As many of you may know, a bill to modify the bankruptcy laws to allow Bankruptcy Judges to modify mortgages on debtors' primary residences passed the House of Representatives in March, but unfortunately, due to intense opposition by mortgage bankers and a lack of support from President Obama, that bill failed to pass the Senate last month. Notwithstanding that, due to the current recession, the United States is experiencing a record number of personal bankruptcy filings. 1.2 million Americans filed for bankruptcy from April 2008 to last month, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
Despite the failure of the new bankruptcy bill, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. It has been our experience to date that filing for bankruptcy (either Chapter 7 or Chapter 13) in conjunction with requesting loss mitigation is one of the most effective ways to modify a first mortgage (the purpose of the proposed bill).
Last week we were negotiating with outside counsel for Chase Home Finance regarding a modification of a first mortgage for a debtor's primary residence, and they indicated that the quickest way to modify a first mortgage would be to move for loss mitigation through the NYSB procedures. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual's primary residence.
Additionally, for individuals that file for bankruptcy, there is a $50,000 homestead exemption per spouse under the New York State Debtor & Creditor Law, so an individual can file for Chapter 7 bankruptcy, and if they're married, they can keep their house by reaffirming the debt (which means that the debtor(s) agree to that the debt will not be discharged in bankruptcy and will be continue to be paid) on a primary residence that has no more than $100,000 in equity.
Due to the sharp decrease in residential real estate values that has left many homeowners with no equity (or "underwater"), many individuals can file for Chapter 7 bankruptcy, wipe out credit card, business debt or guaranties and other debts, retain their house, request Loss Mitigation to modify the terms of the mortgage, reaffirm the mortgage and then emerge from bankruptcy with their homeownership intact.
Anyone with questions regarding personal bankruptcy or the Loss Mitigation Program in the Southern District of New York should contact Jim Shenwick.
Thursday, May 28, 2009
Monday, May 18, 2009
QuickJump
This law firm recently started using a new product from Tech Hit called “QuickJump.” QuickJump lets users navigate to the right Windows folders by using a few keystrokes-a valuable shortcut for attorneys and other users who need to save documents such as e-mail messages and Word files. We have been using QuickJump in conjunction with MessageSave, another Tech Hit product that allows users to quickly save e-mail messages on their C: drive. We have found both programs to be invaluable products that save us much time and effort in saving and filing documents, and we highly recommend them.
Jim Shenwick
Jim Shenwick
NYT: Weighing the Options With Credit Card Debt
By TARA SIEGEL BERNARD
Many consumers are buckling under the weight of mounting credit card debt.
So it should come as no surprise that some have been lured in by often-hollow promises from debt settlement companies, claiming they can reduce debts to a small fraction of what is owed by negotiating with creditors.
But as their customers have learned, debt settlement companies are not debt genies — they do not have special powers to make your debt disappear. Andrew M. Cuomo, New York State’s attorney general, recently announced an investigation into more than a dozen debt settlement companies. Many companies require hefty upfront fees — often 15 percent of your total debt — but often don’t deliver on their promises, experts say.
Of course, figuring out a reasonable way to shed debt may seem an insurmountable task, especially if you have lost your job or you are simply not earning enough. The numbers are not pretty: if you carry $10,000 on a credit card with an 18 percent rate and make only the minimum payment (say, 1 percent of the balance plus interest), it will take 32 years to pay it off — for a grand total of $24,834. That does not count late fees or over-the-limit charges.
So it is important to assess your options before you fall too far behind. This is probably best accomplished with a reputable credit counselor. But before you pick up the phone, familiarize yourself with the pros and cons of the various options.
DO IT YOURSELF If you have only a few thousand dollars in debt on one or two cards, you may try calling your card issuer and asking it about any repayment plan for people facing financial hardship. The company may be willing to work with you. But keep in mind that it is likely to reduce your credit limits to your current balance, experts said.
“Most people are very hesitant to call their creditors,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “But they are the first ones they should consult. They have programs for short-term financial hiccups.”
FIND A COUNSELOR If you are knee-deep in debt, or your debt is spread across multiple cards, consult with a financial counselor. A credit counselor can assess your entire financial picture and help determine the best course of action. It may be as simple as setting up a payment plan that you can handle on your own.
But you need to be careful when choosing a counselor. Stick with someone who is affiliated with one of the legitimate, nonprofit umbrella organizations like the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Their fees should be reasonable (about $30 to $50 to set up, say, a debt management plan) and they should not turn you away if you cannot afford the nominal fee. They should also be willing to spend an hour with you, at the least.
DEBT MANAGEMENT PLAN A credit counseling agency should be able to determine whether this type of plan will work for you. Here is how they operate: the agency negotiates a lower interest rate and payment with the card companies, to a level you can afford. All late fees and over-the-limit fees stop. You then make a single payment to your counseling agency, which disburses the payment to all your creditors. The agency usually charges a fee of about $25 a month. Most plans last three to five years, at which point your existing debt will be paid off.
“A debt management plan doesn’t reduce the balance, but one of the big advantages is that the interest rates go down, usually significantly,” said Rick Phillips, vice president of debt management plan services at Consumer Credit Counseling Service of Greater Atlanta. He said most people who came to them were paying rates from 25 to 29 percent, which usually drop to 6 to 12 percent, or lower.
But these days, fewer people can afford traditional debt management plans. As a result, two credit counseling groups struck a deal with the top 10 credit card issuers this month to make the debt management plans more affordable. That may include lowering the minimum payment and the interest rate even further.
Participating in these plans will not necessarily hurt your credit score, but it is a gray area. It depends on how your creditor reports it to the credit rating agencies. Still, digging out of debt should be the priority; your credit score will eventually improve. Missing payments remain on your record for seven years.
DEBT SETTLEMENT So should debt settlement companies be avoided at all costs? They certainly should not be your first call.
“Sometimes, there are no good solutions, but of the solutions, debt settlement ends up being their best bet,” Gerri Detweiler, a credit adviser at Credit.com, said. “There is a segment of people who cannot afford to pay the full amount through a debt management, but they either don’t want to file for bankruptcy or they can’t file for bankruptcy.” (Credit.com refers prescreened consumers to debt settlement companies through its Web site; the settlement company pays Credit.com a fee each time a consumer fills out an application. Credit.com vets the companies to be sure they disclose all costs.)
But consumer advocates said that many people ended up dropping out of these plans because of the high fees. When you sign up, many firms require you to pay a sizable fee upfront. Or they may levy initial set-up and monthly fees, and charge a percentage of the amount they saved you. They typically advise you to stop paying your debts and tell you to put aside money each month in a separate account over a period of two or three years. That sum will eventually be used to negotiate a settlement, usually about 60 percent of what you owe. In the meantime, though, credit card companies continue to charge interest and late fees. The creditor may sue. And the phone will probably continue to ring incessantly. The companies can offer no guarantees — except that your credit score will drop.
“I wouldn’t rule out the possibility that there is a good company out there, but the basic business model is not a good one for consumers,” said Deanne Loonin, a lawyer at the National Consumer Law Center who has researched the companies. “A lot of creditors won’t even work with debt settlement companies.”
And here is another little-known fact: Any debt forgiven exceeding $600 is considered taxable income unless you can prove you are insolvent (your liabilities exceed your assets).
