part of what makes the tactic irritating is that it is being planned by the people who are supposed to be at the rear of the line in case of bankruptcy — the people who own the equity. In theory, they should not get anything unless all the creditors are first paid in full. In reality, they often can get away with changing the rules.
Realogy wants to make up to $650 million in debt disappear, trading $500 million of new loans for $1.15 billion of old bonds.
The new loans have no guarantee of being paid off, either, but they are not only senior to the old ones, they also mature a few months earlier. There is a possibility that the bondholders who refuse the deal will receive nothing in the end.
All this is possible because companies, in most cases, do not owe fiduciary duties to their bondholders, as they do to their creditors. This transaction is a contractual one, and if a tactic is allowed by the contract, the courts generally will not stop it.
Realogy claims it has the approval of senior creditors to issue more debt, and says that is all that is needed. Of course, those creditors have no reason to care. Their claims will remain senior to everyone else’s. It is sort of like getting Jimmy’s permission to hit Bobby. Bobby may not think Jimmy was the right person to ask.
Realogy has yet to violate the covenants on its bonds, but its business is suffering and it is reasonable to think that covenant violations are possible. Revenue so far this year is down 21 percent, and the company has not been able to cut costs that fast. Losses are rising.
One part of Realogy’s business is faring well. Revenue is soaring at a subsidiary that sells foreclosed homes. It reports that in the third quarter business was up 91 percent compared with a year earlier in the Sacramento area. But that is not enough to offset the growing problems in other operations.
The bonds are trading as if disaster is all but certain, all at prices under 20 cents on the dollar. Some of them are going for prices that assure a profit if the bond simply pays interest for the next 18 months before becoming totally worthless.
Realogy disclosed this week that a lawyer claiming to represent owners of a majority of one class of bonds had threatened to sue, arguing the offering violated bond indentures. The company did not identify the lawyer, but one person involved in the case said Carl C. Icahn, the financier, owned the bonds. Mr. Icahn declined to comment.
Realogy became an independent company in July 2006, just a few months before Apollo swooped in to buy it. It began trading when Cendant, a franchising conglomerate that had fought back from what was, before Enron, the largest accounting fraud in American history, split into four pieces.
Realogy was the only one of the four that worked out for shareholders, selling to Apollo for 19 percent more than the shares were worth just after the split-up. The other three — PHH, a mortgage services company; Wyndham Worldwide, which franchises hotel brands like Days Inn and Ramada; and Avis Budget, the car rental company — have all plunged in the recession. PHH, with a 72 percent decline, is the best performer of the three. Avis Budget, down 97 percent, is the worst.
As it turned out, Cendant split up not long before bad times arrived at virtually all of its businesses. Apollo, which did not see what was coming, now wants those who lent it money to share the pain.
Copyright 2008 The New York Times Company. All rights reserved.
It was as badly timed a takeover as there was during the private equity boom.
At the end of 2006, Apollo Management, the private equity firm headed by Leon Black, agreed to buy Realogy, a conglomerate with a number of franchised real estate businesses, among them Century 21 and Coldwell Banker, for $7 billion in cash.
That was a few months after house prices peaked. By the next spring, when the deal closed, subprime mortgage lenders were starting to go broke. The great housing bubble was bursting, and that was very bad news for a company whose revenue was based on how many homes it could sell and how high the prices were.
Now a struggle is emerging over how the unfortunate lenders should be treated. Realogy, under the direction of Apollo, is using a classic divide-and-conquer strategy. Bondholders are screaming that the tactics are illegal.
The strategy is simple: Just tell one group of bondholders that they can move up in the capital structure (and thus be more likely to be paid if the company goes broke). But first, they have to agree to forget about collecting most of the money they are owed. They are being asked to trade in old bonds for new loans with much smaller face values.
Overindebted consumers can only look on with envy, wishing they could pull off something similar, perhaps by telling one credit card company that they will pay another card company first unless the first company agrees to forgive most of what it is owed.
No owner of Realogy bonds has to make the exchange, of course. But if a bondholder turns it down, and others do make the exchange, that bondholder may find that he is much farther back in line, with even less probability of being paid anything.
Part of what makes the tactic irritating is that it is being planned by the people who are supposed to be at the rear of the line in case of bankruptcy — the people who own the equity. In theory, they should not get anything unless all the creditors are first paid in full. In reality, they often can get away with changing the rules.
Realogy wants to make up to $650 million in debt disappear, trading $500 million of new loans for $1.15 billion of old bonds.
The new loans have no guarantee of being paid off, either, but they are not only senior to the old ones, they also mature a few months earlier. There is a possibility that the bondholders who refuse the deal will receive nothing in the end.
All this is possible because companies, in most cases, do not owe fiduciary duties to their bondholders, as they do to their creditors. This transaction is a contractual one, and if a tactic is allowed by the contract, the courts generally will not stop it.
Realogy claims it has the approval of senior creditors to issue more debt, and says that is all that is needed. Of course, those creditors have no reason to care. Their claims will remain senior to everyone else’s. It is sort of like getting Jimmy’s permission to hit Bobby. Bobby may not think Jimmy was the right person to ask.
Realogy has yet to violate the covenants on its bonds, but its business is suffering and it is reasonable to think that covenant violations are possible. Revenue so far this year is down 21 percent, and the company has not been able to cut costs that fast. Losses are rising.
One part of Realogy’s business is faring well. Revenue is soaring at a subsidiary that sells foreclosed homes. It reports that in the third quarter business was up 91 percent compared with a year earlier in the Sacramento area. But that is not enough to offset the growing problems in other operations.
The bonds are trading as if disaster is all but certain, all at prices under 20 cents on the dollar. Some of them are going for prices that assure a profit if the bond simply pays interest for the next 18 months before becoming totally worthless.
Realogy disclosed this week that a lawyer claiming to represent owners of a majority of one class of bonds had threatened to sue, arguing the offering violated bond indentures. The company did not identify the lawyer, but one person involved in the case said Carl C. Icahn, the financier, owned the bonds. Mr. Icahn declined to comment.
Realogy became an independent company in July 2006, just a few months before Apollo swooped in to buy it. It began trading when Cendant, a franchising conglomerate that had fought back from what was, before Enron, the largest accounting fraud in American history, split into four pieces.
Realogy was the only one of the four that worked out for shareholders, selling to Apollo for 19 percent more than the shares were worth just after the split-up. The other three — PHH, a mortgage services company; Wyndham Worldwide, which franchises hotel brands like Days Inn and Ramada; and Avis Budget, the car rental company — have all plunged in the recession. PHH, with a 72 percent decline, is the best performer of the three. Avis Budget, down 97 percent, is the worst.
As it turned out, Cendant split up not long before bad times arrived at virtually all of its businesses. Apollo, which did not see what was coming, now wants those who lent it money to share the pain.
Copyright 2008 The New York Times Company. All rights reserved.
Monday, November 24, 2008
New York Times: Downturn Drags More Consumers Into Bankruptcy
By TARA SIEGEL BERNARD and JENNY ANDERSON
Published: November 15, 2008
The economy’s deep troubles are pushing a growing number of already struggling consumers into bankruptcy, often with far more debt than those who filed in previous downturns.
Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent mixture. While all the usual reasons that distressed borrowers seek bankruptcy — job loss, medical bills, divorce — play significant roles, new economic forces are changing the calculus of who can ride out the tough times and who cannot.
The number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years, said Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company.
Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007.
Robert M. Lawless, a professor at the University of Illinois College of Law, pointed to the tightening of credit by banks as a significant factor in the increase in October. As banks have pulled back on lending, he said, consumers have been finding it more difficult, and in many cases impossible, to use credit cards, refinance their home mortgages or fall back on their home equity lines to get them through a rough period.
“A credit crunch can drive people into bankruptcy today rather than later as sources of lending dry up,” Professor Lawless said. “With the consumer credit tightening and the economy in a nosedive, this pop could just be the beginning of a long-term rise in the bankruptcy filing rate to levels that are even higher than we had before the 2005 bankruptcy law.”
