By Mike Baker
The Associated Press
April 20, 2009
RALEIGH, N.C. - The number of U.S. businesses and individuals declaring bankruptcy is rising with a vengeance amid the recession, despite a three-year-old federal law that made it much tougher for Americans to escape their debts, an Associated Press analysis found.
"There's no end in sight," said bankruptcy lawyer Bryan Elliott of Hickory, N.C., who is working seven days a week and scheduling prospective clients a month in advance. "To be doing this well and having this much business, it is depressing. It's not a laugh-a-minute job."
Nearly 1.2 million debtors filed for bankruptcy in the past 12 months, according to federal court records collected and analyzed by the AP. Last month, 130,831 sought bankruptcy protection -- an increase of 46 percent over March 2008 and 81 percent over the same month in 2007.
Bob Lawless, a professor at the University of Illinois College of Law, said bankruptcies could reach 1.5 million this year and level off at 1.6 million next year -- around the same time economists expect an economic recovery to begin.
Congress voted in 2005 to make bankruptcy more cumbersome after years of intense lobbying from the nation's lenders, who complained that people were abusing the system. Before the move to change the law, bankruptcies were running at what was then an all-time high of about 1.6 million per year.
The tighter requirements initially appeared to work, with bankruptcies plummeting from a record-shattering 2 million cases in 2005 -- a total that reflected a rush to file before the new law took effect -- to 600,000 in 2006. But now bankruptcies are booming again.
"You wouldn't get this large of a rise without serious problems in the economy," said Lynn LoPucki, a UCLA law professor who researches bankruptcy.
The bankruptcy rate is climbing as well. In the past 12 months, about four people or businesses for every 1,000 people in the country filed for bankruptcy, according to the AP analysis. That is twice the rate in 2006, and close to the average of about five for every 1,000 in the decade leading up to the change in the law.
Lawless said the shame of bankruptcy may have eased somewhat in recent years, but added, "It's still a very stigmatizing, traumatic event for most everyone who files."
Previous recessions also drove people to bankruptcy court, though those increases were more moderate. Bankruptcies went up 19 percent amid the economic contraction in 2001, and about 15 percent during the recession of the early 1980s, according to the Administrative Office of the U.S. Courts.
Bankruptcy is considered a lagging economic indicator, since it is generally a last resort. The filings compiled by the AP illustrate the places where the economic meltdown has hit hardest.
In March, bankruptcy filings jumped the highest across the West. In Arizona, filings rose 91 percent from a year ago. They were up 84 percent in Idaho, 82 percent in California and 79 percent in Nevada, though those were trumped by Delaware, home to many large corporations, which saw a 127 percent jump.
Emory Clark, an Atlanta bankruptcy attorney who has been in the business for 25 years, said he is seeing more affluent people, many who have lost their jobs.
"There's something about human nature or American culture, but people hate filing for bankruptcy," Clark said. "It really is a stamp of failure. Nobody wants to come in here and pay us money to file. They are forced in because of circumstances."
Kathy Stevens of Vista, California, opened a tea and coffee boutique in August 2007, and it grew steadily. Then enrollment started to fall at a nearby mom-and-tot gym her customers frequented, and her business took a hit. The gym finally closed in the fall.
Stevens and her husband spent more than $35,000 to keep the boutique afloat, drawing on their own money and donations from family. After working from 6 a.m. until almost 10 p.m., seven days a week for months on end, Stevens realized her store would not survive. The couple filed for bankruptcy two weeks ago.
"You feel bad, because you never set out to do this," Stevens said. "We're trying to put it behind us and lick our wounds and move on."
Under the 2005 law, Congress imposed higher fees on those seeking bankruptcy and began requiring credit counseling sessions and a means test to assess debtors' ability to pay what they owed.
Lawless, the Illinois law professor, said his research found that the law simply increased the cost of filing by 50 percent and led many more people to cling to false hope longer.
Many filers take a credit counseling class just a day before turning to the courts.
Also, the law's test of a person's ability to pay off debts appears to have failed at one of its goals: steering debtors from Chapter 7, which allows people to sell off their assets to repay what they can and start again debt-free, and into Chapter 13, which places the filer in a repayment plan that can last for years. Chapter 7 cases accounted for 69 percent of all filings in the past year, compared with 71 percent in 2004.
Lawless argued that only a tiny number of people were abusing the system before the 2005 shift, and that the law punishes those who genuinely need help.
"The point of the bankruptcy system is to give the honest but unfortunate debtor a fresh start," Lawless said. "The fact that people are waiting longer to file shows just how mean-spirited the law is."
Copyright 2009 The Associated Press. All rights reserved.
Monday, April 20, 2009
Tuesday, April 14, 2009
NYT: As Some U.S. Markets Level Off, Housing Slump Hits Manhattan
By JOSH BARBANEL
While sales have picked up a bit in some suffering housing markets in the West, creating a glimmer of hope that home prices nationwide may be approaching a bottom, the Manhattan real estate market has just begun a steep slide. It parallels the decline in New York’s financial services industry, and housing analysts say it may continue long after other markets heal.
Apartment prices have once more become the talk of the town in Manhattan, but this time the talk is of uncertainty and falling numbers. While brokers say they are seeing more activity lately, especially from first-time buyers taking advantage of lower interest rates, housing analysts are predicting a prolonged slump in prices and sales that could last as long as four or five years.
In this year’s first quarter, sales of co-ops and condominiums in Manhattan plunged nearly 60 percent from the first quarter of 2008. Average co-op prices fell as much as 24 percent in the same period, according to various market reports released last week.
Condo prices have held up so far, but only because buyers who went into contract long before the downturn were closing on newly completed condominium buildings. But now few new contracts are being signed on unfinished condominiums, and some buyers have been renegotiating contracts or are trying to back out of them. Co-ops and condos make up 98 percent of the residential properties for sale in Manhattan.
The stress is most severe at the high end of the market. There are 350 apartments and town houses for sale in Manhattan with asking prices of more than $10 million, and inventory has been growing. It would take about six years at the current sales rate to absorb all those listings.
“For the last three years, it was the bigger the better,” said Dolly Lenz, a broker at Prudential Douglas Elliman. “Now the key words are smaller, livable and affordable. Before no one asked what the maintenance was. Now everyone wants to know.”
Manhattan was spared some of the housing problems the rest of the country faced during this downturn. The mortgage foreclosure rate in Manhattan remains low even today. While thousands of condos were built here, most were bought by homeowners, not speculators, as was common in Miami and other oversaturated markets.
But Manhattan housing prices were driven higher by record earnings and bonuses on Wall Street, and they fell hard when the music stopped last fall.
The quick fall in prices is shown in the experience of Abigail Disney, a philanthropist and documentary filmmaker, who a year ago put her sprawling 17-room co-op on West End Avenue on the market for $13.5 million.
With trophy homes commanding ever higher prices from the titans of finance, Ms. Disney priced the apartment at 20 percent more than she had paid for it only a few months earlier. Harry Belafonte, the singer and actor, had created the huge space many years earlier by breaking through the walls of two smaller apartments.
After a series of price cuts, Ms. Disney has finally found buyers for the property, for just under $7.5 million, a 46 percent discount from her initial asking price. But to make a deal she agreed to restore the walls and convert it back into two apartments and sell it to two buyers.
Despite government efforts to ease credit around the country, the market in New York is being starved by a limited availability of credit, especially for jumbo mortgages, which are loans of more than $729,750. More than half of all apartment sales in Manhattan are above even the expanded limits of conventional mortgages, which carry lower interest rates.
Jonathan J. Miller, an appraiser who prepares quarterly reports on Manhattan, said the market could continue to fall through this year and next, especially if credit remained tight for most buyers. After that, he said, it could take several more years to work through the excess inventory.
The housing recovery will also depend on the state of the economy, which many forecasters say will take a disproportionate toll on New York City before the recession ends. In New York, the financial industry accounts for more than 30 percent of all wages, and at least some of the wages of half of all very high income households, according to the New York City comptroller’s office.
While employment fell nationwide last year, the number of jobs actually grew in New York City until September. Since then, the city lost nearly 85,000 jobs through January, and the comptroller’s office has forecast a loss of 121,000 jobs in 2009 and another 83,000 in 2010.
Condominiums under construction have been hit particularly hard, especially because new mortgage rules have made it difficult for buyers to get conventional loans unless 70 percent of the apartments in a building are in contract.
This has left many developers scrambling to convert condominium projects to rentals or provide alternative financing.
At 99 John Street in Lower Manhattan, where the Rockrose Development Corporation is converting a 27-story prewar Art Deco rental building into hundreds of condominiums, buyers were offered a chance to “rent to own,” and a promise that Rockrose would buy back an apartment after five years at 110 percent of the purchase price. The developer also began offering the apartments in bulk to investors, in packages of 15 apartments.
In the late 1980s, a surge in condominium construction in New York created a glut of condo apartments. Prices peaked in 1989, declined steeply in 1991, bottomed out in 1993 and stabilized in 1995 and 1996.
Shaun Osher, the chief executive of Core Group Marketing, said he had begun to see more activity this spring, but at much lower prices, with luxury apartment prices off as much as 40 percent.
Mr. Miller said that during the last big real estate downturn, when studio apartments were so cheap that he considered buying one on a credit card, people thought the luxury market would never come back. “Conspicuous consumption was out of vogue in 1991,” he said. “The market was back by 1997 or 1998.”
Copyright 2009 The New York Times Company. All rights reserved.
While sales have picked up a bit in some suffering housing markets in the West, creating a glimmer of hope that home prices nationwide may be approaching a bottom, the Manhattan real estate market has just begun a steep slide. It parallels the decline in New York’s financial services industry, and housing analysts say it may continue long after other markets heal.
