As many of you may know, a bill to modify the bankruptcy laws to allow Bankruptcy Judges to modify mortgages on debtors' primary residences passed the House of Representatives in March, but unfortunately, due to intense opposition by mortgage bankers and a lack of support from President Obama, that bill failed to pass the Senate last month. Notwithstanding that, due to the current recession, the United States is experiencing a record number of personal bankruptcy filings. 1.2 million Americans filed for bankruptcy from April 2008 to last month, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
Despite the failure of the new bankruptcy bill, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. It has been our experience to date that filing for bankruptcy (either Chapter 7 or Chapter 13) in conjunction with requesting loss mitigation is one of the most effective ways to modify a first mortgage (the purpose of the proposed bill).
Last week we were negotiating with outside counsel for Chase Home Finance regarding a modification of a first mortgage for a debtor's primary residence, and they indicated that the quickest way to modify a first mortgage would be to move for loss mitigation through the NYSB procedures. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual's primary residence.
Additionally, for individuals that file for bankruptcy, there is a $50,000 homestead exemption per spouse under the New York State Debtor & Creditor Law, so an individual can file for Chapter 7 bankruptcy, and if they're married, they can keep their house by reaffirming the debt (which means that the debtor(s) agree to that the debt will not be discharged in bankruptcy and will be continue to be paid) on a primary residence that has no more than $100,000 in equity.
Due to the sharp decrease in residential real estate values that has left many homeowners with no equity (or "underwater"), many individuals can file for Chapter 7 bankruptcy, wipe out credit card, business debt or guaranties and other debts, retain their house, request Loss Mitigation to modify the terms of the mortgage, reaffirm the mortgage and then emerge from bankruptcy with their homeownership intact.
Anyone with questions regarding personal bankruptcy or the Loss Mitigation Program in the Southern District of New York should contact Jim Shenwick.
Thursday, May 28, 2009
Monday, May 18, 2009
QuickJump
This law firm recently started using a new product from Tech Hit called “QuickJump.” QuickJump lets users navigate to the right Windows folders by using a few keystrokes-a valuable shortcut for attorneys and other users who need to save documents such as e-mail messages and Word files. We have been using QuickJump in conjunction with MessageSave, another Tech Hit product that allows users to quickly save e-mail messages on their C: drive. We have found both programs to be invaluable products that save us much time and effort in saving and filing documents, and we highly recommend them.
Jim Shenwick
Jim Shenwick
NYT: Weighing the Options With Credit Card Debt
By TARA SIEGEL BERNARD
Many consumers are buckling under the weight of mounting credit card debt.
So it should come as no surprise that some have been lured in by often-hollow promises from debt settlement companies, claiming they can reduce debts to a small fraction of what is owed by negotiating with creditors.
But as their customers have learned, debt settlement companies are not debt genies — they do not have special powers to make your debt disappear. Andrew M. Cuomo, New York State’s attorney general, recently announced an investigation into more than a dozen debt settlement companies. Many companies require hefty upfront fees — often 15 percent of your total debt — but often don’t deliver on their promises, experts say.
Of course, figuring out a reasonable way to shed debt may seem an insurmountable task, especially if you have lost your job or you are simply not earning enough. The numbers are not pretty: if you carry $10,000 on a credit card with an 18 percent rate and make only the minimum payment (say, 1 percent of the balance plus interest), it will take 32 years to pay it off — for a grand total of $24,834. That does not count late fees or over-the-limit charges.
So it is important to assess your options before you fall too far behind. This is probably best accomplished with a reputable credit counselor. But before you pick up the phone, familiarize yourself with the pros and cons of the various options.
DO IT YOURSELF If you have only a few thousand dollars in debt on one or two cards, you may try calling your card issuer and asking it about any repayment plan for people facing financial hardship. The company may be willing to work with you. But keep in mind that it is likely to reduce your credit limits to your current balance, experts said.
“Most people are very hesitant to call their creditors,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “But they are the first ones they should consult. They have programs for short-term financial hiccups.”
FIND A COUNSELOR If you are knee-deep in debt, or your debt is spread across multiple cards, consult with a financial counselor. A credit counselor can assess your entire financial picture and help determine the best course of action. It may be as simple as setting up a payment plan that you can handle on your own.
But you need to be careful when choosing a counselor. Stick with someone who is affiliated with one of the legitimate, nonprofit umbrella organizations like the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Their fees should be reasonable (about $30 to $50 to set up, say, a debt management plan) and they should not turn you away if you cannot afford the nominal fee. They should also be willing to spend an hour with you, at the least.