BANKRUPTCY For some people, at least, it pays to visit a bankruptcy lawyer, where the initial consultations should be free. A lawyer can advise you of your rights and walk you through the many implications of bankruptcy. “It’s not a bad idea if you’re under a lot of financial stress or you are afraid of losing your assets,” Ms. Detweiler said. It also pays to meet with a bankruptcy lawyer and a credit counselor before you consider debt settlement. “If you do it the other way around, you are very vulnerable to being led down the wrong path,” she said. “And what I find is that people hear what they want to hear.”
Copyright 2009 The New York Times Company. All rights reserved.
Many consumers are buckling under the weight of mounting credit card debt.
So it should come as no surprise that some have been lured in by often-hollow promises from debt settlement companies, claiming they can reduce debts to a small fraction of what is owed by negotiating with creditors.
But as their customers have learned, debt settlement companies are not debt genies — they do not have special powers to make your debt disappear. Andrew M. Cuomo, New York State’s attorney general, recently announced an investigation into more than a dozen debt settlement companies. Many companies require hefty upfront fees — often 15 percent of your total debt — but often don’t deliver on their promises, experts say.
Of course, figuring out a reasonable way to shed debt may seem an insurmountable task, especially if you have lost your job or you are simply not earning enough. The numbers are not pretty: if you carry $10,000 on a credit card with an 18 percent rate and make only the minimum payment (say, 1 percent of the balance plus interest), it will take 32 years to pay it off — for a grand total of $24,834. That does not count late fees or over-the-limit charges.
So it is important to assess your options before you fall too far behind. This is probably best accomplished with a reputable credit counselor. But before you pick up the phone, familiarize yourself with the pros and cons of the various options.
DO IT YOURSELF If you have only a few thousand dollars in debt on one or two cards, you may try calling your card issuer and asking it about any repayment plan for people facing financial hardship. The company may be willing to work with you. But keep in mind that it is likely to reduce your credit limits to your current balance, experts said.
“Most people are very hesitant to call their creditors,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “But they are the first ones they should consult. They have programs for short-term financial hiccups.”
FIND A COUNSELOR If you are knee-deep in debt, or your debt is spread across multiple cards, consult with a financial counselor. A credit counselor can assess your entire financial picture and help determine the best course of action. It may be as simple as setting up a payment plan that you can handle on your own.
But you need to be careful when choosing a counselor. Stick with someone who is affiliated with one of the legitimate, nonprofit umbrella organizations like the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Their fees should be reasonable (about $30 to $50 to set up, say, a debt management plan) and they should not turn you away if you cannot afford the nominal fee. They should also be willing to spend an hour with you, at the least.
DEBT MANAGEMENT PLAN A credit counseling agency should be able to determine whether this type of plan will work for you. Here is how they operate: the agency negotiates a lower interest rate and payment with the card companies, to a level you can afford. All late fees and over-the-limit fees stop. You then make a single payment to your counseling agency, which disburses the payment to all your creditors. The agency usually charges a fee of about $25 a month. Most plans last three to five years, at which point your existing debt will be paid off.
“A debt management plan doesn’t reduce the balance, but one of the big advantages is that the interest rates go down, usually significantly,” said Rick Phillips, vice president of debt management plan services at Consumer Credit Counseling Service of Greater Atlanta. He said most people who came to them were paying rates from 25 to 29 percent, which usually drop to 6 to 12 percent, or lower.
But these days, fewer people can afford traditional debt management plans. As a result, two credit counseling groups struck a deal with the top 10 credit card issuers this month to make the debt management plans more affordable. That may include lowering the minimum payment and the interest rate even further.
Participating in these plans will not necessarily hurt your credit score, but it is a gray area. It depends on how your creditor reports it to the credit rating agencies. Still, digging out of debt should be the priority; your credit score will eventually improve. Missing payments remain on your record for seven years.
DEBT SETTLEMENT So should debt settlement companies be avoided at all costs? They certainly should not be your first call.
“Sometimes, there are no good solutions, but of the solutions, debt settlement ends up being their best bet,” Gerri Detweiler, a credit adviser at Credit.com, said. “There is a segment of people who cannot afford to pay the full amount through a debt management, but they either don’t want to file for bankruptcy or they can’t file for bankruptcy.” (Credit.com refers prescreened consumers to debt settlement companies through its Web site; the settlement company pays Credit.com a fee each time a consumer fills out an application. Credit.com vets the companies to be sure they disclose all costs.)
But consumer advocates said that many people ended up dropping out of these plans because of the high fees. When you sign up, many firms require you to pay a sizable fee upfront. Or they may levy initial set-up and monthly fees, and charge a percentage of the amount they saved you. They typically advise you to stop paying your debts and tell you to put aside money each month in a separate account over a period of two or three years. That sum will eventually be used to negotiate a settlement, usually about 60 percent of what you owe. In the meantime, though, credit card companies continue to charge interest and late fees. The creditor may sue. And the phone will probably continue to ring incessantly. The companies can offer no guarantees — except that your credit score will drop.
“I wouldn’t rule out the possibility that there is a good company out there, but the basic business model is not a good one for consumers,” said Deanne Loonin, a lawyer at the National Consumer Law Center who has researched the companies. “A lot of creditors won’t even work with debt settlement companies.”
And here is another little-known fact: Any debt forgiven exceeding $600 is considered taxable income unless you can prove you are insolvent (your liabilities exceed your assets).
BANKRUPTCY For some people, at least, it pays to visit a bankruptcy lawyer, where the initial consultations should be free. A lawyer can advise you of your rights and walk you through the many implications of bankruptcy. “It’s not a bad idea if you’re under a lot of financial stress or you are afraid of losing your assets,” Ms. Detweiler said. It also pays to meet with a bankruptcy lawyer and a credit counselor before you consider debt settlement. “If you do it the other way around, you are very vulnerable to being led down the wrong path,” she said. “And what I find is that people hear what they want to hear.”
Copyright 2009 The New York Times Company. All rights reserved.
Thursday, May 14, 2009
NYT: Slow Start to U.S. Plan for Modifying Mortgages
By TARA SIEGEL BERNARD
The Obama administration’s plan to help millions of troubled homeowners avoid foreclosure by reducing the size of their mortgage payments is just getting off the ground.
So far, two months after the program went into effect, about 55,000 homeowners have been extended loan modification offers, according to a senior administration official. At the same time, foreclosures continue apace. RealtyTrac reported Wednesday that foreclosure filings reached 342,000 last month, up 32 percent from April 2008. Moody’s has estimated that more than 2.1 million homeowners will lose their homes this year.
Because of the size and complexity of the modification program, the administration has only recently assembled most of the pieces. In late April, officials fleshed out their plan to modify or forgive second mortgages — one of the big stumbling blocks in modifying primary mortgages — and provided more details on the Hope for Homeowners program, for borrowers who owe more than their homes are worth. Congress is close to acting on legislation to protect mortgage servicers from potential lawsuits from investors, while also expanding the Federal Housing Administration’s ability to modify loans.
The banks, too, are just now beginning to get their mortgage modification machines up and running.
While it is still too early to know how effective the program will ultimately be, many homeowners who have tried to gain entrance say they have been successful only through persistence — and sometimes, the help of a lawyer.
What may be a larger issue, however, is the continuing deterioration of the economy, experts say. The longer it takes to set the program in motion, they say, the fewer people will qualify for modifications. The expected rise in unemployment in coming months may keep a growing number of homeowners out of the program.