Not only are filings up, but recent filers have had much more credit card debt, often run up in an attempt to keep current on a mortgage that now exceeds the value of their home, bankruptcy lawyers said in interviews.
A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001.
Their incomes, meanwhile, remained static over those six years, according to the study, which used data from the 2007 Consumer Bankruptcy Project, a joint effort of law professors, sociologists and physicians. Researchers surveyed 2,500 households nationwide that filed for bankruptcy in February and March 2007.
“Earlier downturns followed strong booms, so families went into recessions with higher incomes and lower debt loads,” said Elizabeth Warren, a professor at Harvard Law School and, along with Professor Lawless, part of the Bankruptcy Project team. “But the fundamentals are off for families even before we hit the recession this time, so bankruptcy filings are likely to rise faster.”
Not surprisingly, filings are increasing most rapidly in states where real estate values skyrocketed and then crashed, including Nevada, California and Florida. In Nevada, bankruptcy filings in October were up 70 percent compared with last year. In California, bankruptcies jumped 80 percent in the same period, while Florida’s filings rose 62 percent.
In those regions, some people are trying to rescue their homes through bankruptcy proceedings, but many are just as relieved to walk away, shedding layers of debt that otherwise would have taken decades to pay off.
Tony and Carrie Forsyth, both 30, chose not to walk away from their house in Florida. The couple said they thought their financial situation would improve in 2006, when Mr. Forsyth accepted a promotion from his employer, a Michigan food distributor, that required them to move to Florida. But they could not sell their home in Ypsilanti, Mich., so they decided to rent it out.
In June 2006, the couple headed south and bought a house for $220,000 in Tamarac, Fla., with no money down. Five months later, their tenants in Michigan stopped paying, and the family had to carry two mortgage payments, just as the adjustable-rate mortgage on their Michigan home reset to a higher interest rate. They lost the Michigan home to foreclosure in February 2007.
By that time, however, the couple, who have two young daughters, were using credit cards to pay for food, utilities and clothes. After accumulating about $20,000 in debt, they said, they realized that bankruptcy was the only way they could remain in their Florida home, whose value, meanwhile, had plunged 25 percent. They filed for Chapter 13 bankruptcy protection this year, which permitted them to keep the house, and they agreed to repay a portion of their debts over the next three years.
A Chapter 7 bankruptcy, by contrast, provides filers with what is known as a “fresh start” because debts are forgiven. In this case, assets are liquidated, though the states allow for various exemptions. To qualify for a Chapter 7, filers need to pass a means test to determine whether they are unable to repay their debts.
Filers who are deemed able to repay a portion of their debts must file for Chapter 13 bankruptcy. Some debtors choose Chapter 13 because it permits them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments.
Mr. Forsyth said declaring bankruptcy was a difficult step. “Because of our Christian background, it didn’t feel right,” he said. “But there was no other way for us to live and support our family unless we went that route.”
Mrs. Forsyth added: “We are just rolling with life. You have to eat. You have to have diapers.”
The Forsyths are emblematic of the new forces that have led to the sharp rise in bankruptcy filings. “Historically, a person would get behind in his mortgage because of a temporarily catastrophic financial event, such as job loss, divorce, illness,” said Chip Parker, a bankruptcy lawyer in Jacksonville, Fla. “However, when these adjustable-rate mortgages started resetting from their teaser rate and clients couldn’t refinance their way out of trouble, they were getting behind even though there was no catastrophic event.”
Bankruptcy lawyers report that they have been having more consultations with middle-class families with six-figure incomes — including many who either bought a home during the boom or pulled out most or all of their available home equity just keep to up with the cost of living. Also caught up in the bankruptcies are real estate investors, who hoped to flip properties they had bought near the height of the market.
“There are a lot of foreclosures that haven’t taken place yet because people still have available credit,” said Jeffrey H. Tromberg, a bankruptcy lawyer in Fort Lauderdale, Fla. “We don’t see them until they’ve maxed out their credit cards.”
A similar pattern has emerged in Las Vegas, where more people are filing for Chapter 7 bankruptcy protection because it makes more financial sense to walk away from their homes. Real estate values have plummeted, and now the local economy is also suffering. Car salesmen and casino dealers are being laid off. Valet parking attendants and masseuses are collecting less in tips.
“My clients are basically good people that got into a home the best way they could and can no longer meet their obligations because their income has gone down,” said Roger P. Croteau, a lawyer in Las Vegas who concentrates on bankruptcy. “There is no equity to pay off their credit cards, and they are maxed out. They haven’t saved enough because of housing costs.”
Ellen Stoebling, a bankruptcy lawyer in Las Vegas, added: “People are using their cards to try and hold onto their property for as long as possible in hopes they can somehow talk some sense into their lender and stay in the property.”
The problems are not limited to people with adjustable-rate mortgages and homes that are now worth less than they owe. Job losses are also playing a role. Bankruptcies are also up sharply in Delaware, Rhode Island and Indiana, where the unemployment rates have been climbing.
And, of course, some people continue to seek bankruptcy for the usual reasons.
Lisa Marquis, a 35-year-old mother of five in Indiana, has no medical insurance but has undergone 21 operations in the last nine years, some related to emphysema and other respiratory diseases, and others related to accidents and several miscarriages.
Mrs. Marquis cannot work, but her husband earns $13.50 an hour as a truck driver — a salary that makes them ineligible for Medicaid but unable to pay their medical bills. Earlier this year, the family had to leave the mobile home they owned because the mold there was making it hard for her to breathe; they moved into a house where they paid more than $600 a month in rent. Mr. Marquis was spending three days a week in court fending off angry creditors, cutting down on the number of hours he could work.
In April, facing more than $114,000 in medical bills and less available overtime work, the Marquises filed for Chapter 13 bankruptcy — the third time in less than 10 years that Mrs. Marquis had to file for protection because of medical bills. Because the latest filing is a Chapter 13, they have agreed to pay some of their debts.
“We could have waited to do a 7,” Mrs. Marquis said. “I want to pay my debts. I didn’t want to cheat people who helped to save my life.”
Despite the rise in bankruptcies, academics and lawyers say they believe that many others have been discouraged from filing because of the 2005 bankruptcy law.
Ms. Warren, the Harvard law professor, said many borrowers had been left with the mistaken impression that they could no longer file. And, she argued, “the widespread perception that bankruptcy is not available to help families makes this economic crisis worse.”
Published: November 15, 2008
The economy’s deep troubles are pushing a growing number of already struggling consumers into bankruptcy, often with far more debt than those who filed in previous downturns.
Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent mixture. While all the usual reasons that distressed borrowers seek bankruptcy — job loss, medical bills, divorce — play significant roles, new economic forces are changing the calculus of who can ride out the tough times and who cannot.
The number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years, said Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company.
Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007.
Robert M. Lawless, a professor at the University of Illinois College of Law, pointed to the tightening of credit by banks as a significant factor in the increase in October. As banks have pulled back on lending, he said, consumers have been finding it more difficult, and in many cases impossible, to use credit cards, refinance their home mortgages or fall back on their home equity lines to get them through a rough period.
“A credit crunch can drive people into bankruptcy today rather than later as sources of lending dry up,” Professor Lawless said. “With the consumer credit tightening and the economy in a nosedive, this pop could just be the beginning of a long-term rise in the bankruptcy filing rate to levels that are even higher than we had before the 2005 bankruptcy law.”
Not only are filings up, but recent filers have had much more credit card debt, often run up in an attempt to keep current on a mortgage that now exceeds the value of their home, bankruptcy lawyers said in interviews.
A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001.
Their incomes, meanwhile, remained static over those six years, according to the study, which used data from the 2007 Consumer Bankruptcy Project, a joint effort of law professors, sociologists and physicians. Researchers surveyed 2,500 households nationwide that filed for bankruptcy in February and March 2007.