Apartment prices have once more become the talk of the town in Manhattan, but this time the talk is of uncertainty and falling numbers. While brokers say they are seeing more activity lately, especially from first-time buyers taking advantage of lower interest rates, housing analysts are predicting a prolonged slump in prices and sales that could last as long as four or five years.
In this year’s first quarter, sales of co-ops and condominiums in Manhattan plunged nearly 60 percent from the first quarter of 2008. Average co-op prices fell as much as 24 percent in the same period, according to various market reports released last week.
Condo prices have held up so far, but only because buyers who went into contract long before the downturn were closing on newly completed condominium buildings. But now few new contracts are being signed on unfinished condominiums, and some buyers have been renegotiating contracts or are trying to back out of them. Co-ops and condos make up 98 percent of the residential properties for sale in Manhattan.
The stress is most severe at the high end of the market. There are 350 apartments and town houses for sale in Manhattan with asking prices of more than $10 million, and inventory has been growing. It would take about six years at the current sales rate to absorb all those listings.
“For the last three years, it was the bigger the better,” said Dolly Lenz, a broker at Prudential Douglas Elliman. “Now the key words are smaller, livable and affordable. Before no one asked what the maintenance was. Now everyone wants to know.”
Manhattan was spared some of the housing problems the rest of the country faced during this downturn. The mortgage foreclosure rate in Manhattan remains low even today. While thousands of condos were built here, most were bought by homeowners, not speculators, as was common in Miami and other oversaturated markets.
But Manhattan housing prices were driven higher by record earnings and bonuses on Wall Street, and they fell hard when the music stopped last fall.
The quick fall in prices is shown in the experience of Abigail Disney, a philanthropist and documentary filmmaker, who a year ago put her sprawling 17-room co-op on West End Avenue on the market for $13.5 million.
With trophy homes commanding ever higher prices from the titans of finance, Ms. Disney priced the apartment at 20 percent more than she had paid for it only a few months earlier. Harry Belafonte, the singer and actor, had created the huge space many years earlier by breaking through the walls of two smaller apartments.
After a series of price cuts, Ms. Disney has finally found buyers for the property, for just under $7.5 million, a 46 percent discount from her initial asking price. But to make a deal she agreed to restore the walls and convert it back into two apartments and sell it to two buyers.
Despite government efforts to ease credit around the country, the market in New York is being starved by a limited availability of credit, especially for jumbo mortgages, which are loans of more than $729,750. More than half of all apartment sales in Manhattan are above even the expanded limits of conventional mortgages, which carry lower interest rates.
Jonathan J. Miller, an appraiser who prepares quarterly reports on Manhattan, said the market could continue to fall through this year and next, especially if credit remained tight for most buyers. After that, he said, it could take several more years to work through the excess inventory.
The housing recovery will also depend on the state of the economy, which many forecasters say will take a disproportionate toll on New York City before the recession ends. In New York, the financial industry accounts for more than 30 percent of all wages, and at least some of the wages of half of all very high income households, according to the New York City comptroller’s office.
While employment fell nationwide last year, the number of jobs actually grew in New York City until September. Since then, the city lost nearly 85,000 jobs through January, and the comptroller’s office has forecast a loss of 121,000 jobs in 2009 and another 83,000 in 2010.
Condominiums under construction have been hit particularly hard, especially because new mortgage rules have made it difficult for buyers to get conventional loans unless 70 percent of the apartments in a building are in contract.
This has left many developers scrambling to convert condominium projects to rentals or provide alternative financing.
At 99 John Street in Lower Manhattan, where the Rockrose Development Corporation is converting a 27-story prewar Art Deco rental building into hundreds of condominiums, buyers were offered a chance to “rent to own,” and a promise that Rockrose would buy back an apartment after five years at 110 percent of the purchase price. The developer also began offering the apartments in bulk to investors, in packages of 15 apartments.
In the late 1980s, a surge in condominium construction in New York created a glut of condo apartments. Prices peaked in 1989, declined steeply in 1991, bottomed out in 1993 and stabilized in 1995 and 1996.
Shaun Osher, the chief executive of Core Group Marketing, said he had begun to see more activity this spring, but at much lower prices, with luxury apartment prices off as much as 40 percent.
Mr. Miller said that during the last big real estate downturn, when studio apartments were so cheap that he considered buying one on a credit card, people thought the luxury market would never come back. “Conspicuous consumption was out of vogue in 1991,” he said. “The market was back by 1997 or 1998.”
Copyright 2009 The New York Times Company. All rights reserved.
Wednesday, April 08, 2009
NYLJ-Real Estate Title Litigation
Adam Leitman Bailey
04-08-2009
At the start of this new millennium, the most effective means to rob a bank no longer
includes the use of a gun. The real estate closing table has replaced the gun and mask as the most favored and effective tool of theft from financial institutions.
As the New York Times reported on Oct. 19, 2008, the Federal Bureau of Investigation
declared its inability to properly investigate the number of property and mortgage fraud claims, due to inadequate staffing,1 noting that there is "no central way to track the total extent of the problem." The number of mortgage fraud reports filed with the FBI totaled 46,717 in 2007 compared with 6,936 reports filed in 2003 - a 674 percent increase.
Mortgage fraud has taken the lead as our country's fastest growing white collar crime, accounting for more than 20 percent of all fraud in the United States. Federal, state, and local prosecutors have had to expand their resources in order to deal with this crime wave sweeping the nation. In New York City alone, for example, the FBI, two branch offices of the U.S. Attorney's Office, and the Manhattan District Attorney's Office have all restructured to open specialized mortgage fraud bureaus.2
No industry has been stung more by property and mortgage fraud than the title insurance industry. Notwithstanding that a major function of the process of issuing a title insurance policy is to resolve title defects prior to closing, this past August, an executive officer at one of the nation's largest title companies remarked at an annual title insurance industry convention, "We used to have to justify its premiums. 'How can your prices be so high and your claims so low?' they used to ask me. Now, we have really shown them!" (NYLTA Convention, Aug. 26, 2008). In 1996, the title industry reported paid title claims equaling $271.1 million. In 2005, claims reached $916.4 million, followed by paid claims of $870.3 million in 2006. Alarmingly, in 2007, paid title claims reached just under $1.3 billion,
which, notably, is a 149 percent increase from 2006, and a 480 percent increase (or
almost a quintupling 3) in paid claims over the span of a decade.4
Practitioners explaining to purchasers the importance of purchasing title insurance no longer rely on the old adage of an owner reclaiming land transacted as a result of a peace treaty hundreds of years ago. After a generation of protecting clients from property fraud or theft, for the first time in their careers, many practitioners now find themselves also assisting their clients in filing title insurance claims and sitting at depositions explaining the anatomy of the fraud at the closing.
The fact patterns giving rise to the thousands of real estate fraud claims are remarkably similar, most falling into a handful of categories. Taking advantage of lenient due diligence and lax lending standards, four common scenarios have emerged:
• an imposter posing as a property owner and selling or refinancing
the land's equity, while collecting the proceeds at the closing;
• a family member refinancing or selling another family member's
interest in a property;
• a real estate professional selling a property to a straw buyer without
significant, if any, consideration to collect the proceeds of mortgage or
sale;
• an owner fraudulently selling or refinancing a property multiple
times to cash out all the equity from the property even beyond the
true value of the collateral.
Imposter Fraud
Governmental authorities, prosecutors, and title litigation attorneys mostly agree that real estate fraud can be prevented by conducting a degree of due diligence at the closing, and by a more careful read of the closing and mortgage application and documents.
Many times, imposter fraud can be eliminated by collecting a valid governmentally-issued identification before the closing, or, at a minimum, requesting that identification be available for inspection at the actual closing. Some attorneys, banks and at least one title agency now collect identification upon signing the contract of sale or ordering title insurance.
A New York State driver's license, as with many other state driver's licenses, can be run against a readily available Web site that enables a determination of its validity. If an electronic search is not feasible, however, a driver's license from almost any state or country in the world can be checked for validity through the "I.D. Checking Guide" by the Drivers License Guide Company, Redwood City, Calif., which provides tips for identifying counterfeits. For example, on a New York State driver's license that was issued before July 2008, the first two black letters on the far right bottom corner of the license should be the applicant's birth year.
For purchasers and sellers without a driver's license, most states issue a non-driver photo identification card through their Departments of Motor Vehicles or some other state agency. With few, if any, exceptions, non-governmental identification papers do not effectively verify identities.
In the event of a purchaser, who is not a U.S. citizen, proper identification can include a foreign passport with a valid I-551 stamp, a permanent residence card (Form I-551), and/or a foreign passport with a visa and form I-94.
Fake or altered death certificates have also figured into a number of title litigation cases. In all of these cases, a search to see if the owner's death has been "greatly exaggerated" can be run through a free internet search of the Social Security Death Index on Ancestry.com.
One can also require a certified copy of the death certificate prior to closing. In some cases, it may even be appropriate to call the funeral home for verification, although extreme caution should be exercised when making such calls out of state. Anyone who has gone to the trouble of faking the existence of a letter from a non-existent distant funeral home may well furnish an equally phony telephone number.
Power of Attorney Fraud
The United States has no greater enemy in its fight against property and mortgage fraud than the power of attorney. A disproportionate number of title litigation cases have resulted from a spurious power of attorney. Many, and perhaps almost all, of these cases could have been prevented by a diligent attorney contacting the issuer of the power and confirming some of the basic identifying data. These would include the power giver's Social Security number and personal data as reported on the credit report or mortgage application.