DEBT MANAGEMENT PLAN A credit counseling agency should be able to determine whether this type of plan will work for you. Here is how they operate: the agency negotiates a lower interest rate and payment with the card companies, to a level you can afford. All late fees and over-the-limit fees stop. You then make a single payment to your counseling agency, which disburses the payment to all your creditors. The agency usually charges a fee of about $25 a month. Most plans last three to five years, at which point your existing debt will be paid off.
“A debt management plan doesn’t reduce the balance, but one of the big advantages is that the interest rates go down, usually significantly,” said Rick Phillips, vice president of debt management plan services at Consumer Credit Counseling Service of Greater Atlanta. He said most people who came to them were paying rates from 25 to 29 percent, which usually drop to 6 to 12 percent, or lower.
But these days, fewer people can afford traditional debt management plans. As a result, two credit counseling groups struck a deal with the top 10 credit card issuers this month to make the debt management plans more affordable. That may include lowering the minimum payment and the interest rate even further.
Participating in these plans will not necessarily hurt your credit score, but it is a gray area. It depends on how your creditor reports it to the credit rating agencies. Still, digging out of debt should be the priority; your credit score will eventually improve. Missing payments remain on your record for seven years.
DEBT SETTLEMENT So should debt settlement companies be avoided at all costs? They certainly should not be your first call.
“Sometimes, there are no good solutions, but of the solutions, debt settlement ends up being their best bet,” Gerri Detweiler, a credit adviser at Credit.com, said. “There is a segment of people who cannot afford to pay the full amount through a debt management, but they either don’t want to file for bankruptcy or they can’t file for bankruptcy.” (Credit.com refers prescreened consumers to debt settlement companies through its Web site; the settlement company pays Credit.com a fee each time a consumer fills out an application. Credit.com vets the companies to be sure they disclose all costs.)
But consumer advocates said that many people ended up dropping out of these plans because of the high fees. When you sign up, many firms require you to pay a sizable fee upfront. Or they may levy initial set-up and monthly fees, and charge a percentage of the amount they saved you. They typically advise you to stop paying your debts and tell you to put aside money each month in a separate account over a period of two or three years. That sum will eventually be used to negotiate a settlement, usually about 60 percent of what you owe. In the meantime, though, credit card companies continue to charge interest and late fees. The creditor may sue. And the phone will probably continue to ring incessantly. The companies can offer no guarantees — except that your credit score will drop.
“I wouldn’t rule out the possibility that there is a good company out there, but the basic business model is not a good one for consumers,” said Deanne Loonin, a lawyer at the National Consumer Law Center who has researched the companies. “A lot of creditors won’t even work with debt settlement companies.”
And here is another little-known fact: Any debt forgiven exceeding $600 is considered taxable income unless you can prove you are insolvent (your liabilities exceed your assets).
BANKRUPTCY For some people, at least, it pays to visit a bankruptcy lawyer, where the initial consultations should be free. A lawyer can advise you of your rights and walk you through the many implications of bankruptcy. “It’s not a bad idea if you’re under a lot of financial stress or you are afraid of losing your assets,” Ms. Detweiler said. It also pays to meet with a bankruptcy lawyer and a credit counselor before you consider debt settlement. “If you do it the other way around, you are very vulnerable to being led down the wrong path,” she said. “And what I find is that people hear what they want to hear.”
Copyright 2009 The New York Times Company. All rights reserved.
Many consumers are buckling under the weight of mounting credit card debt.
So it should come as no surprise that some have been lured in by often-hollow promises from debt settlement companies, claiming they can reduce debts to a small fraction of what is owed by negotiating with creditors.
But as their customers have learned, debt settlement companies are not debt genies — they do not have special powers to make your debt disappear. Andrew M. Cuomo, New York State’s attorney general, recently announced an investigation into more than a dozen debt settlement companies. Many companies require hefty upfront fees — often 15 percent of your total debt — but often don’t deliver on their promises, experts say.
Of course, figuring out a reasonable way to shed debt may seem an insurmountable task, especially if you have lost your job or you are simply not earning enough. The numbers are not pretty: if you carry $10,000 on a credit card with an 18 percent rate and make only the minimum payment (say, 1 percent of the balance plus interest), it will take 32 years to pay it off — for a grand total of $24,834. That does not count late fees or over-the-limit charges.
So it is important to assess your options before you fall too far behind. This is probably best accomplished with a reputable credit counselor. But before you pick up the phone, familiarize yourself with the pros and cons of the various options.
DO IT YOURSELF If you have only a few thousand dollars in debt on one or two cards, you may try calling your card issuer and asking it about any repayment plan for people facing financial hardship. The company may be willing to work with you. But keep in mind that it is likely to reduce your credit limits to your current balance, experts said.
“Most people are very hesitant to call their creditors,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “But they are the first ones they should consult. They have programs for short-term financial hiccups.”
