By MICHAEL M. GRYNBAUM
Could the days of the iron-clad contract be numbered?
It used to be that once a buyer went to contract on an apartment, the terms of the deal were all but set in stone. Sales prices never budged, and if the buyer balked, the down payment went bye-bye.
But double-digit price declines and the lending drought have started to threaten this once near-inviolable pillar of New York real estate. Buyers are demanding concessions from developers on apartments that they say have lost up to 30 percent in value. Others are hoping to back out of their contracts entirely, while keeping their down payments in the process.
The sudden demand has sent lawyers scurrying to uncover avant-garde legal tactics for ducking out of a deal. Downtown conversions like 75 Wall Street and new developments like One Hunters Point in Long Island City are facing suits from buyers seeking to break contracts on the basis of a once-obscure consumer protection law.
The number of New Yorkers filing claims with the attorney general’s office to claw back their down payments has more than tripled in the last two years, although most disputes don’t reach this step. In 2007, 57 claims were filed; in 2008, 168. By Feb. 20 of this year, the office had already recorded 74 claims.
The ultra high end is not immune. At the Brompton, a heavily marketed Upper East Side condominium designed by the architect Robert A. M. Stern, lawyers say some buyers are calling on the project’s developer to pay closing costs, cover taxes and relocation expenses, and, yes, even retroactively drop the price of apartments.
It remains unclear whether these efforts will be convincing, whether at the negotiating table or in a court of law. On the developer’s side is the legal strength of a signed contract and the financial leverage of a buyer’s deposit.
But the incentives have realigned in a market where many apartments are now worth less than their purchase prices. It may make financial sense for buyers to cut their losses and leave their deposit on the table rather than move into a money pit. And while developers would pocket the down payment, they might be stuck with a unit that eventually sells for much less — or even worse, just sits. This new math may put some developers in a negotiating mood.
“Behind this, the big elephant in the room is the price,” said Adam Leitman Bailey, a real estate lawyer who says he is representing unhappy buyers from nearly 50 buildings.
The traditional method for a buyer to break a contract is to prove that some element of the completed unit differs from the developer’s offering plan. This is why lawyers have been known to use lasers to measure square footage to within a millimeter and to debate descriptions of views and amenities.
But if the issue is more financial than material, buyers may be forced to “in essence, throw themselves at the mercy of the developer,” said Peter Graubard, a real estate lawyer.
“They are saying, ‘Hey, listen, I’m in a financial hardship and the loss of this 10 or 15 percent deposit is going to be devastating to me right now,’ ” said Mr. Graubard, explaining that every one of his clients who went to contract before October 2008 — about 30 in all — is trying to renegotiate or abandon a deal.
Officials at the attorney general’s office said they were seeing more appeals based on such emotional pleas.
But these arguments may not fly. Unless a contract includes a mortgage contingency, nothing in the law allows for a change in financial circumstances or the lending market to constitute a “right of rescission.”
Sometimes, though, a bit of saber-rattling can shake loose concessions.
“Threatening not to close, threatening legal action, maybe the threat of an attorney general’s action, all can bring a developer to negotiate,” Mr. Graubard said.
Some lawyers are looking beyond the traditional methods of arguing breach of contract.
A Web site called No-Condo.com opened in December and immediately received nearly 100 queries from New York residents who want their deposits back. It is the brainchild of Lawrence Weiner, a lawyer at Wilentz, Goldman & Spitzer in Woodbridge, N.J., whose arsenal includes the Interstate Land Sales Full Disclosure Act, a 41-year-old consumer protection law rarely applied in the city.
Created to protect against speculators selling uninhabitable plots, the act requires developers of condominiums or conversions with more than 100 units to provide buyers with a particular type of property report containing information like proof of ownership and the availability of public utilities.
“I wouldn’t categorize it as a technicality,” Mr. Weiner said. “A lot of developers, in a rush to bring things to market, chose not to comply, or maybe they didn’t even realize they needed to comply.” Since December, Wilentz has filed lawsuits on behalf of buyers at 20 Pine Street, 75 Wall Street, One Hunters Point, One Brooklyn Bridge Park and 111 Fulton Street. The developers of these buildings all declined to comment or did not return calls.
The law has its limits as a negotiation device: a developer is exempt from the act if he or she has pledged to complete the unit within two years. But for distressed buyers in certain buildings, the Land Sales Act may offer a way out.
Cynthia Ehrlich, a self-employed tax accountant in her early 50s, made an $85,000 down payment — “all the money I had” — last March on a small one-bedroom at 75 Wall Street, a full-service condominium converted from an old bank building.
The problems began almost immediately. Ms. Ehrlich said she had been attracted to the property by a 10-year tax abatement, but soon learned that the development had not yet qualified for the abatement program. In May, she lost a major source of revenue, and was consequently turned down for a mortgage. Because her contract did not have a contingency clause, she said, the developer declined to return her deposit.
She plans to file suit this month for a return of her deposit on the grounds that the property violated the Land Sales Disclosure Act by not providing the proper property report. Ms. Ehrlich said she had regained hope after learning of the existence of the act.
“It’s the only good news I got,” Ms. Ehrlich said. “It’s a lot of money to lose, and I don’t make a lot.”
The developer of 75 Wall Street, the Hakimian Organization, declined to comment.
At the Brompton, with its “Stylishly Proper” slogan, luxe location on East 85th Street and prices to match, several buyers said they were in financial straits. A group of nearly 30 buyers recently organized over the Internet and held a meeting to discuss their options.
“We just feel this is not primarily a real estate issue,” said Patricia Congiu, 45, an Upper East Sider who went to contract on a 1,900-square-foot three-bedroom in September 2007. “This is not a situation where someone signed a contract and the price went down. It’s a global recession, like nothing seen since the Great Depression.”
Ms. Congiu said she and her husband had “wanted the building to be our final home. We were looking forward to raising our family there.” But now she is not sure whether her income can support the property. Like several other buyers in the Brompton, she said she hoped the developer, the Related Companies, would sympathize with their situation and provide relief so they can move in. “If they gave us a concession,” she said, “we can have a cushion. I don’t want to hurt the building.”
Other unhappy buyers at the Brompton say financial concerns are not the issue. Marc Rossell, 54, went to contract with his wife in August 2007 for a 3,600-square-foot spread, combining three ninth-floor apartments.
He said he was told by the developer that his southern view would clear an adjacent building, but on a walk-through inspection, he found “a water tank right there outside of our windows, and an ugly rooftop.” Mr. Rossell did not think the view matched the description in the offering plan, and believed the discrepancy could help him get free of his contract.
“It didn’t seem to be of the same quality that they basically represented in the showroom,” he said. “We definitely have the money. It’s not that at all.”
Through a spokeswoman, Related declined to comment.
As buyers become more cautious, contracts may begin looking more like they did before the housing boom of the last 15 years.
“You’re going to see a shift back toward an inclusion of mortgage contingencies,” predicted Jay B. Solomon, a partner at Klein & Solomon, a real estate law firm. Such contingencies provided an out for buyers when financing was not available, but they fell out of favor in the last 15 years as buyers faced more competition for apartments.
Under New York state law, buyers in a new development have the right to get out of their contracts if the developer does not close at least one unit within a year of the originally projected start date. Developers almost always find a way to meet this requirement, but lawyers say that buyers are now putting those initial deals under a microscope.
“If you see one unit that’s closed and nothing else for three months, that seems sort of suspect,” said Meg Goble, a partner at the real estate law firm Hanley & Goble. “If you see the unit has closed and there’s no certificate of occupancy, that also looks sort of suspect.”
Ms. Goble said evidence that the sponsor had spun some sort of sweetheart deal for the unit, like giving it away to a friend, could provide a legal ground for breaking a contract.
Of course, not everyone in the industry has sympathy for the buyer who wants concessions or money back.
“I think it is the height of audacity,” said Stuart Saft, a partner in the real estate division of Dewey & Leboeuf, which represents several large developers in contract disputes. “The buyer calls and says, ‘The apartment is not worth as much as when we signed for it.’ My response for that is, if the market went up 20 percent, would you have given us 20 percent more because the market improved?”
And for his part, Mr. Graubard, primarily a buyers’ lawyer, is skeptical of efforts to undo purchase agreements. “You really can’t get that creative; there’s only so far you can go,” he said. “Without the enforceability of a signed contract — well, really, what do we have?”
Copyright 2009 The New York Times Company. All rights reserved.
Monday, March 09, 2009
Thursday, March 05, 2009
New York Times: House to Try Again to Let Judges Alter Mortgages
By CARL HULSE
WASHINGTON — After a brief revolt, the House is scheduled to vote Thursday on a measure that would allow bankruptcy judges to change mortgage terms to help homeowners avoid foreclosure, granting new authority some lawmakers say is central to easing the housing crisis.
The Democratic leadership said it was confident it now has the support to pass the measure, which stalled last week, because of changes won by Democrats who said they feared that homeowners might use bankruptcy to win reductions in mortgages they could still afford. The Senate, where backers of the bill have faced stiff resistance, could consider its own version later this month.
Under the legislation, judges could reduce the principal owed, reduce the interest rate or extend the length of the loan. Currently, bankruptcy courts are prohibited from rewriting loan terms on primary residences even though those homes are at the heart of the foreclosure crisis. Democrats say the legislation, which would work in tandem with President Obama’s new housing plan, could cut foreclosures 20 percent. It would apply only to existing mortgages, not future loans.
“Stabilizing the housing market is central to restoring the American economy,” the Democratic leadership said in a fact sheet distributed Wednesday to encourage lawmakers to back the measure. “We all stand to lose if we do not stop the steep decline in home prices.”
The House was originally expected to easily approve the measure last week. But some Democrats who had heard complaints from the lending community and the public sought changes. They said they did not want the program abused by consumers who were simply seeking a way out of a costly mortgage while most Americans continued to make their payments.
“Our intention was to make sure this was available but as a last resort,” said Ellen Tauscher, Democrat of California. She was joined by two state colleagues — Zoe Lofgren and Dennis Cardoza — in leading the push for revisions.
To appease Democratic critics, backers of the bill made changes to try to ensure that homeowners first sought to negotiate a voluntary loan change from their lenders before filing for bankruptcy.
As a result, the bill requires a homeowner facing foreclosure to seek a loan change 30 days before pursuing one in court and to provide the necessary personal financial information to the lender. Judges would also be required to determine whether a voluntary loan modification had been sought from a lender before the homeowner entered bankruptcy.
Judges would also have to weigh a person’s income against the payments before deciding whether an interest rate or principal reduction was called for and use federally approved appraisal guidelines in determining a home’s value. Other changes are also intended to prevent mortgage reductions in cases in which a person could afford the loan.
Courts are supposed to be able to reduce a mortgage only to the current fair market value of the house and to structure payments in a way that would require homeowners to continue to pay off their original loan to the greatest extent possible considering income.
“Some may think the changes made to the bill go too far, while others will contend that they do not go far enough,” the three California lawmakers wrote to their colleagues. “Given the ever deepening housing crisis, however, we ask you to place such differences aside — as we have done — and support this effort.”
Supporters of the bankruptcy change hoped they had made a breakthrough this year when Citigroup backed the initiative, but many other top lenders remain opposed, as do many Republican lawmakers. The bill is backed by AARP, consumer groups and other housing advocacy organizations.
Copyright 2009 The New York Times Company. All rights reserved.
WASHINGTON — After a brief revolt, the House is scheduled to vote Thursday on a measure that would allow bankruptcy judges to change mortgage terms to help homeowners avoid foreclosure, granting new authority some lawmakers say is central to easing the housing crisis.
The Democratic leadership said it was confident it now has the support to pass the measure, which stalled last week, because of changes won by Democrats who said they feared that homeowners might use bankruptcy to win reductions in mortgages they could still afford. The Senate, where backers of the bill have faced stiff resistance, could consider its own version later this month.
Under the legislation, judges could reduce the principal owed, reduce the interest rate or extend the length of the loan. Currently, bankruptcy courts are prohibited from rewriting loan terms on primary residences even though those homes are at the heart of the foreclosure crisis. Democrats say the legislation, which would work in tandem with President Obama’s new housing plan, could cut foreclosures 20 percent. It would apply only to existing mortgages, not future loans.
“Stabilizing the housing market is central to restoring the American economy,” the Democratic leadership said in a fact sheet distributed Wednesday to encourage lawmakers to back the measure. “We all stand to lose if we do not stop the steep decline in home prices.”
The House was originally expected to easily approve the measure last week. But some Democrats who had heard complaints from the lending community and the public sought changes. They said they did not want the program abused by consumers who were simply seeking a way out of a costly mortgage while most Americans continued to make their payments.
“Our intention was to make sure this was available but as a last resort,” said Ellen Tauscher, Democrat of California. She was joined by two state colleagues — Zoe Lofgren and Dennis Cardoza — in leading the push for revisions.
To appease Democratic critics, backers of the bill made changes to try to ensure that homeowners first sought to negotiate a voluntary loan change from their lenders before filing for bankruptcy.
As a result, the bill requires a homeowner facing foreclosure to seek a loan change 30 days before pursuing one in court and to provide the necessary personal financial information to the lender. Judges would also be required to determine whether a voluntary loan modification had been sought from a lender before the homeowner entered bankruptcy.
Judges would also have to weigh a person’s income against the payments before deciding whether an interest rate or principal reduction was called for and use federally approved appraisal guidelines in determining a home’s value. Other changes are also intended to prevent mortgage reductions in cases in which a person could afford the loan.
Courts are supposed to be able to reduce a mortgage only to the current fair market value of the house and to structure payments in a way that would require homeowners to continue to pay off their original loan to the greatest extent possible considering income.
“Some may think the changes made to the bill go too far, while others will contend that they do not go far enough,” the three California lawmakers wrote to their colleagues. “Given the ever deepening housing crisis, however, we ask you to place such differences aside — as we have done — and support this effort.”
Supporters of the bankruptcy change hoped they had made a breakthrough this year when Citigroup backed the initiative, but many other top lenders remain opposed, as do many Republican lawmakers. The bill is backed by AARP, consumer groups and other housing advocacy organizations.
Copyright 2009 The New York Times Company. All rights reserved.
Wednesday, March 04, 2009
New York Times: You’re Dead? That Won’t Stop the Debt Collector
By DAVID STREITFELD
MINNEAPOLIS — The banks need another bailout and countless homeowners cannot handle their mortgage payments, but one group is paying its bills: the dead.
Dozens of specially trained agents work on the third floor of DCM Services here, calling up the dear departed’s next of kin and kindly asking if they want to settle the balance on a credit card or bank loan, or perhaps make that final utility bill or cellphone payment.
The people on the other end of the line often have no legal obligation to assume the debt of a spouse, sibling or parent. But they take responsibility for it anyway.
“I am out of work now, to be honest with you, and money is very tight for us,” one man declared on a recent phone call after he was apprised of his late mother-in-law’s $280 credit card bill. He promised to pay $15 a month.
Dead people are the newest frontier in debt collecting, and one of the healthiest parts of the industry. Those who dun the living say that people are so scared and so broke it is difficult to get them to cough up even token payments.
Collecting from the dead, however, is expanding. Improved database technology is making it easier to discover when estates are opened in the country’s 3,000 probate courts, giving collectors an opportunity to file timely claims. But if there is no formal estate and thus nothing to file against, the human touch comes into play.
New hires at DCM train for three weeks in what the company calls “empathic active listening,” which mixes the comforting air of a funeral director with the nonjudgmental tones of a friend. The new employees learn to use such anger-deflecting phrases as “If I hear you correctly, you’d like...”
“You get to be the person who cares,” the training manager, Autumn Boomgaarden, told a class of four new hires.
For some relatives, paying is pragmatic. The law varies from state to state, but generally survivors are not required to pay a dead relative’s bills from their own assets. In theory, however, collection agencies could go after any property inherited from the deceased.
But sentiment also plays a large role, the agencies say. Some relatives are loyal to the credit card or bank in question. Some feel a strong sense of morality, that all debts should be paid. Most of all, people feel they are honoring the wishes of their loved ones.
“In times of illness and death, the hierarchy of debts is adjusted,” said Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry. “We do our best to make sure our doctor is paid, because we might need him again. And we want the dead to rest easy, knowing their obligations are taken care of.”
Finally, of course, some of those who pay a dead relative’s debts are unaware they may have no legal obligation.
Scott Weltman of Weltman, Weinberg & Reis, a Cleveland law firm that performs deceased collections, says that if family members ask, “we definitely tell them” they have no legal obligation to pay. “But is it disclosed upfront — ‘Mr. Smith, you definitely don’t owe the money’? It’s not that blunt.”
DCM Services, which began in 1999 as a law firm, recently acquired clients in banking, automobile finance, retailing, telecommunications and health care; DCM says its contracts preclude it from naming them.