Furthermore, the person granting the power of attorney should be contacted at the phone number listed on reliable documents. A credit report or a Google search may also be able to produce a reliable phone number. During the ensuing conversation, the issuer should be asked about the instant transaction and details surrounding the sale. The inquirer should also ask the issuer to fax, or send in Portable Document Format (PDF), identification documents immediately after the telephone call. Any delay in the receipt of that data should arouse suspicions.
Where there are persons holding powers connected with a guardianship proceeding, the
investigator should review the guardianship order to ensure both that the guardian has the power to transfer real property, and that the order and commission have been duly authenticated by the issuing court, most typically with a raised seal.
Forgeries
Fraudulent transactions arising from forgeries are exceedingly difficult to prove. The author's review of over 25 cases involving a deed or a power of attorney with a forged name revealed that the forgers either spend a lot of time perfecting the victim's signature, or use some type of tracing device with capabilities to fool even handwriting experts.
Many of these forgeries can be blamed on a notary, who fails to require the forger to
produce verifiable identification before signing. In fact, many of the notaries in these cases sign his or her verification without even being in the presence of the transgressor or without asking for identification. With this kind of fraud so proliferating, attorneys and real estate professionals must diligently require notaries to make copies of proper identification and supply such copies to all financially interested parties.
The irony of this is that the office of the notary was designed centuries ago to provide routine and ready fraud prevention, but is now regarded as an outmoded formalism. Nowadays, clear thinkers realize that insistence upon the notary's performing the duties of the office diligently can lead to the prevention of deception. Once such due diligence again becomes the norm, the real estate industry will have recovered a hoary, but inexpensive, means of fighting fraud.
Family Member Transfers
By far, the most common form of closing fraud involves inter-spousal and other family
member transfers. The motives are usually self-evident: one disgruntled spouse may
attempt to cut off the other from the value of the equity, or a judgment debtor may
attempt to transfer assets to a family member to avoid a creditor.
Many title professionals assert that all family transfers should be treated as suspect. When very little or no consideration changes hands, an even higher alert should be signaled, as fraudsters usually attempt to retain assets and, therefore, make sure only a small amount of transfer taxes are paid at closing. Like all of us, even fraudsters do not like paying taxes.
Satisfaction of Mortgage
A close companion to the unmasked and gunless bank robber comes in the form of a
satisfaction or payoff of a mortgage. Fraudsters have been attending closings with
self-created bank letters indicating false prior mortgagees. One method involves
fraudulent payoff letters from a fake service agent pretending to act on behalf of a lender collecting the proceeds to pay off an existing loan.
Another form of fraud evolved with the creation of the Mortgage Electronic Registration Systems, popularly known as "MERS." Under the system, this central organization, MERS, appears on all papers as the nominee of the holder of the mortgage in question. However, the right to "service" that mortgage, such as collecting payments and monitoring compliance with various mortgage requirements, or to be the holder in due course of the debt can be freely passed around from one institution to another like the baton in a relay race.
This practice enables the trading and assigning of massive amounts of debt without
having to record new mortgage ownership documents on every transfer of a mortgage.
The weakness of the system, from a fraud point of view, is that, at many closings, the actual pay-off holder in due course cannot be determined from the face of the mortgage itself or its accompanying documentation. This enables thieves, for example, to supply fictitious letterhead with instructions for the payoff of the loan into a fraudulently created account.
In all of these cases, a simple phone call to MERS, or use of its public Web site
(www.mers-servicerid.org/sis) to determine the actual owner of the mortgage, would unmask the fraud.
Because lenders normally return the original stock pertaining to a cooperative unit upon the satisfaction of the obligation, owners should expect these documents to be present at a closing where the payoff is being made. Otherwise, a copy of the stock or mortgage, as recorded, should be requested to be brought to closing with the cancelled check matching the payoff amount that can be confirmed with the bank. In any event, if the payoff letter is issued by MERS or a servicing agent, as opposed to being issued by the lender of record, the lender must confirm the identity and proper allocation of monies to be transferred.
Suspicion has become a closing professional's best friend, as it goads the professional to look more deeply into the finer parts of the transaction. Aside from the intensity it gains from any other irregularity, such suspicion should always be heightened when large amounts of money are being transferred to parties other than the buyer, seller, or the prior mortgagee, or where the prior lender is not listed as the payoff entity.
Whenever a loan is not satisfied or paid off from the funds transferred in the closing transaction, suspicion should also be aroused. The diligent closing professional should see to the authentication and verification of any satisfaction or release presented at closing.
Recording Office Indolence
As one reads the literature on fraud cases, it becomes quickly apparent that many of them stem from someone assuming that, just because a document is actually genuinely
recorded, it represents a legitimate transaction. However, the main things that the
recording stamps of the county clerks and other recording officers ensure, are that the document, whatever it may be, with all its faults and flaws: (1) exists, (2) is recorded, (3) is signed in original ink, and (4) was paid for - nothing more.
This may change at some future time. At the time of this writing, there are recording
officers, who are contemplating potential procedures that will ensure some level of validity to recorded documents they are recording. Until such procedures are implemented, however, no justifiable sense of security can arise from the existence of a recording stamp, beyond confirming that the document was recorded, signed in original ink, and paid for.
Recording offices do not generally check the validity of the transaction, do not inquire into the credentials of the notary, do not inquire as to whether the notary was properly satisfied of the identity of the signatories, and do not inquire into the identities of the parties involved in the transaction. The recording officers, for the most part, see their duties as largely ministerial, complete after simply checking for a properly created Cover Page and recording the transaction.
Timely Recording Deeds
Selling the same property to more than one person also joins the list of common types of fraudulent practices. States that call for recording a deed within minutes of the transfer are the least vulnerable to this kind of fraud. But in other states, like New York, where the practice is more lax, the vulnerability to fraud heightens because documents can be recorded weeks, or even months, after a closing.
In such states, a clever thief will use the gap between transaction and recordation to give another mortgage on the premises to a different bank that also thinks the lien is in first priority. The thief flees with the proceeds of the two "sales," and the hapless multiple lenders are left to battle out the question of which bank won the race to the recording office.
Just because a state does not have "walked in" deeds as the usual methodology, however, does not mean that a recording office will refuse to accommodate a filer who does, in fact, walk-in a deed. This is an inexpensive way to ensure the priority of a transaction, even if it is at the expense of other purchasers and mortgagees, who are less vigilant.
Freezing Credit Lines
To prevent a borrower from illegally squeezing extra money from a line of credit, the
lender must obtain all instruments that would enable such a theft and destroy them at the closing. A letter from the lender acknowledging that the line of credit has been frozen should be included with the payoff letter at closing.
Outside of the Closing
Closers need to be motivated to want to uncover fraud. One such motivation the author
has titled the "Fraud Buster Bonus," which would involve the title company giving the
closer a money reward for uncovering a fraud in an amount equal to the commission the
closer would have gotten had the deal gone forward.
In addition, some real estate professionals have created internal private lists of unethical bank attorneys, real estate brokers, appraisers, and title companies. These lists set forth the names of persons, who have proven unethical, and persons with an acquired reputation for committing and/or facilitating ethical breaches.
Finally, as many fraudsters are repeat offenders, a shared database of these names should be maintained with banking and title insurance companies, as well as with interested governmental agencies. Real estate professionals must balance the utility of fraud prevention measures against the utility of efficient transaction of business. There is undoubted trouble and expense involved in protecting one's business, but it does not even begin to approach the expense of not protecting that business in the shark infested waters of real property fraud transactions.
Adam Leitman Bailey is the founding partner of the firm that bears his name.
Endnotes:
1. Eric Lichtblau, "F.B.I. Struggles to Handle Financial Fraud Cases," N.Y. Times, Oct. 19, 2008 at A1.
2. "Mortgage Fraud Is Top White Collar Crime," Organized Crime Digest, ¶3 (Dec. 15,
2005), at http://findarticles.com/p/articles/mi_qa4441/is_200512/ai_n16065739.
3. None of these figures are adjusted for inflation.
4. A.M. Best Research 2008 special report data visually depicted by chart for the American Land Title Association and reported to Adam Leitman Bailey, P.C. by Stephen Brown Klinger, senior business analyst at A.M. Best.
Copyright 2009. Incisive Media US Properties, LLC. All rights reserved.
04-08-2009
At the start of this new millennium, the most effective means to rob a bank no longer
includes the use of a gun. The real estate closing table has replaced the gun and mask as the most favored and effective tool of theft from financial institutions.
As the New York Times reported on Oct. 19, 2008, the Federal Bureau of Investigation
declared its inability to properly investigate the number of property and mortgage fraud claims, due to inadequate staffing,1 noting that there is "no central way to track the total extent of the problem." The number of mortgage fraud reports filed with the FBI totaled 46,717 in 2007 compared with 6,936 reports filed in 2003 - a 674 percent increase.
Mortgage fraud has taken the lead as our country's fastest growing white collar crime, accounting for more than 20 percent of all fraud in the United States. Federal, state, and local prosecutors have had to expand their resources in order to deal with this crime wave sweeping the nation. In New York City alone, for example, the FBI, two branch offices of the U.S. Attorney's Office, and the Manhattan District Attorney's Office have all restructured to open specialized mortgage fraud bureaus.2
No industry has been stung more by property and mortgage fraud than the title insurance industry. Notwithstanding that a major function of the process of issuing a title insurance policy is to resolve title defects prior to closing, this past August, an executive officer at one of the nation's largest title companies remarked at an annual title insurance industry convention, "We used to have to justify its premiums. 'How can your prices be so high and your claims so low?' they used to ask me. Now, we have really shown them!" (NYLTA Convention, Aug. 26, 2008). In 1996, the title industry reported paid title claims equaling $271.1 million. In 2005, claims reached $916.4 million, followed by paid claims of $870.3 million in 2006. Alarmingly, in 2007, paid title claims reached just under $1.3 billion,
which, notably, is a 149 percent increase from 2006, and a 480 percent increase (or
almost a quintupling 3) in paid claims over the span of a decade.4
Practitioners explaining to purchasers the importance of purchasing title insurance no longer rely on the old adage of an owner reclaiming land transacted as a result of a peace treaty hundreds of years ago. After a generation of protecting clients from property fraud or theft, for the first time in their careers, many practitioners now find themselves also assisting their clients in filing title insurance claims and sitting at depositions explaining the anatomy of the fraud at the closing.