FIND A COUNSELOR If you are knee-deep in debt, or your debt is spread across multiple cards, consult with a financial counselor. A credit counselor can assess your entire financial picture and help determine the best course of action. It may be as simple as setting up a payment plan that you can handle on your own.
But you need to be careful when choosing a counselor. Stick with someone who is affiliated with one of the legitimate, nonprofit umbrella organizations like the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Their fees should be reasonable (about $30 to $50 to set up, say, a debt management plan) and they should not turn you away if you cannot afford the nominal fee. They should also be willing to spend an hour with you, at the least.
DEBT MANAGEMENT PLAN A credit counseling agency should be able to determine whether this type of plan will work for you. Here is how they operate: the agency negotiates a lower interest rate and payment with the card companies, to a level you can afford. All late fees and over-the-limit fees stop. You then make a single payment to your counseling agency, which disburses the payment to all your creditors. The agency usually charges a fee of about $25 a month. Most plans last three to five years, at which point your existing debt will be paid off.
“A debt management plan doesn’t reduce the balance, but one of the big advantages is that the interest rates go down, usually significantly,” said Rick Phillips, vice president of debt management plan services at Consumer Credit Counseling Service of Greater Atlanta. He said most people who came to them were paying rates from 25 to 29 percent, which usually drop to 6 to 12 percent, or lower.
But these days, fewer people can afford traditional debt management plans. As a result, two credit counseling groups struck a deal with the top 10 credit card issuers this month to make the debt management plans more affordable. That may include lowering the minimum payment and the interest rate even further.
Participating in these plans will not necessarily hurt your credit score, but it is a gray area. It depends on how your creditor reports it to the credit rating agencies. Still, digging out of debt should be the priority; your credit score will eventually improve. Missing payments remain on your record for seven years.
DEBT SETTLEMENT So should debt settlement companies be avoided at all costs? They certainly should not be your first call.
“Sometimes, there are no good solutions, but of the solutions, debt settlement ends up being their best bet,” Gerri Detweiler, a credit adviser at Credit.com, said. “There is a segment of people who cannot afford to pay the full amount through a debt management, but they either don’t want to file for bankruptcy or they can’t file for bankruptcy.” (Credit.com refers prescreened consumers to debt settlement companies through its Web site; the settlement company pays Credit.com a fee each time a consumer fills out an application. Credit.com vets the companies to be sure they disclose all costs.)
But consumer advocates said that many people ended up dropping out of these plans because of the high fees. When you sign up, many firms require you to pay a sizable fee upfront. Or they may levy initial set-up and monthly fees, and charge a percentage of the amount they saved you. They typically advise you to stop paying your debts and tell you to put aside money each month in a separate account over a period of two or three years. That sum will eventually be used to negotiate a settlement, usually about 60 percent of what you owe. In the meantime, though, credit card companies continue to charge interest and late fees. The creditor may sue. And the phone will probably continue to ring incessantly. The companies can offer no guarantees — except that your credit score will drop.
“I wouldn’t rule out the possibility that there is a good company out there, but the basic business model is not a good one for consumers,” said Deanne Loonin, a lawyer at the National Consumer Law Center who has researched the companies. “A lot of creditors won’t even work with debt settlement companies.”
And here is another little-known fact: Any debt forgiven exceeding $600 is considered taxable income unless you can prove you are insolvent (your liabilities exceed your assets).
BANKRUPTCY For some people, at least, it pays to visit a bankruptcy lawyer, where the initial consultations should be free. A lawyer can advise you of your rights and walk you through the many implications of bankruptcy. “It’s not a bad idea if you’re under a lot of financial stress or you are afraid of losing your assets,” Ms. Detweiler said. It also pays to meet with a bankruptcy lawyer and a credit counselor before you consider debt settlement. “If you do it the other way around, you are very vulnerable to being led down the wrong path,” she said. “And what I find is that people hear what they want to hear.”
Copyright 2009 The New York Times Company. All rights reserved.
Thursday, May 14, 2009
NYT: Slow Start to U.S. Plan for Modifying Mortgages
By TARA SIEGEL BERNARD
The Obama administration’s plan to help millions of troubled homeowners avoid foreclosure by reducing the size of their mortgage payments is just getting off the ground.
So far, two months after the program went into effect, about 55,000 homeowners have been extended loan modification offers, according to a senior administration official. At the same time, foreclosures continue apace. RealtyTrac reported Wednesday that foreclosure filings reached 342,000 last month, up 32 percent from April 2008. Moody’s has estimated that more than 2.1 million homeowners will lose their homes this year.