The companies “want to protect their brand,” said DCM’s chief executive, Steven Farsht. Despite the delicacy of such collections, he says his 180-employee firm is providing a service to the economy. “The financial services industry is under a tremendous amount of pressure, and every dollar we collect improves their profitability,” he said.
To listen to even a small sample of DCM’s calls — executives played tapes of 10 of them for a reporter, electronically edited to remove all names — is to reveal the wages of misery, right down to the penny.
A man has left credit card debt of $26,693.77, the legacy of a battle with cancer. A widow says her husband “had no money. He pretty much just had debt.” Asked about an outstanding account of $1,084.86, a woman says the deceased had no property beyond “some tools in the garage” and an 18-year-old Dodge.
Not everyone has the temperament to make such calls. About half of DCM’s hires do not make it past the first 90 days. For those who survive, many tools help them deal with stress: yoga classes and foosball tables, a rotating assortment of free snacks as well as full-scale lunches twice a month. A masseuse comes in regularly to work on their heads and necks.
Brenda Edwards, one of DCM’s top collectors, spoke with a woman in New Jersey about her mother’s $544.96 credit card bill.
“She had no will, no finances, nothing,” the daughter said. “Nothing went to probate.” The $200 in the checking account was used for funeral expenses. But the woman also said the family “filed a form with the county,” indicating that perhaps there was a legal estate after all.
“Is anyone in the family in a position to pay this?” Ms. Edwards asked, adding: “I’m not telling you it needs to be paid at all.”
The woman reached a decision. “I will talk to my brothers and sisters and we will pay this,” she said.
Ms. Edwards has a girlish voice that sounds younger than her 29 years. “If you plant a seed and leave on a good note, they’ll call back and pay it,” she said.
DCM started a Web site called MyWayForward.com to provide the bereaved with information, tools and, some day, products. “We will never sell death. But it’s O.K. to provide things that could be helpful to the survivor,” Mr. Farsht said. Death will be the end of one customer relationship but the beginning of another.
Some survivors are surprised, and a few are shocked, that they are hearing from a collector.
Eric Frenchman, an online consultant, said a DCM agent inquired about his late father’s $50 Discover card balance before the bill was even due. Since Mr. Frenchman had been planning to pay it anyway, he emerged from the experience vowing never to get a Discover card himself.
The major deceased-debt firms say such experiences are rare. Adam Cohen, chief executive of Phillips & Cohen Associates of Westampton, N.J., said his team of 300 collectors “are all trained in the five stages of grief.”
If a relative is more focused on denial or anger instead of, say, bargaining, the collector offers to transfer him to the human resources company Ceridian LifeWorks, where “master’s level grief counselors” are standing by. After a week, the relative is contacted again.
DCM executives say some of the survivors not only gladly pay but write appreciative notes. They offered up a stack, with the names deleted, as proof.
One widow wrote that a collector “was so nice to me, even when I could only pay $5 a month a few times.” Saying that money was “so tight” after her husband died, she added: “It was very hard for me, and to get a job at my age. Thank you."
Copyright 2009 The New York Times Company. All rights reserved.
MINNEAPOLIS — The banks need another bailout and countless homeowners cannot handle their mortgage payments, but one group is paying its bills: the dead.
Dozens of specially trained agents work on the third floor of DCM Services here, calling up the dear departed’s next of kin and kindly asking if they want to settle the balance on a credit card or bank loan, or perhaps make that final utility bill or cellphone payment.
The people on the other end of the line often have no legal obligation to assume the debt of a spouse, sibling or parent. But they take responsibility for it anyway.
“I am out of work now, to be honest with you, and money is very tight for us,” one man declared on a recent phone call after he was apprised of his late mother-in-law’s $280 credit card bill. He promised to pay $15 a month.
Dead people are the newest frontier in debt collecting, and one of the healthiest parts of the industry. Those who dun the living say that people are so scared and so broke it is difficult to get them to cough up even token payments.
Collecting from the dead, however, is expanding. Improved database technology is making it easier to discover when estates are opened in the country’s 3,000 probate courts, giving collectors an opportunity to file timely claims. But if there is no formal estate and thus nothing to file against, the human touch comes into play.
New hires at DCM train for three weeks in what the company calls “empathic active listening,” which mixes the comforting air of a funeral director with the nonjudgmental tones of a friend. The new employees learn to use such anger-deflecting phrases as “If I hear you correctly, you’d like...”
“You get to be the person who cares,” the training manager, Autumn Boomgaarden, told a class of four new hires.
For some relatives, paying is pragmatic. The law varies from state to state, but generally survivors are not required to pay a dead relative’s bills from their own assets. In theory, however, collection agencies could go after any property inherited from the deceased.
But sentiment also plays a large role, the agencies say. Some relatives are loyal to the credit card or bank in question. Some feel a strong sense of morality, that all debts should be paid. Most of all, people feel they are honoring the wishes of their loved ones.
“In times of illness and death, the hierarchy of debts is adjusted,” said Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry. “We do our best to make sure our doctor is paid, because we might need him again. And we want the dead to rest easy, knowing their obligations are taken care of.”
Finally, of course, some of those who pay a dead relative’s debts are unaware they may have no legal obligation.
Scott Weltman of Weltman, Weinberg & Reis, a Cleveland law firm that performs deceased collections, says that if family members ask, “we definitely tell them” they have no legal obligation to pay. “But is it disclosed upfront — ‘Mr. Smith, you definitely don’t owe the money’? It’s not that blunt.”
DCM Services, which began in 1999 as a law firm, recently acquired clients in banking, automobile finance, retailing, telecommunications and health care; DCM says its contracts preclude it from naming them.
The companies “want to protect their brand,” said DCM’s chief executive, Steven Farsht. Despite the delicacy of such collections, he says his 180-employee firm is providing a service to the economy. “The financial services industry is under a tremendous amount of pressure, and every dollar we collect improves their profitability,” he said.
To listen to even a small sample of DCM’s calls — executives played tapes of 10 of them for a reporter, electronically edited to remove all names — is to reveal the wages of misery, right down to the penny.
A man has left credit card debt of $26,693.77, the legacy of a battle with cancer. A widow says her husband “had no money. He pretty much just had debt.” Asked about an outstanding account of $1,084.86, a woman says the deceased had no property beyond “some tools in the garage” and an 18-year-old Dodge.
Not everyone has the temperament to make such calls. About half of DCM’s hires do not make it past the first 90 days. For those who survive, many tools help them deal with stress: yoga classes and foosball tables, a rotating assortment of free snacks as well as full-scale lunches twice a month. A masseuse comes in regularly to work on their heads and necks.
Brenda Edwards, one of DCM’s top collectors, spoke with a woman in New Jersey about her mother’s $544.96 credit card bill.
“She had no will, no finances, nothing,” the daughter said. “Nothing went to probate.” The $200 in the checking account was used for funeral expenses. But the woman also said the family “filed a form with the county,” indicating that perhaps there was a legal estate after all.
“Is anyone in the family in a position to pay this?” Ms. Edwards asked, adding: “I’m not telling you it needs to be paid at all.”
The woman reached a decision. “I will talk to my brothers and sisters and we will pay this,” she said.
Ms. Edwards has a girlish voice that sounds younger than her 29 years. “If you plant a seed and leave on a good note, they’ll call back and pay it,” she said.
DCM started a Web site called MyWayForward.com to provide the bereaved with information, tools and, some day, products. “We will never sell death. But it’s O.K. to provide things that could be helpful to the survivor,” Mr. Farsht said. Death will be the end of one customer relationship but the beginning of another.
Some survivors are surprised, and a few are shocked, that they are hearing from a collector.
Eric Frenchman, an online consultant, said a DCM agent inquired about his late father’s $50 Discover card balance before the bill was even due. Since Mr. Frenchman had been planning to pay it anyway, he emerged from the experience vowing never to get a Discover card himself.
The major deceased-debt firms say such experiences are rare. Adam Cohen, chief executive of Phillips & Cohen Associates of Westampton, N.J., said his team of 300 collectors “are all trained in the five stages of grief.”
If a relative is more focused on denial or anger instead of, say, bargaining, the collector offers to transfer him to the human resources company Ceridian LifeWorks, where “master’s level grief counselors” are standing by. After a week, the relative is contacted again.
DCM executives say some of the survivors not only gladly pay but write appreciative notes. They offered up a stack, with the names deleted, as proof.
One widow wrote that a collector “was so nice to me, even when I could only pay $5 a month a few times.” Saying that money was “so tight” after her husband died, she added: “It was very hard for me, and to get a job at my age. Thank you."
Copyright 2009 The New York Times Company. All rights reserved.
New York Times: Ex-Lenders Profit From Home Loans Gone Bad
By ERIC LIPTON
CALABASAS, Calif. — Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering.
So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.
Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.
“It has been very successful — very strong,” John Lawrence, the company’s head of loan servicing, told Mr. Kurland one recent morning in a glass-walled boardroom here at PennyMac’s spacious headquarters, opened last year in the same Los Angeles suburb where Countrywide once flourished.
“In fact, it’s off-the-charts good,” he told Mr. Kurland, who was leaning back comfortably in his leather boardroom chair, even as the financial markets in New York were plunging.
As hundreds of billions of dollars flow from Washington to jump-start the nation’s staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history.
They include big investors who are buying up failed banks taken over by the federal government and lobbyists. And there is PennyMac, led by Mr. Kurland, 56, once the soft-spoken No. 2 to Angelo R. Mozilo, the perpetually tanned former chief executive of Countrywide and its public face.
Mr. Kurland has raised hundreds of millions of dollars from big players like BlackRock, the investment manager, to finance his start-up. Having sold off close to $200 million in stock before leaving Countrywide, he has also put up some of his own cash.
While some critics are distressed that Mr. Kurland and his team are back in business, the executives say that PennyMac’s operations serve as a model for how the government, working with banks, can help stabilize the housing market and lead the nation out of the recession. “It is very important to the entire team here to be part of a solution,” Mr. Kurland said, standing in his office, which has views of the Santa Monica Mountains.
It is quite evident that their efforts are, in fact, helping many distressed homeowners.
“Literally, their assistance saved my family’s home,” said Robert Robinson, of Felton, Pa., whose interest rate was cut by more than half, making his mortgage affordable again.
But to some, it is disturbing to see former Countrywide executives in the industry again. “It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it,” said Margot Saunders, a lawyer with the National Consumer Law Center, which for years has sought to place limits on what it calls abusive lending practices by Countrywide and other companies.
More than any other major lending institution, Countrywide has become synonymous with the excesses that led to the housing bubble. The firm’s reputation has been so tarnished that Bank of America, which bought it last year at a bargain price, announced that the name and logo of Countrywide, once the biggest mortgage lender in the nation, would soon disappear.
Mr. Kurland acknowledges pushing Countrywide into the type of higher-risk loans that have since, in large numbers, gone into default. But he said that he always insisted that the loans go only to borrowers who could afford to repay them. He also said that Countrywide’s riskiest lending took place after he left the company, in late 2006, after what he said was an internal conflict with Mr. Mozilo and other executives, whom he blames for loosening loan standards.
In retrospect, Mr. Kurland said, he regrets what happened at Countrywide and in the mortgage industry nationwide, but does not believe he deserves blame. “It is horrible what transpired in the industry,” said Mr. Kurland, who has never been subject to any regulatory actions.
But lawsuits against Countrywide raise questions about Mr. Kurland’s portrayal of his role. They accuse him of being at the center of a culture shift at Countrywide that started in 2003, as the company popularized a type of loan that often came with low “teaser” interest rates and that, for some, became unaffordable when the low rate expired.
The lawsuits, including one filed by New York State’s comptroller, say Mr. Kurland was well aware of the risks, and even misled Countrywide’s investors about the precariousness of the company’s portfolio, which grew to $463 billion in loans, from $62 billion, three times faster than the market nationwide, during the final six years of his tenure.
“Kurland is seeking to capitalize on a situation that was a product of his own creation,” said Blair A. Nicholas, a lawyer representing retired Arkansas teachers who are also suing Mr. Kurland and other former Countrywide executives. “It is tragic and ironic. But then again, greed is a growth industry.”
David K. Willingham, a lawyer representing Mr. Kurland in several of these suits, said the allegations related to Mr. Kurland were without merit, and motions had been filed to seek their dismissal.
Federal banking officials — without mentioning Mr. Kurland by name — added that just because an executive worked at an institution like Countrywide did not mean he was to blame for questionable lending practices. They said that it was important to do business with experienced mortgage operators like Mr. Kurland, who know how to creatively renegotiate delinquent loans.
PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.
Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.
Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
PennyMac hopes to achieve a profit of at least 20 percent annually, and it is actively courting other investors to build its portfolio, which now consists of $800 million in loans, to as much as $15 billion in the next 18 months, executives said. For the borrowers whose loans have ended up with PennyMac, it can translate into an extraordinary deal.
The Laverdes, of Porter Ranch, Calif., had fallen three months behind on their mortgage after sales at a furniture store owned by the family dipped in the economic crisis. Margarita Laverde and her husband were fearful that they might need to move their four children, three dogs and giant saltwater aquarium into a cramped apartment, leaving behind their dream home — a five-bedroom ranch on a suburban street overlooking the San Fernando Valley.
But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said.
"I kept on asking, ‘Are you sure this is correct? Are you sure?’ ” Ms. Laverde said. Even with this reduction, PennyMac stands to make a profit of at least 50 percent, a company official said.
Ms. Laverde could not care less that executives at PennyMac used to work at Countrywide.
“What matters,” she said, “is that we know our house is secure and our credit is safe.”
Copyright 2009 The New York Times Company. All rights reserved.
CALABASAS, Calif. — Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering.
So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.
Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.
“It has been very successful — very strong,” John Lawrence, the company’s head of loan servicing, told Mr. Kurland one recent morning in a glass-walled boardroom here at PennyMac’s spacious headquarters, opened last year in the same Los Angeles suburb where Countrywide once flourished.
“In fact, it’s off-the-charts good,” he told Mr. Kurland, who was leaning back comfortably in his leather boardroom chair, even as the financial markets in New York were plunging.
As hundreds of billions of dollars flow from Washington to jump-start the nation’s staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history.
They include big investors who are buying up failed banks taken over by the federal government and lobbyists. And there is PennyMac, led by Mr. Kurland, 56, once the soft-spoken No. 2 to Angelo R. Mozilo, the perpetually tanned former chief executive of Countrywide and its public face.
Mr. Kurland has raised hundreds of millions of dollars from big players like BlackRock, the investment manager, to finance his start-up. Having sold off close to $200 million in stock before leaving Countrywide, he has also put up some of his own cash.
While some critics are distressed that Mr. Kurland and his team are back in business, the executives say that PennyMac’s operations serve as a model for how the government, working with banks, can help stabilize the housing market and lead the nation out of the recession. “It is very important to the entire team here to be part of a solution,” Mr. Kurland said, standing in his office, which has views of the Santa Monica Mountains.
It is quite evident that their efforts are, in fact, helping many distressed homeowners.
“Literally, their assistance saved my family’s home,” said Robert Robinson, of Felton, Pa., whose interest rate was cut by more than half, making his mortgage affordable again.
But to some, it is disturbing to see former Countrywide executives in the industry again. “It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it,” said Margot Saunders, a lawyer with the National Consumer Law Center, which for years has sought to place limits on what it calls abusive lending practices by Countrywide and other companies.
More than any other major lending institution, Countrywide has become synonymous with the excesses that led to the housing bubble. The firm’s reputation has been so tarnished that Bank of America, which bought it last year at a bargain price, announced that the name and logo of Countrywide, once the biggest mortgage lender in the nation, would soon disappear.
Mr. Kurland acknowledges pushing Countrywide into the type of higher-risk loans that have since, in large numbers, gone into default. But he said that he always insisted that the loans go only to borrowers who could afford to repay them. He also said that Countrywide’s riskiest lending took place after he left the company, in late 2006, after what he said was an internal conflict with Mr. Mozilo and other executives, whom he blames for loosening loan standards.
In retrospect, Mr. Kurland said, he regrets what happened at Countrywide and in the mortgage industry nationwide, but does not believe he deserves blame. “It is horrible what transpired in the industry,” said Mr. Kurland, who has never been subject to any regulatory actions.
But lawsuits against Countrywide raise questions about Mr. Kurland’s portrayal of his role. They accuse him of being at the center of a culture shift at Countrywide that started in 2003, as the company popularized a type of loan that often came with low “teaser” interest rates and that, for some, became unaffordable when the low rate expired.
The lawsuits, including one filed by New York State’s comptroller, say Mr. Kurland was well aware of the risks, and even misled Countrywide’s investors about the precariousness of the company’s portfolio, which grew to $463 billion in loans, from $62 billion, three times faster than the market nationwide, during the final six years of his tenure.