The fact patterns giving rise to the thousands of real estate fraud claims are remarkably similar, most falling into a handful of categories. Taking advantage of lenient due diligence and lax lending standards, four common scenarios have emerged:
• an imposter posing as a property owner and selling or refinancing
the land's equity, while collecting the proceeds at the closing;
• a family member refinancing or selling another family member's
interest in a property;
• a real estate professional selling a property to a straw buyer without
significant, if any, consideration to collect the proceeds of mortgage or
sale;
• an owner fraudulently selling or refinancing a property multiple
times to cash out all the equity from the property even beyond the
true value of the collateral.
Imposter Fraud
Governmental authorities, prosecutors, and title litigation attorneys mostly agree that real estate fraud can be prevented by conducting a degree of due diligence at the closing, and by a more careful read of the closing and mortgage application and documents.
Many times, imposter fraud can be eliminated by collecting a valid governmentally-issued identification before the closing, or, at a minimum, requesting that identification be available for inspection at the actual closing. Some attorneys, banks and at least one title agency now collect identification upon signing the contract of sale or ordering title insurance.
A New York State driver's license, as with many other state driver's licenses, can be run against a readily available Web site that enables a determination of its validity. If an electronic search is not feasible, however, a driver's license from almost any state or country in the world can be checked for validity through the "I.D. Checking Guide" by the Drivers License Guide Company, Redwood City, Calif., which provides tips for identifying counterfeits. For example, on a New York State driver's license that was issued before July 2008, the first two black letters on the far right bottom corner of the license should be the applicant's birth year.
For purchasers and sellers without a driver's license, most states issue a non-driver photo identification card through their Departments of Motor Vehicles or some other state agency. With few, if any, exceptions, non-governmental identification papers do not effectively verify identities.
In the event of a purchaser, who is not a U.S. citizen, proper identification can include a foreign passport with a valid I-551 stamp, a permanent residence card (Form I-551), and/or a foreign passport with a visa and form I-94.
Fake or altered death certificates have also figured into a number of title litigation cases. In all of these cases, a search to see if the owner's death has been "greatly exaggerated" can be run through a free internet search of the Social Security Death Index on Ancestry.com.
One can also require a certified copy of the death certificate prior to closing. In some cases, it may even be appropriate to call the funeral home for verification, although extreme caution should be exercised when making such calls out of state. Anyone who has gone to the trouble of faking the existence of a letter from a non-existent distant funeral home may well furnish an equally phony telephone number.
Power of Attorney Fraud
The United States has no greater enemy in its fight against property and mortgage fraud than the power of attorney. A disproportionate number of title litigation cases have resulted from a spurious power of attorney. Many, and perhaps almost all, of these cases could have been prevented by a diligent attorney contacting the issuer of the power and confirming some of the basic identifying data. These would include the power giver's Social Security number and personal data as reported on the credit report or mortgage application.
Furthermore, the person granting the power of attorney should be contacted at the phone number listed on reliable documents. A credit report or a Google search may also be able to produce a reliable phone number. During the ensuing conversation, the issuer should be asked about the instant transaction and details surrounding the sale. The inquirer should also ask the issuer to fax, or send in Portable Document Format (PDF), identification documents immediately after the telephone call. Any delay in the receipt of that data should arouse suspicions.
Where there are persons holding powers connected with a guardianship proceeding, the
investigator should review the guardianship order to ensure both that the guardian has the power to transfer real property, and that the order and commission have been duly authenticated by the issuing court, most typically with a raised seal.
Forgeries
Fraudulent transactions arising from forgeries are exceedingly difficult to prove. The author's review of over 25 cases involving a deed or a power of attorney with a forged name revealed that the forgers either spend a lot of time perfecting the victim's signature, or use some type of tracing device with capabilities to fool even handwriting experts.
Many of these forgeries can be blamed on a notary, who fails to require the forger to
produce verifiable identification before signing. In fact, many of the notaries in these cases sign his or her verification without even being in the presence of the transgressor or without asking for identification. With this kind of fraud so proliferating, attorneys and real estate professionals must diligently require notaries to make copies of proper identification and supply such copies to all financially interested parties.
The irony of this is that the office of the notary was designed centuries ago to provide routine and ready fraud prevention, but is now regarded as an outmoded formalism. Nowadays, clear thinkers realize that insistence upon the notary's performing the duties of the office diligently can lead to the prevention of deception. Once such due diligence again becomes the norm, the real estate industry will have recovered a hoary, but inexpensive, means of fighting fraud.
Family Member Transfers
By far, the most common form of closing fraud involves inter-spousal and other family
member transfers. The motives are usually self-evident: one disgruntled spouse may
attempt to cut off the other from the value of the equity, or a judgment debtor may
attempt to transfer assets to a family member to avoid a creditor.
Many title professionals assert that all family transfers should be treated as suspect. When very little or no consideration changes hands, an even higher alert should be signaled, as fraudsters usually attempt to retain assets and, therefore, make sure only a small amount of transfer taxes are paid at closing. Like all of us, even fraudsters do not like paying taxes.
Satisfaction of Mortgage
A close companion to the unmasked and gunless bank robber comes in the form of a
satisfaction or payoff of a mortgage. Fraudsters have been attending closings with
self-created bank letters indicating false prior mortgagees. One method involves
fraudulent payoff letters from a fake service agent pretending to act on behalf of a lender collecting the proceeds to pay off an existing loan.
Another form of fraud evolved with the creation of the Mortgage Electronic Registration Systems, popularly known as "MERS." Under the system, this central organization, MERS, appears on all papers as the nominee of the holder of the mortgage in question. However, the right to "service" that mortgage, such as collecting payments and monitoring compliance with various mortgage requirements, or to be the holder in due course of the debt can be freely passed around from one institution to another like the baton in a relay race.
This practice enables the trading and assigning of massive amounts of debt without
having to record new mortgage ownership documents on every transfer of a mortgage.
The weakness of the system, from a fraud point of view, is that, at many closings, the actual pay-off holder in due course cannot be determined from the face of the mortgage itself or its accompanying documentation. This enables thieves, for example, to supply fictitious letterhead with instructions for the payoff of the loan into a fraudulently created account.
In all of these cases, a simple phone call to MERS, or use of its public Web site
(www.mers-servicerid.org/sis) to determine the actual owner of the mortgage, would unmask the fraud.
Because lenders normally return the original stock pertaining to a cooperative unit upon the satisfaction of the obligation, owners should expect these documents to be present at a closing where the payoff is being made. Otherwise, a copy of the stock or mortgage, as recorded, should be requested to be brought to closing with the cancelled check matching the payoff amount that can be confirmed with the bank. In any event, if the payoff letter is issued by MERS or a servicing agent, as opposed to being issued by the lender of record, the lender must confirm the identity and proper allocation of monies to be transferred.
Suspicion has become a closing professional's best friend, as it goads the professional to look more deeply into the finer parts of the transaction. Aside from the intensity it gains from any other irregularity, such suspicion should always be heightened when large amounts of money are being transferred to parties other than the buyer, seller, or the prior mortgagee, or where the prior lender is not listed as the payoff entity.
Whenever a loan is not satisfied or paid off from the funds transferred in the closing transaction, suspicion should also be aroused. The diligent closing professional should see to the authentication and verification of any satisfaction or release presented at closing.
Recording Office Indolence
As one reads the literature on fraud cases, it becomes quickly apparent that many of them stem from someone assuming that, just because a document is actually genuinely
recorded, it represents a legitimate transaction. However, the main things that the
recording stamps of the county clerks and other recording officers ensure, are that the document, whatever it may be, with all its faults and flaws: (1) exists, (2) is recorded, (3) is signed in original ink, and (4) was paid for - nothing more.
This may change at some future time. At the time of this writing, there are recording
officers, who are contemplating potential procedures that will ensure some level of validity to recorded documents they are recording. Until such procedures are implemented, however, no justifiable sense of security can arise from the existence of a recording stamp, beyond confirming that the document was recorded, signed in original ink, and paid for.
Recording offices do not generally check the validity of the transaction, do not inquire into the credentials of the notary, do not inquire as to whether the notary was properly satisfied of the identity of the signatories, and do not inquire into the identities of the parties involved in the transaction. The recording officers, for the most part, see their duties as largely ministerial, complete after simply checking for a properly created Cover Page and recording the transaction.
Timely Recording Deeds
Selling the same property to more than one person also joins the list of common types of fraudulent practices. States that call for recording a deed within minutes of the transfer are the least vulnerable to this kind of fraud. But in other states, like New York, where the practice is more lax, the vulnerability to fraud heightens because documents can be recorded weeks, or even months, after a closing.
In such states, a clever thief will use the gap between transaction and recordation to give another mortgage on the premises to a different bank that also thinks the lien is in first priority. The thief flees with the proceeds of the two "sales," and the hapless multiple lenders are left to battle out the question of which bank won the race to the recording office.