“We have a debt crisis, and mortgage is at the center of it,” said Alan M. White, an assistant professor at Valparaiso University School of Law in Indiana who specializes in foreclosures. “To get out of it, we need to reduce the debt, and that is not really happening.”
The administration remains confident that the program will end up offering help to as many as three million to four million homeowners, with the pace of modifications beginning to pick up in coming months.
“If you think about the context and scale involved, it is an extraordinary, rapid effort,” said Jenni Engebretsen, a Treasury spokeswoman. She noted that 14 mortgage servicers had signed up for the program, covering 75 percent of the market.
A vibrant mortgage modification program is a necessary bulwark against the wave of foreclosures. Without it, housing prices will continue their downward spiral longer, said Mark Zandi, chief economist at Moody’s Economy.com.
“It prolongs the economic agony,” he said. “The pain will not go away until foreclosures subside.”
Mr. Zandi was not as optimistic that the program would help as many as the administration expects. He estimated it would end up assisting only 1.5 million to 2 million homeowners over the next few years. Even so, he added, the program will, in the end, “make a meaningful difference.”
The Obama plan aims to lower monthly payments to 31 percent of the borrower’s gross income by reducing interest rates to as low as 2 percent, extending the loan term or deferring principal. Mortgage servicers can reduce principal but are not required to.
The mortgage modifications to date have come in various forms, but some have not reduced monthly payments and most have not reduced the balance owed — crucial for people who owe more than their homes are worth. Still, the number of loan modifications with lower payments has increased in recent months, an encouraging sign.
In April, 59 percent of loan modifications reduced payments, 29 percent increased payments and 12 percent of modifications kept payments steady, according to Professor White at Valparaiso. Borrowers with loan modifications that have not cut their payments tend to default again within six to 12 months.
To persuade mortgage servicers and investors to sign on to mortgage modifications, Democrats originally sought legislation that would have given bankruptcy judges the power to reduce primary mortgages. The threat of a principal reduction in bankruptcy would have served as a stick to have modifications done outside court, experts said. But the measure failed in the Senate last week after intense lobbying by the banking industry.
Several experts said reducing the amount of principal would go a long way toward helping borrowers who owe more than a home is worth — those informally known as under water.
“Even if they do drop your loan payment, you can still be in deep negative equity, which is not an immediate crisis,” said Adam J. Levitin, an associate professor at Georgetown University Law Center. “But let’s say you need to relocate because the auto manufacturer you work for is radically downsizing. You are faced with losing your house in foreclosure or a huge balloon payment. And neither of those is palatable.”
“If you don’t want all of the spillover effects from foreclosure, you have to keep people in their houses,” he added.
But the modifications may not be enough for the underwater homeowners. “In many ways, we are kicking the can down the road,” Mr. Zandi said. “Many of these homeowners are under tremendous amounts of financial pressure, and they have significant negative equity positions. Lowering their mortgage debt-to-income ratio helps, but it doesn’t solve their problem in a significant way and many will redefault in the future.”
About 15.4 million borrowers, 20 percent of single-family homeowners, are underwater, up from 13.6 million at the end of last year, according to Moody’s. Being underwater is one of the biggest indicators of default, experts said.
The administration tries to address the problems of the underwater homeowners through its Hope for Homeowners refinancing program. In its previous incarnation, the program was deemed a failure after it produced only about 50 new loans.
Under the new initiative, mortgage servicers are required to vet borrowers for Hope for Homeowners after they have qualified for a trial loan modification. If borrowers are qualified, they refinance into new loans through the Federal Housing Administration. Mortgage investors must accept a write-down on their investment and the government backs the new loan.
Despite the federal backing, lenders must also be willing to make the new loans, said Rod Dubitsky, a mortgage analyst at Credit Suisse.
Many homeowners, consumer advocates say, do not even know they are eligible for a modification. Others may think they are eligible, but have to navigate a maze of rules and bureaucracies.
Amy and Robert Darr, of Coshocton, Ohio, for instance, fell behind on their payments in October after Robert’s hours were cut; he is a maintenance worker at a foundry. They tried to catch up on their payments when they received their tax refund, but by that time the couple had received a foreclosure notice. They contacted their lender to see if they would qualify for a loan modification, and provided the lender with the required paperwork.
But CitiMortgage refused to suspend the foreclosure proceedings. Citigroup declined to comment.
“Hopefully, we will qualify,” Mrs. Darr said, “because I don’t want to lose my home.”
The couple contacted Southeastern Ohio Legal Services, which filed a motion with the local court to suspend the foreclosure and is currently waiting for a response.
“The right hand doesn’t know what the left hand is doing,” said Melissa Benson, a staff lawyer with the legal services organization. “Most people who get foreclosure complaints don’t even know how to put up a fight at all. And they lose fairly quickly.”
Ashley Southall contributed reporting.
Copyright 2009 The New York Times Company. All rights reserved.
The Obama administration’s plan to help millions of troubled homeowners avoid foreclosure by reducing the size of their mortgage payments is just getting off the ground.
So far, two months after the program went into effect, about 55,000 homeowners have been extended loan modification offers, according to a senior administration official. At the same time, foreclosures continue apace. RealtyTrac reported Wednesday that foreclosure filings reached 342,000 last month, up 32 percent from April 2008. Moody’s has estimated that more than 2.1 million homeowners will lose their homes this year.
Because of the size and complexity of the modification program, the administration has only recently assembled most of the pieces. In late April, officials fleshed out their plan to modify or forgive second mortgages — one of the big stumbling blocks in modifying primary mortgages — and provided more details on the Hope for Homeowners program, for borrowers who owe more than their homes are worth. Congress is close to acting on legislation to protect mortgage servicers from potential lawsuits from investors, while also expanding the Federal Housing Administration’s ability to modify loans.
The banks, too, are just now beginning to get their mortgage modification machines up and running.
While it is still too early to know how effective the program will ultimately be, many homeowners who have tried to gain entrance say they have been successful only through persistence — and sometimes, the help of a lawyer.
What may be a larger issue, however, is the continuing deterioration of the economy, experts say. The longer it takes to set the program in motion, they say, the fewer people will qualify for modifications. The expected rise in unemployment in coming months may keep a growing number of homeowners out of the program.
“We have a debt crisis, and mortgage is at the center of it,” said Alan M. White, an assistant professor at Valparaiso University School of Law in Indiana who specializes in foreclosures. “To get out of it, we need to reduce the debt, and that is not really happening.”
The administration remains confident that the program will end up offering help to as many as three million to four million homeowners, with the pace of modifications beginning to pick up in coming months.
“If you think about the context and scale involved, it is an extraordinary, rapid effort,” said Jenni Engebretsen, a Treasury spokeswoman. She noted that 14 mortgage servicers had signed up for the program, covering 75 percent of the market.
A vibrant mortgage modification program is a necessary bulwark against the wave of foreclosures. Without it, housing prices will continue their downward spiral longer, said Mark Zandi, chief economist at Moody’s Economy.com.
“It prolongs the economic agony,” he said. “The pain will not go away until foreclosures subside.”
Mr. Zandi was not as optimistic that the program would help as many as the administration expects. He estimated it would end up assisting only 1.5 million to 2 million homeowners over the next few years. Even so, he added, the program will, in the end, “make a meaningful difference.”