Because of the size and complexity of the modification program, the administration has only recently assembled most of the pieces. In late April, officials fleshed out their plan to modify or forgive second mortgages — one of the big stumbling blocks in modifying primary mortgages — and provided more details on the Hope for Homeowners program, for borrowers who owe more than their homes are worth. Congress is close to acting on legislation to protect mortgage servicers from potential lawsuits from investors, while also expanding the Federal Housing Administration’s ability to modify loans.
The banks, too, are just now beginning to get their mortgage modification machines up and running.
While it is still too early to know how effective the program will ultimately be, many homeowners who have tried to gain entrance say they have been successful only through persistence — and sometimes, the help of a lawyer.
What may be a larger issue, however, is the continuing deterioration of the economy, experts say. The longer it takes to set the program in motion, they say, the fewer people will qualify for modifications. The expected rise in unemployment in coming months may keep a growing number of homeowners out of the program.
“We have a debt crisis, and mortgage is at the center of it,” said Alan M. White, an assistant professor at Valparaiso University School of Law in Indiana who specializes in foreclosures. “To get out of it, we need to reduce the debt, and that is not really happening.”
The administration remains confident that the program will end up offering help to as many as three million to four million homeowners, with the pace of modifications beginning to pick up in coming months.
“If you think about the context and scale involved, it is an extraordinary, rapid effort,” said Jenni Engebretsen, a Treasury spokeswoman. She noted that 14 mortgage servicers had signed up for the program, covering 75 percent of the market.
A vibrant mortgage modification program is a necessary bulwark against the wave of foreclosures. Without it, housing prices will continue their downward spiral longer, said Mark Zandi, chief economist at Moody’s Economy.com.
“It prolongs the economic agony,” he said. “The pain will not go away until foreclosures subside.”
Mr. Zandi was not as optimistic that the program would help as many as the administration expects. He estimated it would end up assisting only 1.5 million to 2 million homeowners over the next few years. Even so, he added, the program will, in the end, “make a meaningful difference.”
The Obama plan aims to lower monthly payments to 31 percent of the borrower’s gross income by reducing interest rates to as low as 2 percent, extending the loan term or deferring principal. Mortgage servicers can reduce principal but are not required to.
The mortgage modifications to date have come in various forms, but some have not reduced monthly payments and most have not reduced the balance owed — crucial for people who owe more than their homes are worth. Still, the number of loan modifications with lower payments has increased in recent months, an encouraging sign.
In April, 59 percent of loan modifications reduced payments, 29 percent increased payments and 12 percent of modifications kept payments steady, according to Professor White at Valparaiso. Borrowers with loan modifications that have not cut their payments tend to default again within six to 12 months.
To persuade mortgage servicers and investors to sign on to mortgage modifications, Democrats originally sought legislation that would have given bankruptcy judges the power to reduce primary mortgages. The threat of a principal reduction in bankruptcy would have served as a stick to have modifications done outside court, experts said. But the measure failed in the Senate last week after intense lobbying by the banking industry.
Several experts said reducing the amount of principal would go a long way toward helping borrowers who owe more than a home is worth — those informally known as under water.
“Even if they do drop your loan payment, you can still be in deep negative equity, which is not an immediate crisis,” said Adam J. Levitin, an associate professor at Georgetown University Law Center. “But let’s say you need to relocate because the auto manufacturer you work for is radically downsizing. You are faced with losing your house in foreclosure or a huge balloon payment. And neither of those is palatable.”
“If you don’t want all of the spillover effects from foreclosure, you have to keep people in their houses,” he added.
But the modifications may not be enough for the underwater homeowners. “In many ways, we are kicking the can down the road,” Mr. Zandi said. “Many of these homeowners are under tremendous amounts of financial pressure, and they have significant negative equity positions. Lowering their mortgage debt-to-income ratio helps, but it doesn’t solve their problem in a significant way and many will redefault in the future.”
About 15.4 million borrowers, 20 percent of single-family homeowners, are underwater, up from 13.6 million at the end of last year, according to Moody’s. Being underwater is one of the biggest indicators of default, experts said.
The administration tries to address the problems of the underwater homeowners through its Hope for Homeowners refinancing program. In its previous incarnation, the program was deemed a failure after it produced only about 50 new loans.
Under the new initiative, mortgage servicers are required to vet borrowers for Hope for Homeowners after they have qualified for a trial loan modification. If borrowers are qualified, they refinance into new loans through the Federal Housing Administration. Mortgage investors must accept a write-down on their investment and the government backs the new loan.
Despite the federal backing, lenders must also be willing to make the new loans, said Rod Dubitsky, a mortgage analyst at Credit Suisse.
Many homeowners, consumer advocates say, do not even know they are eligible for a modification. Others may think they are eligible, but have to navigate a maze of rules and bureaucracies.