“Earlier downturns followed strong booms, so families went into recessions with higher incomes and lower debt loads,” said Elizabeth Warren, a professor at Harvard Law School and, along with Professor Lawless, part of the Bankruptcy Project team. “But the fundamentals are off for families even before we hit the recession this time, so bankruptcy filings are likely to rise faster.”
Not surprisingly, filings are increasing most rapidly in states where real estate values skyrocketed and then crashed, including Nevada, California and Florida. In Nevada, bankruptcy filings in October were up 70 percent compared with last year. In California, bankruptcies jumped 80 percent in the same period, while Florida’s filings rose 62 percent.
In those regions, some people are trying to rescue their homes through bankruptcy proceedings, but many are just as relieved to walk away, shedding layers of debt that otherwise would have taken decades to pay off.
Tony and Carrie Forsyth, both 30, chose not to walk away from their house in Florida. The couple said they thought their financial situation would improve in 2006, when Mr. Forsyth accepted a promotion from his employer, a Michigan food distributor, that required them to move to Florida. But they could not sell their home in Ypsilanti, Mich., so they decided to rent it out.
In June 2006, the couple headed south and bought a house for $220,000 in Tamarac, Fla., with no money down. Five months later, their tenants in Michigan stopped paying, and the family had to carry two mortgage payments, just as the adjustable-rate mortgage on their Michigan home reset to a higher interest rate. They lost the Michigan home to foreclosure in February 2007.
By that time, however, the couple, who have two young daughters, were using credit cards to pay for food, utilities and clothes. After accumulating about $20,000 in debt, they said, they realized that bankruptcy was the only way they could remain in their Florida home, whose value, meanwhile, had plunged 25 percent. They filed for Chapter 13 bankruptcy protection this year, which permitted them to keep the house, and they agreed to repay a portion of their debts over the next three years.
A Chapter 7 bankruptcy, by contrast, provides filers with what is known as a “fresh start” because debts are forgiven. In this case, assets are liquidated, though the states allow for various exemptions. To qualify for a Chapter 7, filers need to pass a means test to determine whether they are unable to repay their debts.
Filers who are deemed able to repay a portion of their debts must file for Chapter 13 bankruptcy. Some debtors choose Chapter 13 because it permits them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments.
Mr. Forsyth said declaring bankruptcy was a difficult step. “Because of our Christian background, it didn’t feel right,” he said. “But there was no other way for us to live and support our family unless we went that route.”
Mrs. Forsyth added: “We are just rolling with life. You have to eat. You have to have diapers.”
The Forsyths are emblematic of the new forces that have led to the sharp rise in bankruptcy filings. “Historically, a person would get behind in his mortgage because of a temporarily catastrophic financial event, such as job loss, divorce, illness,” said Chip Parker, a bankruptcy lawyer in Jacksonville, Fla. “However, when these adjustable-rate mortgages started resetting from their teaser rate and clients couldn’t refinance their way out of trouble, they were getting behind even though there was no catastrophic event.”
Bankruptcy lawyers report that they have been having more consultations with middle-class families with six-figure incomes — including many who either bought a home during the boom or pulled out most or all of their available home equity just keep to up with the cost of living. Also caught up in the bankruptcies are real estate investors, who hoped to flip properties they had bought near the height of the market.
“There are a lot of foreclosures that haven’t taken place yet because people still have available credit,” said Jeffrey H. Tromberg, a bankruptcy lawyer in Fort Lauderdale, Fla. “We don’t see them until they’ve maxed out their credit cards.”
A similar pattern has emerged in Las Vegas, where more people are filing for Chapter 7 bankruptcy protection because it makes more financial sense to walk away from their homes. Real estate values have plummeted, and now the local economy is also suffering. Car salesmen and casino dealers are being laid off. Valet parking attendants and masseuses are collecting less in tips.
“My clients are basically good people that got into a home the best way they could and can no longer meet their obligations because their income has gone down,” said Roger P. Croteau, a lawyer in Las Vegas who concentrates on bankruptcy. “There is no equity to pay off their credit cards, and they are maxed out. They haven’t saved enough because of housing costs.”
Ellen Stoebling, a bankruptcy lawyer in Las Vegas, added: “People are using their cards to try and hold onto their property for as long as possible in hopes they can somehow talk some sense into their lender and stay in the property.”
The problems are not limited to people with adjustable-rate mortgages and homes that are now worth less than they owe. Job losses are also playing a role. Bankruptcies are also up sharply in Delaware, Rhode Island and Indiana, where the unemployment rates have been climbing.
And, of course, some people continue to seek bankruptcy for the usual reasons.
Lisa Marquis, a 35-year-old mother of five in Indiana, has no medical insurance but has undergone 21 operations in the last nine years, some related to emphysema and other respiratory diseases, and others related to accidents and several miscarriages.
Mrs. Marquis cannot work, but her husband earns $13.50 an hour as a truck driver — a salary that makes them ineligible for Medicaid but unable to pay their medical bills. Earlier this year, the family had to leave the mobile home they owned because the mold there was making it hard for her to breathe; they moved into a house where they paid more than $600 a month in rent. Mr. Marquis was spending three days a week in court fending off angry creditors, cutting down on the number of hours he could work.
In April, facing more than $114,000 in medical bills and less available overtime work, the Marquises filed for Chapter 13 bankruptcy — the third time in less than 10 years that Mrs. Marquis had to file for protection because of medical bills. Because the latest filing is a Chapter 13, they have agreed to pay some of their debts.
“We could have waited to do a 7,” Mrs. Marquis said. “I want to pay my debts. I didn’t want to cheat people who helped to save my life.”
Despite the rise in bankruptcies, academics and lawyers say they believe that many others have been discouraged from filing because of the 2005 bankruptcy law.
Ms. Warren, the Harvard law professor, said many borrowers had been left with the mistaken impression that they could no longer file. And, she argued, “the widespread perception that bankruptcy is not available to help families makes this economic crisis worse.”
Wednesday, November 12, 2008
Negotiating Better Terms for Mortgage
By RON LIEBER
You don’t need to be behind on your mortgage payments to ask for a better deal from your bank.
Surprised? It’s easy to see why. The government’s announcement on Tuesday that Fannie Mae and Freddie Mac would modify terms for borrowers who are at least 90 days late with their payments makes it seem as if only the delinquent are eligible for a personal bailout.
But 90 percent or so of homeowners are still current with their payments, and for them, it has often seemed as if the banks were playing a game of chicken. Sorry, but until you blow off the payments for a few months running and wreck your credit in the process, the lender won’t even consider renegotiating the terms.
On Monday, however, Citigroup announced a pre-emptive campaign to talk to people before they fall behind on their payments. It plans to reach out to borrowers in distressed areas, including Arizona, California, Florida, Indiana, Michigan, Nevada and Ohio, and offer new terms to those who anticipate trouble making their payments.
And it turns out that other banks may also be willing to negotiate with borrowers who are current with their payments, even if they aren’t promoting it as aggressively as Citi.
JPMorgan Chase, HSBC and Bank of America, which took over Countrywide and its soured mortgage portfolio, have modified terms for such borrowers. And some of these adjustments are patterned after plans that the Federal Deposit Insurance Corporation put into place after it took over IndyMac.
There are several prerequisites to consider if you’re a borrower who is paying on time and wants some kind of a break. The home in question must be your primary residence. And the banks generally need to have your mortgage on their books and not have sold it off to Fannie Mae or Freddie Mac or someone else.
Then, the big question will be how financially strained you are. Perhaps your loan is about to adjust to a higher rate that is barely affordable — or already has. Or maybe you live in a two-income household where one income has disappeared or fallen drastically because of reduced sales commissions. Or, possibly, you lied about how much money you were making when you applied for a mortgage back in 2006 when nobody bothered checking.