“Kurland is seeking to capitalize on a situation that was a product of his own creation,” said Blair A. Nicholas, a lawyer representing retired Arkansas teachers who are also suing Mr. Kurland and other former Countrywide executives. “It is tragic and ironic. But then again, greed is a growth industry.”
David K. Willingham, a lawyer representing Mr. Kurland in several of these suits, said the allegations related to Mr. Kurland were without merit, and motions had been filed to seek their dismissal.
Federal banking officials — without mentioning Mr. Kurland by name — added that just because an executive worked at an institution like Countrywide did not mean he was to blame for questionable lending practices. They said that it was important to do business with experienced mortgage operators like Mr. Kurland, who know how to creatively renegotiate delinquent loans.
PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.
Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.
Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
PennyMac hopes to achieve a profit of at least 20 percent annually, and it is actively courting other investors to build its portfolio, which now consists of $800 million in loans, to as much as $15 billion in the next 18 months, executives said. For the borrowers whose loans have ended up with PennyMac, it can translate into an extraordinary deal.
The Laverdes, of Porter Ranch, Calif., had fallen three months behind on their mortgage after sales at a furniture store owned by the family dipped in the economic crisis. Margarita Laverde and her husband were fearful that they might need to move their four children, three dogs and giant saltwater aquarium into a cramped apartment, leaving behind their dream home — a five-bedroom ranch on a suburban street overlooking the San Fernando Valley.
But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said.
"I kept on asking, ‘Are you sure this is correct? Are you sure?’ ” Ms. Laverde said. Even with this reduction, PennyMac stands to make a profit of at least 50 percent, a company official said.
Ms. Laverde could not care less that executives at PennyMac used to work at Countrywide.
“What matters,” she said, “is that we know our house is secure and our credit is safe.”
Copyright 2009 The New York Times Company. All rights reserved.
New York Times: Commercial Renters Have a New Worry-A Landlord's Default
By ALISON GREGOR
Office landlords have always scrutinized the financial stability of prospective tenants, but now they are finding themselves under the lens.
Prospective tenants are asking for financial statements from landlords, hoping to avoid companies that might default on their mortgages and leave tenants at risk of losing the space. Tenants are also more wary of subleasing space, and are tending to flock to buildings with stable owners.
“We have to be more attentive to the finances of our landlords than we’ve ever been to get a sense of their financial stability and ability to service their debt,” said David N. Feldman, a managing partner at the law firm Feldman Weinstein & Smith, a 12,500-square-foot office tenant at 420 Lexington Avenue near Grand Central Terminal that, with a lease expiring in 2011, will soon start looking for office space.
During the recent era of cheap money that led to the real estate boom, many investors bought their office buildings at high prices with extensive debt, hoping to flip the building quickly. Some landlords calculated their cash flow too optimistically, intending to lease poorly performing office buildings at high rents to maximize their profit, and are having trouble paying their debt, in some cases falling behind on payments.
“Today, we have this environment where we know that anyone who bought a building in the last few years is at jeopardy of losing that building,” said Howard Fiddle, a vice chairman at the commercial real estate brokerage CB Richard Ellis. “So, just from a purely operational perspective, you want to know who your landlord is.”
In many ways it is a great time to be a tenant. Rents have dropped by 15 percent or so in Manhattan, smaller security deposits are required, and some landlords are offering free rent for as long as a year and a half.
But tenants also must be wary. Marisa Manley, president of Commercial Tenant Real Estate Representation, said there are reasons for an office tenant to worry about a landlord’s losing the building. Money given by landlords to tenants to customize their office space, generally paid as an allowance over a period of time, could be lost, and in the current market, brokers said that money from landlords could be equivalent to $70 a square foot. Also, services in the building could deteriorate, Ms. Manley said.
She suggested that tenants demand that landlords offering tenant improvements put the funds in escrow or in a letter of credit, which means they could not be seized in a bankruptcy proceeding.
Protections against declining building services are harder to achieve, but a larger tenant can try to negotiate “self-help rights,” Ms. Manley said.
“If the landlord doesn’t perform certain duties, you have the right to go and hire someone to do them yourself,” she said, and get compensated by the landlord. “These are things like cleaning, and heating, ventilation and air-conditioning maintenance.”
Mr. Fiddle said that office tenants could also negotiate the “right of offset.”
“Let’s say part of the original deal was the landlord had to fund a $50-a-foot cash contribution toward tenant improvements,” he said. “And let’s say the landlord paid about $30 a foot and then went bankrupt. The right of offset means that the additional $20 a foot could be deducted from the rent the tenant owes.”
Mr. Fiddle said these types of protections did not get discussed much during the real estate boom.
“People know the terminology, but they have to pull it out and dust it off,” he said.
To avoid the aggravation of these highly specialized negotiations, Mr. Fiddle said most office tenants would simply gravitate toward stronger landlords with lower debt on their office buildings.
“What’s basically happening is a flight to quality,” said Frank Mancini, an executive managing director at the commercial real estate brokerage Grubb & Ellis. “But it’s not only quality of space, but quality of landlord or owner.”
Though banks would be unlikely to kick out existing leaseholders on taking over ownership of an office building, tenants — especially larger ones — should get a nondisturbance agreement from a landlord’s mortgage lender as a matter of routine, Mr. Fiddle said. This means the bank would have to recognize the existing lease of the tenant if it took over the building.
“Any full-floor or multiple-floor tenant will get a nondisturb — it’s almost automatic,” he said. “However, for very small tenants, it’s not automatic.”
Any potential pitfalls for office tenants in the current economic downturn are magnified for those companies seeking to sublease space, brokers said.
“The sublease market has been flooded with space, and most of these are fantastic spaces,” said Ruth Colp-Haber, a founding partner at Wharton Properties, a commercial real estate brokerage. “However, if you look at the profile of the average sublandlord, they’re putting space on the market because they’re having financial difficulty. Therefore, some type of lease default, and maybe even bankruptcy, is very conceivable.”
Ms. Colp-Haber said that companies that sublease space could protect themselves by negotiating the right to stay in the space with the building’s landlord if the sublandlord should default.
To avoid the perils of subleasing office space, the CRG Partners Group, a turnaround consulting business, is seeking to leave its subleasing situation at 711 Third Avenue at 45th Street for a direct lease, said Timothy J. Lewis, a partner with the firm.
The New York office of the firm, which assists businesses in financial trouble or in bankruptcy, has been growing rapidly in recent months. Given the company’s line of work, Mr. Lewis said CRG was especially careful about evaluating the financial stability of landlords.
“We’re certainly aware of the risk, so we’re probably a little bit more careful,” Mr. Lewis said. “If we decided to go the sublease route, we’d vet the financial condition of the lessor pretty closely, and partly for that reason, we’ve decided to try and do a direct lease.”
Copyright 2009 The New York Times Company. All rights reserved.
Office landlords have always scrutinized the financial stability of prospective tenants, but now they are finding themselves under the lens.
Prospective tenants are asking for financial statements from landlords, hoping to avoid companies that might default on their mortgages and leave tenants at risk of losing the space. Tenants are also more wary of subleasing space, and are tending to flock to buildings with stable owners.
“We have to be more attentive to the finances of our landlords than we’ve ever been to get a sense of their financial stability and ability to service their debt,” said David N. Feldman, a managing partner at the law firm Feldman Weinstein & Smith, a 12,500-square-foot office tenant at 420 Lexington Avenue near Grand Central Terminal that, with a lease expiring in 2011, will soon start looking for office space.
During the recent era of cheap money that led to the real estate boom, many investors bought their office buildings at high prices with extensive debt, hoping to flip the building quickly. Some landlords calculated their cash flow too optimistically, intending to lease poorly performing office buildings at high rents to maximize their profit, and are having trouble paying their debt, in some cases falling behind on payments.
“Today, we have this environment where we know that anyone who bought a building in the last few years is at jeopardy of losing that building,” said Howard Fiddle, a vice chairman at the commercial real estate brokerage CB Richard Ellis. “So, just from a purely operational perspective, you want to know who your landlord is.”
In many ways it is a great time to be a tenant. Rents have dropped by 15 percent or so in Manhattan, smaller security deposits are required, and some landlords are offering free rent for as long as a year and a half.
But tenants also must be wary. Marisa Manley, president of Commercial Tenant Real Estate Representation, said there are reasons for an office tenant to worry about a landlord’s losing the building. Money given by landlords to tenants to customize their office space, generally paid as an allowance over a period of time, could be lost, and in the current market, brokers said that money from landlords could be equivalent to $70 a square foot. Also, services in the building could deteriorate, Ms. Manley said.
She suggested that tenants demand that landlords offering tenant improvements put the funds in escrow or in a letter of credit, which means they could not be seized in a bankruptcy proceeding.
Protections against declining building services are harder to achieve, but a larger tenant can try to negotiate “self-help rights,” Ms. Manley said.
“If the landlord doesn’t perform certain duties, you have the right to go and hire someone to do them yourself,” she said, and get compensated by the landlord. “These are things like cleaning, and heating, ventilation and air-conditioning maintenance.”
Mr. Fiddle said that office tenants could also negotiate the “right of offset.”
“Let’s say part of the original deal was the landlord had to fund a $50-a-foot cash contribution toward tenant improvements,” he said. “And let’s say the landlord paid about $30 a foot and then went bankrupt. The right of offset means that the additional $20 a foot could be deducted from the rent the tenant owes.”
Mr. Fiddle said these types of protections did not get discussed much during the real estate boom.
“People know the terminology, but they have to pull it out and dust it off,” he said.
To avoid the aggravation of these highly specialized negotiations, Mr. Fiddle said most office tenants would simply gravitate toward stronger landlords with lower debt on their office buildings.
“What’s basically happening is a flight to quality,” said Frank Mancini, an executive managing director at the commercial real estate brokerage Grubb & Ellis. “But it’s not only quality of space, but quality of landlord or owner.”
Though banks would be unlikely to kick out existing leaseholders on taking over ownership of an office building, tenants — especially larger ones — should get a nondisturbance agreement from a landlord’s mortgage lender as a matter of routine, Mr. Fiddle said. This means the bank would have to recognize the existing lease of the tenant if it took over the building.
“Any full-floor or multiple-floor tenant will get a nondisturb — it’s almost automatic,” he said. “However, for very small tenants, it’s not automatic.”
Any potential pitfalls for office tenants in the current economic downturn are magnified for those companies seeking to sublease space, brokers said.
“The sublease market has been flooded with space, and most of these are fantastic spaces,” said Ruth Colp-Haber, a founding partner at Wharton Properties, a commercial real estate brokerage. “However, if you look at the profile of the average sublandlord, they’re putting space on the market because they’re having financial difficulty. Therefore, some type of lease default, and maybe even bankruptcy, is very conceivable.”
Ms. Colp-Haber said that companies that sublease space could protect themselves by negotiating the right to stay in the space with the building’s landlord if the sublandlord should default.
To avoid the perils of subleasing office space, the CRG Partners Group, a turnaround consulting business, is seeking to leave its subleasing situation at 711 Third Avenue at 45th Street for a direct lease, said Timothy J. Lewis, a partner with the firm.
The New York office of the firm, which assists businesses in financial trouble or in bankruptcy, has been growing rapidly in recent months. Given the company’s line of work, Mr. Lewis said CRG was especially careful about evaluating the financial stability of landlords.
“We’re certainly aware of the risk, so we’re probably a little bit more careful,” Mr. Lewis said. “If we decided to go the sublease route, we’d vet the financial condition of the lessor pretty closely, and partly for that reason, we’ve decided to try and do a direct lease.”
Copyright 2009 The New York Times Company. All rights reserved.
Monday, March 02, 2009
New York Times: Guess What Got Lost in the Pool?
March 1, 2009
By GRETCHEN MORGENSON
We are all learning, to our deep distress, how the perpetual pursuit of profits drove so many of the bad decisions that financial institutions made during the mortgage mania.
But while investors tally the losses that were generated by loose lending so far, the impact of another lax practice is only beginning to be seen. That is the big banks’ minimalist approach to meeting legal requirements — bookkeeping matters, really — when pooling thousands of loans into securitization trusts.
Stated simply, the notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded.
But this seems not to have been a priority with many big banks. The result is that bankruptcy judges are finding that institutions claiming to hold the notes that back specific mortgages often cannot prove it.
On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.
With the sale set aside, Ms. Fernandez remains in the home. “We believe this loan was never assigned,” said Ray Garcia, the lawyer in Miami who represented the borrower. Now, he said, it is up to whoever can produce the underlying note to litigate the case. The statute of limitations on such a matter runs for five years, he said.
A spokeswoman for Capital One, which is in the process of acquiring Chevy Chase, did not return a phone call on Friday seeking comment.
Mr. Garcia has another case in which a borrower tried to sell his home but could not because the note underlying a $60,000 second mortgage cannot be found. The statute of limitations on the matter will expire in October, he said, and if the note holder has not come forward by then, the borrower will be free of his obligation on the second mortgage.
No one knows how many loans went into securitization trusts with defective documentation. But as messes go, this one has, ahem, potential. According to Inside Mortgage Finance, some eight million nonprime mortgages were put into securities pools in 2005 and 2006 and sold to investors. The value of these loans was $797 billion in 2005 and $815 billion in 2006.
If notes underlying even some of these mortgages were improperly assigned or lost, that will surely complicate pending legislation intended to allow bankruptcy judges to modify mortgage terms for troubled borrowers. A so-called cram-down provision in the law would let judges reduce the size of a loan, forcing whoever holds the security interest in it to take a loss.
But if the holder of the note is in doubt, how can these loans be modified?
Bookkeeping is such a bore, especially when there are billions to be made shoveling loans into trusts like coal into the Titanic’s boilers. You can imagine the thought process: Assigning notes takes time and costs money, why bother? Who’s going to ask for proof of ownership of these notes anyhow?
But as the Fernandez case and others indicate, bankruptcy judges across the country are increasingly asking these pesky questions. Two judges in California — one in state court, another in federal court — issued temporary restraining orders last month stopping foreclosures because proper documentation was not produced by lenders or their representatives. And in another California case, a borrower’s lawyer was awarded $8,800 in attorney’s fees relating to costs spent litigating against a lender that could not prove it had the right to foreclose.
California cases are especially interesting because foreclosures in that state can be conducted without the oversight of a judge. Borrowers who do not have a lawyer representing them can be turned out of their homes in four months.
Samuel L. Bufford, a federal bankruptcy judge in Los Angeles since 1985, has overseen some 100,000 bankruptcy cases. He said that in previous years, he rarely asked for documentation in a foreclosure case but that problems encountered in mortgage securitizations have made him become more demanding.
In a recent case, Judge Bufford said, he asked a lender to produce the original of the note and it turned out to be different from the copy that had been previously submitted to the court. The original had been assigned to a bank that had then transferred it to Freddie Mac, the judge explained. “They had no clue what happened after that,” he said. “Now somebody’s got to go find that note.”
“My guess is it’s because in the secondary mortgage market they have been sloppy,” Judge Bufford added. “The people who put the deals together get paid for the deals, but they don’t get paid for the paperwork.”
A small but spirited group of consumer lawyers has argued for years that the process of pooling residential mortgages into securities was so haphazard that proper documentation of the loans was never made in many cases. Leading the brigade is April Charney, a foreclosure lawyer at Jacksonville Legal Aid in Florida; she now trains consumer lawyers around the country to litigate these cases.
Depending on the documentation defect, lawyers say, investors in the trust could try to force the institution that sold the loan to the trust to buy it back. Many of these institutions would be unable to do so, however, because they are defunct. In the meantime, when judges are not persuaded that the documentation is proper, troubled borrowers can remain in their homes even if they are delinquent.
The woes brought on by sloppy bookkeeping in securitizations will be on the agenda at the American Bankruptcy Institute’s annual spring meeting on April 3. An article titled “Where’s the Note, Who’s the Holder,” co-written by Judge Bufford and R. Glen Ayers, a former federal bankruptcy judge in Texas, will be the basis of a discussion at the meeting.
Mr. Ayers, who is a lawyer at Langley & Banack in San Antonio, said he expects that these documentation problems will halt a lot of foreclosures. That will mean pain for investors who hold the securities. The problem for those who expect to receive the benefit of the note, Mr. Ayers said, is that they “may not be able to show to the judge they have a right to foreclose.”
“It’s a huge problem,” he added. “It’s going to be expensive, I don’t know how expensive, ultimately to the bondholders.”
Copyright 2009 The New York Times Company. All rights reserved.
By GRETCHEN MORGENSON
We are all learning, to our deep distress, how the perpetual pursuit of profits drove so many of the bad decisions that financial institutions made during the mortgage mania.
But while investors tally the losses that were generated by loose lending so far, the impact of another lax practice is only beginning to be seen. That is the big banks’ minimalist approach to meeting legal requirements — bookkeeping matters, really — when pooling thousands of loans into securitization trusts.