Just because a state does not have "walked in" deeds as the usual methodology, however, does not mean that a recording office will refuse to accommodate a filer who does, in fact, walk-in a deed. This is an inexpensive way to ensure the priority of a transaction, even if it is at the expense of other purchasers and mortgagees, who are less vigilant.
Freezing Credit Lines
To prevent a borrower from illegally squeezing extra money from a line of credit, the
lender must obtain all instruments that would enable such a theft and destroy them at the closing. A letter from the lender acknowledging that the line of credit has been frozen should be included with the payoff letter at closing.
Outside of the Closing
Closers need to be motivated to want to uncover fraud. One such motivation the author
has titled the "Fraud Buster Bonus," which would involve the title company giving the
closer a money reward for uncovering a fraud in an amount equal to the commission the
closer would have gotten had the deal gone forward.
In addition, some real estate professionals have created internal private lists of unethical bank attorneys, real estate brokers, appraisers, and title companies. These lists set forth the names of persons, who have proven unethical, and persons with an acquired reputation for committing and/or facilitating ethical breaches.
Finally, as many fraudsters are repeat offenders, a shared database of these names should be maintained with banking and title insurance companies, as well as with interested governmental agencies. Real estate professionals must balance the utility of fraud prevention measures against the utility of efficient transaction of business. There is undoubted trouble and expense involved in protecting one's business, but it does not even begin to approach the expense of not protecting that business in the shark infested waters of real property fraud transactions.
Adam Leitman Bailey is the founding partner of the firm that bears his name.
Endnotes:
1. Eric Lichtblau, "F.B.I. Struggles to Handle Financial Fraud Cases," N.Y. Times, Oct. 19, 2008 at A1.
2. "Mortgage Fraud Is Top White Collar Crime," Organized Crime Digest, ¶3 (Dec. 15,
2005), at http://findarticles.com/p/articles/mi_qa4441/is_200512/ai_n16065739.
3. None of these figures are adjusted for inflation.
4. A.M. Best Research 2008 special report data visually depicted by chart for the American Land Title Association and reported to Adam Leitman Bailey, P.C. by Stephen Brown Klinger, senior business analyst at A.M. Best.
Copyright 2009. Incisive Media US Properties, LLC. All rights reserved.
Monday, April 06, 2009
Pick-me-up enters a down market
Entrepreneurs launch hangover ‘recovery’ drink aimed at nightclub hoppers with day jobs
By Kira Bindrim
The time: 8 a.m. Friday morning. The culprit: four ill-advised tequila shots the previous evening. The feeling: dehydrated, exhausted, hung over. The cure: a new azure-hued beverage called Code Blue.
Or at least that’s what Michael Sachs, along with brothers Jeff and Steven Frumin, hope their “recovery drink” will be for hardworking, hard-playing urban dwellers.
The fact that the former college buddies have launched Code Blue in the heart of a recession confirms not only their belief in the concept, but also the faith of three beverage industry veterans who are the startup’s angel investors.
Doing promotions in the nightlife industry, Messrs. Sachs and Frumin came up with the idea for Code Blue while commiserating over their hangovers.
Working with food scientist and Gatorade co-developer Sumner Katz, the marketers-turned-entrepreneurs came up with a formula that included standard electrolytes, vitamins and minerals. It had two additional ingredients: “reduced glutathione,” which acts as an antioxidant, and a blend of agave nectar and prickly pear juice, considered to have anti-inflammatory properties.
The Code Blue team knows its target demographic. Mr. Sachs, formerly marketing manager for Bacardi’s Grey Goose Vodka, has more than a decade of experience in the wine-and-spirits industry. On the marketing side, the Frumin brothers co-founded Universal Promotions Inc., a Boston-based event management company, as well as promotions agency UCG Marketing.
The guys sat down with beverage executives from 15 different companies to tout their product and take in feedback. Along the way, they snagged three major backers: Jack Belsito, former chief executive of Snapple; Hank McInerney, former chief executive of Tetley Tea; and David Kanbar, former executive vice president and director of Skyy Spirits.
“I thought, ‘This isn’t a drink that you might have every day, but it’s great for what it is,’” says Mr. Kanbar. “There’s a need in the market for it.”
Indeed, Code Blue, which was three years in the making, plowed through its January launch in the Big Apple and has since rolled out in Boston. The drink is sold in hotels, health clubs and bodegas, and earlier this month became available in all 230 Duane Reade locations in the New York metro area.
There are undoubtedly growing pains ahead. Launching a new product in the crowded beverage marketplace is no small feat, even without a nationwide recession.
“They’ve joined a category, but they’re not leading one or creating a new one,” says Tom Pirko, president of beverage industry consultancy Bevmark. “Whether they succeed will depend more than anything on their ability to get inside the consumer’s head and say, ‘This is different.’ ”
Nor is Code Blue the cheapest thing on the shelf. The drink runs $3.50 per 12-ounce bottle.
Mr. Pirko says the drink might benefit from its niche focus. “If you’ve got a severe headache and you’re having double vision because of last night’s blowout, this has an over-the-counter medical appeal,” he says.
The clear minds behind Code Blue agree. “We’re solving a problem,” says Jeff Frumin.
Copyright 2009 Crain's Communications, Inc. All rights reserved.
By Kira Bindrim
The time: 8 a.m. Friday morning. The culprit: four ill-advised tequila shots the previous evening. The feeling: dehydrated, exhausted, hung over. The cure: a new azure-hued beverage called Code Blue.
Or at least that’s what Michael Sachs, along with brothers Jeff and Steven Frumin, hope their “recovery drink” will be for hardworking, hard-playing urban dwellers.
The fact that the former college buddies have launched Code Blue in the heart of a recession confirms not only their belief in the concept, but also the faith of three beverage industry veterans who are the startup’s angel investors.
Doing promotions in the nightlife industry, Messrs. Sachs and Frumin came up with the idea for Code Blue while commiserating over their hangovers.
Working with food scientist and Gatorade co-developer Sumner Katz, the marketers-turned-entrepreneurs came up with a formula that included standard electrolytes, vitamins and minerals. It had two additional ingredients: “reduced glutathione,” which acts as an antioxidant, and a blend of agave nectar and prickly pear juice, considered to have anti-inflammatory properties.
The Code Blue team knows its target demographic. Mr. Sachs, formerly marketing manager for Bacardi’s Grey Goose Vodka, has more than a decade of experience in the wine-and-spirits industry. On the marketing side, the Frumin brothers co-founded Universal Promotions Inc., a Boston-based event management company, as well as promotions agency UCG Marketing.
The guys sat down with beverage executives from 15 different companies to tout their product and take in feedback. Along the way, they snagged three major backers: Jack Belsito, former chief executive of Snapple; Hank McInerney, former chief executive of Tetley Tea; and David Kanbar, former executive vice president and director of Skyy Spirits.
“I thought, ‘This isn’t a drink that you might have every day, but it’s great for what it is,’” says Mr. Kanbar. “There’s a need in the market for it.”
Indeed, Code Blue, which was three years in the making, plowed through its January launch in the Big Apple and has since rolled out in Boston. The drink is sold in hotels, health clubs and bodegas, and earlier this month became available in all 230 Duane Reade locations in the New York metro area.
There are undoubtedly growing pains ahead. Launching a new product in the crowded beverage marketplace is no small feat, even without a nationwide recession.
“They’ve joined a category, but they’re not leading one or creating a new one,” says Tom Pirko, president of beverage industry consultancy Bevmark. “Whether they succeed will depend more than anything on their ability to get inside the consumer’s head and say, ‘This is different.’ ”
Nor is Code Blue the cheapest thing on the shelf. The drink runs $3.50 per 12-ounce bottle.
Mr. Pirko says the drink might benefit from its niche focus. “If you’ve got a severe headache and you’re having double vision because of last night’s blowout, this has an over-the-counter medical appeal,” he says.
The clear minds behind Code Blue agree. “We’re solving a problem,” says Jeff Frumin.
Copyright 2009 Crain's Communications, Inc. All rights reserved.
Friday, April 03, 2009
NYT: Bankruptcies Rose to Nearly 6,000 a Day in March
By Tara Siegel Bernard
The ailing economy continues to pull more Americans into bankruptcy court, where the number of troubled consumers filing for protection soared in March to its highest level since October 2005, when a new law made it more arduous and expensive to file.
And as job losses continue to climb, they may well drag bankruptcy filings along with them.
An average of 5,945 bankruptcy petitions were filed each day in March, up 9 percent from February and up 38 percent compared with a year earlier, according to Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company. In all, 130,793 people filed for bankruptcy in March.
The weak economy and its repercussions — rising unemployment, lower pay, fewer people with health insurance, and the mortgage and foreclosure crises — are all playing a role in the big increase in bankruptcies. And some of the most common factors that tend to lead to bankruptcy filings — divorce and disruptive health problems — have not gone away.
But the biggest factor in the current spate of filings may be the tightening of credit.
“We have a lot of people out of work, but that alone is not driving the spike in bankruptcy filings,” said Robert M. Lawless, a professor at the University of Illinois College of Law. “Along with job loss is the tightening of consumer credit. Compared to 18 months ago, the American consumer does not have the same ability to borrow in an attempt to stave off the day of reckoning. With no income and no credit, it is not surprising that the middle class is looking to the bankruptcy courts for relief.”
Professor Lawless said he expected total bankruptcy filings to reach 1.45 million to 1.5 million by the end of the year, compared with nearly 1.1 million filings in 2008, an increase of 31 percent to 36 percent. It also means that filings are fast approaching the average number of annual filings of about 1.4 million before the new bankruptcy law took effect in October 2005.
“It shows you that a lot more people are hurting,” Mr. Bickford said. “Even with the more restrictive law in place, the filings are back up to the pre-law level.”