The Obama plan aims to lower monthly payments to 31 percent of the borrower’s gross income by reducing interest rates to as low as 2 percent, extending the loan term or deferring principal. Mortgage servicers can reduce principal but are not required to.
The mortgage modifications to date have come in various forms, but some have not reduced monthly payments and most have not reduced the balance owed — crucial for people who owe more than their homes are worth. Still, the number of loan modifications with lower payments has increased in recent months, an encouraging sign.
In April, 59 percent of loan modifications reduced payments, 29 percent increased payments and 12 percent of modifications kept payments steady, according to Professor White at Valparaiso. Borrowers with loan modifications that have not cut their payments tend to default again within six to 12 months.
To persuade mortgage servicers and investors to sign on to mortgage modifications, Democrats originally sought legislation that would have given bankruptcy judges the power to reduce primary mortgages. The threat of a principal reduction in bankruptcy would have served as a stick to have modifications done outside court, experts said. But the measure failed in the Senate last week after intense lobbying by the banking industry.
Several experts said reducing the amount of principal would go a long way toward helping borrowers who owe more than a home is worth — those informally known as under water.
“Even if they do drop your loan payment, you can still be in deep negative equity, which is not an immediate crisis,” said Adam J. Levitin, an associate professor at Georgetown University Law Center. “But let’s say you need to relocate because the auto manufacturer you work for is radically downsizing. You are faced with losing your house in foreclosure or a huge balloon payment. And neither of those is palatable.”
“If you don’t want all of the spillover effects from foreclosure, you have to keep people in their houses,” he added.
But the modifications may not be enough for the underwater homeowners. “In many ways, we are kicking the can down the road,” Mr. Zandi said. “Many of these homeowners are under tremendous amounts of financial pressure, and they have significant negative equity positions. Lowering their mortgage debt-to-income ratio helps, but it doesn’t solve their problem in a significant way and many will redefault in the future.”
About 15.4 million borrowers, 20 percent of single-family homeowners, are underwater, up from 13.6 million at the end of last year, according to Moody’s. Being underwater is one of the biggest indicators of default, experts said.
The administration tries to address the problems of the underwater homeowners through its Hope for Homeowners refinancing program. In its previous incarnation, the program was deemed a failure after it produced only about 50 new loans.
Under the new initiative, mortgage servicers are required to vet borrowers for Hope for Homeowners after they have qualified for a trial loan modification. If borrowers are qualified, they refinance into new loans through the Federal Housing Administration. Mortgage investors must accept a write-down on their investment and the government backs the new loan.
Despite the federal backing, lenders must also be willing to make the new loans, said Rod Dubitsky, a mortgage analyst at Credit Suisse.
Many homeowners, consumer advocates say, do not even know they are eligible for a modification. Others may think they are eligible, but have to navigate a maze of rules and bureaucracies.
Amy and Robert Darr, of Coshocton, Ohio, for instance, fell behind on their payments in October after Robert’s hours were cut; he is a maintenance worker at a foundry. They tried to catch up on their payments when they received their tax refund, but by that time the couple had received a foreclosure notice. They contacted their lender to see if they would qualify for a loan modification, and provided the lender with the required paperwork.
But CitiMortgage refused to suspend the foreclosure proceedings. Citigroup declined to comment.
“Hopefully, we will qualify,” Mrs. Darr said, “because I don’t want to lose my home.”
The couple contacted Southeastern Ohio Legal Services, which filed a motion with the local court to suspend the foreclosure and is currently waiting for a response.
“The right hand doesn’t know what the left hand is doing,” said Melissa Benson, a staff lawyer with the legal services organization. “Most people who get foreclosure complaints don’t even know how to put up a fight at all. And they lose fairly quickly.”
Ashley Southall contributed reporting.
Copyright 2009 The New York Times Company. All rights reserved.
Monday, May 11, 2009
NYT: Banks Brace for Credit Card Write-Offs
By ERIC DASH and ANDREW MARTIN
It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.
Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.
Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.
For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.
Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.
Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.
Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.
She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.
When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.
Copyright 2009 The New York Times Company. All rights reserved.
It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.
Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.
Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.
For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.
Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.
Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.
Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.
She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.
When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.
Copyright 2009 The New York Times Company. All rights reserved.
Monday, May 04, 2009
The Practical Implications as Chrysler Goes to Court
By MICHELINE MAYNARD
Chrysler is the first major automaker since Studebaker in 1933 to try to reorganize in bankruptcy and emerge as a viable company. The process can be complicated. Here is a quick look at how it is likely to play out.
Q. Is Chrysler going out of business?
A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to emerge from bankruptcy, these companies are reconstituted as new legal entities.
Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.
Q. How long will this take?
A. The Obama administration spoke of a “surgical bankruptcy” that it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.
In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steel maker, took seven years to resolve.
Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization. A judge can extend that period exclusivity for 18 months, but creditors or potential buyers for a company can present a competing plan once that period expires.
Q. What happens to Chrysler dealers?
A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that would happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler will continue to provide dealers with vehicles to sell.
Chrysler Financial will cease making consumer loans for Chrysler vehicles; GMAC, with support from the government, will provide financing through Chrysler dealers.
Q. What happens to Chrysler employees?
A. The White House said it did not expect any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.
But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.
Q. Are pensions and retiree health care benefits protected?
A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a brief trial on the subject and hear both sides. If pensions were terminated, employees would still receive about one-third of their benefits through financing from the federal pension agency.
A company also can eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.
Q. What happens to Chrysler suppliers?
A. In its bankruptcy filing, Chrysler listed its 50 biggest creditors holding unsecured claims, meaning those that would have to get in line behind creditors whose debt is secured by collateral, like the company’s plants, brands and other assets. The unsecured creditors include its advertising agency, BBDO, and parts suppliers, like Johnson Controls, Magna International and Cummins Engine.
The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
Chrysler is likely to tell the court which suppliers it wants to keep doing business with, and which contracts it wants to reject. Suppliers could challenge the rejection of their contract, but most likely they would have to reach a settlement with Chrysler.
Q. What happens next in the bankruptcy case?
A. Chrysler filed its initial paperwork with the federal bankruptcy court in New York on Thursday. On Friday, it will ask a judge to issue a series of rulings called the first day orders, which allow the company to keep operating. They may include authorizing the payment of routine expenses, like salaries and payments to vendors, including its lawyers, and whatever else Chrysler needs to run its business. Chrysler said it would halt production while it completes a deal with Fiat.
Once the case begins, Chrysler can ask a judge to issue an emergency order to temporarily reduce salaries, which is meant to conserve its cash. A committee will also be formed that represents Chrysler’s creditors.
Q. Should owners of Chrysler cars and trucks be concerned?
A. The federal government said it would back the warranties on vehicles bought from Chrysler while it is operating in bankruptcy. So, effective Thursday, warranties are underwritten by the government.
Owners of Chrysler vehicles bought before Thursday should expect their warranties to be honored until they expire. But the work may not be performed by a Chrysler dealer. Companies operating in bankruptcy sometimes ask a judge to let them assign warranty repairs to outside vendors, who charge the company less for their work than a dealer would expect to be reimbursed.
Owners whose vehicle warranties have run out are liable for any problems with their cars and trucks, as they are now.
Copyright 2009 The New York Times Company. All rights reserved.
Chrysler is the first major automaker since Studebaker in 1933 to try to reorganize in bankruptcy and emerge as a viable company. The process can be complicated. Here is a quick look at how it is likely to play out.