Amy and Robert Darr, of Coshocton, Ohio, for instance, fell behind on their payments in October after Robert’s hours were cut; he is a maintenance worker at a foundry. They tried to catch up on their payments when they received their tax refund, but by that time the couple had received a foreclosure notice. They contacted their lender to see if they would qualify for a loan modification, and provided the lender with the required paperwork.
But CitiMortgage refused to suspend the foreclosure proceedings. Citigroup declined to comment.
“Hopefully, we will qualify,” Mrs. Darr said, “because I don’t want to lose my home.”
The couple contacted Southeastern Ohio Legal Services, which filed a motion with the local court to suspend the foreclosure and is currently waiting for a response.
“The right hand doesn’t know what the left hand is doing,” said Melissa Benson, a staff lawyer with the legal services organization. “Most people who get foreclosure complaints don’t even know how to put up a fight at all. And they lose fairly quickly.”
Ashley Southall contributed reporting.
Copyright 2009 The New York Times Company. All rights reserved.
The Obama administration’s plan to help millions of troubled homeowners avoid foreclosure by reducing the size of their mortgage payments is just getting off the ground.
So far, two months after the program went into effect, about 55,000 homeowners have been extended loan modification offers, according to a senior administration official. At the same time, foreclosures continue apace. RealtyTrac reported Wednesday that foreclosure filings reached 342,000 last month, up 32 percent from April 2008. Moody’s has estimated that more than 2.1 million homeowners will lose their homes this year.
Because of the size and complexity of the modification program, the administration has only recently assembled most of the pieces. In late April, officials fleshed out their plan to modify or forgive second mortgages — one of the big stumbling blocks in modifying primary mortgages — and provided more details on the Hope for Homeowners program, for borrowers who owe more than their homes are worth. Congress is close to acting on legislation to protect mortgage servicers from potential lawsuits from investors, while also expanding the Federal Housing Administration’s ability to modify loans.
The banks, too, are just now beginning to get their mortgage modification machines up and running.
While it is still too early to know how effective the program will ultimately be, many homeowners who have tried to gain entrance say they have been successful only through persistence — and sometimes, the help of a lawyer.
What may be a larger issue, however, is the continuing deterioration of the economy, experts say. The longer it takes to set the program in motion, they say, the fewer people will qualify for modifications. The expected rise in unemployment in coming months may keep a growing number of homeowners out of the program.
“We have a debt crisis, and mortgage is at the center of it,” said Alan M. White, an assistant professor at Valparaiso University School of Law in Indiana who specializes in foreclosures. “To get out of it, we need to reduce the debt, and that is not really happening.”
The administration remains confident that the program will end up offering help to as many as three million to four million homeowners, with the pace of modifications beginning to pick up in coming months.
“If you think about the context and scale involved, it is an extraordinary, rapid effort,” said Jenni Engebretsen, a Treasury spokeswoman. She noted that 14 mortgage servicers had signed up for the program, covering 75 percent of the market.
A vibrant mortgage modification program is a necessary bulwark against the wave of foreclosures. Without it, housing prices will continue their downward spiral longer, said Mark Zandi, chief economist at Moody’s Economy.com.
“It prolongs the economic agony,” he said. “The pain will not go away until foreclosures subside.”
Mr. Zandi was not as optimistic that the program would help as many as the administration expects. He estimated it would end up assisting only 1.5 million to 2 million homeowners over the next few years. Even so, he added, the program will, in the end, “make a meaningful difference.”
The Obama plan aims to lower monthly payments to 31 percent of the borrower’s gross income by reducing interest rates to as low as 2 percent, extending the loan term or deferring principal. Mortgage servicers can reduce principal but are not required to.
The mortgage modifications to date have come in various forms, but some have not reduced monthly payments and most have not reduced the balance owed — crucial for people who owe more than their homes are worth. Still, the number of loan modifications with lower payments has increased in recent months, an encouraging sign.
In April, 59 percent of loan modifications reduced payments, 29 percent increased payments and 12 percent of modifications kept payments steady, according to Professor White at Valparaiso. Borrowers with loan modifications that have not cut their payments tend to default again within six to 12 months.
To persuade mortgage servicers and investors to sign on to mortgage modifications, Democrats originally sought legislation that would have given bankruptcy judges the power to reduce primary mortgages. The threat of a principal reduction in bankruptcy would have served as a stick to have modifications done outside court, experts said. But the measure failed in the Senate last week after intense lobbying by the banking industry.
Several experts said reducing the amount of principal would go a long way toward helping borrowers who owe more than a home is worth — those informally known as under water.
“Even if they do drop your loan payment, you can still be in deep negative equity, which is not an immediate crisis,” said Adam J. Levitin, an associate professor at Georgetown University Law Center. “But let’s say you need to relocate because the auto manufacturer you work for is radically downsizing. You are faced with losing your house in foreclosure or a huge balloon payment. And neither of those is palatable.”