Whatever the reason, the bank wants to know your current debt to (pretax) income ratio. If your monthly household income is $10,000, the bank may consider you overburdened if you’re paying more than $4,000 or so toward your housing costs, or 40 percent of your income. So don’t bother trying to get a better deal if your percentage is down near 25 percent.
If you think you may qualify, then you need to figure out whom to talk to. You should expect that every major mortgage lender or servicer is utterly overwhelmed right now. Calling the 800 number on your bank statement may lead to long hold times or representatives confused about changing internal guidelines.
Try asking immediately to speak to a loss mitigation or workout specialist. Chase has helpfully set up a separate number, (866) 550-5705, to take customers of Chase, EMC Mortgage and Washington Mutual straight to a loan modification specialist. Whomever you’re dealing with, write down everything they say and get the phone extension for people who are particularly helpful so you can talk to them again when things go wrong.
Then, expect a grilling. Chase will want a hardship letter, explaining what has gone wrong and why you need a break on your loan terms. A bank may ask for your last few pay stubs, a few years of tax returns and other financial information. “Expect to have your numbers crunched pretty hard,” said a Chase spokesman, Tom Kelly.
A bank may turn you down because you’re not struggling enough. Or, if you’re out of work, the bank may decide that foreclosure will be cleaner than lowering your payments to a level that you still won’t be able to afford.
If you do get a better deal — and it’s possible that very few people current on a 30-year fixed-rate mortgage will — don’t expect much of a gift. As far as the banks are concerned, they want to extract as much as possible, as long as it doesn’t break you.
In reducing the size of your monthly payments, they can play with the interest rate or the principal owed, either temporarily or permanently. If at all possible, the banks want any adjustment to be temporary and would prefer not to reduce the principal owed by a single penny.
At IndyMac, many mortgage customers whose payments were about to adjust upward to unaffordable levels were switched into loans with much lower interest rates for five years. The alterations are aimed at keeping the debt-to-income ratio at 38 percent or below. Then, the rate adjusts upward by no more than 1 percentage point each year until it hits the prevailing average at that point.
Other banks are doing something called principal forbearance. There, the bank carves off a chunk of the money you owe and puts it aside. You continue making payments, now lowered, on the rest of the loan. When you sell or refinance later, however, the bank adds that chunk back onto the total amount you must repay. By then, it is hoped, the value of the home has rebounded or you’ve built up enough equity to make the bank whole.
Alas, this is not exactly a handout. We’re not at the point yet where widespread offers of no-strings reductions in principal are available (or mandated by the government). But banks do seem to hope that if they continue to offer a bit more flexibility in dribs and drabs every few months, borrowers will forget that they owe $100,000 more than their home is worth and remember that they like their neighborhood and don’t want to turn the keys over to the bank.
So if you’re devoting a big chunk of your income to dutifully sending the mortgage lender a check, it may be worth calling to see if you can figure out a way to make the payment smaller.
Report your loan modification to rlieber@nytimes.com.
Copyright 2008 The New York Times Company. All rights reserved.
You don’t need to be behind on your mortgage payments to ask for a better deal from your bank.
Surprised? It’s easy to see why. The government’s announcement on Tuesday that Fannie Mae and Freddie Mac would modify terms for borrowers who are at least 90 days late with their payments makes it seem as if only the delinquent are eligible for a personal bailout.
But 90 percent or so of homeowners are still current with their payments, and for them, it has often seemed as if the banks were playing a game of chicken. Sorry, but until you blow off the payments for a few months running and wreck your credit in the process, the lender won’t even consider renegotiating the terms.
On Monday, however, Citigroup announced a pre-emptive campaign to talk to people before they fall behind on their payments. It plans to reach out to borrowers in distressed areas, including Arizona, California, Florida, Indiana, Michigan, Nevada and Ohio, and offer new terms to those who anticipate trouble making their payments.
And it turns out that other banks may also be willing to negotiate with borrowers who are current with their payments, even if they aren’t promoting it as aggressively as Citi.
JPMorgan Chase, HSBC and Bank of America, which took over Countrywide and its soured mortgage portfolio, have modified terms for such borrowers. And some of these adjustments are patterned after plans that the Federal Deposit Insurance Corporation put into place after it took over IndyMac.
There are several prerequisites to consider if you’re a borrower who is paying on time and wants some kind of a break. The home in question must be your primary residence. And the banks generally need to have your mortgage on their books and not have sold it off to Fannie Mae or Freddie Mac or someone else.
Then, the big question will be how financially strained you are. Perhaps your loan is about to adjust to a higher rate that is barely affordable — or already has. Or maybe you live in a two-income household where one income has disappeared or fallen drastically because of reduced sales commissions. Or, possibly, you lied about how much money you were making when you applied for a mortgage back in 2006 when nobody bothered checking.
Whatever the reason, the bank wants to know your current debt to (pretax) income ratio. If your monthly household income is $10,000, the bank may consider you overburdened if you’re paying more than $4,000 or so toward your housing costs, or 40 percent of your income. So don’t bother trying to get a better deal if your percentage is down near 25 percent.
If you think you may qualify, then you need to figure out whom to talk to. You should expect that every major mortgage lender or servicer is utterly overwhelmed right now. Calling the 800 number on your bank statement may lead to long hold times or representatives confused about changing internal guidelines.
Try asking immediately to speak to a loss mitigation or workout specialist. Chase has helpfully set up a separate number, (866) 550-5705, to take customers of Chase, EMC Mortgage and Washington Mutual straight to a loan modification specialist. Whomever you’re dealing with, write down everything they say and get the phone extension for people who are particularly helpful so you can talk to them again when things go wrong.
Then, expect a grilling. Chase will want a hardship letter, explaining what has gone wrong and why you need a break on your loan terms. A bank may ask for your last few pay stubs, a few years of tax returns and other financial information. “Expect to have your numbers crunched pretty hard,” said a Chase spokesman, Tom Kelly.
A bank may turn you down because you’re not struggling enough. Or, if you’re out of work, the bank may decide that foreclosure will be cleaner than lowering your payments to a level that you still won’t be able to afford.
If you do get a better deal — and it’s possible that very few people current on a 30-year fixed-rate mortgage will — don’t expect much of a gift. As far as the banks are concerned, they want to extract as much as possible, as long as it doesn’t break you.
In reducing the size of your monthly payments, they can play with the interest rate or the principal owed, either temporarily or permanently. If at all possible, the banks want any adjustment to be temporary and would prefer not to reduce the principal owed by a single penny.
At IndyMac, many mortgage customers whose payments were about to adjust upward to unaffordable levels were switched into loans with much lower interest rates for five years. The alterations are aimed at keeping the debt-to-income ratio at 38 percent or below. Then, the rate adjusts upward by no more than 1 percentage point each year until it hits the prevailing average at that point.
Other banks are doing something called principal forbearance. There, the bank carves off a chunk of the money you owe and puts it aside. You continue making payments, now lowered, on the rest of the loan. When you sell or refinance later, however, the bank adds that chunk back onto the total amount you must repay. By then, it is hoped, the value of the home has rebounded or you’ve built up enough equity to make the bank whole.
Alas, this is not exactly a handout. We’re not at the point yet where widespread offers of no-strings reductions in principal are available (or mandated by the government). But banks do seem to hope that if they continue to offer a bit more flexibility in dribs and drabs every few months, borrowers will forget that they owe $100,000 more than their home is worth and remember that they like their neighborhood and don’t want to turn the keys over to the bank.
So if you’re devoting a big chunk of your income to dutifully sending the mortgage lender a check, it may be worth calling to see if you can figure out a way to make the payment smaller.
Report your loan modification to rlieber@nytimes.com.
Copyright 2008 The New York Times Company. All rights reserved.