Stated simply, the notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded.
But this seems not to have been a priority with many big banks. The result is that bankruptcy judges are finding that institutions claiming to hold the notes that back specific mortgages often cannot prove it.
On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.
With the sale set aside, Ms. Fernandez remains in the home. “We believe this loan was never assigned,” said Ray Garcia, the lawyer in Miami who represented the borrower. Now, he said, it is up to whoever can produce the underlying note to litigate the case. The statute of limitations on such a matter runs for five years, he said.
A spokeswoman for Capital One, which is in the process of acquiring Chevy Chase, did not return a phone call on Friday seeking comment.
Mr. Garcia has another case in which a borrower tried to sell his home but could not because the note underlying a $60,000 second mortgage cannot be found. The statute of limitations on the matter will expire in October, he said, and if the note holder has not come forward by then, the borrower will be free of his obligation on the second mortgage.
No one knows how many loans went into securitization trusts with defective documentation. But as messes go, this one has, ahem, potential. According to Inside Mortgage Finance, some eight million nonprime mortgages were put into securities pools in 2005 and 2006 and sold to investors. The value of these loans was $797 billion in 2005 and $815 billion in 2006.
If notes underlying even some of these mortgages were improperly assigned or lost, that will surely complicate pending legislation intended to allow bankruptcy judges to modify mortgage terms for troubled borrowers. A so-called cram-down provision in the law would let judges reduce the size of a loan, forcing whoever holds the security interest in it to take a loss.
But if the holder of the note is in doubt, how can these loans be modified?
Bookkeeping is such a bore, especially when there are billions to be made shoveling loans into trusts like coal into the Titanic’s boilers. You can imagine the thought process: Assigning notes takes time and costs money, why bother? Who’s going to ask for proof of ownership of these notes anyhow?
But as the Fernandez case and others indicate, bankruptcy judges across the country are increasingly asking these pesky questions. Two judges in California — one in state court, another in federal court — issued temporary restraining orders last month stopping foreclosures because proper documentation was not produced by lenders or their representatives. And in another California case, a borrower’s lawyer was awarded $8,800 in attorney’s fees relating to costs spent litigating against a lender that could not prove it had the right to foreclose.
California cases are especially interesting because foreclosures in that state can be conducted without the oversight of a judge. Borrowers who do not have a lawyer representing them can be turned out of their homes in four months.
Samuel L. Bufford, a federal bankruptcy judge in Los Angeles since 1985, has overseen some 100,000 bankruptcy cases. He said that in previous years, he rarely asked for documentation in a foreclosure case but that problems encountered in mortgage securitizations have made him become more demanding.
In a recent case, Judge Bufford said, he asked a lender to produce the original of the note and it turned out to be different from the copy that had been previously submitted to the court. The original had been assigned to a bank that had then transferred it to Freddie Mac, the judge explained. “They had no clue what happened after that,” he said. “Now somebody’s got to go find that note.”
“My guess is it’s because in the secondary mortgage market they have been sloppy,” Judge Bufford added. “The people who put the deals together get paid for the deals, but they don’t get paid for the paperwork.”
A small but spirited group of consumer lawyers has argued for years that the process of pooling residential mortgages into securities was so haphazard that proper documentation of the loans was never made in many cases. Leading the brigade is April Charney, a foreclosure lawyer at Jacksonville Legal Aid in Florida; she now trains consumer lawyers around the country to litigate these cases.
Depending on the documentation defect, lawyers say, investors in the trust could try to force the institution that sold the loan to the trust to buy it back. Many of these institutions would be unable to do so, however, because they are defunct. In the meantime, when judges are not persuaded that the documentation is proper, troubled borrowers can remain in their homes even if they are delinquent.
The woes brought on by sloppy bookkeeping in securitizations will be on the agenda at the American Bankruptcy Institute’s annual spring meeting on April 3. An article titled “Where’s the Note, Who’s the Holder,” co-written by Judge Bufford and R. Glen Ayers, a former federal bankruptcy judge in Texas, will be the basis of a discussion at the meeting.
Mr. Ayers, who is a lawyer at Langley & Banack in San Antonio, said he expects that these documentation problems will halt a lot of foreclosures. That will mean pain for investors who hold the securities. The problem for those who expect to receive the benefit of the note, Mr. Ayers said, is that they “may not be able to show to the judge they have a right to foreclose.”
“It’s a huge problem,” he added. “It’s going to be expensive, I don’t know how expensive, ultimately to the bondholders.”
Copyright 2009 The New York Times Company. All rights reserved.
Friday, February 27, 2009
Don't Let Judges Fix Loans
By ALAN SCHWARTZ
In his housing plan, President Obama has asked Congress to give bankruptcy judges the authority to rework the terms of mortgages and allow more people to stay in their homes. Though the president’s idea sounds appealing, there are at least three reasons it is misguided.
First, the proposal would swamp bankruptcy courts. There are only about 300 bankruptcy judges, and they are already busy with an increasing number of bankruptcies. Clearing millions of new mortgage cases will take a long time and thus have little immediate effect on the foreclosure crisis. In addition, the flood of new cases would delay the resolution of business bankruptcies, to the detriment of the economy.
Second, many debtors will be disappointed. Consider the parties’ incentives. Debtors will argue for low home values while lenders will argue for the opposite, to minimize their losses. Lenders will win many of these valuation contests: they have more expertise than individuals in making their case and greater resources.
Finally, the proposal worsens economic uncertainty. A major cause of the financial crisis is that many banks do not know what their assets — and particularly home mortgages — are worth. Valuing homes is simple when prices are stable. An appraiser can look at prices in a neighborhood and plausibly infer that a particular house is worth about as much as similar houses there.
But even experts do not know how to value individual houses when a large number of them are in default, and thus potentially for sale, and cash is tight for prospective buyers. Under the president’s proposal, however, bankruptcy judges who are not experts at valuation would be required to price individual houses. Valuation thus will likely be a shot in the dark, inevitably affected by a judge’s personal sympathies. The arbitrariness of valuing single homes in bankruptcy will further increase the already considerable uncertainty regarding the value of the banks’ “toxic assets.”
There are many things that can be done to help debtors retain their homes. It would help, for instance, to change regulations to let loan administrators modify mortgages without fear of liability from the mortgage’s ultimate holders. What won’t help, however, would be to put bankruptcy judges in the business of reworking bad home loans.
Alan Schwartz is a professor of law and management at Yale.
Copyright 2009 The New York Times Company. All rights reserved.
In his housing plan, President Obama has asked Congress to give bankruptcy judges the authority to rework the terms of mortgages and allow more people to stay in their homes. Though the president’s idea sounds appealing, there are at least three reasons it is misguided.
First, the proposal would swamp bankruptcy courts. There are only about 300 bankruptcy judges, and they are already busy with an increasing number of bankruptcies. Clearing millions of new mortgage cases will take a long time and thus have little immediate effect on the foreclosure crisis. In addition, the flood of new cases would delay the resolution of business bankruptcies, to the detriment of the economy.
Second, many debtors will be disappointed. Consider the parties’ incentives. Debtors will argue for low home values while lenders will argue for the opposite, to minimize their losses. Lenders will win many of these valuation contests: they have more expertise than individuals in making their case and greater resources.
Finally, the proposal worsens economic uncertainty. A major cause of the financial crisis is that many banks do not know what their assets — and particularly home mortgages — are worth. Valuing homes is simple when prices are stable. An appraiser can look at prices in a neighborhood and plausibly infer that a particular house is worth about as much as similar houses there.
But even experts do not know how to value individual houses when a large number of them are in default, and thus potentially for sale, and cash is tight for prospective buyers. Under the president’s proposal, however, bankruptcy judges who are not experts at valuation would be required to price individual houses. Valuation thus will likely be a shot in the dark, inevitably affected by a judge’s personal sympathies. The arbitrariness of valuing single homes in bankruptcy will further increase the already considerable uncertainty regarding the value of the banks’ “toxic assets.”
There are many things that can be done to help debtors retain their homes. It would help, for instance, to change regulations to let loan administrators modify mortgages without fear of liability from the mortgage’s ultimate holders. What won’t help, however, would be to put bankruptcy judges in the business of reworking bad home loans.
Alan Schwartz is a professor of law and management at Yale.
Copyright 2009 The New York Times Company. All rights reserved.
Wednesday, February 25, 2009
Loss Mitigation in the Southern District of New York
In recognition of the mounting number of foreclosures on residential and commercial properties in the current shaky economy, the United States Bankruptcy Court for the Southern District of New York adopted a Loss Mitigation Program on December 18, 2008, which became effective on January 5, 2009.
The Loss Mitigation Program is intended to facilitate consensual resolutions for individual debtors whose residential real property is at risk of loss to foreclosure, avoid the need for bankruptcy litigation, reduce costs to debtors and secured creditors and enable debtors to reorganize or otherwise address their most significant debts and assets under the Bankruptcy Code.
"Loss mitigation" is intended to describe the full range of solutions that may avert the loss of a debtor's property to foreclosure, increased costs to the lender, or both, and may include loan modification, loan refinance, forbearance, short sale, surrender of the property in full satisfaction, or some combination of these agreements.
Any individual or joint debtor filing for relief under Chapter 7, 11, 12 or 13 of the Bankruptcy Code is eligible to participate in the Loss Mitigation Program, provided that they possess real property or a cooperative apartment that is used as a principal residence.
A party may request (or the Bankruptcy Court may order) a Chapter 13 Trustee to participate in loss mitigation. At any time a party may request (or the Bankruptcy Court may order) the appointment of an independent mediator. However, it is unclear which party or parties will be responsible for the cost of mediation.
Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time. Loss mitigation may be initiated by the debtor, by a creditor or by the Bankruptcy Court. Parties may object, in which case the Bankruptcy Court will hold a hearing.
When a Loss Mitigation Order is entered:
1. Creditors are authorized to contact the debtor directly, with the presumption that such communications do not violate the automatic stay.
2. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file for relief from the automatic stay during the loss mitigation period.
3. In a Chapter 13 case, the deadline by which a creditor must object to confirmation of the Chapter 13 plan shall be extended to permit the creditor an additional two weeks after the termination of loss mitigation, including any extension of the loss mitigation period.
At the beginning of the loss mitigation process, the Loss Mitigation Parties should discuss the following:
1. The time and method for conducting the loss mitigation sessions.
2. The types of loss mitigation solutions under consideration by each party.
3. A plan for the exchange of required information prior to the loss mitigation session, including the due date for the debtor to complete and return any information request or loss mitigation paperwork that each creditor may require.
At any time during the loss mitigation period, a Loss Mitigation Party may request a settlement conference or status conference with the Bankruptcy Court. Loss Mitigation Parties may request an extension of the loss mitigation period. If party does not consent, the Bankruptcy Court shall schedule a hearing to consider whether further loss mitigation sessions are likely to be successful.
A Loss Mitigation Party may request that the loss mitigation period be terminated and state the reasons for the request. The Bankruptcy Court may schedule a hearing to consider the request.
The Loss Mitigation Parties shall provide either a written or verbal report to the Bankruptcy Court regarding the status of loss mitigation within the time set by the Bankruptcy Court in the Loss Mitigation Order. The Loss Mitigation Parties must seek Bankruptcy Court approval of any resolution or settlement reached during loss mitigation.
To learn more about how the Loss Mitigation Program can protect your residence from foreclosure, please contact Jim Shenwick.
The Loss Mitigation Program is intended to facilitate consensual resolutions for individual debtors whose residential real property is at risk of loss to foreclosure, avoid the need for bankruptcy litigation, reduce costs to debtors and secured creditors and enable debtors to reorganize or otherwise address their most significant debts and assets under the Bankruptcy Code.
"Loss mitigation" is intended to describe the full range of solutions that may avert the loss of a debtor's property to foreclosure, increased costs to the lender, or both, and may include loan modification, loan refinance, forbearance, short sale, surrender of the property in full satisfaction, or some combination of these agreements.
Any individual or joint debtor filing for relief under Chapter 7, 11, 12 or 13 of the Bankruptcy Code is eligible to participate in the Loss Mitigation Program, provided that they possess real property or a cooperative apartment that is used as a principal residence.
A party may request (or the Bankruptcy Court may order) a Chapter 13 Trustee to participate in loss mitigation. At any time a party may request (or the Bankruptcy Court may order) the appointment of an independent mediator. However, it is unclear which party or parties will be responsible for the cost of mediation.
Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time. Loss mitigation may be initiated by the debtor, by a creditor or by the Bankruptcy Court. Parties may object, in which case the Bankruptcy Court will hold a hearing.
When a Loss Mitigation Order is entered:
1. Creditors are authorized to contact the debtor directly, with the presumption that such communications do not violate the automatic stay.
2. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file for relief from the automatic stay during the loss mitigation period.
3. In a Chapter 13 case, the deadline by which a creditor must object to confirmation of the Chapter 13 plan shall be extended to permit the creditor an additional two weeks after the termination of loss mitigation, including any extension of the loss mitigation period.
At the beginning of the loss mitigation process, the Loss Mitigation Parties should discuss the following:
1. The time and method for conducting the loss mitigation sessions.
2. The types of loss mitigation solutions under consideration by each party.
3. A plan for the exchange of required information prior to the loss mitigation session, including the due date for the debtor to complete and return any information request or loss mitigation paperwork that each creditor may require.
At any time during the loss mitigation period, a Loss Mitigation Party may request a settlement conference or status conference with the Bankruptcy Court. Loss Mitigation Parties may request an extension of the loss mitigation period. If party does not consent, the Bankruptcy Court shall schedule a hearing to consider whether further loss mitigation sessions are likely to be successful.
A Loss Mitigation Party may request that the loss mitigation period be terminated and state the reasons for the request. The Bankruptcy Court may schedule a hearing to consider the request.
The Loss Mitigation Parties shall provide either a written or verbal report to the Bankruptcy Court regarding the status of loss mitigation within the time set by the Bankruptcy Court in the Loss Mitigation Order. The Loss Mitigation Parties must seek Bankruptcy Court approval of any resolution or settlement reached during loss mitigation.
To learn more about how the Loss Mitigation Program can protect your residence from foreclosure, please contact Jim Shenwick.
Tuesday, January 27, 2009
Dischargeability of Taxes in Bankruptcy
Many clients, lawyers and accountants have called us regarding the discharge of taxes in bankruptcy filings. In these difficult economic times, the IRS and New York State have stepped up their auditing of individuals and businesses.
Many kinds of “old” state and federal income taxes are dischargeable in bankruptcy. In the case of income taxes, they are dischargeable in Chapter 7 if all of the following criteria are met:
1. The tax is for a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition;
2. A tax return was filed more than two years prior to the filing of the bankruptcy petition;
3. The tax was assessed more than 240 days prior to filing of the bankruptcy petition;
4. The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax;
5. The tax was not assessable at the time of the filing of the bankruptcy petition; and
6. The tax was unsecured.
Section 507(a)(8) of the Bankruptcy Code provides that:
Income taxes: (i) for tax years ending on or before the date of filing the bankruptcy petition, for which a return is due (including extensions) within 3 years of the filing of the bankruptcy petition; (ii) assessed within 240 days before the date of filing the petition; (iii) not assessed before the petition date, but were assessable as of the petition date, unless these taxes were still assessable solely because no return, a late return (within 2 years of the filing of the bankruptcy petition), or a fraudulent return was filed, withholding taxes for which a person is liable in any capacity, an employer's share of employment taxes on wages, salaries, or commissions (including vacation, severance, and sick leave pay) and excise taxes on transactions occurring before the date of filing the bankruptcy petition are all not dischargeable in bankruptcy.
As part of our bankruptcy intake process, we analyze a client’s state and federal tax transcripts to determine whether or not their tax debts (if any) are dischargeable or not.
However, some of the taxes that would ordinarily be dischargeable because of their age may not be, if the Bankruptcy Court determines that the debtor has acted in “bad faith” with respect to their non-payment of taxes. Section 523 of the Bankruptcy Code (which governs exemptions to discharge) provides in Section 523(a)(1)(C) that:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.”
However, Section 523 does not define what constitutes a “willful attempt to evade or defeat” a tax. To interpret this language, the Bankruptcy Court adopted the three-part test applicable under Section 6672 of the Internal Revenue Code, which imposes civil penalties on any taxpayer “who willfully attempts in any manner to evade or defeat any . . . tax or the payment thereof.” Under that test, a willful attempt to evade or defeat a tax is established if the debtor (1) had a duty to pay the tax, (2) knew of that duty, and (3) voluntarily and intentionally violated the duty. Numerous courts have adopted this test as the standard for willful evasion under Section 523.
With respect to the attempt to avoid or evade taxes, the IRS takes the position that if a well-to-do individual (doctor, investment banker, or attorney) pays creditors other than the IRS, when they have available assets, this is “an attempt to avoid or evade taxes.”
In Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003), the debtor, Christine Carter Lynch, brought an adversary proceeding under chapter 7 of the Bankruptcy Code seeking a discharge of the claims of the Internal Revenue Service, totaling approximately $600,000 as of the time of trial, with respect to her tax liability for two groups of tax years -- for tax years 1980, 1981 and 1982, totaling approximately $542,000 (the “1980s Taxes”), and for tax years 1993, 1994 and 1995, totaling approximately $55,000 (the “1990s Taxes”). The IRS opposed her request for relief, with respect to both groups of tax years, contending that she is subject to the statutory exception to discharge of §523(a)(1)(C).
The Court noted that the caselaw applying §523(a)(1)(C) has consistently held that its requirements are satisfied in situations where the debtor -- even without
fraud or evil motive -- has prioritized his or her spending by choosing to satisfy other obligations and/or pay for other things (at least for non-essentials) (emphasis added) before the payment of taxes, and taxes knowingly are not paid.
Here, with respect to each of the 1980s Taxes and 1990s Taxes, the Court had to determine whether that latter principle applies under the facts here. Assuming it did, the Court had to also determine, with respect to the 1980s Taxes, to what extent it applies when if the Debtor not acted in that manner, she could not have paid all of the tax debt anyway.
After hearing the evidence, the Court found that Ms. Lynch - among other things, spending money on a Central Park West Apartment at a cost of more than $6,000 per month; eating dinner in restaurants four days a week; traveling considerably, to California, China and Paris; running up credit card bills; and making huge gratuitous transfers to her church, all ahead of payment of the back taxes due -- of the same type that has been held to constitute a willful attempt to evade the payment of taxes in earlier cases. And the Court further found that, but for her spending priorities, Ms. Lynch could have paid the majority of the 1980s Taxes -- even after payment of the 1990s Taxes, which plainly could have been and should have been paid in full.
The Court held that Ms. Lynch’s extravagant lifestyle was a factor in her failure to pay both the 1980s Taxes and the 1990s Taxes, stating:
“By electing to make discretionary expenditures on the incremental cost of a Central Park West apartment, the restaurant dining, the credit card purchases and payments, the travel, the tuition and the ‘tithing,’ Ms. Lynch evidenced exactly the kind of conduct that resulted in nondischargeability in Wright, Haesloop, Angel, and the other discretionary spending cases.” Lynch at 65.
Because Ms. Lynch elected to spend her money elsewhere and not to satisfy her tax obligations -- especially when she had the ability to easily pay them in full -- the Court held that she willfully evaded her 1990s Taxes.
At the same time, the Court conceded that the IRS was unrealistic in expecting Ms. Lynch to be able to pay the entirety of her 1980s Taxes without a reduction, and criticized the government’s conduct in the case. However, the Court found that Ms. Lynch could have easily paid her 1990s Taxes without a drastic adjustment in her lifestyle.
Anyone who has questions concerning the discharge of taxes should contact Jim Shenwick.
Many kinds of “old” state and federal income taxes are dischargeable in bankruptcy. In the case of income taxes, they are dischargeable in Chapter 7 if all of the following criteria are met:
1. The tax is for a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition;
2. A tax return was filed more than two years prior to the filing of the bankruptcy petition;
3. The tax was assessed more than 240 days prior to filing of the bankruptcy petition;
4. The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax;
5. The tax was not assessable at the time of the filing of the bankruptcy petition; and
6. The tax was unsecured.
Section 507(a)(8) of the Bankruptcy Code provides that:
Income taxes: (i) for tax years ending on or before the date of filing the bankruptcy petition, for which a return is due (including extensions) within 3 years of the filing of the bankruptcy petition; (ii) assessed within 240 days before the date of filing the petition; (iii) not assessed before the petition date, but were assessable as of the petition date, unless these taxes were still assessable solely because no return, a late return (within 2 years of the filing of the bankruptcy petition), or a fraudulent return was filed, withholding taxes for which a person is liable in any capacity, an employer's share of employment taxes on wages, salaries, or commissions (including vacation, severance, and sick leave pay) and excise taxes on transactions occurring before the date of filing the bankruptcy petition are all not dischargeable in bankruptcy.
As part of our bankruptcy intake process, we analyze a client’s state and federal tax transcripts to determine whether or not their tax debts (if any) are dischargeable or not.
However, some of the taxes that would ordinarily be dischargeable because of their age may not be, if the Bankruptcy Court determines that the debtor has acted in “bad faith” with respect to their non-payment of taxes. Section 523 of the Bankruptcy Code (which governs exemptions to discharge) provides in Section 523(a)(1)(C) that:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.”
However, Section 523 does not define what constitutes a “willful attempt to evade or defeat” a tax. To interpret this language, the Bankruptcy Court adopted the three-part test applicable under Section 6672 of the Internal Revenue Code, which imposes civil penalties on any taxpayer “who willfully attempts in any manner to evade or defeat any . . . tax or the payment thereof.” Under that test, a willful attempt to evade or defeat a tax is established if the debtor (1) had a duty to pay the tax, (2) knew of that duty, and (3) voluntarily and intentionally violated the duty. Numerous courts have adopted this test as the standard for willful evasion under Section 523.
With respect to the attempt to avoid or evade taxes, the IRS takes the position that if a well-to-do individual (doctor, investment banker, or attorney) pays creditors other than the IRS, when they have available assets, this is “an attempt to avoid or evade taxes.”
In Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003), the debtor, Christine Carter Lynch, brought an adversary proceeding under chapter 7 of the Bankruptcy Code seeking a discharge of the claims of the Internal Revenue Service, totaling approximately $600,000 as of the time of trial, with respect to her tax liability for two groups of tax years -- for tax years 1980, 1981 and 1982, totaling approximately $542,000 (the “1980s Taxes”), and for tax years 1993, 1994 and 1995, totaling approximately $55,000 (the “1990s Taxes”). The IRS opposed her request for relief, with respect to both groups of tax years, contending that she is subject to the statutory exception to discharge of §523(a)(1)(C).
The Court noted that the caselaw applying §523(a)(1)(C) has consistently held that its requirements are satisfied in situations where the debtor -- even without
fraud or evil motive -- has prioritized his or her spending by choosing to satisfy other obligations and/or pay for other things (at least for non-essentials) (emphasis added) before the payment of taxes, and taxes knowingly are not paid.
Here, with respect to each of the 1980s Taxes and 1990s Taxes, the Court had to determine whether that latter principle applies under the facts here. Assuming it did, the Court had to also determine, with respect to the 1980s Taxes, to what extent it applies when if the Debtor not acted in that manner, she could not have paid all of the tax debt anyway.
After hearing the evidence, the Court found that Ms. Lynch - among other things, spending money on a Central Park West Apartment at a cost of more than $6,000 per month; eating dinner in restaurants four days a week; traveling considerably, to California, China and Paris; running up credit card bills; and making huge gratuitous transfers to her church, all ahead of payment of the back taxes due -- of the same type that has been held to constitute a willful attempt to evade the payment of taxes in earlier cases. And the Court further found that, but for her spending priorities, Ms. Lynch could have paid the majority of the 1980s Taxes -- even after payment of the 1990s Taxes, which plainly could have been and should have been paid in full.
The Court held that Ms. Lynch’s extravagant lifestyle was a factor in her failure to pay both the 1980s Taxes and the 1990s Taxes, stating:
“By electing to make discretionary expenditures on the incremental cost of a Central Park West apartment, the restaurant dining, the credit card purchases and payments, the travel, the tuition and the ‘tithing,’ Ms. Lynch evidenced exactly the kind of conduct that resulted in nondischargeability in Wright, Haesloop, Angel, and the other discretionary spending cases.” Lynch at 65.
Because Ms. Lynch elected to spend her money elsewhere and not to satisfy her tax obligations -- especially when she had the ability to easily pay them in full -- the Court held that she willfully evaded her 1990s Taxes.
At the same time, the Court conceded that the IRS was unrealistic in expecting Ms. Lynch to be able to pay the entirety of her 1980s Taxes without a reduction, and criticized the government’s conduct in the case. However, the Court found that Ms. Lynch could have easily paid her 1990s Taxes without a drastic adjustment in her lifestyle.
Anyone who has questions concerning the discharge of taxes should contact Jim Shenwick.
Monday, January 26, 2009
Bankruptcy as a Step to Solvency
By M. P. DUNLEAVEY
Published: January 23, 2009
The idea of declaring bankruptcy may be unpleasant, even abhorrent, but for many people right now it could be the best option.
The question is: How do you make that choice? How bad do things need to get before you throw in the towel, and most of your debts, and petition the courts for a fresh start?
More than a million people filed for personal bankruptcy in the 12 months that ended last September, a staggering 30 percent increase over the period a year earlier, according to the Administrative Office of the U.S. Courts. And thousands more “are unofficially bankrupt” and reluctant to file, said Justin Harelik, a lawyer with Price Law Group in Los Angeles.
“I’m aware that the word itself carries so much shame and stigma,” said Mr. Harelik. “But it’s right for so many people.”
The sting of failure and the dread of ruined credit are, understandably, deterrents to a bankruptcy filing. But those fears can prevent people from taking advantage of the financial protection offered by bankruptcy, which may allow you to erase most of your consumer debt while preserving assets like your retirement accounts and sometimes even your home and car. Instead, many people delay filling until they are truly desperate.
“When we surveyed people about how long they seriously struggled, over 40 percent said more than two years,” said Katherine M. Porter, associate professor at the University of Iowa law school and a researcher with the Consumer Bankruptcy Project, a continuing study of consumer bankruptcy filings. “A lot of attorneys say they wish people would come earlier, before they emptied their retirement accounts or lost their car to repossession,” she said.
Because bankruptcy is so complex, and because bankruptcy laws underwent a major overhaul in 2005, many people are not only wary of filing, but also confused about their options and what the possible outcomes are.
One common misunderstanding is that declaring bankruptcy will ruin your credit. If you’re at the point of even considering bankruptcy, it’s likely that your credit is in tatters anyway, notes Ms. Porter.
“You may not end up that much worse off,” she said. In some cases, your credit could emerge in better shape once you’ve dealt with your debts.
Another myth is that you must be at the frayed end of your financial rope before you file. You won’t lose everything in a bankruptcy because some assets are protected, and you will need those to move forward, says Elizabeth Warren, a professor at Harvard Law School and one of the lead researchers on the Consumer Bankruptcy Project. Waiting until your resources are entirely depleted defeats an important purpose of bankruptcy, “which is to help people rebuild their lives on a sounder footing,” Ms. Warren said.
It was the desire to move forward with her life, not just shrug off her debts, that finally pushed Claire Morgan, who lives in Chicago, to begin the bankruptcy process in December. In addition to lingering student loans of about $12,000, Ms. Morgan had been struggling to pay $40,000 in credit card debt — a sum slightly higher than her annual income, she said. But she couldn’t make any headway.
In part, it was the sense of futility that finally pushed Ms. Morgan over the edge. But she also happened to hear a cautionary tale about a friend, also deeply in debt, who had decided not to declare bankruptcy — and ended up living in constant strain, unable to move forward with life.
“That really made me think twice,” she said. “Bankruptcy was the last thing I wanted. But it’s better to be able to say ‘I’m in the clear’ than to be still be struggling in five years to pay $40,000 in debt on a $35,000 salary.”
Knowing whether to file, when to file and whether to do so under Chapter 7 or Chapter 13 of the bankruptcy code is a decision best made with the help of a lawyer. Most bankruptcy lawyers offer a free initial consultation, Ms. Porter said. The National Association of Consumer Bankruptcy Attorneys has a Web site where you can search for a lawyer by location.
Copyright 2009 The New York Times Company. All rights reserved.
Published: January 23, 2009
The idea of declaring bankruptcy may be unpleasant, even abhorrent, but for many people right now it could be the best option.
The question is: How do you make that choice? How bad do things need to get before you throw in the towel, and most of your debts, and petition the courts for a fresh start?
More than a million people filed for personal bankruptcy in the 12 months that ended last September, a staggering 30 percent increase over the period a year earlier, according to the Administrative Office of the U.S. Courts. And thousands more “are unofficially bankrupt” and reluctant to file, said Justin Harelik, a lawyer with Price Law Group in Los Angeles.
“I’m aware that the word itself carries so much shame and stigma,” said Mr. Harelik. “But it’s right for so many people.”
The sting of failure and the dread of ruined credit are, understandably, deterrents to a bankruptcy filing. But those fears can prevent people from taking advantage of the financial protection offered by bankruptcy, which may allow you to erase most of your consumer debt while preserving assets like your retirement accounts and sometimes even your home and car. Instead, many people delay filling until they are truly desperate.
“When we surveyed people about how long they seriously struggled, over 40 percent said more than two years,” said Katherine M. Porter, associate professor at the University of Iowa law school and a researcher with the Consumer Bankruptcy Project, a continuing study of consumer bankruptcy filings. “A lot of attorneys say they wish people would come earlier, before they emptied their retirement accounts or lost their car to repossession,” she said.
Because bankruptcy is so complex, and because bankruptcy laws underwent a major overhaul in 2005, many people are not only wary of filing, but also confused about their options and what the possible outcomes are.
One common misunderstanding is that declaring bankruptcy will ruin your credit. If you’re at the point of even considering bankruptcy, it’s likely that your credit is in tatters anyway, notes Ms. Porter.
“You may not end up that much worse off,” she said. In some cases, your credit could emerge in better shape once you’ve dealt with your debts.
Another myth is that you must be at the frayed end of your financial rope before you file. You won’t lose everything in a bankruptcy because some assets are protected, and you will need those to move forward, says Elizabeth Warren, a professor at Harvard Law School and one of the lead researchers on the Consumer Bankruptcy Project. Waiting until your resources are entirely depleted defeats an important purpose of bankruptcy, “which is to help people rebuild their lives on a sounder footing,” Ms. Warren said.
It was the desire to move forward with her life, not just shrug off her debts, that finally pushed Claire Morgan, who lives in Chicago, to begin the bankruptcy process in December. In addition to lingering student loans of about $12,000, Ms. Morgan had been struggling to pay $40,000 in credit card debt — a sum slightly higher than her annual income, she said. But she couldn’t make any headway.
In part, it was the sense of futility that finally pushed Ms. Morgan over the edge. But she also happened to hear a cautionary tale about a friend, also deeply in debt, who had decided not to declare bankruptcy — and ended up living in constant strain, unable to move forward with life.
“That really made me think twice,” she said. “Bankruptcy was the last thing I wanted. But it’s better to be able to say ‘I’m in the clear’ than to be still be struggling in five years to pay $40,000 in debt on a $35,000 salary.”
Knowing whether to file, when to file and whether to do so under Chapter 7 or Chapter 13 of the bankruptcy code is a decision best made with the help of a lawyer. Most bankruptcy lawyers offer a free initial consultation, Ms. Porter said. The National Association of Consumer Bankruptcy Attorneys has a Web site where you can search for a lawyer by location.
Copyright 2009 The New York Times Company. All rights reserved.
Tuesday, January 20, 2009
More Headaches on the Way for Madoff Investors
The Bernard Madoff Ponzi scheme was announced on December 11, 2008, and already, much has transpired. The U.S. Justice Department has a criminal action pending against Madoff, the U.S. Securities Exchange Commission has an enforcement action against him and his brokerage firm, and numerous suits have been filed against various parties. Bernard L. Madoff Securities, LLC is now in bankruptcy and a Trustee has been appointed. The Trustee recently sent claim forms to customers of Madoff Securities in order to provide them with information on how to take advantage of insurance protection that is available from the Securities Investment Protection Corporation.
What lies ahead for investors? Investors are likely to be faced with a lawsuit by the Trustee seeking the return of some or all of the proceeds they received from Madoff Securities. As an example, in another recent Ponzi scheme, the trustee brought suit against more than 10,000 investors for the return of proceeds received from the Ponzi scheme operator.
On the basis of fraudulent transfer laws, the Trustee can pursue investors to recover money paid to them. Under Section 548 of the Bankruptcy Code, the Trustee may avoid any transfer of monies from the Ponzi scheme operator made within two (2) years prior to the date of filing of a petition in Bankruptcy. Under similar state statutes, the Trustee to go back even longer, up to six (6) years in some cases. Other actions can also be initiated. Under fraudulent conveyance law, as long as the transfer of payment was made with the intent to hinder, delay, or defraud a bankrupt entity, the Trustee can seek to recover funds.
Unfortunately, for the investors, the courts have determined that actual fraud always exists in a Ponzi scheme. Based on this theory, the Trustee can seek to recover all the amounts that have been paid to the investor, both principal and any return on the investment. Other theories of recovery also exist. In any event, lawsuits are on their way.