Q. Is Chrysler going out of business?
A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to emerge from bankruptcy, these companies are reconstituted as new legal entities.
Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.
Q. How long will this take?
A. The Obama administration spoke of a “surgical bankruptcy” that it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.
In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steel maker, took seven years to resolve.
Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization. A judge can extend that period exclusivity for 18 months, but creditors or potential buyers for a company can present a competing plan once that period expires.
Q. What happens to Chrysler dealers?
A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that would happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler will continue to provide dealers with vehicles to sell.
Chrysler Financial will cease making consumer loans for Chrysler vehicles; GMAC, with support from the government, will provide financing through Chrysler dealers.
Q. What happens to Chrysler employees?
A. The White House said it did not expect any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.
But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.
Q. Are pensions and retiree health care benefits protected?
A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a brief trial on the subject and hear both sides. If pensions were terminated, employees would still receive about one-third of their benefits through financing from the federal pension agency.
A company also can eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.
Q. What happens to Chrysler suppliers?
A. In its bankruptcy filing, Chrysler listed its 50 biggest creditors holding unsecured claims, meaning those that would have to get in line behind creditors whose debt is secured by collateral, like the company’s plants, brands and other assets. The unsecured creditors include its advertising agency, BBDO, and parts suppliers, like Johnson Controls, Magna International and Cummins Engine.
The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
Chrysler is likely to tell the court which suppliers it wants to keep doing business with, and which contracts it wants to reject. Suppliers could challenge the rejection of their contract, but most likely they would have to reach a settlement with Chrysler.
Q. What happens next in the bankruptcy case?
A. Chrysler filed its initial paperwork with the federal bankruptcy court in New York on Thursday. On Friday, it will ask a judge to issue a series of rulings called the first day orders, which allow the company to keep operating. They may include authorizing the payment of routine expenses, like salaries and payments to vendors, including its lawyers, and whatever else Chrysler needs to run its business. Chrysler said it would halt production while it completes a deal with Fiat.
Once the case begins, Chrysler can ask a judge to issue an emergency order to temporarily reduce salaries, which is meant to conserve its cash. A committee will also be formed that represents Chrysler’s creditors.
Q. Should owners of Chrysler cars and trucks be concerned?
A. The federal government said it would back the warranties on vehicles bought from Chrysler while it is operating in bankruptcy. So, effective Thursday, warranties are underwritten by the government.
Owners of Chrysler vehicles bought before Thursday should expect their warranties to be honored until they expire. But the work may not be performed by a Chrysler dealer. Companies operating in bankruptcy sometimes ask a judge to let them assign warranty repairs to outside vendors, who charge the company less for their work than a dealer would expect to be reimbursed.
Owners whose vehicle warranties have run out are liable for any problems with their cars and trucks, as they are now.
Copyright 2009 The New York Times Company. All rights reserved.
NYT: Senate Refuses to Let Judges Fix Mortgages in Bankruptcy
By STEPHEN LABATON
WASHINGTON — The Senate handed a victory to the banking industry on Thursday, defeating a Democratic proposal that would have given homeowners in financial trouble greater flexibility to renegotiate the terms of their mortgages.
The House of Representatives, meanwhile, overwhelmingly approved a bill backed by the Obama administration that would limit the ability of credit card companies to charge high fees and penalties. The bill, approved 357 to 70, still faces obstacles in the Senate, where — as the action on Thursday illustrated — the industry has more clout, particularly among Republicans and moderate Democrats. In recent days the White House, partly in response to polls showing the significant public outrage over high fees charged by credit card companies, has begun to work for its passage.
The mortgage provision garnered only 45 votes in the Senate, falling well short of the 60 votes necessary to break a threatened filibuster to a measure sponsored by Senator Richard Durbin, Democrat of Illinois, that would give bankruptcy judges greater flexibility to modify mortgages. In recent weeks, major banks and bank trade associations worked closely with Senate Republicans to stop the measure. Twelve Democrats joined all the Republicans in voting against it.
The defeat clears the way for a final vote as early as Friday for the legislation, which has several features that the banking industry has sought. One provision would have the effect of reducing a proposed special premium the banks would owe the Federal Deposit Insurance Corporation later that year by more than 50 percent — a $7.7 billion saving. A second provision would make permanent the temporary increase in deposits guaranteed by the F.D.I.C., to $250,000, from $100,000.
Once the Senate completes its action on the legislation, it will have to be reconciled with a similar measure already adopted in the House before it can become law.
The House bill contains the bankruptcy provision. But the Senate’s defeat of the so-called bankruptcy cramdown measure all but makes certain it will disappear from the final bill.
It also demonstrates that, even though Democrats are close to gaining 60 votes in the Senate with the recent decision by Senator Arlen Specter to leave the Republican Party, the increasing number of Democrats does not prevent the Republicans — with the support of a handful of moderate or conservative Democrats — from blocking legislation. Mr. Specter voted against the provision.
Bank lobbyists had maintained that the legislation, if adopted, would have resulted in higher rates for all mortgage holders. A letter signed by 12 industry organizations this week to senators warned that the legislation would “have the unintended consequence of further destabilizing the markets.”
“Though interest rates today are at all-time lows, this legislation would result in higher costs for future borrowers,” the letter said.
But supporters of the legislation disputed that argument. President Obama sought the cramdown provision during the election, although the White House has done virtually nothing to move it through Congress.
Copyright 2009 The New York Times Company. All rights reserved.
WASHINGTON — The Senate handed a victory to the banking industry on Thursday, defeating a Democratic proposal that would have given homeowners in financial trouble greater flexibility to renegotiate the terms of their mortgages.
The House of Representatives, meanwhile, overwhelmingly approved a bill backed by the Obama administration that would limit the ability of credit card companies to charge high fees and penalties. The bill, approved 357 to 70, still faces obstacles in the Senate, where — as the action on Thursday illustrated — the industry has more clout, particularly among Republicans and moderate Democrats. In recent days the White House, partly in response to polls showing the significant public outrage over high fees charged by credit card companies, has begun to work for its passage.
The mortgage provision garnered only 45 votes in the Senate, falling well short of the 60 votes necessary to break a threatened filibuster to a measure sponsored by Senator Richard Durbin, Democrat of Illinois, that would give bankruptcy judges greater flexibility to modify mortgages. In recent weeks, major banks and bank trade associations worked closely with Senate Republicans to stop the measure. Twelve Democrats joined all the Republicans in voting against it.
The defeat clears the way for a final vote as early as Friday for the legislation, which has several features that the banking industry has sought. One provision would have the effect of reducing a proposed special premium the banks would owe the Federal Deposit Insurance Corporation later that year by more than 50 percent — a $7.7 billion saving. A second provision would make permanent the temporary increase in deposits guaranteed by the F.D.I.C., to $250,000, from $100,000.
Once the Senate completes its action on the legislation, it will have to be reconciled with a similar measure already adopted in the House before it can become law.
The House bill contains the bankruptcy provision. But the Senate’s defeat of the so-called bankruptcy cramdown measure all but makes certain it will disappear from the final bill.
It also demonstrates that, even though Democrats are close to gaining 60 votes in the Senate with the recent decision by Senator Arlen Specter to leave the Republican Party, the increasing number of Democrats does not prevent the Republicans — with the support of a handful of moderate or conservative Democrats — from blocking legislation. Mr. Specter voted against the provision.