Wednesday, November 05, 2008
Letter to Senators Schumer and Clinton regarding allowing Bankruptcy Judges to modify mortgages in Chapter 13 bankruptcy
Dear Senators Schumer and Clinton:
I wanted to congratulate you on a spectacular election for Senate Democrats. Both of you deserve a great deal of credit for your roles in last night’s gain of seats for your caucus in the Senate.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
Now that Democrats have increased their control of the Senate and President-elect Obama has expressed his support for allowing bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases, we would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
James Shenwick
I wanted to congratulate you on a spectacular election for Senate Democrats. Both of you deserve a great deal of credit for your roles in last night’s gain of seats for your caucus in the Senate.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
Now that Democrats have increased their control of the Senate and President-elect Obama has expressed his support for allowing bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases, we would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
James Shenwick
Wednesday, October 29, 2008
Fraudulent Transfers to Employees
Shenwick & Associates has recently received calls from employees of struggling businesses inquiring whether bonuses paid to employees are recoverable in bankruptcy. These inquiries stem from recent articles in the New York Times, CFO.com, and Creditslips.org that discuss the possibility that the Bankruptcy Code may allow Lehman Brothers as a debtor-in-possession to "claw back" some of the $5.7 billion in bonuses that were paid out to its employees and executives in the past year.
Under section 548 of the Bankruptcy Code, a trustee in bankruptcy can recover fraudulent transfers made prior to bankruptcy. Specifically, section 548(a)(1)(B) of the Bankruptcy Code allows recovery by the debtor-in-possession if constructive fraud exists. Constructive fraud exists if the debtor: (1) made a transfer within 2 years of the filing of its bankruptcy petition; (2) received less than "reasonable equivalent value" in exchange for the transfer; and (3) either was insolvent at the time the transfer was made, made insolvent by the transfer, or the transfer was made to the benefit of an insider under an employment contract and not in the "ordinary course of business."
In a post on Creditslips.org, Adam Levitin, a professor of law at Georgetown University, stated that the third element would likely be the deciding factor if a fraudulent transfer claim was filed in the Lehman Brothers bankruptcy case. He reasoned that the first two elements were easily established because the bonuses being challenged were made within one year of the bankruptcy petition and generally, bonuses that are paid in addition to a salary are clearly transfers made for less than reasonable equivalent value.
It is this author's experience that in these cases the third factor is always the key factor. The defenses available to an employee who seek to retain his or her bonus are that the company was solvent when the bonus was paid or the bonus was made in the ordinary course of business.
Accordingly, regardless of insolvency, Lehman Brothers may succeed in a fraudulent transfer claim if it can establish that the bonuses were made to insiders and were not made in the ordinary course of business.
For more information about the recovery of bonuses under the Bankruptcy Code, please contact Jim Shenwick.
Under section 548 of the Bankruptcy Code, a trustee in bankruptcy can recover fraudulent transfers made prior to bankruptcy. Specifically, section 548(a)(1)(B) of the Bankruptcy Code allows recovery by the debtor-in-possession if constructive fraud exists. Constructive fraud exists if the debtor: (1) made a transfer within 2 years of the filing of its bankruptcy petition; (2) received less than "reasonable equivalent value" in exchange for the transfer; and (3) either was insolvent at the time the transfer was made, made insolvent by the transfer, or the transfer was made to the benefit of an insider under an employment contract and not in the "ordinary course of business."
In a post on Creditslips.org, Adam Levitin, a professor of law at Georgetown University, stated that the third element would likely be the deciding factor if a fraudulent transfer claim was filed in the Lehman Brothers bankruptcy case. He reasoned that the first two elements were easily established because the bonuses being challenged were made within one year of the bankruptcy petition and generally, bonuses that are paid in addition to a salary are clearly transfers made for less than reasonable equivalent value.
It is this author's experience that in these cases the third factor is always the key factor. The defenses available to an employee who seek to retain his or her bonus are that the company was solvent when the bonus was paid or the bonus was made in the ordinary course of business.
Accordingly, regardless of insolvency, Lehman Brothers may succeed in a fraudulent transfer claim if it can establish that the bonuses were made to insiders and were not made in the ordinary course of business.
For more information about the recovery of bonuses under the Bankruptcy Code, please contact Jim Shenwick.
Monday, October 27, 2008
New York Times: Banks Mine Data and Woo Troubled Borrowers
By BRAD STONE
Published: October 21, 2008
Brenda Jerez hardly seems like the kind of person lenders would fight over.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” Brenda Jerez said of credit offers.
Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.
For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.
“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”
Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.
Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.
They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.
These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.
These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”
This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.
The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.
“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”
Compiling Histories
To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.
Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.
The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.
“It almost seems like they are trying to get you into trouble,” he says.
The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.
During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.
The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.
Profiling Methods
Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.
In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.
One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.
The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.
The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.
An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”
Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.
In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.
At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.
“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”
“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.
The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.
What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.
“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.
Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.
“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.
Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.
Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.
“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”
Decrease in Mailings
In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.
Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.
Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.
For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.
Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.
He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.
The campaign flopped. “It was just too eerie,” Mr. Harvey said.
Copyright 2008 The New York Times Company. All rights reserved.
Published: October 21, 2008
Brenda Jerez hardly seems like the kind of person lenders would fight over.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” Brenda Jerez said of credit offers.
Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.
For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.
“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”
Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.
Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.
They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.
These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.
These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”
This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.
The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.
“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”
Compiling Histories
To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.
Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.
The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.
“It almost seems like they are trying to get you into trouble,” he says.
The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.
During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.
The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.
Profiling Methods
Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.
In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.
One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.
The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.
The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.
An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”
Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.
In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.
At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.
“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”
“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.
The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.
What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.
“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.
Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.
“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.
Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.
Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.
“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”
Decrease in Mailings
In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.
Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.
Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.
For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.
Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.
He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.
The campaign flopped. “It was just too eerie,” Mr. Harvey said.
Copyright 2008 The New York Times Company. All rights reserved.
Monday, October 13, 2008
New York Times article-One Thing You Can Control: Your Credit Score
By Ron Lieber
It’s been nearly impossible to think about much other than retirement, college or other savings in recent days. The pain has been all too acute and, unfortunately, the damage is not contained. Lurking beyond the devastation in the markets are other problems, like the fact that consumers are having an increasingly hard time getting loans.
I know it seems odd to think about your own creditworthiness at a time like this. Isn’t borrowing what got the world into this mess in the first place?
Your credit score, however, is something that you have a fair bit of control over, since it reflects your behavior as a borrower. Right about now, focusing on something within your control may feel like real progress. Last week, we started down that road with a look at budgets and spending, and there’s more to come.
Credit matters if you need a new mortgage because you have to move for your current job (or a new job if you lose your old one). It matters for many of the loans you may use to send a child to college. And it matters if you need to use credit cards for a time because your income has fallen or disappeared and there is no other option.
You don’t always know ahead of time when your creditworthiness will be a factor. But if an immediate need to borrow emerges, which it may for any number of people in the coming months, there will be no time to fix any problems. That’s why it’s a good idea to focus on it now.
Lenders are already rendering harsher judgments, and they’re likely to get even tougher. The Federal Reserve Board survey of senior bank loan officers in July, the most recent such survey, showed tightening lending standards across every major loan category.
“It’s a 10,000-decibel wake-up call and a slap in the face to people who viewed credit as a right rather than a privilege,” John R. Ulzheimer, the author of “You’re Nothing But a Number.”
That number he wrote about is the almighty FICO score. A company called Fair Isaac supplies the formula that generates the score. The three major credit bureaus, Equifax, Experian, and TransUnion, create their own versions of the FICO score using data from the credit reports they keep on you. They also, confusingly, create their own alternative credit scores, but more about those another time. For today’s column, the term “credit score” is synonymous with FICO score.
If you want to see the credit history that serves as data for the score, you can get a free copy of your credit report free each year, once from each of the bureaus, at annualcreditreport.com. If you want to see the FICO scores themselves, you can pay $47.85 for the three of them at myfico.com. Click “products,” then select the “FICO Credit Complete” package.
The median FICO score is roughly 720, according to Fair Isaac, though that number will probably drift a bit lower in the coming months. That’s a good SAT math score, but a score at that level may cause some problems as lenders get more strict.