The law, the Bankruptcy Abuse Prevention and Consumer Protection Act, made it more difficult for consumers to erase their debts through Chapter 7 bankruptcies. Those who earn more than their state’s median income are now required to first pass a means test — based on income, living expenses and other factors. If they are deemed able to repay some debts, they are then forced to pursue a Chapter 13 bankruptcy, which sets up a three- or five-year repayment plan and makes it more difficult to get a fresh start.
“In a nutshell, bankruptcies happen because financial distress happens,” said Jack Williams, resident scholar at the American Bankruptcy Institute and a bankruptcy professor at the Georgia State University College of Law. “It is hubris to think that we can manage such a complex system by inserting a means test here, a credit counseling requirement there.”
Keith and Leola Gladney of St. Charles, Mo., filed for Chapter 13 bankruptcy last summer. Their problems began to unfold in September 2007, when Mrs. Gladney, who was pregnant, was put on bed rest and could no longer work as a marketing assistant. They lost her income, though she did receive short-term disability payments. In January 2008, Mr. Gladney, 38, lost his job as a manager of an auto parts store. Within months, the couple had fallen behind on the mortgage payments on their home, which they bought for $130,000 in 2004.
They lost the house around the time their son was born in March 2008, and the couple had to move into a hotel with their newborn. Though they eventually found an apartment to rent, the Gladneys decided to file for bankruptcy. Adding to their troubles, Mrs. Gladney, 37, found out last November that she did not have a job to return to.
“It is really stressful for me because I thought I would find another job,” she said.
Mr. Gladney said he was hopeful that he was close to receiving a job offer on one of the 30 or so résumés he sends out daily. “We are trying to keep our heads up and keep a positive attitude and hope things will get better,” he said. “We go to church every Sunday. We haven’t changed our routine.”
If history is any guide, the number of bankruptcy filings will increase through this year, but will not jump as much as they did from February to March because that tends to be a popular time for filing, Professor Lawless said. But if legislation is passed that would allow bankruptcy judges to modify some primary mortgages, filings could rise significantly.
The House has approved a version of that so-called cramdown legislation, but the Senate did not have enough votes to overcome a filibuster by Republicans, who want the modifications to apply to a much smaller pool of loans. The Senate Democrats are working on a compromise, and say they hope they can bring the bill to the floor after Congress returns from recess on April 20.
The power to modify home mortgages would probably lead many more people to pursue bankruptcy to save their homes. If the legislation were to pass, Mr. Lawless said, 1.6 million would be a conservative estimate of the number of bankruptcy filings this year.
“We have to remember that pre-bankruptcy negotiations take place in the shadow of the bankruptcy law,” he added. “We would expect that banks would be more likely to come to the negotiation table.”
Regardless of what happens, the number of consumers filing for bankruptcy is expected to continue to climb even after the economy begins to recover.
“What is sobering about these numbers is that bankruptcy is generally a lagging economic indicator,” Professor Williams said. “So even as the economy starts to turn around down the road, we will still continue to see bankruptcy filings increase even past that turning point, and that trend will continue anywhere from three to five quarters.”
Copyright 2009 The New York Times Company. All rights reserved.
The ailing economy continues to pull more Americans into bankruptcy court, where the number of troubled consumers filing for protection soared in March to its highest level since October 2005, when a new law made it more arduous and expensive to file.
And as job losses continue to climb, they may well drag bankruptcy filings along with them.
An average of 5,945 bankruptcy petitions were filed each day in March, up 9 percent from February and up 38 percent compared with a year earlier, according to Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company. In all, 130,793 people filed for bankruptcy in March.
The weak economy and its repercussions — rising unemployment, lower pay, fewer people with health insurance, and the mortgage and foreclosure crises — are all playing a role in the big increase in bankruptcies. And some of the most common factors that tend to lead to bankruptcy filings — divorce and disruptive health problems — have not gone away.
But the biggest factor in the current spate of filings may be the tightening of credit.
“We have a lot of people out of work, but that alone is not driving the spike in bankruptcy filings,” said Robert M. Lawless, a professor at the University of Illinois College of Law. “Along with job loss is the tightening of consumer credit. Compared to 18 months ago, the American consumer does not have the same ability to borrow in an attempt to stave off the day of reckoning. With no income and no credit, it is not surprising that the middle class is looking to the bankruptcy courts for relief.”
Professor Lawless said he expected total bankruptcy filings to reach 1.45 million to 1.5 million by the end of the year, compared with nearly 1.1 million filings in 2008, an increase of 31 percent to 36 percent. It also means that filings are fast approaching the average number of annual filings of about 1.4 million before the new bankruptcy law took effect in October 2005.
“It shows you that a lot more people are hurting,” Mr. Bickford said. “Even with the more restrictive law in place, the filings are back up to the pre-law level.”
The law, the Bankruptcy Abuse Prevention and Consumer Protection Act, made it more difficult for consumers to erase their debts through Chapter 7 bankruptcies. Those who earn more than their state’s median income are now required to first pass a means test — based on income, living expenses and other factors. If they are deemed able to repay some debts, they are then forced to pursue a Chapter 13 bankruptcy, which sets up a three- or five-year repayment plan and makes it more difficult to get a fresh start.
“In a nutshell, bankruptcies happen because financial distress happens,” said Jack Williams, resident scholar at the American Bankruptcy Institute and a bankruptcy professor at the Georgia State University College of Law. “It is hubris to think that we can manage such a complex system by inserting a means test here, a credit counseling requirement there.”
Keith and Leola Gladney of St. Charles, Mo., filed for Chapter 13 bankruptcy last summer. Their problems began to unfold in September 2007, when Mrs. Gladney, who was pregnant, was put on bed rest and could no longer work as a marketing assistant. They lost her income, though she did receive short-term disability payments. In January 2008, Mr. Gladney, 38, lost his job as a manager of an auto parts store. Within months, the couple had fallen behind on the mortgage payments on their home, which they bought for $130,000 in 2004.
They lost the house around the time their son was born in March 2008, and the couple had to move into a hotel with their newborn. Though they eventually found an apartment to rent, the Gladneys decided to file for bankruptcy. Adding to their troubles, Mrs. Gladney, 37, found out last November that she did not have a job to return to.
“It is really stressful for me because I thought I would find another job,” she said.
Mr. Gladney said he was hopeful that he was close to receiving a job offer on one of the 30 or so résumés he sends out daily. “We are trying to keep our heads up and keep a positive attitude and hope things will get better,” he said. “We go to church every Sunday. We haven’t changed our routine.”
If history is any guide, the number of bankruptcy filings will increase through this year, but will not jump as much as they did from February to March because that tends to be a popular time for filing, Professor Lawless said. But if legislation is passed that would allow bankruptcy judges to modify some primary mortgages, filings could rise significantly.
The House has approved a version of that so-called cramdown legislation, but the Senate did not have enough votes to overcome a filibuster by Republicans, who want the modifications to apply to a much smaller pool of loans. The Senate Democrats are working on a compromise, and say they hope they can bring the bill to the floor after Congress returns from recess on April 20.
The power to modify home mortgages would probably lead many more people to pursue bankruptcy to save their homes. If the legislation were to pass, Mr. Lawless said, 1.6 million would be a conservative estimate of the number of bankruptcy filings this year.
“We have to remember that pre-bankruptcy negotiations take place in the shadow of the bankruptcy law,” he added. “We would expect that banks would be more likely to come to the negotiation table.”
Regardless of what happens, the number of consumers filing for bankruptcy is expected to continue to climb even after the economy begins to recover.
“What is sobering about these numbers is that bankruptcy is generally a lagging economic indicator,” Professor Williams said. “So even as the economy starts to turn around down the road, we will still continue to see bankruptcy filings increase even past that turning point, and that trend will continue anywhere from three to five quarters.”
Copyright 2009 The New York Times Company. All rights reserved.
Thursday, March 26, 2009
Prepackaged bankruptcies
At Shenwick & Associates, we’re seeing an increasing amount of small companies looking for relief under the Bankruptcy Code. Companies filing for bankruptcy protection are increasingly turning to prepackaged bankruptcies, a tool used by Chapter 11 attorneys since the early 1990s.
These “prepacks,” as they are known, have gained popularity since changes made to bankruptcy law by the Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA).
Some of the advantages of pre-packaged bankruptcies are:
1. Creditors and Debtors negotiate out of court, which keeps the parties’ business affairs out of the public eye and reduces administrative expenses, since the company is only paying as expenses are incurred.
2. Prepacks can be completed in a matter of weeks, while traditional Chapter 11 cases take a year or more.
3. Prepacks have a higher rate of success compared to traditional Chapter 11 bankruptcy filings.
4. Prepacks are useful for large workouts, where there are few significant creditors, other than a lender and the claims of other creditors are to be substantially paid in full as part of the plan.
5. In states with high conveyance taxes (like New York), a prepack is a good way to effect a transfer of distressed real estate without paying transfer taxes.
6. Reduced disruption of the Debtor business.
7. Increased confidence that the reorganization will succeed.
8. Minority creditors are less likely to be able to command a premium from the Debtor to consent to the restructuring.
9. “Lockup agreements” can be used to bind shareholders and/or creditors to the terms of a restructuring proposal.
For more information about pre-packaged bankruptcies, please contact Jim Shenwick.
These “prepacks,” as they are known, have gained popularity since changes made to bankruptcy law by the Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA).
Some of the advantages of pre-packaged bankruptcies are:
1. Creditors and Debtors negotiate out of court, which keeps the parties’ business affairs out of the public eye and reduces administrative expenses, since the company is only paying as expenses are incurred.