Bank lobbyists had maintained that the legislation, if adopted, would have resulted in higher rates for all mortgage holders. A letter signed by 12 industry organizations this week to senators warned that the legislation would “have the unintended consequence of further destabilizing the markets.”
“Though interest rates today are at all-time lows, this legislation would result in higher costs for future borrowers,” the letter said.
But supporters of the legislation disputed that argument. President Obama sought the cramdown provision during the election, although the White House has done virtually nothing to move it through Congress.
Copyright 2009 The New York Times Company. All rights reserved.
Monday, April 27, 2009
NYT: Tracking Loans Through a Firm That Holds Millions
By MIKE McINTIRE
Judge Walt Logan had seen enough. As a county judge in Florida, he had 28 cases pending in which an entity called MERS wanted to foreclose on homeowners even though it had never lent them any money.
MERS, a tiny data-management company, claimed the right to foreclose, but would not explain how it came to possess the mortgage notes originally issued by banks. Judge Logan summoned a MERS lawyer to the Pinellas County courthouse and insisted that that fundamental question be answered before he permitted the drastic step of seizing someone’s home.
“You don’t think that’s reasonable?” the judge asked.
“I don’t,” the lawyer replied. “And in fact, not only do I think it’s not reasonable, often that’s going to be impossible.”
Judge Logan had entered the murky realm of MERS. Although the average person has never heard of it, MERS — short for Mortgage Electronic Registration Systems — holds 60 million mortgages on American homes, through a legal maneuver that has saved banks more than $1 billion over the last decade but made life maddeningly difficult for some troubled homeowners.
Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.
If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods.
In Brooklyn, an elderly homeowner pursuing fraud claims had to go to court to learn the identity of the bank holding his mortgage note, which was concealed in the MERS system. In distressed neighborhoods of Atlanta, where MERS appeared as the most frequent filer of foreclosures, advocates wanting to engage lenders “face a challenge even finding someone with whom to begin the conversation,” according to a reportby NeighborWorks America, a community development group.
To a number of critics, MERS has served to cushion banks from the fallout of their reckless lending practices.
“I’m convinced that part of the scheme here is to exhaust the resources of consumers and their advocates,” said Marie McDonnell, a mortgage analyst in Orleans, Mass., who is a consultant for lawyers suing lenders. “This system removes transparency over what’s happening to these mortgage obligations and sows confusion, which can only benefit the banks.”
A recent visitor to the MERS offices in Reston, Va., found the receptionist answering a telephone call from a befuddled borrower: “I’m sorry, ma’am, we can’t help you with your loan.” MERS officials say they frequently get such calls, and they offer a phone line and Web page where homeowners can look up the actual servicer of their mortgage.
In an interview, the president of MERS, R. K. Arnold, said that his company had benefited not only banks, but also millions of borrowers who could not have obtained loans without the money-saving efficiencies it brought to the mortgage trade. He said that far from posing a hurdle for homeowners, MERS had helped reduce mortgage fraud and imposed order on a sprawling industry where, in the past, lenders might have gone out of business and left no contact information for borrowers seeking assistance.
“We’re not this big bad animal,” Mr. Arnold said. “This crisis that we’ve had in the mortgage business would have been a lot worse without MERS.”
About 3,000 financial services firms pay annual fees for access to MERS, which has 44 employees and is owned by two dozen of the nation’s largest lenders, including Citigroup, JPMorgan Chase and Wells Fargo. It was the brainchild of the Mortgage Bankers Association, along with Fannie Mae, Freddie Mac and Ginnie Mae, the mortgage finance giants, who produced a white paper in 1993 on the need to modernize the trading of mortgages.
At the time, the secondary market was gaining momentum, and Wall Street banks and institutional investors were making millions of dollars from the creative bundling and reselling of loans. But unlike common stocks, whose ownership has traditionally been hidden, mortgage-backed securities are based on loans whose details were long available in public land records kept by county clerks, who collect fees for each filing. The “tyranny of these forms,” the white paper said, was costing the industry $164 million a year.
“Before MERS,” said John A. Courson, president of the Mortgage Bankers Association, “the problem was that every time those documents or a file changed hands, you had to file a paper assignment, and that becomes terribly debilitating.”
Although several courts have raised questions over the years about the secrecy afforded mortgage owners by MERS, the legality has ultimately been upheld. The issue has surfaced again because so many homeowners facing foreclosure are dealing with MERS.
Advocates for borrowers complain that the system’s secrecy makes it impossible to seek help from the unidentified investors who own their loans. Avi Shenkar, whose company, the GMA Modification Corporation in North Miami Beach, Fla., helps homeowners renegotiate mortgages, said loan servicers frequently argued that “investor guidelines” prevented them from modifying loan terms.
“But when you ask what those guidelines are, or who the investor is so you can talk to them directly, you can’t find out,” he said.
MERS has considered making information about secondary ownership of mortgages available to borrowers, Mr. Arnold said, but he expressed doubts that it would be useful. Banks appoint a servicer to manage individual mortgages so “investors are not in the business of dealing with borrowers,” he said. “It seems like anything that bypasses the servicer is counterproductive,” he added.
When foreclosures do occur, MERS becomes responsible for initiating them as the mortgage holder of record. But because MERS occupies that role in name only, the bank actually servicing the loan deputizes its employees to act for MERS and has its lawyers file foreclosures in the name of MERS.
The potential for confusion is multiplied when the high-tech MERS system collides with the paper-driven foreclosure process. Banks using MERS to consummate mortgage trades with “electronic handshakes” must later prove their legal standing to foreclose. But without the chain of title that MERS removed from the public record, banks sometimes recreate paper assignments long after the fact or try to replace mortgage notes lost in the securitization process.
This maneuvering has been attacked by judges, who say it reflects a cavalier attitude toward legal safeguards for property owners, and exploited by borrowers hoping to delay foreclosure. Judge Logan in Florida, among the first to raise questions about the role of MERS, stopped accepting MERS foreclosures in 2005 after his colloquy with the company lawyer. MERS appealed and won two years later, although it has asked banks not to foreclose in its name in Florida because of lingering concerns.
Last February, a State Supreme Court justice in Brooklyn, Arthur M. Schack, rejected a foreclosure based on a document in which a Bank of New York executive identified herself as a vice president of MERS. Calling her “a milliner’s delight by virtue of the number of hats she wears,” Judge Schack wondered if the banker was “engaged in a subterfuge.”
In Seattle, Ms. McDonnell has raised similar questions about bankers with dual identities and sloppily prepared documents, helping to delay foreclosure on the home of Darlene and Robert Blendheim, whose subprime lender went out of business and left a confusing paper trail.
“I had never heard of MERS until this happened,” Mrs. Blendheim said. “It became an issue with us, because the bank didn’t have the paperwork to prove they owned the mortgage and basically recreated what they needed.”
The avalanche of foreclosures — three million last year, up 81 percent from 2007 — has also caused unforeseen problems for the people who run MERS, who take obvious pride in their unheralded role as a fulcrum of the American mortgage industry.
In Delaware, MERS is facing a class-action lawsuit by homeowners who contend it should be held accountable for fraudulent fees charged by banks that foreclose in MERS’s name.
Sometimes, banks have held title to foreclosed homes in the name of MERS, rather than their own. When local officials call and complain about vacant properties falling into disrepair, MERS tries to track down the lender for them, and has also created a registry to locate property managers responsible for foreclosed homes.