The investor must then defend the suit or be subject to entry of default judgment. The investor can try to avail himself of certain defenses, including one based on "good faith." In such instance, if the investor can prove that payments were received in good faith, the Trustee will only be able to recover profits, not any principal that was returned to the investor. A good faith defense will be judged by an objective standard, that is, the investor must prove that he did not know and should not have known of the debtors Ponzi scheme. One of the factors that determines whether the investor should have known that a Ponzi scheme was in place will be an analysis of the profits promised in contrast to returns that can be obtained under actual market conditions.
If the investor successfully proves a good faith defense, the Trustee's recovery will be limited to the amount of profits received and the investor will be able to retain any principal repayments.
The Trustee can also proceed based on the theory of "constructive fraud" under the fraudulent transfer laws. However, under this theory, the Trustee can only recover profits paid to the investor, not the principal.
The Trustee also has another option in attempting to recover money from investors. Under the bankruptcy law provisions, the Trustee can seek recover, as a preference payment, any payment to the investor made within ninety (90) days of filing the petition in the bankruptcy case. This period can be extended to one (1) year for "insiders." Depending on the facts, the investor may have defenses available to this action.
Where will all this "recaptured" money go? To the Bankruptcy Estates.
Eventually, after the expenses of the bankruptcy case and litigations are paid, the money will go back to claimants and investors. The leftover funds will to be distributed pro rata, on the basis of valid claims against the Bankruptcy Estate, and in order of priority established under the Bankruptcy Code.
It is clear that another headache awaits the investors in this Ponzi scheme... defending themselves from lawsuits brought by the Trustee.
Copyright 2009 LeClairRyan. All rights reserved.
What lies ahead for investors? Investors are likely to be faced with a lawsuit by the Trustee seeking the return of some or all of the proceeds they received from Madoff Securities. As an example, in another recent Ponzi scheme, the trustee brought suit against more than 10,000 investors for the return of proceeds received from the Ponzi scheme operator.
On the basis of fraudulent transfer laws, the Trustee can pursue investors to recover money paid to them. Under Section 548 of the Bankruptcy Code, the Trustee may avoid any transfer of monies from the Ponzi scheme operator made within two (2) years prior to the date of filing of a petition in Bankruptcy. Under similar state statutes, the Trustee to go back even longer, up to six (6) years in some cases. Other actions can also be initiated. Under fraudulent conveyance law, as long as the transfer of payment was made with the intent to hinder, delay, or defraud a bankrupt entity, the Trustee can seek to recover funds.
Unfortunately, for the investors, the courts have determined that actual fraud always exists in a Ponzi scheme. Based on this theory, the Trustee can seek to recover all the amounts that have been paid to the investor, both principal and any return on the investment. Other theories of recovery also exist. In any event, lawsuits are on their way.
The investor must then defend the suit or be subject to entry of default judgment. The investor can try to avail himself of certain defenses, including one based on "good faith." In such instance, if the investor can prove that payments were received in good faith, the Trustee will only be able to recover profits, not any principal that was returned to the investor. A good faith defense will be judged by an objective standard, that is, the investor must prove that he did not know and should not have known of the debtors Ponzi scheme. One of the factors that determines whether the investor should have known that a Ponzi scheme was in place will be an analysis of the profits promised in contrast to returns that can be obtained under actual market conditions.
If the investor successfully proves a good faith defense, the Trustee's recovery will be limited to the amount of profits received and the investor will be able to retain any principal repayments.
The Trustee can also proceed based on the theory of "constructive fraud" under the fraudulent transfer laws. However, under this theory, the Trustee can only recover profits paid to the investor, not the principal.
The Trustee also has another option in attempting to recover money from investors. Under the bankruptcy law provisions, the Trustee can seek recover, as a preference payment, any payment to the investor made within ninety (90) days of filing the petition in the bankruptcy case. This period can be extended to one (1) year for "insiders." Depending on the facts, the investor may have defenses available to this action.
Where will all this "recaptured" money go? To the Bankruptcy Estates.
Eventually, after the expenses of the bankruptcy case and litigations are paid, the money will go back to claimants and investors. The leftover funds will to be distributed pro rata, on the basis of valid claims against the Bankruptcy Estate, and in order of priority established under the Bankruptcy Code.
It is clear that another headache awaits the investors in this Ponzi scheme... defending themselves from lawsuits brought by the Trustee.
Copyright 2009 LeClairRyan. All rights reserved.
Monday, January 12, 2009
Business Week: The Madoff Case Could Reel in Former Investors
By Matthew Goldstein
The managers of the Fort Worth Employees' Retirement Fund thought they had dodged a bullet when Bernard L. Madoff was arrested on Dec. 11 for alleged fraud. Just a few months earlier the $1.7 billion public pension plan had pulled $10 million out of a hedge fund that invested exclusively with Madoff. But now the managers face the possibility of having to give back the money—a sum that includes all of the pension's purported gains over the years plus its initial investment.
The Fort Worth plan and other Madoff investors who got out before the operation imploded may yet be snared by the bankruptcy proceedings. Under federal law, the trustee in the case can sue former investors to force them to return their profits and principal, a process known as a clawback. The legal theory is that investors who stick around to the bitter end shouldn't bear all the pain. With the multibillion-dollar tally of losses rising daily, the Madoff case could take years to unravel in court, leaving hundreds of pensions, endowments, and other former investors in the lurch as they await a ruling on their financial liability. "It depends on what the trustee wants to do," says Michael Missal, a lawyer at K&L Gates. Irving Picard, the trustee named on Dec. 15 to oversee the liquidation of Madoff's business, declined to comment.
Picard may take his cues from the recent bankruptcy case of Bayou Group, the $450 million hedge fund whose managers were convicted of conspiracy and fraud in 2005. The trustee in those proceedings, Jeff Marwil, filed more than 130 suits against investors who had pulled money from the fund within the prior six years. Marwil argued that former clients, even those who barely knew Bayou manager Samuel Israel, should have to take a hit as well, since Bayou was nothing more than a Ponzi scheme. The judge ruled in his favor.
The clawbacks in the Madoff case could prove more controversial. In most hedge fund scandals, including Bayou, the majority of clients invested directly with the dubious money management firm. But most of Madoff's customers came through a half-dozen or so "feeder" funds. Those affiliated vehicles operated under their own brand name but handed much of the money over to Madoff.
"financial death sentence"
Some investors may not have known what they were buying. The Fort Worth pension fund, for example, owned the Rye Select Broad Market, a hedge fund managed by the Tremont Group. The Rye marketing literature rarely, if ever, mentioned Madoff by name, even though his fund was the only investment. Says Steven Caruso, a lawyer for a number of Tremont investors: "Some investors may be facing the prospect of a financial death sentence if they're forced to return funds." In a letter to investors, Tremont's managers say they "exercised appropriate due diligence."
Managers of the Fort Worth pension fund, who first invested with Rye five years ago, started to rethink their investment in early 2008 after hiring Albourne Partners, a London due diligence firm, to assess their hedge fund portfolio. The Rye fund raised red flags almost immediately. Albourne's managing director, Simon Ruddick, says the firm, which had long-standing concerns about Madoff's trading strategy and consistent returns, had urged clients for nearly a decade to avoid affiliated funds such as Rye. In July the pension's board voted unanimously to dump its Rye stake. "If you are person who has nothing left, naturally you want everyone to share in the pain," says Robert Klausner, a lawyer for the Fort Worth pension. "But if you are someone with no inside knowledge of fraud who redeems an investment in the ordinary course of business, you shouldn't be punished."
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
The managers of the Fort Worth Employees' Retirement Fund thought they had dodged a bullet when Bernard L. Madoff was arrested on Dec. 11 for alleged fraud. Just a few months earlier the $1.7 billion public pension plan had pulled $10 million out of a hedge fund that invested exclusively with Madoff. But now the managers face the possibility of having to give back the money—a sum that includes all of the pension's purported gains over the years plus its initial investment.
The Fort Worth plan and other Madoff investors who got out before the operation imploded may yet be snared by the bankruptcy proceedings. Under federal law, the trustee in the case can sue former investors to force them to return their profits and principal, a process known as a clawback. The legal theory is that investors who stick around to the bitter end shouldn't bear all the pain. With the multibillion-dollar tally of losses rising daily, the Madoff case could take years to unravel in court, leaving hundreds of pensions, endowments, and other former investors in the lurch as they await a ruling on their financial liability. "It depends on what the trustee wants to do," says Michael Missal, a lawyer at K&L Gates. Irving Picard, the trustee named on Dec. 15 to oversee the liquidation of Madoff's business, declined to comment.
Picard may take his cues from the recent bankruptcy case of Bayou Group, the $450 million hedge fund whose managers were convicted of conspiracy and fraud in 2005. The trustee in those proceedings, Jeff Marwil, filed more than 130 suits against investors who had pulled money from the fund within the prior six years. Marwil argued that former clients, even those who barely knew Bayou manager Samuel Israel, should have to take a hit as well, since Bayou was nothing more than a Ponzi scheme. The judge ruled in his favor.
The clawbacks in the Madoff case could prove more controversial. In most hedge fund scandals, including Bayou, the majority of clients invested directly with the dubious money management firm. But most of Madoff's customers came through a half-dozen or so "feeder" funds. Those affiliated vehicles operated under their own brand name but handed much of the money over to Madoff.
"financial death sentence"
Some investors may not have known what they were buying. The Fort Worth pension fund, for example, owned the Rye Select Broad Market, a hedge fund managed by the Tremont Group. The Rye marketing literature rarely, if ever, mentioned Madoff by name, even though his fund was the only investment. Says Steven Caruso, a lawyer for a number of Tremont investors: "Some investors may be facing the prospect of a financial death sentence if they're forced to return funds." In a letter to investors, Tremont's managers say they "exercised appropriate due diligence."
Managers of the Fort Worth pension fund, who first invested with Rye five years ago, started to rethink their investment in early 2008 after hiring Albourne Partners, a London due diligence firm, to assess their hedge fund portfolio. The Rye fund raised red flags almost immediately. Albourne's managing director, Simon Ruddick, says the firm, which had long-standing concerns about Madoff's trading strategy and consistent returns, had urged clients for nearly a decade to avoid affiliated funds such as Rye. In July the pension's board voted unanimously to dump its Rye stake. "If you are person who has nothing left, naturally you want everyone to share in the pain," says Robert Klausner, a lawyer for the Fort Worth pension. "But if you are someone with no inside knowledge of fraud who redeems an investment in the ordinary course of business, you shouldn't be punished."
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
Friday, January 09, 2009
NYT: Citi Reaches Deal with Lawmakers on Home Loans
By CARL HULSE
Published: January 8, 2009
WASHINGTON — In a move that would help troubled homeowners, Citigroup agreed to support legislation that would let bankruptcy judges adjust mortgages for at-risk borrowers, leading Congressional Democrats said on Thursday.
Financial industry lobbyists, however, said the plan was flawed and vowed to fight legislation aimed at easing up on homeowners facing foreclosure.
Members of the House and Senate said Citigroup had agreed to drop its opposition, providing no future mortgages are covered by the law.
Citigroup, which is receiving more than $300 billion in bailout assistance, says that it is open to measures that would help homeowners.
“Citi shares this legislation’s goal to help distressed borrowers stay in their homes, and believes it will serve as an additional tool to the extensive home retention programs currently in place to help at-risk borrowers,” Vikram S. Pandit, the chief executive of Citigroup, wrote in a letter released Thursday night.
The revised bill that Citigroup endorsed would allow bankruptcy judges to adjust the principal payments or interest rates on existing loans.
Judges could also extend the terms on mortgage loans, according to the language of the bill, which would force lenders to take losses without a say in bankruptcy court proceedings.
Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, said he and fellow backers of the plan see it as a way to create more voluntary negotiations between struggling homeowners and financial institutions. So far, voluntary programs have proved ineffective, Democrats said.
Citigroup had been part of the Bankruptcy Coalition of the Financial Services Roundtable, an industry group, since it aggressively lobbied for changes to the bankruptcy code in 2005.
The coalition — a group of major trade associations and lenders like Bank of America, JPMorgan Chase and Wells Fargo — also fought to block the so-called cramdown legislation last year.
No other bank has broken ranks with the industry on the proposed bill. Mr. Durbin said he hoped the move by Citigroup, should other banks and financial trade associations take the same stance, would lead to backing by enough Democrats and moderate Republicans to push the bill through.
Senator Charles E. Schumer, Democrat of New York, said he had been contacting officials of top financial institutions for months, trying to persuade them that it would be to their advantage to back the plan since it could help stabilize a housing market that has severely hurt the economy.
Three changes were made to the legislation sponsored by Mr. Durbin and Representative John Conyers Jr., Democrat of Michigan and chairman of the House Judiciary Committee: only existing mortgages will be eligible; homeowners will have to certify they tried to contact their mortgage holder lenders regarding loan modifications before filing for bankruptcy; and only major violations of the Truth in Lending Act will cause lenders to forfeit their claims in a bankruptcy.
Backed by bankers and other financial groups, many Congressional Republicans and some Democrats have balked at the plan to let bankruptcy judges alter mortgage terms on primary residences, saying that would drive up mortgage costs.
But officials said financial institutions were coming to the conclusion that it might be better to get a reduced loan payment through a bankruptcy or voluntary negotiations than to get no money at all.
Aides to Senator Richard C. Shelby of Alabama, the senior Republican on the Senate banking committee, said he would have no immediate response to the plan.
Scott E. Talbott, senior vice president for government affairs at the Financial Services Roundtable, said the group opposed cramdown legislation because it “creates huge risks” for the mortgage market.
He suggested the bill would force banks to further restrict lending and absorb huge losses as the economy worsens. He also suggested the bill would create perverse incentives that might encourage more homeowners to seek bankruptcy protection.
Citigroup recently began negotiating with lawmakers, in a move that some observers suggest reflects its desire to win favor on Capitol Hill after receiving billions in funds from the bailout program.
The government has invested $45 billion in Citigroup and agreed to guarantee about $269 billion in highly illiquid mortgage investments.
“If you’re looking at a way to get to the bottom of the economic problems in our country, this is the cause of our economic problems,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee. “It is the housing foreclosure problem. We’ve got to address that.”
The plan has been backed by members of Congress who see it as a way to help distressed homeowners and balance federal relief efforts that have been aimed at Wall Street and the automobile industry.
Mr. Schumer said he had been in contact with other large banks and he expected they would soon announce their support or at least drop their opposition to the plan.
“Citigroup’s action has broken the dam,” he said.
Eric Dash in New York contributed reporting.
Copyright 2008 The New York Times Company. All rights reserved.
Published: January 8, 2009
WASHINGTON — In a move that would help troubled homeowners, Citigroup agreed to support legislation that would let bankruptcy judges adjust mortgages for at-risk borrowers, leading Congressional Democrats said on Thursday.
Financial industry lobbyists, however, said the plan was flawed and vowed to fight legislation aimed at easing up on homeowners facing foreclosure.
Members of the House and Senate said Citigroup had agreed to drop its opposition, providing no future mortgages are covered by the law.
Citigroup, which is receiving more than $300 billion in bailout assistance, says that it is open to measures that would help homeowners.
“Citi shares this legislation’s goal to help distressed borrowers stay in their homes, and believes it will serve as an additional tool to the extensive home retention programs currently in place to help at-risk borrowers,” Vikram S. Pandit, the chief executive of Citigroup, wrote in a letter released Thursday night.
The revised bill that Citigroup endorsed would allow bankruptcy judges to adjust the principal payments or interest rates on existing loans.
Judges could also extend the terms on mortgage loans, according to the language of the bill, which would force lenders to take losses without a say in bankruptcy court proceedings.
Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, said he and fellow backers of the plan see it as a way to create more voluntary negotiations between struggling homeowners and financial institutions. So far, voluntary programs have proved ineffective, Democrats said.
Citigroup had been part of the Bankruptcy Coalition of the Financial Services Roundtable, an industry group, since it aggressively lobbied for changes to the bankruptcy code in 2005.
The coalition — a group of major trade associations and lenders like Bank of America, JPMorgan Chase and Wells Fargo — also fought to block the so-called cramdown legislation last year.
No other bank has broken ranks with the industry on the proposed bill. Mr. Durbin said he hoped the move by Citigroup, should other banks and financial trade associations take the same stance, would lead to backing by enough Democrats and moderate Republicans to push the bill through.
Senator Charles E. Schumer, Democrat of New York, said he had been contacting officials of top financial institutions for months, trying to persuade them that it would be to their advantage to back the plan since it could help stabilize a housing market that has severely hurt the economy.
Three changes were made to the legislation sponsored by Mr. Durbin and Representative John Conyers Jr., Democrat of Michigan and chairman of the House Judiciary Committee: only existing mortgages will be eligible; homeowners will have to certify they tried to contact their mortgage holder lenders regarding loan modifications before filing for bankruptcy; and only major violations of the Truth in Lending Act will cause lenders to forfeit their claims in a bankruptcy.