2. Prepacks can be completed in a matter of weeks, while traditional Chapter 11 cases take a year or more.
3. Prepacks have a higher rate of success compared to traditional Chapter 11 bankruptcy filings.
4. Prepacks are useful for large workouts, where there are few significant creditors, other than a lender and the claims of other creditors are to be substantially paid in full as part of the plan.
5. In states with high conveyance taxes (like New York), a prepack is a good way to effect a transfer of distressed real estate without paying transfer taxes.
6. Reduced disruption of the Debtor business.
7. Increased confidence that the reorganization will succeed.
8. Minority creditors are less likely to be able to command a premium from the Debtor to consent to the restructuring.
9. “Lockup agreements” can be used to bind shareholders and/or creditors to the terms of a restructuring proposal.
For more information about pre-packaged bankruptcies, please contact Jim Shenwick.
Monday, March 16, 2009
New York Times: Thoughts on Walking Away From Your Home Loan
By RON LIEBER
If you’re among the millions of people who will not qualify for the Obama administration’s program to help troubled homeowners, you’re probably wondering what you’re supposed to do now.
Perhaps you no longer have enough income to pay your loans. Or you can afford the payments but don’t qualify for refinancing under the new plan because the value of your home is too far below the balance of the loan. If you’re far enough underwater, you’re probably questioning the wisdom of writing a monthly check on a place that may take 10 or 15 years to get back to the value it had two or three years ago. It isn’t easy to come up with the answer, and if you have moral misgivings about not making good on your mortgage, a religious officiant may offer as much useful guidance as a financial planner.
In an economic environment like this one, however, the consequences of giving up on your mortgage may not be as painful as they were a few years ago. Yes, it’s almost always preferable to negotiate a better deal on your existing mortgage than to walk away. But if you can’t work things out with your lender, you probably won’t be sued. You shouldn’t receive a major tax bill either. And the damage to your credit will not be permanent or insurmountable.
Let’s look at these last three in order.
YOUR LENDER First off, let’s define what we mean by “giving up” on your current mortgage. It may mean trying for a short sale, where the lender allows you to sell your home for less than the mortgage amount. You may also hand over the deed to the home in exchange for the lender agreeing not to start foreclosure proceedings (a “deed in lieu” in industry terms). Then, there’s foreclosure itself, and the possibility that bankruptcy judges may soon have the power to adjust the terms of primary mortgages.
That said, just because you’re ineligible under the Obama plan doesn’t mean that your lender or servicer won’t ultimately adjust your mortgage anyhow. Collectively, there are enough people in trouble or under water on their loans that they have plenty of leverage if they’re willing to play chicken with their lender and threaten to stop paying.
The problem is, the lender can play chicken, too, by threatening to come after you for the balance of any money you owe — whether it’s the difference between what you sell the property for yourself and the remaining mortgage, or the loan amount left over after the lender sells your property in foreclosure.
The lender may not follow through, though. “What our membership is telling us is that it can be cost-prohibitive to chase down a borrower who is already in financial distress,” said John Mechem, a spokesman for the Mortgage Bankers Association. “You can’t squeeze blood from a stone.” They may, however, still come after people with high incomes who walk away from jumbo loans that are way under water or loans on investment properties.
Some states have laws that may specifically prohibit lenders from pursuing borrowers for the balance of many mortgage loans after foreclosure, though the particulars vary. Arizona and California are among these states, according to Steven Bender, a professor at the University of Oregon School of Law. It’s best to talk to a lawyer to determine your state’s rules.
In fact, if you want to be sure your lender (or a collection agency that it may sell your loan to) won’t chase you down, it’s a good idea to have a lawyer involved with any short sale, deed in lieu or foreclosure itself. “You must get the bank to agree in writing that any deficiency is waived,” said Chip Parker, a lawyer specializing in foreclosure with Parker & DuFresne in Jacksonville, Fla.
The biggest challenge here may simply be finding someone at the bank to help. Having a second mortgage will also complicate matters.
YOUR TAXES You also need to consider the taxman. Often, forgiven debts are taxable as income. Recent legislative changes, however, eliminate the federal tax burden through 2012 on most primary residence debt that a lender has reduced through loan restructuring or forgiven during foreclosure.
Mark Luscombe, principal analyst for CCH, a tax information service, said that people who sell their home through a short sale or give up the deed in lieu of foreclosure can also qualify for tax relief if they use a special tax form, 1099-C, that reflects the amount of debt that the lender has forgiven.
People who live in states with their own income taxes may avoid a big bill as well. Some states, like Arizona and California, have introduced or passed legislation that echoes the federal laws, according to the National Conference of State Legislatures. Many others tend to mimic most or all federal income tax laws as a general rule, according to CCH. Check with an accountant in your state to be sure.
YOUR CREDIT A short sale, deed in lieu or foreclosure itself will almost certainly damage your credit report and score, and the black mark will last for up to seven years. But the amount of damage it does will depend on how much other credit trouble you’ve gotten yourself into with other lenders.
If you’re giving up the home you own, you’ll probably need to rent soon afterward. Will landlords turn you away once they check your credit and discover your troubled mortgage? “If it’s the only thing marring their credit, it’s probably not a big issue,” said Clay Powell, the director of the Rental Property Owners Association of Michigan, who added that good tenants could be scarce in economic environments like this one.
In fact, Todd J. Zywicki, a law professor at George Mason University, predicted that FICO may have to adjust its credit scores to lessen the impact of a foreclosure or similar incident. “It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he said. “To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”
Craig Watts, a spokesman for FICO, said that was an interesting idea. “We try not to get involved too much in psychobabble around what is and isn’t predictive,” he said. “If the numbers show that foreclosure is less predictive, then we’ll take it into account in future redevelopments of the formula.” That would take a minimum of two to three years, though.
Some lenders aren’t waiting that long to initiate their own foreclosure destigmatization programs. The Golden 1, one of the nation’s largest credit unions, now has a mortgage repair loan for people who have lost a home to foreclosure but want to buy a new one.
It’s hard to imagine that there won’t be a parade of insurance companies, credit card issuers and mortgage lenders in Golden 1’s wake, even though Fannie Mae and Freddie Mac may be unwilling to guarantee the mortgages of such borrowers for several years. In fact, Aaron Bresko, the vice president of lending for BECU, another large credit union based in Washington State, is putting together a panel called “How to Lend to the Newly Credit Impaired” for a conference later this year.
“Good people have bad things happen to them, so how do you find those people and reach out to them?” he said. “As the year progresses, it’s going to be an emerging market.”
Copyright 2009 The New York Times Company. All rights reserved.
If you’re among the millions of people who will not qualify for the Obama administration’s program to help troubled homeowners, you’re probably wondering what you’re supposed to do now.
Perhaps you no longer have enough income to pay your loans. Or you can afford the payments but don’t qualify for refinancing under the new plan because the value of your home is too far below the balance of the loan. If you’re far enough underwater, you’re probably questioning the wisdom of writing a monthly check on a place that may take 10 or 15 years to get back to the value it had two or three years ago. It isn’t easy to come up with the answer, and if you have moral misgivings about not making good on your mortgage, a religious officiant may offer as much useful guidance as a financial planner.
In an economic environment like this one, however, the consequences of giving up on your mortgage may not be as painful as they were a few years ago. Yes, it’s almost always preferable to negotiate a better deal on your existing mortgage than to walk away. But if you can’t work things out with your lender, you probably won’t be sued. You shouldn’t receive a major tax bill either. And the damage to your credit will not be permanent or insurmountable.
Let’s look at these last three in order.
YOUR LENDER First off, let’s define what we mean by “giving up” on your current mortgage. It may mean trying for a short sale, where the lender allows you to sell your home for less than the mortgage amount. You may also hand over the deed to the home in exchange for the lender agreeing not to start foreclosure proceedings (a “deed in lieu” in industry terms). Then, there’s foreclosure itself, and the possibility that bankruptcy judges may soon have the power to adjust the terms of primary mortgages.
That said, just because you’re ineligible under the Obama plan doesn’t mean that your lender or servicer won’t ultimately adjust your mortgage anyhow. Collectively, there are enough people in trouble or under water on their loans that they have plenty of leverage if they’re willing to play chicken with their lender and threaten to stop paying.
The problem is, the lender can play chicken, too, by threatening to come after you for the balance of any money you owe — whether it’s the difference between what you sell the property for yourself and the remaining mortgage, or the loan amount left over after the lender sells your property in foreclosure.
The lender may not follow through, though. “What our membership is telling us is that it can be cost-prohibitive to chase down a borrower who is already in financial distress,” said John Mechem, a spokesman for the Mortgage Bankers Association. “You can’t squeeze blood from a stone.” They may, however, still come after people with high incomes who walk away from jumbo loans that are way under water or loans on investment properties.
Some states have laws that may specifically prohibit lenders from pursuing borrowers for the balance of many mortgage loans after foreclosure, though the particulars vary. Arizona and California are among these states, according to Steven Bender, a professor at the University of Oregon School of Law. It’s best to talk to a lawyer to determine your state’s rules.
In fact, if you want to be sure your lender (or a collection agency that it may sell your loan to) won’t chase you down, it’s a good idea to have a lawyer involved with any short sale, deed in lieu or foreclosure itself. “You must get the bank to agree in writing that any deficiency is waived,” said Chip Parker, a lawyer specializing in foreclosure with Parker & DuFresne in Jacksonville, Fla.
The biggest challenge here may simply be finding someone at the bank to help. Having a second mortgage will also complicate matters.
YOUR TAXES You also need to consider the taxman. Often, forgiven debts are taxable as income. Recent legislative changes, however, eliminate the federal tax burden through 2012 on most primary residence debt that a lender has reduced through loan restructuring or forgiven during foreclosure.