“But at the end of the day,” said Mr. Arnold, president of MERS, “if that lawn is not getting mowed and we cannot find the party who’s responsible for that, I have to get out there and mow that lawn.”
Copyright 2009 The New York Times Company. All rights reserved.
Judge Walt Logan had seen enough. As a county judge in Florida, he had 28 cases pending in which an entity called MERS wanted to foreclose on homeowners even though it had never lent them any money.
MERS, a tiny data-management company, claimed the right to foreclose, but would not explain how it came to possess the mortgage notes originally issued by banks. Judge Logan summoned a MERS lawyer to the Pinellas County courthouse and insisted that that fundamental question be answered before he permitted the drastic step of seizing someone’s home.
“You don’t think that’s reasonable?” the judge asked.
“I don’t,” the lawyer replied. “And in fact, not only do I think it’s not reasonable, often that’s going to be impossible.”
Judge Logan had entered the murky realm of MERS. Although the average person has never heard of it, MERS — short for Mortgage Electronic Registration Systems — holds 60 million mortgages on American homes, through a legal maneuver that has saved banks more than $1 billion over the last decade but made life maddeningly difficult for some troubled homeowners.
Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.
If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods.
In Brooklyn, an elderly homeowner pursuing fraud claims had to go to court to learn the identity of the bank holding his mortgage note, which was concealed in the MERS system. In distressed neighborhoods of Atlanta, where MERS appeared as the most frequent filer of foreclosures, advocates wanting to engage lenders “face a challenge even finding someone with whom to begin the conversation,” according to a reportby NeighborWorks America, a community development group.
To a number of critics, MERS has served to cushion banks from the fallout of their reckless lending practices.
“I’m convinced that part of the scheme here is to exhaust the resources of consumers and their advocates,” said Marie McDonnell, a mortgage analyst in Orleans, Mass., who is a consultant for lawyers suing lenders. “This system removes transparency over what’s happening to these mortgage obligations and sows confusion, which can only benefit the banks.”
A recent visitor to the MERS offices in Reston, Va., found the receptionist answering a telephone call from a befuddled borrower: “I’m sorry, ma’am, we can’t help you with your loan.” MERS officials say they frequently get such calls, and they offer a phone line and Web page where homeowners can look up the actual servicer of their mortgage.
In an interview, the president of MERS, R. K. Arnold, said that his company had benefited not only banks, but also millions of borrowers who could not have obtained loans without the money-saving efficiencies it brought to the mortgage trade. He said that far from posing a hurdle for homeowners, MERS had helped reduce mortgage fraud and imposed order on a sprawling industry where, in the past, lenders might have gone out of business and left no contact information for borrowers seeking assistance.
“We’re not this big bad animal,” Mr. Arnold said. “This crisis that we’ve had in the mortgage business would have been a lot worse without MERS.”
About 3,000 financial services firms pay annual fees for access to MERS, which has 44 employees and is owned by two dozen of the nation’s largest lenders, including Citigroup, JPMorgan Chase and Wells Fargo. It was the brainchild of the Mortgage Bankers Association, along with Fannie Mae, Freddie Mac and Ginnie Mae, the mortgage finance giants, who produced a white paper in 1993 on the need to modernize the trading of mortgages.
At the time, the secondary market was gaining momentum, and Wall Street banks and institutional investors were making millions of dollars from the creative bundling and reselling of loans. But unlike common stocks, whose ownership has traditionally been hidden, mortgage-backed securities are based on loans whose details were long available in public land records kept by county clerks, who collect fees for each filing. The “tyranny of these forms,” the white paper said, was costing the industry $164 million a year.
“Before MERS,” said John A. Courson, president of the Mortgage Bankers Association, “the problem was that every time those documents or a file changed hands, you had to file a paper assignment, and that becomes terribly debilitating.”
Although several courts have raised questions over the years about the secrecy afforded mortgage owners by MERS, the legality has ultimately been upheld. The issue has surfaced again because so many homeowners facing foreclosure are dealing with MERS.
Advocates for borrowers complain that the system’s secrecy makes it impossible to seek help from the unidentified investors who own their loans. Avi Shenkar, whose company, the GMA Modification Corporation in North Miami Beach, Fla., helps homeowners renegotiate mortgages, said loan servicers frequently argued that “investor guidelines” prevented them from modifying loan terms.
“But when you ask what those guidelines are, or who the investor is so you can talk to them directly, you can’t find out,” he said.
MERS has considered making information about secondary ownership of mortgages available to borrowers, Mr. Arnold said, but he expressed doubts that it would be useful. Banks appoint a servicer to manage individual mortgages so “investors are not in the business of dealing with borrowers,” he said. “It seems like anything that bypasses the servicer is counterproductive,” he added.
When foreclosures do occur, MERS becomes responsible for initiating them as the mortgage holder of record. But because MERS occupies that role in name only, the bank actually servicing the loan deputizes its employees to act for MERS and has its lawyers file foreclosures in the name of MERS.
The potential for confusion is multiplied when the high-tech MERS system collides with the paper-driven foreclosure process. Banks using MERS to consummate mortgage trades with “electronic handshakes” must later prove their legal standing to foreclose. But without the chain of title that MERS removed from the public record, banks sometimes recreate paper assignments long after the fact or try to replace mortgage notes lost in the securitization process.
This maneuvering has been attacked by judges, who say it reflects a cavalier attitude toward legal safeguards for property owners, and exploited by borrowers hoping to delay foreclosure. Judge Logan in Florida, among the first to raise questions about the role of MERS, stopped accepting MERS foreclosures in 2005 after his colloquy with the company lawyer. MERS appealed and won two years later, although it has asked banks not to foreclose in its name in Florida because of lingering concerns.
Last February, a State Supreme Court justice in Brooklyn, Arthur M. Schack, rejected a foreclosure based on a document in which a Bank of New York executive identified herself as a vice president of MERS. Calling her “a milliner’s delight by virtue of the number of hats she wears,” Judge Schack wondered if the banker was “engaged in a subterfuge.”
In Seattle, Ms. McDonnell has raised similar questions about bankers with dual identities and sloppily prepared documents, helping to delay foreclosure on the home of Darlene and Robert Blendheim, whose subprime lender went out of business and left a confusing paper trail.
“I had never heard of MERS until this happened,” Mrs. Blendheim said. “It became an issue with us, because the bank didn’t have the paperwork to prove they owned the mortgage and basically recreated what they needed.”
The avalanche of foreclosures — three million last year, up 81 percent from 2007 — has also caused unforeseen problems for the people who run MERS, who take obvious pride in their unheralded role as a fulcrum of the American mortgage industry.
In Delaware, MERS is facing a class-action lawsuit by homeowners who contend it should be held accountable for fraudulent fees charged by banks that foreclose in MERS’s name.
Sometimes, banks have held title to foreclosed homes in the name of MERS, rather than their own. When local officials call and complain about vacant properties falling into disrepair, MERS tries to track down the lender for them, and has also created a registry to locate property managers responsible for foreclosed homes.
“But at the end of the day,” said Mr. Arnold, president of MERS, “if that lawn is not getting mowed and we cannot find the party who’s responsible for that, I have to get out there and mow that lawn.”
Copyright 2009 The New York Times Company. All rights reserved.