Backed by bankers and other financial groups, many Congressional Republicans and some Democrats have balked at the plan to let bankruptcy judges alter mortgage terms on primary residences, saying that would drive up mortgage costs.
But officials said financial institutions were coming to the conclusion that it might be better to get a reduced loan payment through a bankruptcy or voluntary negotiations than to get no money at all.
Aides to Senator Richard C. Shelby of Alabama, the senior Republican on the Senate banking committee, said he would have no immediate response to the plan.
Scott E. Talbott, senior vice president for government affairs at the Financial Services Roundtable, said the group opposed cramdown legislation because it “creates huge risks” for the mortgage market.
He suggested the bill would force banks to further restrict lending and absorb huge losses as the economy worsens. He also suggested the bill would create perverse incentives that might encourage more homeowners to seek bankruptcy protection.
Citigroup recently began negotiating with lawmakers, in a move that some observers suggest reflects its desire to win favor on Capitol Hill after receiving billions in funds from the bailout program.
The government has invested $45 billion in Citigroup and agreed to guarantee about $269 billion in highly illiquid mortgage investments.
“If you’re looking at a way to get to the bottom of the economic problems in our country, this is the cause of our economic problems,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee. “It is the housing foreclosure problem. We’ve got to address that.”
The plan has been backed by members of Congress who see it as a way to help distressed homeowners and balance federal relief efforts that have been aimed at Wall Street and the automobile industry.
Mr. Schumer said he had been in contact with other large banks and he expected they would soon announce their support or at least drop their opposition to the plan.
“Citigroup’s action has broken the dam,” he said.
Eric Dash in New York contributed reporting.
Copyright 2008 The New York Times Company. All rights reserved.
Thursday, January 08, 2009
NYT: Gentler Tax Laws Urged on Debt Default
By LYNNLEY BROWNING
Published: January 7, 2009
Congress should ease certain tax laws governing defaults on mortgages, credit cards and other consumer debt to help Americans who are struggling in the economic downturn, the watchdog agency of the Internal Revenue Service said Wednesday.
In its annual written report, the agency, the National Taxpayer Advocate, said that without the changes hundreds of thousands of Americans could mistakenly pay taxes this year on their canceled debts, adding to their financial malaise.
The I.R.S. generally treats canceled debts as subject to federal income tax unless the taxpayer is insolvent or in bankruptcy proceedings.
But Nina E. Olson, who leads the watchdog agency, wrote that most taxpayers eligible to exclude canceled debts from their overall taxable income were unaware that they must file an obscure, complex form with the I.R.S.
She called on Congress to change the law to exempt taxpayers with what she termed “modest” amounts of canceled debt from having to submit the form. She did not put a dollar limit on the amounts and instead asked Congress to establish a threshold.
Congress has already provided some debt relief to homeowners through the Mortgage Forgiveness Debt Relief Act of 2007, which exempts from taxes any debts reduced or canceled during foreclosure or mortgage restructuring. But the exemption applies only if proceeds are used to acquire or improve a principal residence — something home buyers do not always do.
“It appears that most subprime borrowers use a portion of their loans for other purposes (e.g., to pay off car loans, credit card balances, student loans or medical bills),” Ms. Olson wrote.
She issued her report amid a flurry of unusual activity by the I.R.S. to award tax breaks to banks and financial corporations. The breaks, which give banks more leeway to use tax losses from banks they acquire, are estimated by leading tax specialists to be worth at least $110 billion.
Ms. Olson, referring to the economic downturn, also called on the I.R.S. to ease harsh collection practices. Levies, liens and asset seizures — all increasingly used tools of the I.R.S. — should give way to installment agreements with taxpayers and deals known as “offers in compromise,” in which taxpayers offer to pay part of their tax debts.
While I.R.S. staff members are required by law and internal procedures to consider whether collection efforts impose an economic hardship on taxpayers, they often do not do so, Ms. Olson wrote.
She urged the I.R.S. to protect low-income Social Security recipients from automated tax levies, which typically total 15 percent of the federal payments they receive.
In 2008, the I.R.S. issued levies against 1.8 million payments made to Social Security recipients. More than a fourth of those taxpayers had incomes below the poverty level, and more than a third probably would be classified as unable to pay by the I.R.S. if their cases were subject to human review.
Ms. Olson also called on Congress to simplify the tax code radically, an issue she identified as the leading challenge to taxpayers, and one that has appeared frequently in her annual reports.
Copyright 2008 The New York Times Company. All rights reserved.
Published: January 7, 2009
Congress should ease certain tax laws governing defaults on mortgages, credit cards and other consumer debt to help Americans who are struggling in the economic downturn, the watchdog agency of the Internal Revenue Service said Wednesday.
In its annual written report, the agency, the National Taxpayer Advocate, said that without the changes hundreds of thousands of Americans could mistakenly pay taxes this year on their canceled debts, adding to their financial malaise.
The I.R.S. generally treats canceled debts as subject to federal income tax unless the taxpayer is insolvent or in bankruptcy proceedings.
But Nina E. Olson, who leads the watchdog agency, wrote that most taxpayers eligible to exclude canceled debts from their overall taxable income were unaware that they must file an obscure, complex form with the I.R.S.
She called on Congress to change the law to exempt taxpayers with what she termed “modest” amounts of canceled debt from having to submit the form. She did not put a dollar limit on the amounts and instead asked Congress to establish a threshold.
Congress has already provided some debt relief to homeowners through the Mortgage Forgiveness Debt Relief Act of 2007, which exempts from taxes any debts reduced or canceled during foreclosure or mortgage restructuring. But the exemption applies only if proceeds are used to acquire or improve a principal residence — something home buyers do not always do.
“It appears that most subprime borrowers use a portion of their loans for other purposes (e.g., to pay off car loans, credit card balances, student loans or medical bills),” Ms. Olson wrote.
She issued her report amid a flurry of unusual activity by the I.R.S. to award tax breaks to banks and financial corporations. The breaks, which give banks more leeway to use tax losses from banks they acquire, are estimated by leading tax specialists to be worth at least $110 billion.
Ms. Olson, referring to the economic downturn, also called on the I.R.S. to ease harsh collection practices. Levies, liens and asset seizures — all increasingly used tools of the I.R.S. — should give way to installment agreements with taxpayers and deals known as “offers in compromise,” in which taxpayers offer to pay part of their tax debts.
While I.R.S. staff members are required by law and internal procedures to consider whether collection efforts impose an economic hardship on taxpayers, they often do not do so, Ms. Olson wrote.
She urged the I.R.S. to protect low-income Social Security recipients from automated tax levies, which typically total 15 percent of the federal payments they receive.
In 2008, the I.R.S. issued levies against 1.8 million payments made to Social Security recipients. More than a fourth of those taxpayers had incomes below the poverty level, and more than a third probably would be classified as unable to pay by the I.R.S. if their cases were subject to human review.
Ms. Olson also called on Congress to simplify the tax code radically, an issue she identified as the leading challenge to taxpayers, and one that has appeared frequently in her annual reports.
Copyright 2008 The New York Times Company. All rights reserved.
Monday, January 05, 2009
NYT: Credit Card Companies Willing to Deal Over Debt
By ERIC DASH
Published: January 2, 2009
Hard times are usually good times for debt collectors, who make their money morning and night with the incessant ring of a phone.
But in this recession, perhaps the deepest in decades, the unthinkable is happening: collectors, who usually do the squeezing, are getting squeezed a bit themselves.
After helping to foster the explosive growth of consumer debt in recent years, credit card companies are realizing that some hard-pressed Americans will not be able to pay their bills as the economy deteriorates.
So lenders and their collectors are rushing to round up what money they can before things get worse, even if that means forgiving part of some borrowers’ debts. Increasingly, they are stretching out payments and accepting dimes, if not pennies, on the dollar as payment in full.
“You can’t squeeze blood out of a turnip,” said Don Siler, the chief marketing officer at MRS Associates, a big collection company that works with seven of the 10 largest credit card companies. “The big settlements just aren’t there anymore.”
Lenders are not being charitable. They are simply trying to protect themselves.
Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first. Besides, the sooner people get their financial houses in order, the sooner they can start borrowing again.
So even as many banks cut consumers’ credit lines, raise card fees and generally pull back on lending, some lenders are trying to give customers a little wiggle room. Bank of America, for instance, says it has waived late fees, lowered interest charges and, in some cases, reduced loan balances for more than 700,000 credit card holders in 2008.
American Express and Chase Card Services say they are taking similar actions as more customers fall behind on their bills. Every major credit card lender is giving its collection agents more leeway to make adjustments for consumers in financial distress.
Debt collectors, who are typically paid based on the amount of money they recover, report that the number of troubled borrowers getting payment extensions has at least doubled in the last six months. In other cases, borrowers who appear to be pushed to the brink are being offered deals that forgive 20 to 70 percent of credit card debt.
“Consumers have never been in a better position to negotiate a partial payment,” said Robert D. Manning, the author of “Credit Card Nation” and a longtime critic of the credit card industry. “It’s like that old movie ‘Rosalie Goes Shopping.’ When it’s $100,000 of debt, it’s your problem. When it’s a million dollars of debt, it’s the bank’s problem.”
The recent wave of debt concessions is a reversal from only a few years ago, when consumers usually lost battles with their credit card companies. Now, as bad debts soar, it is the lenders who are crying mercy.
Credit card lenders expect to write off an unprecedented $395 billion of soured loans over the next five years, according to projections from The Nilson Report, an industry newsletter. That compares with a total of about $275 billion in the last five years.
All that bad debt is getting harder to collect. In the past, troubled borrowers might have been able to pay down card loans by tapping the equity in their homes, drawing on retirement savings, taking out a debt consolidation loan, or even calling a relative for help. But with credit tight, consumers are maxed out.
“Knowing that the sources of funding have dried up, having someone pay the balance in full isn’t a viable strategy,” said Tim Smith, a senior executive at Firstsource, one of the biggest debt collection companies.
Lenders are reluctant to admit they will accept less than full payment, lest they encourage good customers to stop paying what they can. Industrywide data is scarce.
Unlike the huge mortgage loan modification programs that are taking place, which address thousands of mortgages at once, workouts for credit card customers are still being handled on a case-by-case basis.
In addition to debt forgiveness, debt collectors are allowing many delinquent borrowers to pay down their debt over the course of a year rather than the standard six months.
Paul Hunziker, the chairman of Capital Management Services, said that before this downturn, his firm put only about a quarter of all borrowers into longer-term repayment plans. Now, it puts about half on such plans.
Some lenders are also reaching out to borrowers shortly after they fall behind on their payments to try to avoid having to write off the account. Others are reaching out to customers who seem likely to fall behind. Just as lenders competed for years to be the first card to be taken out of the wallet, they are now competing to be the first ones paid back.
And realizing that millions more consumers are likely to default on their credit card bills in the coming months, the banking industry has started lobbying regulators to make it more advantageous to lenders to extend payment terms or forgive debt.
In an unusual alliance, the Financial Services Roundtable, one of the industry’s biggest lobbyists, and the Consumer Federation of America recently proposed a credit card loan modification program, which was rejected by regulators.
Under the plan, lenders would have forgiven about 40 percent of what was owed by individual borrowers over five years. Lenders could report the loss once whatever part of the debt was repaid, instead of shortly after default, as current accounting rules require. That would allow them to write off less later. Borrowers would have been allowed to defer any tax payments owed on the forgiven debt.
Landmark changes to bankruptcy legislation passed in 2005, for which the industry aggressively lobbied, seem to have hurt card debt collections. Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.
Borrowers should not expect sweetheart deals. Card companies will offer loan modifications only to people who meet certain criteria. Most customers must be delinquent for 90 days or longer. Other considerations include the borrower’s income, existing bank relationships and a credit record that suggests missing a payment is an exception rather than the rule.
While a deal may help avoid credit card cancellation or bankruptcy, it will also lead to a sharp drop in the borrower’s credit score for as long as seven years, making it far more difficult and expensive to obtain new loans. The average consumer’s score will fall 70 to 130 points, on a scale where the strongest borrowers register 700 or more.
For the moment, it may be easier for troubled borrowers to start negotiating a modification by contacting the card company or collection agency directly. Credit counselors can help borrowers consolidate their debts and get card companies to lower their interest payments and other fees, but they currently cannot get the loan principal reduced.
Another option is for a borrower to sign up a debt settlement company to negotiate on her behalf. But regulation of this business is loose, and consumer advocacy groups warn that some firms prey on troubled borrowers with aggressive marketing tactics and exorbitant upfront fees.
Copyright 2009 The New York Times Company. All rights reserved.
Published: January 2, 2009
Hard times are usually good times for debt collectors, who make their money morning and night with the incessant ring of a phone.
But in this recession, perhaps the deepest in decades, the unthinkable is happening: collectors, who usually do the squeezing, are getting squeezed a bit themselves.
After helping to foster the explosive growth of consumer debt in recent years, credit card companies are realizing that some hard-pressed Americans will not be able to pay their bills as the economy deteriorates.
So lenders and their collectors are rushing to round up what money they can before things get worse, even if that means forgiving part of some borrowers’ debts. Increasingly, they are stretching out payments and accepting dimes, if not pennies, on the dollar as payment in full.
“You can’t squeeze blood out of a turnip,” said Don Siler, the chief marketing officer at MRS Associates, a big collection company that works with seven of the 10 largest credit card companies. “The big settlements just aren’t there anymore.”
Lenders are not being charitable. They are simply trying to protect themselves.
Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first. Besides, the sooner people get their financial houses in order, the sooner they can start borrowing again.
So even as many banks cut consumers’ credit lines, raise card fees and generally pull back on lending, some lenders are trying to give customers a little wiggle room. Bank of America, for instance, says it has waived late fees, lowered interest charges and, in some cases, reduced loan balances for more than 700,000 credit card holders in 2008.
American Express and Chase Card Services say they are taking similar actions as more customers fall behind on their bills. Every major credit card lender is giving its collection agents more leeway to make adjustments for consumers in financial distress.
Debt collectors, who are typically paid based on the amount of money they recover, report that the number of troubled borrowers getting payment extensions has at least doubled in the last six months. In other cases, borrowers who appear to be pushed to the brink are being offered deals that forgive 20 to 70 percent of credit card debt.
“Consumers have never been in a better position to negotiate a partial payment,” said Robert D. Manning, the author of “Credit Card Nation” and a longtime critic of the credit card industry. “It’s like that old movie ‘Rosalie Goes Shopping.’ When it’s $100,000 of debt, it’s your problem. When it’s a million dollars of debt, it’s the bank’s problem.”
The recent wave of debt concessions is a reversal from only a few years ago, when consumers usually lost battles with their credit card companies. Now, as bad debts soar, it is the lenders who are crying mercy.
Credit card lenders expect to write off an unprecedented $395 billion of soured loans over the next five years, according to projections from The Nilson Report, an industry newsletter. That compares with a total of about $275 billion in the last five years.
All that bad debt is getting harder to collect. In the past, troubled borrowers might have been able to pay down card loans by tapping the equity in their homes, drawing on retirement savings, taking out a debt consolidation loan, or even calling a relative for help. But with credit tight, consumers are maxed out.
“Knowing that the sources of funding have dried up, having someone pay the balance in full isn’t a viable strategy,” said Tim Smith, a senior executive at Firstsource, one of the biggest debt collection companies.
Lenders are reluctant to admit they will accept less than full payment, lest they encourage good customers to stop paying what they can. Industrywide data is scarce.
Unlike the huge mortgage loan modification programs that are taking place, which address thousands of mortgages at once, workouts for credit card customers are still being handled on a case-by-case basis.
In addition to debt forgiveness, debt collectors are allowing many delinquent borrowers to pay down their debt over the course of a year rather than the standard six months.
Paul Hunziker, the chairman of Capital Management Services, said that before this downturn, his firm put only about a quarter of all borrowers into longer-term repayment plans. Now, it puts about half on such plans.
Some lenders are also reaching out to borrowers shortly after they fall behind on their payments to try to avoid having to write off the account. Others are reaching out to customers who seem likely to fall behind. Just as lenders competed for years to be the first card to be taken out of the wallet, they are now competing to be the first ones paid back.
And realizing that millions more consumers are likely to default on their credit card bills in the coming months, the banking industry has started lobbying regulators to make it more advantageous to lenders to extend payment terms or forgive debt.
In an unusual alliance, the Financial Services Roundtable, one of the industry’s biggest lobbyists, and the Consumer Federation of America recently proposed a credit card loan modification program, which was rejected by regulators.
Under the plan, lenders would have forgiven about 40 percent of what was owed by individual borrowers over five years. Lenders could report the loss once whatever part of the debt was repaid, instead of shortly after default, as current accounting rules require. That would allow them to write off less later. Borrowers would have been allowed to defer any tax payments owed on the forgiven debt.