So first, let’s review the new standards in a few major lending categories, keeping in mind that banks do make exceptions in some cases. Then, let’s look at some tips for improving your credit standing.
CREDIT CARDS If you’re looking to get the best interest rate or some of the richest reward offerings, representatives from card shopping sites like cardratings.com and creditcards.com figure you will need at least a score in the 720 to 750 range right now.
For a card with a credit limit of $20,000 or $25,000, a score closer to 700 was often adequate until recently, said Mr. Ulzheimer, the author, who is also the president of consumer education for credit.com, a credit information and application site.
The Fed loan officer survey said that 65 percent of domestic banks had tightened lending standards for cards, up from 30 percent in its April survey.
AUTO LOANS It’s not easy to get one right now. In 2007, 83 percent of people who applied for one got one, according to CNW Marketing Research of Bandon, Ore. The approval rate this year? Sixty percent, through Oct. 8.
Meanwhile, the minimum credit score required for the very best rate was 786 at the end of September according to CNW, up from 741 a year ago. Marc Cannon, a spokesman for AutoNation, the largest car dealer in the United States, added that there was no magic number for good rates, because it could depend on car type, cost and loan length.
MORTGAGES Here, it’s especially hard to come up with a bottom line number, because different entities (lenders, mortgage insurers, Fannie Mae and Freddie Mac) can add fees or dictate terms. In general, the bigger your down payment, the better chance you’ll have at getting the best available rate, as long as you have a credit score of at least 740 or so.
If you can’t come up with a big down payment, there are still loans available. There is one bright spot for borrowers: The Federal Housing Administration backs certain loans that lenders make to borrowers with down payments of as little as 3 percent, even if their credit scores are below average.
If only such programs were available for lower-scoring people elsewhere. Until they are, your score remains crucial, and there are a number of things you can do to improve or preserve it.
CHECK FOR ERRORS First, examine your credit report for accounts you don’t recognize. If you find any, it may be a simple error, but it could be a sign that a thief is opening new accounts in your name.
You’ll also want to look for any incorrect indications of late payments or other black marks. If you find any, report them to the credit bureau, since the errors are probably hurting your credit score. They are supposed to respond within 30 days.
PAY ON TIME It’s obvious, but it’s also crucial, because payment history accounts for about 35 percent of the FICO calculation for the general population (it could be more, or less, for certain individuals though). Just 60 or 65 percent of credit reports show no late payments, which means a lot of other people are still messing this up.
It’s easy to get lulled into complacency when, say, doctors’ billing services decline to report you to the credit bureaus for ignoring their bills for three months. Sure, they may be lenient, but don’t think that a mortgage company won’t report you for being a single day late.
If you have trouble remembering to send in bills, pay them automatically each month through your bank account or credit card. Then, pay the card bill automatically as well each month, or set multiple reminders for yourself to pay that bill on time.
REDEFINE YOUR DEBT About 30 percent of your score reflects the amount of money you owe. If you pay your credit card bills off each month, you may think that you’re home free on this front and that your debt is zero.
But that may not be the case. The credit report data used by the FICO system show your credit limit and your end-of-month balance, before you pay the bill. If you have just one credit card with a credit limit of $5,000 and you’re spending $4,000 each month, that can rough up your score, even if you’re paying it off in full every month.
Mr. Ulzheimer, the author and credit.com educator, suggested that if you were applying for any sort of loan or card soon that you put away your other cards for a few months so that you show no balance at all. If that’s not possible or practical, lower your spending so that your monthly bills are no more than 10 percent of the available credit on all of your cards. It also may be worth asking for a higher limit on a card or two, just to improve this ratio.
BEWARE OF RETAIL CARDS Given the overall economic environment, you’ll probably be looking for savings everywhere you can find them come holiday gift-shopping season.
But stay away from those deals offering 10 percent off when you open up a store credit card account.
These cards can hurt your credit score if you open too many in a short time, and their credit limits tend to be lower than standard credit cards, Mr. Ulzheimer noted. That can contribute to the same problem he addressed in the section above.
So use an existing credit card. Or spend cash. Better yet, give cash. It may come in even handier than a great credit score in the coming months.
Copyright (c) 2008 The New York Times Company. All rights reserved.
It’s been nearly impossible to think about much other than retirement, college or other savings in recent days. The pain has been all too acute and, unfortunately, the damage is not contained. Lurking beyond the devastation in the markets are other problems, like the fact that consumers are having an increasingly hard time getting loans.
I know it seems odd to think about your own creditworthiness at a time like this. Isn’t borrowing what got the world into this mess in the first place?
Your credit score, however, is something that you have a fair bit of control over, since it reflects your behavior as a borrower. Right about now, focusing on something within your control may feel like real progress. Last week, we started down that road with a look at budgets and spending, and there’s more to come.
Credit matters if you need a new mortgage because you have to move for your current job (or a new job if you lose your old one). It matters for many of the loans you may use to send a child to college. And it matters if you need to use credit cards for a time because your income has fallen or disappeared and there is no other option.
You don’t always know ahead of time when your creditworthiness will be a factor. But if an immediate need to borrow emerges, which it may for any number of people in the coming months, there will be no time to fix any problems. That’s why it’s a good idea to focus on it now.
Lenders are already rendering harsher judgments, and they’re likely to get even tougher. The Federal Reserve Board survey of senior bank loan officers in July, the most recent such survey, showed tightening lending standards across every major loan category.
“It’s a 10,000-decibel wake-up call and a slap in the face to people who viewed credit as a right rather than a privilege,” John R. Ulzheimer, the author of “You’re Nothing But a Number.”
That number he wrote about is the almighty FICO score. A company called Fair Isaac supplies the formula that generates the score. The three major credit bureaus, Equifax, Experian, and TransUnion, create their own versions of the FICO score using data from the credit reports they keep on you. They also, confusingly, create their own alternative credit scores, but more about those another time. For today’s column, the term “credit score” is synonymous with FICO score.
If you want to see the credit history that serves as data for the score, you can get a free copy of your credit report free each year, once from each of the bureaus, at annualcreditreport.com. If you want to see the FICO scores themselves, you can pay $47.85 for the three of them at myfico.com. Click “products,” then select the “FICO Credit Complete” package.
The median FICO score is roughly 720, according to Fair Isaac, though that number will probably drift a bit lower in the coming months. That’s a good SAT math score, but a score at that level may cause some problems as lenders get more strict.
So first, let’s review the new standards in a few major lending categories, keeping in mind that banks do make exceptions in some cases. Then, let’s look at some tips for improving your credit standing.
CREDIT CARDS If you’re looking to get the best interest rate or some of the richest reward offerings, representatives from card shopping sites like cardratings.com and creditcards.com figure you will need at least a score in the 720 to 750 range right now.
For a card with a credit limit of $20,000 or $25,000, a score closer to 700 was often adequate until recently, said Mr. Ulzheimer, the author, who is also the president of consumer education for credit.com, a credit information and application site.
The Fed loan officer survey said that 65 percent of domestic banks had tightened lending standards for cards, up from 30 percent in its April survey.
AUTO LOANS It’s not easy to get one right now. In 2007, 83 percent of people who applied for one got one, according to CNW Marketing Research of Bandon, Ore. The approval rate this year? Sixty percent, through Oct. 8.
Meanwhile, the minimum credit score required for the very best rate was 786 at the end of September according to CNW, up from 741 a year ago. Marc Cannon, a spokesman for AutoNation, the largest car dealer in the United States, added that there was no magic number for good rates, because it could depend on car type, cost and loan length.
MORTGAGES Here, it’s especially hard to come up with a bottom line number, because different entities (lenders, mortgage insurers, Fannie Mae and Freddie Mac) can add fees or dictate terms. In general, the bigger your down payment, the better chance you’ll have at getting the best available rate, as long as you have a credit score of at least 740 or so.