Mark Luscombe, principal analyst for CCH, a tax information service, said that people who sell their home through a short sale or give up the deed in lieu of foreclosure can also qualify for tax relief if they use a special tax form, 1099-C, that reflects the amount of debt that the lender has forgiven.
People who live in states with their own income taxes may avoid a big bill as well. Some states, like Arizona and California, have introduced or passed legislation that echoes the federal laws, according to the National Conference of State Legislatures. Many others tend to mimic most or all federal income tax laws as a general rule, according to CCH. Check with an accountant in your state to be sure.
YOUR CREDIT A short sale, deed in lieu or foreclosure itself will almost certainly damage your credit report and score, and the black mark will last for up to seven years. But the amount of damage it does will depend on how much other credit trouble you’ve gotten yourself into with other lenders.
If you’re giving up the home you own, you’ll probably need to rent soon afterward. Will landlords turn you away once they check your credit and discover your troubled mortgage? “If it’s the only thing marring their credit, it’s probably not a big issue,” said Clay Powell, the director of the Rental Property Owners Association of Michigan, who added that good tenants could be scarce in economic environments like this one.
In fact, Todd J. Zywicki, a law professor at George Mason University, predicted that FICO may have to adjust its credit scores to lessen the impact of a foreclosure or similar incident. “It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he said. “To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”
Craig Watts, a spokesman for FICO, said that was an interesting idea. “We try not to get involved too much in psychobabble around what is and isn’t predictive,” he said. “If the numbers show that foreclosure is less predictive, then we’ll take it into account in future redevelopments of the formula.” That would take a minimum of two to three years, though.
Some lenders aren’t waiting that long to initiate their own foreclosure destigmatization programs. The Golden 1, one of the nation’s largest credit unions, now has a mortgage repair loan for people who have lost a home to foreclosure but want to buy a new one.
It’s hard to imagine that there won’t be a parade of insurance companies, credit card issuers and mortgage lenders in Golden 1’s wake, even though Fannie Mae and Freddie Mac may be unwilling to guarantee the mortgages of such borrowers for several years. In fact, Aaron Bresko, the vice president of lending for BECU, another large credit union based in Washington State, is putting together a panel called “How to Lend to the Newly Credit Impaired” for a conference later this year.
“Good people have bad things happen to them, so how do you find those people and reach out to them?” he said. “As the year progresses, it’s going to be an emerging market.”
Copyright 2009 The New York Times Company. All rights reserved.
Wednesday, March 11, 2009
Jim Shenwick's response to New York Times op-ed "Don't Let Judges Fix Loans"
Dear Mr. Schwartz:
I read your op-ed in the New York Times called “Don’t Let Judges Fix Loans” and as an experienced bankruptcy attorney, I thought your piece was both misguided and inaccurate. It is clear that from reading your op-ed that, although you may be a professor of law and management at Yale, you are not a bankruptcy practitioner and don’t understand bankruptcy law or process.
First, you indicate that the proposal would swamp Bankruptcy Courts. However, in 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), there were over two million bankruptcy filings. Right now, there are approximately one million bankruptcy filings per year. Accordingly, there is sufficient capacity in the Bankruptcy Courts for an additional million filings.
Secondly, if filings were to increase dramatically, Congress could budget for additional bankruptcy judges and court staff. You should note that as part of BAPCPA, Congress increased the number of bankruptcy judges in the U.S. Bankruptcy Court for the District of Delaware from two to six.
Your next argument is that lenders will win many of these valuation contests, because they will have more expertise and resources than individual homeowners. This argument is also specious and not supported by the reality of bankruptcy practice. The most common motion in bankruptcy when real estate is part of the case is a motion for relief from the automatic stay. In those cases, an appraiser is retained by the debtor and another appraiser is retained by the secured creditor. The cost of an appraisal of residential property is approximately $500 to $750. Even if a debtor could not afford an appraisal, they could get a broker price opinion letter which would be free. They could also use various free websites to support their valuation. In fact, the cost of an appraisal is reasonable and in the grasp of most debtors, and bankruptcy judges deal with issues of valuation on a routine basis.
Your final argument is that the proposed legislation would worsen economic uncertainty-whatever that means. The reality is that based on generally accepted accounting principles and other accounting and bankruptcy standards, banks should write down their assets to realistic values. While this may create a short term hit to bank bottom lines, it would create a sounder financial system in the long run.
Yale Law and Business School and your students deserve sounder arguments than those presented in your op-ed piece.
I read your op-ed in the New York Times called “Don’t Let Judges Fix Loans” and as an experienced bankruptcy attorney, I thought your piece was both misguided and inaccurate. It is clear that from reading your op-ed that, although you may be a professor of law and management at Yale, you are not a bankruptcy practitioner and don’t understand bankruptcy law or process.
First, you indicate that the proposal would swamp Bankruptcy Courts. However, in 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), there were over two million bankruptcy filings. Right now, there are approximately one million bankruptcy filings per year. Accordingly, there is sufficient capacity in the Bankruptcy Courts for an additional million filings.
Secondly, if filings were to increase dramatically, Congress could budget for additional bankruptcy judges and court staff. You should note that as part of BAPCPA, Congress increased the number of bankruptcy judges in the U.S. Bankruptcy Court for the District of Delaware from two to six.
Your next argument is that lenders will win many of these valuation contests, because they will have more expertise and resources than individual homeowners. This argument is also specious and not supported by the reality of bankruptcy practice. The most common motion in bankruptcy when real estate is part of the case is a motion for relief from the automatic stay. In those cases, an appraiser is retained by the debtor and another appraiser is retained by the secured creditor. The cost of an appraisal of residential property is approximately $500 to $750. Even if a debtor could not afford an appraisal, they could get a broker price opinion letter which would be free. They could also use various free websites to support their valuation. In fact, the cost of an appraisal is reasonable and in the grasp of most debtors, and bankruptcy judges deal with issues of valuation on a routine basis.
Your final argument is that the proposed legislation would worsen economic uncertainty-whatever that means. The reality is that based on generally accepted accounting principles and other accounting and bankruptcy standards, banks should write down their assets to realistic values. While this may create a short term hit to bank bottom lines, it would create a sounder financial system in the long run.
Yale Law and Business School and your students deserve sounder arguments than those presented in your op-ed piece.
Jim Shenwick's letter to Christopher Mayer on modification of first mortgages in Chapter 13 bankruptcy
Dear Mr. Mayer:
I read a synopsis of your testimony to Congress in “Bankruptcy Court Decisions” that allowing bankruptcy judges to modify first mortgages for individuals by amending the Bankruptcy Code to permit “cramdowns” would generate serious risks and many unintended consequences. You indicate that one of the unintended consequences is that the option of bankruptcy might lead millions of borrowers to stop paying their mortgages.
As an experienced bankruptcy attorney who represents individuals and businesses and has filed over 500 personal bankruptcies, I can tell you that this argument is misguided and inaccurate. Filing for personal bankruptcy is a serious consequence for an individual, as is stopping payment on their mortgages, which may lead to a bankruptcy. In my experience, which is considerable, people are reluctant to file for personal bankruptcy, and when they do, they do it as a last resort. Based on the decline in the value of residential real estate during this recession, the best and only way to help individual borrowers retain their homes is to allow bankruptcy judges to “cramdown” or modify first mortgages for individuals in Chapter 13 bankruptcy.
You should note, if you would have studied bankruptcy law and practice, that the Bankruptcy Code presently permits bankruptcy judges to modify second mortgages on individual residences and mortgages on investment, business and vacation properties. All of these loan modifications or “cramdowns” have not resulted in millions of Americans stopping payment on their mortgages or filing for bankruptcy and it has not created economic uncertainty. There have been many attempts by the state and federal governments to assist homeowners who are in danger of foreclosure; however, none of them have yet worked.
The proven way to prevent foreclosures that works is bankruptcy, whether it be Chapter 7 or Chapter 13-and it would be even more effective if Congress would allow bankruptcy judges to modify first mortgages. Your attention to this matter is appreciated.
I read a synopsis of your testimony to Congress in “Bankruptcy Court Decisions” that allowing bankruptcy judges to modify first mortgages for individuals by amending the Bankruptcy Code to permit “cramdowns” would generate serious risks and many unintended consequences. You indicate that one of the unintended consequences is that the option of bankruptcy might lead millions of borrowers to stop paying their mortgages.
As an experienced bankruptcy attorney who represents individuals and businesses and has filed over 500 personal bankruptcies, I can tell you that this argument is misguided and inaccurate. Filing for personal bankruptcy is a serious consequence for an individual, as is stopping payment on their mortgages, which may lead to a bankruptcy. In my experience, which is considerable, people are reluctant to file for personal bankruptcy, and when they do, they do it as a last resort. Based on the decline in the value of residential real estate during this recession, the best and only way to help individual borrowers retain their homes is to allow bankruptcy judges to “cramdown” or modify first mortgages for individuals in Chapter 13 bankruptcy.
You should note, if you would have studied bankruptcy law and practice, that the Bankruptcy Code presently permits bankruptcy judges to modify second mortgages on individual residences and mortgages on investment, business and vacation properties. All of these loan modifications or “cramdowns” have not resulted in millions of Americans stopping payment on their mortgages or filing for bankruptcy and it has not created economic uncertainty. There have been many attempts by the state and federal governments to assist homeowners who are in danger of foreclosure; however, none of them have yet worked.
The proven way to prevent foreclosures that works is bankruptcy, whether it be Chapter 7 or Chapter 13-and it would be even more effective if Congress would allow bankruptcy judges to modify first mortgages. Your attention to this matter is appreciated.
Monday, March 09, 2009
New York Times: What Contract?
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.
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.
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.
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