“If you don’t want all of the spillover effects from foreclosure, you have to keep people in their houses,” he added.
But the modifications may not be enough for the underwater homeowners. “In many ways, we are kicking the can down the road,” Mr. Zandi said. “Many of these homeowners are under tremendous amounts of financial pressure, and they have significant negative equity positions. Lowering their mortgage debt-to-income ratio helps, but it doesn’t solve their problem in a significant way and many will redefault in the future.”
About 15.4 million borrowers, 20 percent of single-family homeowners, are underwater, up from 13.6 million at the end of last year, according to Moody’s. Being underwater is one of the biggest indicators of default, experts said.
The administration tries to address the problems of the underwater homeowners through its Hope for Homeowners refinancing program. In its previous incarnation, the program was deemed a failure after it produced only about 50 new loans.
Under the new initiative, mortgage servicers are required to vet borrowers for Hope for Homeowners after they have qualified for a trial loan modification. If borrowers are qualified, they refinance into new loans through the Federal Housing Administration. Mortgage investors must accept a write-down on their investment and the government backs the new loan.
Despite the federal backing, lenders must also be willing to make the new loans, said Rod Dubitsky, a mortgage analyst at Credit Suisse.
Many homeowners, consumer advocates say, do not even know they are eligible for a modification. Others may think they are eligible, but have to navigate a maze of rules and bureaucracies.
Amy and Robert Darr, of Coshocton, Ohio, for instance, fell behind on their payments in October after Robert’s hours were cut; he is a maintenance worker at a foundry. They tried to catch up on their payments when they received their tax refund, but by that time the couple had received a foreclosure notice. They contacted their lender to see if they would qualify for a loan modification, and provided the lender with the required paperwork.
But CitiMortgage refused to suspend the foreclosure proceedings. Citigroup declined to comment.
“Hopefully, we will qualify,” Mrs. Darr said, “because I don’t want to lose my home.”
The couple contacted Southeastern Ohio Legal Services, which filed a motion with the local court to suspend the foreclosure and is currently waiting for a response.
“The right hand doesn’t know what the left hand is doing,” said Melissa Benson, a staff lawyer with the legal services organization. “Most people who get foreclosure complaints don’t even know how to put up a fight at all. And they lose fairly quickly.”
Ashley Southall contributed reporting.
Copyright 2009 The New York Times Company. All rights reserved.
Monday, May 11, 2009
NYT: Banks Brace for Credit Card Write-Offs
By ERIC DASH and ANDREW MARTIN
It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.
Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.
Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.
For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.
Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.
Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.
Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.
She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.
When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.
Copyright 2009 The New York Times Company. All rights reserved.
It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.
Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.
Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.
For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.
Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.
Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.
Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.
She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.
When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.
Copyright 2009 The New York Times Company. All rights reserved.
Monday, May 04, 2009
The Practical Implications as Chrysler Goes to Court
By MICHELINE MAYNARD
Chrysler is the first major automaker since Studebaker in 1933 to try to reorganize in bankruptcy and emerge as a viable company. The process can be complicated. Here is a quick look at how it is likely to play out.
Q. Is Chrysler going out of business?
A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to emerge from bankruptcy, these companies are reconstituted as new legal entities.
Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.
Q. How long will this take?
A. The Obama administration spoke of a “surgical bankruptcy” that it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.
In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steel maker, took seven years to resolve.
Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization. A judge can extend that period exclusivity for 18 months, but creditors or potential buyers for a company can present a competing plan once that period expires.
Q. What happens to Chrysler dealers?
A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that would happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler will continue to provide dealers with vehicles to sell.
Chrysler Financial will cease making consumer loans for Chrysler vehicles; GMAC, with support from the government, will provide financing through Chrysler dealers.
Q. What happens to Chrysler employees?
A. The White House said it did not expect any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.
But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.
Q. Are pensions and retiree health care benefits protected?
A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a brief trial on the subject and hear both sides. If pensions were terminated, employees would still receive about one-third of their benefits through financing from the federal pension agency.
A company also can eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.
Q. What happens to Chrysler suppliers?
A. In its bankruptcy filing, Chrysler listed its 50 biggest creditors holding unsecured claims, meaning those that would have to get in line behind creditors whose debt is secured by collateral, like the company’s plants, brands and other assets. The unsecured creditors include its advertising agency, BBDO, and parts suppliers, like Johnson Controls, Magna International and Cummins Engine.
The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
Chrysler is likely to tell the court which suppliers it wants to keep doing business with, and which contracts it wants to reject. Suppliers could challenge the rejection of their contract, but most likely they would have to reach a settlement with Chrysler.