If you can’t come up with a big down payment, there are still loans available. There is one bright spot for borrowers: The Federal Housing Administration backs certain loans that lenders make to borrowers with down payments of as little as 3 percent, even if their credit scores are below average.
If only such programs were available for lower-scoring people elsewhere. Until they are, your score remains crucial, and there are a number of things you can do to improve or preserve it.
CHECK FOR ERRORS First, examine your credit report for accounts you don’t recognize. If you find any, it may be a simple error, but it could be a sign that a thief is opening new accounts in your name.
You’ll also want to look for any incorrect indications of late payments or other black marks. If you find any, report them to the credit bureau, since the errors are probably hurting your credit score. They are supposed to respond within 30 days.
PAY ON TIME It’s obvious, but it’s also crucial, because payment history accounts for about 35 percent of the FICO calculation for the general population (it could be more, or less, for certain individuals though). Just 60 or 65 percent of credit reports show no late payments, which means a lot of other people are still messing this up.
It’s easy to get lulled into complacency when, say, doctors’ billing services decline to report you to the credit bureaus for ignoring their bills for three months. Sure, they may be lenient, but don’t think that a mortgage company won’t report you for being a single day late.
If you have trouble remembering to send in bills, pay them automatically each month through your bank account or credit card. Then, pay the card bill automatically as well each month, or set multiple reminders for yourself to pay that bill on time.
REDEFINE YOUR DEBT About 30 percent of your score reflects the amount of money you owe. If you pay your credit card bills off each month, you may think that you’re home free on this front and that your debt is zero.
But that may not be the case. The credit report data used by the FICO system show your credit limit and your end-of-month balance, before you pay the bill. If you have just one credit card with a credit limit of $5,000 and you’re spending $4,000 each month, that can rough up your score, even if you’re paying it off in full every month.
Mr. Ulzheimer, the author and credit.com educator, suggested that if you were applying for any sort of loan or card soon that you put away your other cards for a few months so that you show no balance at all. If that’s not possible or practical, lower your spending so that your monthly bills are no more than 10 percent of the available credit on all of your cards. It also may be worth asking for a higher limit on a card or two, just to improve this ratio.
BEWARE OF RETAIL CARDS Given the overall economic environment, you’ll probably be looking for savings everywhere you can find them come holiday gift-shopping season.
But stay away from those deals offering 10 percent off when you open up a store credit card account.
These cards can hurt your credit score if you open too many in a short time, and their credit limits tend to be lower than standard credit cards, Mr. Ulzheimer noted. That can contribute to the same problem he addressed in the section above.
So use an existing credit card. Or spend cash. Better yet, give cash. It may come in even handier than a great credit score in the coming months.
Copyright (c) 2008 The New York Times Company. All rights reserved.
New York Times op-ed: Fight for the Family Home
By Eric S. Nguyen
Cambridge, Mass.
Lenders have been foreclosing on about 250,000 homes every month this year — one every 10 seconds. And among the hardest-hit Americans have been families with school-age children. Many of those families file for bankruptcy; indeed, nearly two-thirds of those trying to save their homes in bankruptcy have young children. Yet our laws make it especially difficult for families to keep their homes.
Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.
The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?
If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes — but not on the family home.
For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments — to keep the children in the same school and stay in the same neighborhood.
Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.
Congress missed the chance to include this critical reform in its recent $700 billion bailout for financial institutions. But both Republicans and Democrats should see the wisdom of fixing the problem quickly. Automatic foreclosures on family homes do not reflect our shared sense of fairness. And bankruptcy reform is an important step on the road to recovery.
Eric S. Nguyen is a student at Harvard Law School.
Copyright (c) 2008 The New York Times Company. All rights reserved.
Cambridge, Mass.
Lenders have been foreclosing on about 250,000 homes every month this year — one every 10 seconds. And among the hardest-hit Americans have been families with school-age children. Many of those families file for bankruptcy; indeed, nearly two-thirds of those trying to save their homes in bankruptcy have young children. Yet our laws make it especially difficult for families to keep their homes.
Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.
The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?
If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes — but not on the family home.
For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments — to keep the children in the same school and stay in the same neighborhood.
Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.
Congress missed the chance to include this critical reform in its recent $700 billion bailout for financial institutions. But both Republicans and Democrats should see the wisdom of fixing the problem quickly. Automatic foreclosures on family homes do not reflect our shared sense of fairness. And bankruptcy reform is an important step on the road to recovery.
Eric S. Nguyen is a student at Harvard Law School.
Copyright (c) 2008 The New York Times Company. All rights reserved.
Wednesday, October 08, 2008
Letter to Sen. Chris Dodd and Rep. Barney Frank on personal bankruptcy and Chapter 13 bankruptcy filings
Gentlemen:
The purpose of this letter is to acknowledge your efforts regarding the $700 billion bailout bill and also bring to your attention certain issues regarding personal bankruptcy in the current financial crisis that many United States citizens are experiencing.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that these mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
We would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
Sincerely,
/s/ James H. Shenwick
James H. Shenwick
The purpose of this letter is to acknowledge your efforts regarding the $700 billion bailout bill and also bring to your attention certain issues regarding personal bankruptcy in the current financial crisis that many United States citizens are experiencing.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that these mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
We would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
Sincerely,
/s/ James H. Shenwick
James H. Shenwick
Friday, October 03, 2008
Blackberry and iPod Portable Electronics Repair
Yesterday my Blackberry broke. Rather than throw it out, I had it repaired at Portatronics. Their number is (646) 797-2838. They have two locations in midtown Manhattan at 2 West 46th St (at 5th Ave), 16th Floor and at 307 W. 38th St (at 8th Ave). Their hours are 10 a.m. to 7 p.m. The service was amazing! In 10 minutes they fixed the "spin wheel" and the cost was $59. I recommend them highly for Blackberry, iPod and any portable electronic device repairs.
Tuesday, September 23, 2008
Assuming Leases in Bankruptcy
During these difficult economic times, many businesses that have been contacting Shenwick & Associates are faced with the threat of insolvency. Insolvency occurs when a business is unable to pay its debts as they become due. A very common business expense is a lease obligation. For most businesses, an office lease is essential to survival. Without a space to operate following eviction, most businesses would immediately fail. In order to prevent the harsh consequences of eviction, a business may seek protection through bankruptcy.
Two very important provisions of the Bankruptcy Code provide both immediate and remedial relief to business debtors facing eviction. First, under section 362 of the Bankruptcy Code, the business immediately receives the protections of the automatic stay. Specifically, section 362(a)(1) prevents the landlord from pursuing or continuing eviction proceedings against the debtor. Second, under section 365(a), the debtor in a chapter 11 filing may assume unexpired leases that were entered into prior to bankruptcy. The ability to assume a lease is a wonderful tool because it allows the business to avoid eviction by reinstating the lease. In order to properly assume a lease under section 365(a), the debtor must cure previous defaults, compensate the landlord for losses caused by the previous default, and provide adequate assurance of future performance. By properly assuming the lease, the business avoids eviction and remains in possession under the lease.
For businesses faced with the threat of eviction, the Bankruptcy Code may provide the relief they seek. Specifically, seeking bankruptcy protection allows the business to stay current and future eviction proceedings and reinstates the lease. With the lease reinstated, the business' chances of survival in these harsh times are dramatically improved. For more information about protecting your office space through the bankruptcy process, please contact Jim Shenwick.
Two very important provisions of the Bankruptcy Code provide both immediate and remedial relief to business debtors facing eviction. First, under section 362 of the Bankruptcy Code, the business immediately receives the protections of the automatic stay. Specifically, section 362(a)(1) prevents the landlord from pursuing or continuing eviction proceedings against the debtor. Second, under section 365(a), the debtor in a chapter 11 filing may assume unexpired leases that were entered into prior to bankruptcy. The ability to assume a lease is a wonderful tool because it allows the business to avoid eviction by reinstating the lease. In order to properly assume a lease under section 365(a), the debtor must cure previous defaults, compensate the landlord for losses caused by the previous default, and provide adequate assurance of future performance. By properly assuming the lease, the business avoids eviction and remains in possession under the lease.