Landmark changes to bankruptcy legislation passed in 2005, for which the industry aggressively lobbied, seem to have hurt card debt collections. Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.
Borrowers should not expect sweetheart deals. Card companies will offer loan modifications only to people who meet certain criteria. Most customers must be delinquent for 90 days or longer. Other considerations include the borrower’s income, existing bank relationships and a credit record that suggests missing a payment is an exception rather than the rule.
While a deal may help avoid credit card cancellation or bankruptcy, it will also lead to a sharp drop in the borrower’s credit score for as long as seven years, making it far more difficult and expensive to obtain new loans. The average consumer’s score will fall 70 to 130 points, on a scale where the strongest borrowers register 700 or more.
For the moment, it may be easier for troubled borrowers to start negotiating a modification by contacting the card company or collection agency directly. Credit counselors can help borrowers consolidate their debts and get card companies to lower their interest payments and other fees, but they currently cannot get the loan principal reduced.
Another option is for a borrower to sign up a debt settlement company to negotiate on her behalf. But regulation of this business is loose, and consumer advocacy groups warn that some firms prey on troubled borrowers with aggressive marketing tactics and exorbitant upfront fees.
Copyright 2009 The New York Times Company. All rights reserved.
NYT: As Vacant Office Space Grows, So Does the Crisis for Lenders
By CHARLES V. BAGLI
Published: January 4, 2009
Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.
With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.”
Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year.
The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.
The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.
Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. “Each one by itself is not significant,” he said, “but the cumulative effect will put tremendous stress on the financial sector.”
Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.
Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.
Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.
Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.
Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.
By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.
Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.
“The economic recession is so widespread that we believe virtually every market in the country will see a rise in vacancy rates of between 2 and 5 percentage points by mid-2009,” said Bill Goade, chief executive of CresaPartners, which advises corporations on leasing and buying office space.
There is no relief in sight for Orange County, where subprime lenders and title companies once dominated the market but are now shedding space because their business has dried up, and big banks are now shrinking because of a wave of mergers. The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa area should match this month, local real estate brokers say.
In New York, where rents had risen the highest as financial companies gobbled up office space, vacancy rates are floating above 10 percent for the first time in years.
What looked like the worst possible case a few weeks ago for Chicago now appears to be the most likely outcome, said Bill Rogers, a managing director at Jones Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable at 10 percent, is now rising quickly and could hit 17 percent in 2009, he said. “A lot of companies are trying to shed excess space ahead of what is expected to be a worse market in 2009,” Mr. Rogers said.
Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas to rise to 19 percent this year, from 16.3 percent.
Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt.
Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising.
“I see a wave of troubled assets coming out of Texas in the near future,” said Dan Fasulo, managing director of Real Capital Analytics, a real estate research firm.
Effective rents, after free rent and other landlord concessions, have already started to fall and are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts.
That is making it all the more difficult for owners, who projected ever-rising rents when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.
Without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.
Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.
The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. In recent weeks, a group led by the New York developer William Rudin has pleaded with Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and others to have the government include commercial real estate in a new $200 billion program intended to spur lending.
Mr. DeBoer, the roundtable’s leader, said building owners are by and large making their loan payments. It is the refinancing that is worrisome.
Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, Mr. DeBoer said.
Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on payments and can make an equity payment to compensate for the decline in the building’s value.
Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to a report by Real Capital Analytics.
New York, the biggest market by far, leads the pack with 268 troubled properties valued at $12 billion. But there are 19 more cities, including Atlanta, Denver and Seattle, with more than $1 billion worth of distressed commercial properties.
Analysts are especially concerned about buildings like 666 Fifth Avenue, One Park Avenue and the Riverton complex in New York, the Pacifica Tower in San Diego and the Sears Tower in Chicago, which were acquired in 2006 and 2007 with mortgage-backed financing based on future rents rather than existing income.
“Many of those buildings are basically underwater,” said Mr. Goade of CresaPartners. “The price they paid was too high to begin with. There’s no way anyone would lend that kind of money today.”
Copyright 2009 The New York Times Company. All rights reserved.
Published: January 4, 2009
Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.
With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.”
Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year.
The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.
The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.
Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. “Each one by itself is not significant,” he said, “but the cumulative effect will put tremendous stress on the financial sector.”
Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.
Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.
Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.
Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.
Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.
By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.
Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.
“The economic recession is so widespread that we believe virtually every market in the country will see a rise in vacancy rates of between 2 and 5 percentage points by mid-2009,” said Bill Goade, chief executive of CresaPartners, which advises corporations on leasing and buying office space.
There is no relief in sight for Orange County, where subprime lenders and title companies once dominated the market but are now shedding space because their business has dried up, and big banks are now shrinking because of a wave of mergers. The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa area should match this month, local real estate brokers say.
In New York, where rents had risen the highest as financial companies gobbled up office space, vacancy rates are floating above 10 percent for the first time in years.
What looked like the worst possible case a few weeks ago for Chicago now appears to be the most likely outcome, said Bill Rogers, a managing director at Jones Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable at 10 percent, is now rising quickly and could hit 17 percent in 2009, he said. “A lot of companies are trying to shed excess space ahead of what is expected to be a worse market in 2009,” Mr. Rogers said.
Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas to rise to 19 percent this year, from 16.3 percent.
Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt.
Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising.
“I see a wave of troubled assets coming out of Texas in the near future,” said Dan Fasulo, managing director of Real Capital Analytics, a real estate research firm.
Effective rents, after free rent and other landlord concessions, have already started to fall and are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts.
That is making it all the more difficult for owners, who projected ever-rising rents when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.
Without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.
Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.
The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. In recent weeks, a group led by the New York developer William Rudin has pleaded with Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and others to have the government include commercial real estate in a new $200 billion program intended to spur lending.
Mr. DeBoer, the roundtable’s leader, said building owners are by and large making their loan payments. It is the refinancing that is worrisome.
Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, Mr. DeBoer said.
Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on payments and can make an equity payment to compensate for the decline in the building’s value.
Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to a report by Real Capital Analytics.
New York, the biggest market by far, leads the pack with 268 troubled properties valued at $12 billion. But there are 19 more cities, including Atlanta, Denver and Seattle, with more than $1 billion worth of distressed commercial properties.
Analysts are especially concerned about buildings like 666 Fifth Avenue, One Park Avenue and the Riverton complex in New York, the Pacifica Tower in San Diego and the Sears Tower in Chicago, which were acquired in 2006 and 2007 with mortgage-backed financing based on future rents rather than existing income.
“Many of those buildings are basically underwater,” said Mr. Goade of CresaPartners. “The price they paid was too high to begin with. There’s no way anyone would lend that kind of money today.”
Copyright 2009 The New York Times Company. All rights reserved.
Friday, January 02, 2009
WSJ: Mortgage 'Cram-Downs' Loom as Foreclosures Mount
By MICHAEL CORKERY
Mortgage lenders who wake up Thursday with a New Year's hangover are likely to face another headache soon: The effort to give bankruptcy judges the power to rewrite mortgages is gaining steam.
The banking industry hoped the mortgage "cram-down" measure died when Congress removed it from the $700 billion bailout bill that passed in October. But it has been gathering momentum in Democrat-controlled Washington, as evidence emerges that current voluntary foreclosure-prevention programs are falling short.
In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb the loss. Bankruptcy judges currently have the ability to modify certain personal loans and even mortgages on vacation homes, but they can not cram-down mortgages on primary residences.
Even staunch opponents acknowledge that mortgage cram-downs for primary residences are likely to be as part of Congress's economic-stimulus package in early 2009. The National Association of Home Builders used to reject any bill with a cram-down provision outright. Now it is saying the measure is worth a look.
President-elect Barack Obama and his incoming administration aren't disclosing details of the much-awaited foreclosure-prevention plans, but during the campaign Mr. Obama called for closing the loophole that prevents bankruptcy judges from restructuring mortgages on primary residences. Lawrence Summers, a top economic adviser of Mr. Obama, publicly voiced support for bankruptcy reform before his appointment.
"To the extent that nothing else is working, bankruptcy cram-downs are becoming more likely," says Rod Dubitsky, head of asset-backed-securities research at Credit Suisse.
The latest embattled foreclosure-prevention program is Hope for Homeowners, which was approved by Congress last summer and supposed to help 400,000 homeowners. Only 357 people have signed up so far for the voluntary program. The Department of Housing and Urban Development, which is administering the program, acknowledges that it has been encumbered by high fees and narrow eligibility requirements.
[With efforts to stem home foreclosures stagnating, mortgage 'cram-down' efforts seem destined to re-emerge under the new Congress. Here, a foreclosed home for sale in Lakewood, Colo., in September.] Associated Press
With efforts to stem home foreclosures stagnating, mortgage 'cram-down' efforts seem destined to re-emerge under the new Congress. Here, a foreclosed home for sale in Lakewood, Colo., in September.
Another government program, FHASecure, was intended to help 80,000 homeowners who had fallen behind on their payments after their adjustable interest rates reset. It has helped only 4,100 delinquent borrowers refinance since September 2007 and will stop taking new loan applications as of Wednesday.
Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn't solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.
"It is absolutely clear that voluntary modification is just not working," says Rep. Brad Miller, a North Carolina Democrat. "Every plan that Congress has passed, we do it and nothing happens."
Mr. Miller intends to introduce a mortgage bankruptcy-reform bill Monday, the first day of the new session. Illinois Democrat Richard Durbin plans to introduce a similar bill in the Senate.
Lenders warn that mortgage cram-downs will lead to higher interest rates and down payments, as banks seek to mitigate future losses from judicially imposed write-downs. They also are concerned that the reform measure would add to the losses they have already sustained from the housing crisis.
"Our members have modified 2.8 million loans," says Francis Creighton, chief lobbyist of the Mortgage Bankers Association, which opposes cram-downs. "Could we do better? We are trying to do better."
Proponents of bankruptcy reform say that previous modification efforts are falling short because they have focused on spreading out payment terms and forestalling delinquent payments. But that hasn't cured a big part of the problem: that one in six houses is now worth less than its mortgage. Only programs that reduce principal amounts are likely to restore equity to millions of homeowners, they say.
"You have to deal with the systematic problem of underwater mortgages or you are not going to stop foreclosures," says Harvard University economist Martin Feldstein, who has proposed his own plan to help homeowners with negative equity in their homes, which involves mortgage principal write-downs and replacing part of the original mortgage with a new, lower cost loan.
Proponents of bankruptcy reform also note that millions of troubled loans aren't being addressed by current modification programs because they were carved up and sold to investors as securities. Mortgage servicers have been reluctant to aggressively modify these loans because they have been unsure of their legal rights.
The mere threat of mortgage cram-downs could break the standoff between mortgage servicers and mortgage investors, which has slowed aggressive loan modifications. Investors may be more willing to go along with industry-driven modifications when facing the threat that a judge could ultimately order the amounts of loan principals reduced, forcing them to eat bigger losses.
"The servicers can argue we have to give this to the borrower otherwise they will get it in bankruptcy court," Mr. Dubitsky says.
Lenders argue that loans modified by bankruptcy judges often have high rates of default on the new payment plans. "We should be working on keeping people out of bankruptcy not pushing people into it,'' says Mr. Creighton of the Mortgage Bankers trade group
Bankruptcy reform is likely to be one of many proposals that Congress considers as part of comprehensive foreclosure-prevention effort. Another element is likely to be one that FDIC Chairman Sheila Bair has been proposing. Under her plan, the government and lenders would split the losses on modified loans that go into default.
Some economists are urging the new administration to go even further. Mark Zandi, chief economist at Moody's Economy.com, proposes that the government subsidize the bulk of principal write-downs to the tune of $100 billion, about four times as much as Ms. Bair's program.
—Nick Timiraos contributed to this article.
Write to Michael Corkery at michael.corkery@wsj.com
Copyright 2008 News Corp. All rights reserved.
Mortgage lenders who wake up Thursday with a New Year's hangover are likely to face another headache soon: The effort to give bankruptcy judges the power to rewrite mortgages is gaining steam.
The banking industry hoped the mortgage "cram-down" measure died when Congress removed it from the $700 billion bailout bill that passed in October. But it has been gathering momentum in Democrat-controlled Washington, as evidence emerges that current voluntary foreclosure-prevention programs are falling short.
In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb the loss. Bankruptcy judges currently have the ability to modify certain personal loans and even mortgages on vacation homes, but they can not cram-down mortgages on primary residences.
Even staunch opponents acknowledge that mortgage cram-downs for primary residences are likely to be as part of Congress's economic-stimulus package in early 2009. The National Association of Home Builders used to reject any bill with a cram-down provision outright. Now it is saying the measure is worth a look.
President-elect Barack Obama and his incoming administration aren't disclosing details of the much-awaited foreclosure-prevention plans, but during the campaign Mr. Obama called for closing the loophole that prevents bankruptcy judges from restructuring mortgages on primary residences. Lawrence Summers, a top economic adviser of Mr. Obama, publicly voiced support for bankruptcy reform before his appointment.
"To the extent that nothing else is working, bankruptcy cram-downs are becoming more likely," says Rod Dubitsky, head of asset-backed-securities research at Credit Suisse.
The latest embattled foreclosure-prevention program is Hope for Homeowners, which was approved by Congress last summer and supposed to help 400,000 homeowners. Only 357 people have signed up so far for the voluntary program. The Department of Housing and Urban Development, which is administering the program, acknowledges that it has been encumbered by high fees and narrow eligibility requirements.
[With efforts to stem home foreclosures stagnating, mortgage 'cram-down' efforts seem destined to re-emerge under the new Congress. Here, a foreclosed home for sale in Lakewood, Colo., in September.] Associated Press
With efforts to stem home foreclosures stagnating, mortgage 'cram-down' efforts seem destined to re-emerge under the new Congress. Here, a foreclosed home for sale in Lakewood, Colo., in September.
Another government program, FHASecure, was intended to help 80,000 homeowners who had fallen behind on their payments after their adjustable interest rates reset. It has helped only 4,100 delinquent borrowers refinance since September 2007 and will stop taking new loan applications as of Wednesday.
Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn't solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.
"It is absolutely clear that voluntary modification is just not working," says Rep. Brad Miller, a North Carolina Democrat. "Every plan that Congress has passed, we do it and nothing happens."
Mr. Miller intends to introduce a mortgage bankruptcy-reform bill Monday, the first day of the new session. Illinois Democrat Richard Durbin plans to introduce a similar bill in the Senate.
Lenders warn that mortgage cram-downs will lead to higher interest rates and down payments, as banks seek to mitigate future losses from judicially imposed write-downs. They also are concerned that the reform measure would add to the losses they have already sustained from the housing crisis.
"Our members have modified 2.8 million loans," says Francis Creighton, chief lobbyist of the Mortgage Bankers Association, which opposes cram-downs. "Could we do better? We are trying to do better."
Proponents of bankruptcy reform say that previous modification efforts are falling short because they have focused on spreading out payment terms and forestalling delinquent payments. But that hasn't cured a big part of the problem: that one in six houses is now worth less than its mortgage. Only programs that reduce principal amounts are likely to restore equity to millions of homeowners, they say.
"You have to deal with the systematic problem of underwater mortgages or you are not going to stop foreclosures," says Harvard University economist Martin Feldstein, who has proposed his own plan to help homeowners with negative equity in their homes, which involves mortgage principal write-downs and replacing part of the original mortgage with a new, lower cost loan.
Proponents of bankruptcy reform also note that millions of troubled loans aren't being addressed by current modification programs because they were carved up and sold to investors as securities. Mortgage servicers have been reluctant to aggressively modify these loans because they have been unsure of their legal rights.
The mere threat of mortgage cram-downs could break the standoff between mortgage servicers and mortgage investors, which has slowed aggressive loan modifications. Investors may be more willing to go along with industry-driven modifications when facing the threat that a judge could ultimately order the amounts of loan principals reduced, forcing them to eat bigger losses.
"The servicers can argue we have to give this to the borrower otherwise they will get it in bankruptcy court," Mr. Dubitsky says.
Lenders argue that loans modified by bankruptcy judges often have high rates of default on the new payment plans. "We should be working on keeping people out of bankruptcy not pushing people into it,'' says Mr. Creighton of the Mortgage Bankers trade group
Bankruptcy reform is likely to be one of many proposals that Congress considers as part of comprehensive foreclosure-prevention effort. Another element is likely to be one that FDIC Chairman Sheila Bair has been proposing. Under her plan, the government and lenders would split the losses on modified loans that go into default.
Some economists are urging the new administration to go even further. Mark Zandi, chief economist at Moody's Economy.com, proposes that the government subsidize the bulk of principal write-downs to the tune of $100 billion, about four times as much as Ms. Bair's program.
—Nick Timiraos contributed to this article.
Write to Michael Corkery at michael.corkery@wsj.com
Copyright 2008 News Corp. All rights reserved.
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