Q. What happens next in the bankruptcy case?
A. Chrysler filed its initial paperwork with the federal bankruptcy court in New York on Thursday. On Friday, it will ask a judge to issue a series of rulings called the first day orders, which allow the company to keep operating. They may include authorizing the payment of routine expenses, like salaries and payments to vendors, including its lawyers, and whatever else Chrysler needs to run its business. Chrysler said it would halt production while it completes a deal with Fiat.
Once the case begins, Chrysler can ask a judge to issue an emergency order to temporarily reduce salaries, which is meant to conserve its cash. A committee will also be formed that represents Chrysler’s creditors.
Q. Should owners of Chrysler cars and trucks be concerned?
A. The federal government said it would back the warranties on vehicles bought from Chrysler while it is operating in bankruptcy. So, effective Thursday, warranties are underwritten by the government.
Owners of Chrysler vehicles bought before Thursday should expect their warranties to be honored until they expire. But the work may not be performed by a Chrysler dealer. Companies operating in bankruptcy sometimes ask a judge to let them assign warranty repairs to outside vendors, who charge the company less for their work than a dealer would expect to be reimbursed.
Owners whose vehicle warranties have run out are liable for any problems with their cars and trucks, as they are now.
Copyright 2009 The New York Times Company. All rights reserved.
Chrysler is the first major automaker since Studebaker in 1933 to try to reorganize in bankruptcy and emerge as a viable company. The process can be complicated. Here is a quick look at how it is likely to play out.
Q. Is Chrysler going out of business?
A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to emerge from bankruptcy, these companies are reconstituted as new legal entities.
Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.
Q. How long will this take?
A. The Obama administration spoke of a “surgical bankruptcy” that it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.
In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steel maker, took seven years to resolve.
Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization. A judge can extend that period exclusivity for 18 months, but creditors or potential buyers for a company can present a competing plan once that period expires.
Q. What happens to Chrysler dealers?
A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that would happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler will continue to provide dealers with vehicles to sell.
Chrysler Financial will cease making consumer loans for Chrysler vehicles; GMAC, with support from the government, will provide financing through Chrysler dealers.
Q. What happens to Chrysler employees?
A. The White House said it did not expect any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.
But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.
Q. Are pensions and retiree health care benefits protected?
A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a brief trial on the subject and hear both sides. If pensions were terminated, employees would still receive about one-third of their benefits through financing from the federal pension agency.
A company also can eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.
Q. What happens to Chrysler suppliers?
A. In its bankruptcy filing, Chrysler listed its 50 biggest creditors holding unsecured claims, meaning those that would have to get in line behind creditors whose debt is secured by collateral, like the company’s plants, brands and other assets. The unsecured creditors include its advertising agency, BBDO, and parts suppliers, like Johnson Controls, Magna International and Cummins Engine.
The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
Chrysler is likely to tell the court which suppliers it wants to keep doing business with, and which contracts it wants to reject. Suppliers could challenge the rejection of their contract, but most likely they would have to reach a settlement with Chrysler.
Q. What happens next in the bankruptcy case?
A. Chrysler filed its initial paperwork with the federal bankruptcy court in New York on Thursday. On Friday, it will ask a judge to issue a series of rulings called the first day orders, which allow the company to keep operating. They may include authorizing the payment of routine expenses, like salaries and payments to vendors, including its lawyers, and whatever else Chrysler needs to run its business. Chrysler said it would halt production while it completes a deal with Fiat.
Once the case begins, Chrysler can ask a judge to issue an emergency order to temporarily reduce salaries, which is meant to conserve its cash. A committee will also be formed that represents Chrysler’s creditors.
Q. Should owners of Chrysler cars and trucks be concerned?
A. The federal government said it would back the warranties on vehicles bought from Chrysler while it is operating in bankruptcy. So, effective Thursday, warranties are underwritten by the government.
Owners of Chrysler vehicles bought before Thursday should expect their warranties to be honored until they expire. But the work may not be performed by a Chrysler dealer. Companies operating in bankruptcy sometimes ask a judge to let them assign warranty repairs to outside vendors, who charge the company less for their work than a dealer would expect to be reimbursed.
Owners whose vehicle warranties have run out are liable for any problems with their cars and trucks, as they are now.
Copyright 2009 The New York Times Company. All rights reserved.
NYT: Senate Refuses to Let Judges Fix Mortgages in Bankruptcy
By STEPHEN LABATON
WASHINGTON — The Senate handed a victory to the banking industry on Thursday, defeating a Democratic proposal that would have given homeowners in financial trouble greater flexibility to renegotiate the terms of their mortgages.