For businesses faced with the threat of eviction, the Bankruptcy Code may provide the relief they seek. Specifically, seeking bankruptcy protection allows the business to stay current and future eviction proceedings and reinstates the lease. With the lease reinstated, the business' chances of survival in these harsh times are dramatically improved. For more information about protecting your office space through the bankruptcy process, please contact Jim Shenwick.
Monday, September 15, 2008
Tougher Bankruptcy Laws Bite the Lenders
By Jessica Silver-Greenberg
The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn't take on risky mortgages in the first place. And that's bad news for lenders, which suffer financially every time they have to take a troubled property on their books.
Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. "[The rules] are directly responsible for the rising foreclosure rate," notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: "These studies don't stand up to scrutiny."
Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.
They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn't stave off foreclosure.
ONLY TEMPORARY RESPITE
As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that's often only a temporary salve, since other debts aren't eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: "In some cases, bankruptcy has become so onerous that it's not worth it to save the house."
The pain of foreclosures, of course, isn't limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.
Cases such as Yvonne Reina's will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: "I just couldn't make it work anymore."
Silver-Greenberg is a reporter for BusinessWeek.com.
Copyright 2008 by The McGraw-Hill Companies Inc. All rights reserved.
The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn't take on risky mortgages in the first place. And that's bad news for lenders, which suffer financially every time they have to take a troubled property on their books.
Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. "[The rules] are directly responsible for the rising foreclosure rate," notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: "These studies don't stand up to scrutiny."
Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.
They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn't stave off foreclosure.
ONLY TEMPORARY RESPITE
As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that's often only a temporary salve, since other debts aren't eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: "In some cases, bankruptcy has become so onerous that it's not worth it to save the house."
The pain of foreclosures, of course, isn't limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.
Cases such as Yvonne Reina's will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: "I just couldn't make it work anymore."
Silver-Greenberg is a reporter for BusinessWeek.com.
Copyright 2008 by The McGraw-Hill Companies Inc. All rights reserved.
Monday, September 08, 2008
When Chapter 11 Is the End of the Story
The 2005 rules are squeezing out bankrupt chains, which face harsher time constraints than in the past
When Sharper Image filed for bankruptcy back in February, new Chief Executive Officer Robert Conway decided to close half of the chain's 184 stores and craft a turnaround plan. But critical court deadlines loomed, and Conway, a restructuring specialist, gave up hope a few weeks later. In July the company shuttered the last location. Says Conway: "Not only do lenders have limited patience, but there are many additional pressures."
It would be difficult enough if retailers were just getting hit by the double whammy of weak consumer spending and tight credit. But new bankruptcy rules passed in 2005 are proving fatal for some. In Chapter 11, companies continue to operate while getting relief from creditors. The recent changes, though, require that businesses move more quickly on key decisions and find cash up front to pay off certain debts.
Facing those hurdles, retailers such as Sharper Image, Wickes Furniture, Bombay, Levitz Furniture, Friedman's, and Whitehall Jewelers have rapidly dissolved, going from broke to out of business in a matter of months. In previous downturns, it took years to reach that dramatic end—and most companies actually emerged from bankruptcy. The worry is that more retailers will disappear. Roughly 15 have filed for Chapter 11 so far this year, more than double the number in all of 2007, according to research firm bankruptcy.com.
Although the new rules apply to all companies, retailers are feeling the changes acutely. Before 2005, businesses had an unlimited amount of time to file a restructuring plan. Now they have 18 months to do so. After that, creditors and other interested parties can offer up their own ideas to the court. In a concession to mall owners and landlords, the new laws also force retailers to decide within 210 days whether to keep a location open. Under the old procedure, courts would grant extensions of two years or more. "Lenders are not willing to refinance a shopping center if a major tenant hasn't decided whether to stay," says J. David Forsyth, a partner at Sessions, Fishman, Nathan & Israel.
But time can be crucial. Retailers often need to monitor sales trends for at least a year, including the highly profitable holiday shopping season, before getting a complete picture of their prospects. Macy's (M), which filed for Chapter 11 in the early 1990s, took two years to hash out a plan and three years to climb out of its financial hole. "In stress situations, you have to analyze by circumstances and not make deals under a formula," says Harvey R. Miller, a partner at firm Weil, Gotshal & Manges, who is working with Goody's Family Clothing, the 355-store chain that filed for Chapter 11 on July 9.
Bankrupt companies also have to come up with cash to pay suppliers and utilities. Under the old laws, the two groups had to wait until a company emerged from bankruptcy before collecting. Those demands can be particularly burdensome on retailers, which may have bills from dozens of vendors and multiple water, gas, and electric companies. Steve & Barry's, the bankrupt apparel store that was acquired by a private equity firm on Aug. 22, manages operations across 39 states. Says Lawrence C. Gottlieb, a partner at Cooley Godward Kronish, which is representing creditors of the bankrupt Linens 'N Things: "Liquidity is sucked out of the debtor in a way that becomes hard to survive."
Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.
When Sharper Image filed for bankruptcy back in February, new Chief Executive Officer Robert Conway decided to close half of the chain's 184 stores and craft a turnaround plan. But critical court deadlines loomed, and Conway, a restructuring specialist, gave up hope a few weeks later. In July the company shuttered the last location. Says Conway: "Not only do lenders have limited patience, but there are many additional pressures."
It would be difficult enough if retailers were just getting hit by the double whammy of weak consumer spending and tight credit. But new bankruptcy rules passed in 2005 are proving fatal for some. In Chapter 11, companies continue to operate while getting relief from creditors. The recent changes, though, require that businesses move more quickly on key decisions and find cash up front to pay off certain debts.
Facing those hurdles, retailers such as Sharper Image, Wickes Furniture, Bombay, Levitz Furniture, Friedman's, and Whitehall Jewelers have rapidly dissolved, going from broke to out of business in a matter of months. In previous downturns, it took years to reach that dramatic end—and most companies actually emerged from bankruptcy. The worry is that more retailers will disappear. Roughly 15 have filed for Chapter 11 so far this year, more than double the number in all of 2007, according to research firm bankruptcy.com.
Although the new rules apply to all companies, retailers are feeling the changes acutely. Before 2005, businesses had an unlimited amount of time to file a restructuring plan. Now they have 18 months to do so. After that, creditors and other interested parties can offer up their own ideas to the court. In a concession to mall owners and landlords, the new laws also force retailers to decide within 210 days whether to keep a location open. Under the old procedure, courts would grant extensions of two years or more. "Lenders are not willing to refinance a shopping center if a major tenant hasn't decided whether to stay," says J. David Forsyth, a partner at Sessions, Fishman, Nathan & Israel.
But time can be crucial. Retailers often need to monitor sales trends for at least a year, including the highly profitable holiday shopping season, before getting a complete picture of their prospects. Macy's (M), which filed for Chapter 11 in the early 1990s, took two years to hash out a plan and three years to climb out of its financial hole. "In stress situations, you have to analyze by circumstances and not make deals under a formula," says Harvey R. Miller, a partner at firm Weil, Gotshal & Manges, who is working with Goody's Family Clothing, the 355-store chain that filed for Chapter 11 on July 9.
Bankrupt companies also have to come up with cash to pay suppliers and utilities. Under the old laws, the two groups had to wait until a company emerged from bankruptcy before collecting. Those demands can be particularly burdensome on retailers, which may have bills from dozens of vendors and multiple water, gas, and electric companies. Steve & Barry's, the bankrupt apparel store that was acquired by a private equity firm on Aug. 22, manages operations across 39 states. Says Lawrence C. Gottlieb, a partner at Cooley Godward Kronish, which is representing creditors of the bankrupt Linens 'N Things: "Liquidity is sucked out of the debtor in a way that becomes hard to survive."
Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.
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