The House of Representatives, meanwhile, overwhelmingly approved a bill backed by the Obama administration that would limit the ability of credit card companies to charge high fees and penalties. The bill, approved 357 to 70, still faces obstacles in the Senate, where — as the action on Thursday illustrated — the industry has more clout, particularly among Republicans and moderate Democrats. In recent days the White House, partly in response to polls showing the significant public outrage over high fees charged by credit card companies, has begun to work for its passage.
The mortgage provision garnered only 45 votes in the Senate, falling well short of the 60 votes necessary to break a threatened filibuster to a measure sponsored by Senator Richard Durbin, Democrat of Illinois, that would give bankruptcy judges greater flexibility to modify mortgages. In recent weeks, major banks and bank trade associations worked closely with Senate Republicans to stop the measure. Twelve Democrats joined all the Republicans in voting against it.
The defeat clears the way for a final vote as early as Friday for the legislation, which has several features that the banking industry has sought. One provision would have the effect of reducing a proposed special premium the banks would owe the Federal Deposit Insurance Corporation later that year by more than 50 percent — a $7.7 billion saving. A second provision would make permanent the temporary increase in deposits guaranteed by the F.D.I.C., to $250,000, from $100,000.
Once the Senate completes its action on the legislation, it will have to be reconciled with a similar measure already adopted in the House before it can become law.
The House bill contains the bankruptcy provision. But the Senate’s defeat of the so-called bankruptcy cramdown measure all but makes certain it will disappear from the final bill.
It also demonstrates that, even though Democrats are close to gaining 60 votes in the Senate with the recent decision by Senator Arlen Specter to leave the Republican Party, the increasing number of Democrats does not prevent the Republicans — with the support of a handful of moderate or conservative Democrats — from blocking legislation. Mr. Specter voted against the provision.
Bank lobbyists had maintained that the legislation, if adopted, would have resulted in higher rates for all mortgage holders. A letter signed by 12 industry organizations this week to senators warned that the legislation would “have the unintended consequence of further destabilizing the markets.”
“Though interest rates today are at all-time lows, this legislation would result in higher costs for future borrowers,” the letter said.
But supporters of the legislation disputed that argument. President Obama sought the cramdown provision during the election, although the White House has done virtually nothing to move it through Congress.
Copyright 2009 The New York Times Company. All rights reserved.
WASHINGTON — The Senate handed a victory to the banking industry on Thursday, defeating a Democratic proposal that would have given homeowners in financial trouble greater flexibility to renegotiate the terms of their mortgages.
The House of Representatives, meanwhile, overwhelmingly approved a bill backed by the Obama administration that would limit the ability of credit card companies to charge high fees and penalties. The bill, approved 357 to 70, still faces obstacles in the Senate, where — as the action on Thursday illustrated — the industry has more clout, particularly among Republicans and moderate Democrats. In recent days the White House, partly in response to polls showing the significant public outrage over high fees charged by credit card companies, has begun to work for its passage.
The mortgage provision garnered only 45 votes in the Senate, falling well short of the 60 votes necessary to break a threatened filibuster to a measure sponsored by Senator Richard Durbin, Democrat of Illinois, that would give bankruptcy judges greater flexibility to modify mortgages. In recent weeks, major banks and bank trade associations worked closely with Senate Republicans to stop the measure. Twelve Democrats joined all the Republicans in voting against it.
The defeat clears the way for a final vote as early as Friday for the legislation, which has several features that the banking industry has sought. One provision would have the effect of reducing a proposed special premium the banks would owe the Federal Deposit Insurance Corporation later that year by more than 50 percent — a $7.7 billion saving. A second provision would make permanent the temporary increase in deposits guaranteed by the F.D.I.C., to $250,000, from $100,000.
Once the Senate completes its action on the legislation, it will have to be reconciled with a similar measure already adopted in the House before it can become law.
The House bill contains the bankruptcy provision. But the Senate’s defeat of the so-called bankruptcy cramdown measure all but makes certain it will disappear from the final bill.
It also demonstrates that, even though Democrats are close to gaining 60 votes in the Senate with the recent decision by Senator Arlen Specter to leave the Republican Party, the increasing number of Democrats does not prevent the Republicans — with the support of a handful of moderate or conservative Democrats — from blocking legislation. Mr. Specter voted against the provision.
Bank lobbyists had maintained that the legislation, if adopted, would have resulted in higher rates for all mortgage holders. A letter signed by 12 industry organizations this week to senators warned that the legislation would “have the unintended consequence of further destabilizing the markets.”
“Though interest rates today are at all-time lows, this legislation would result in higher costs for future borrowers,” the letter said.
But supporters of the legislation disputed that argument. President Obama sought the cramdown provision during the election, although the White House has done virtually nothing to move it through Congress.
Copyright 2009 The New York Times Company. All rights reserved.
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