Friday, April 24, 2009
Commercial Real Estate Negotiations
At Shenwick & Associates, as a result of the current hard times that we are facing, and the increased number of bankruptcy filings, we are receiving a number of calls from clients regarding the consequences of a bankruptcy filing by their Landlord or Sublandlord, and what protections they need when negotiating a lease or sublease with a Landlord or Sublandlord who may be in financial trouble.
First, let’s talk about the situation where a Landlord or Sublandlord files for bankruptcy. Section 365(h) of the Bankruptcy Code says that if a debtor files for bankruptcy (the debtor would be a Landlord or Sublandlord) and seeks to reject an unexpired lease of real property under which the debtor is the lessor, if the lease term has commenced, the tenant or subtenant may retain its rights under the lease. These rights include rights related to the timing and amount of the payment of rent and other amounts payable by the tenant or subtenant, and any right of use, possession, quiet enjoyment, subletting, assignment or hypothecation for the balance of the lease term, and any renewal or extension of such rights, to the extent that those rights are enforceable under applicable non-bankruptcy law. Section 365(h) also provides that if the tenant or subtenant retains its rights under its lease, then the tenant or subtenant may offset against the rent reserved under the lease for the balance of the term after the date of the rejection of the lease and for any renewal or extension of the lease:
1. The value of any damage caused by the nonperformance after the date of rejection;
and
2. Any obligation of the debtor/Landlord or Sublandlord;
but the tenant or subtenant shall not have any right against the estate of the debtor on account of the damage occurring after such date due to nonperformance. In plain English, 365(h) provides that if a Landlord or Sublandlord files for bankruptcy, then the tenant or subtenant may vacate the space or remain in the space pursuant to the terms of the lease or sublease and may offset against rent any damages resulting from the Landlord/Sublandlord’s bankruptcy filing.
As a result of the protections provided to tenants and subtenants by Section 365(h), they may use the opportunity of a Landlord/Sublandlord’s bankruptcy filing as an opportunity or leverage to renegotiate their lease/sublease, particularly if the real estate market has dropped. With respect to a tenant or subtenant that is concerned about the Landlord/Sublandlord’s financial condition, provided below are some tips regarding lease clauses that they may want incorporated into their lease/sublease:
1. The ability to review financial statements from Landlord/Sublandlord.
2. Tenant/subtenant improvement funds from Landlord/Sublandlord should be in
escrow or in a letter of credit.
3. Large tenants/subtenants (full floor) should obtain a non-disturbance agreement from Landlord/Sublandlord’s mortgage lender.
4. In the case of a sublease, negotiate the right to remain in the space with the Landlord if the Sublandlord defaults or files for bankruptcy through a recognition or attornment agreement with the Landlord in the Landlord’s consent to sublease.
5. The right to take over Landlord/Sublandlord work if the building owner falls behind on maintenance or upgrades (“self help rights”), and to reduce the amount paid for building maintenance from the payment of rent (right of offset).
6. The right to deal directly with a Landlord/Sublandlord’s lender if the Landlord/Sublandlord goes bankrupt (a non-disrupt clause).
7. The right to terminate a lease if the tenant/subtenant’s business condition deteriorates.
8. The right to sublet space to whomever the tenant/subtenant chooses at any price.
9. The right to open negotiations for a lease renewal eight months before the lease expiration instead of the standard 24 months.
If any parties are interested in additional information regarding a potential bankruptcy filing by their Landlord or Sublandlord, or assistance in negotiating a lease, please contact Jim Shenwick.
First, let’s talk about the situation where a Landlord or Sublandlord files for bankruptcy. Section 365(h) of the Bankruptcy Code says that if a debtor files for bankruptcy (the debtor would be a Landlord or Sublandlord) and seeks to reject an unexpired lease of real property under which the debtor is the lessor, if the lease term has commenced, the tenant or subtenant may retain its rights under the lease. These rights include rights related to the timing and amount of the payment of rent and other amounts payable by the tenant or subtenant, and any right of use, possession, quiet enjoyment, subletting, assignment or hypothecation for the balance of the lease term, and any renewal or extension of such rights, to the extent that those rights are enforceable under applicable non-bankruptcy law. Section 365(h) also provides that if the tenant or subtenant retains its rights under its lease, then the tenant or subtenant may offset against the rent reserved under the lease for the balance of the term after the date of the rejection of the lease and for any renewal or extension of the lease:
1. The value of any damage caused by the nonperformance after the date of rejection;
and
2. Any obligation of the debtor/Landlord or Sublandlord;
but the tenant or subtenant shall not have any right against the estate of the debtor on account of the damage occurring after such date due to nonperformance. In plain English, 365(h) provides that if a Landlord or Sublandlord files for bankruptcy, then the tenant or subtenant may vacate the space or remain in the space pursuant to the terms of the lease or sublease and may offset against rent any damages resulting from the Landlord/Sublandlord’s bankruptcy filing.
As a result of the protections provided to tenants and subtenants by Section 365(h), they may use the opportunity of a Landlord/Sublandlord’s bankruptcy filing as an opportunity or leverage to renegotiate their lease/sublease, particularly if the real estate market has dropped. With respect to a tenant or subtenant that is concerned about the Landlord/Sublandlord’s financial condition, provided below are some tips regarding lease clauses that they may want incorporated into their lease/sublease:
1. The ability to review financial statements from Landlord/Sublandlord.
2. Tenant/subtenant improvement funds from Landlord/Sublandlord should be in
escrow or in a letter of credit.
3. Large tenants/subtenants (full floor) should obtain a non-disturbance agreement from Landlord/Sublandlord’s mortgage lender.
4. In the case of a sublease, negotiate the right to remain in the space with the Landlord if the Sublandlord defaults or files for bankruptcy through a recognition or attornment agreement with the Landlord in the Landlord’s consent to sublease.
5. The right to take over Landlord/Sublandlord work if the building owner falls behind on maintenance or upgrades (“self help rights”), and to reduce the amount paid for building maintenance from the payment of rent (right of offset).
6. The right to deal directly with a Landlord/Sublandlord’s lender if the Landlord/Sublandlord goes bankrupt (a non-disrupt clause).
7. The right to terminate a lease if the tenant/subtenant’s business condition deteriorates.
8. The right to sublet space to whomever the tenant/subtenant chooses at any price.
9. The right to open negotiations for a lease renewal eight months before the lease expiration instead of the standard 24 months.
If any parties are interested in additional information regarding a potential bankruptcy filing by their Landlord or Sublandlord, or assistance in negotiating a lease, please contact Jim Shenwick.
Tuesday, April 21, 2009
NYT: Debt Settlement Firms Offer Promises But Little Help
April 20, 2009
By DAVID STREITFELD
Tyna Carter, burdened with $25,000 in credit card debt, did not want to be a deadbeat. After looking for help on the Internet, Mrs. Carter, a West Virginia homemaker, wound up in the hands of a sweet-talking “credit specialist” from Texas.
He claimed his company, Credit Solutions of America, could set her on the road to a debt-free life. But what really happened, Mrs. Carter says, is that Credit Solutions pocketed nearly $4,000 of the couple’s income, a little bit each month. Now they are in a deeper hole than ever.
It is a pervasive problem these days. With the economy on the ropes, hundreds of thousands of consumers are turning to “debt settlement” companies like Credit Solutions to escape a crushing pile of bills.
As many as 2,000 settlement companies operate in the United States, triple the number of a few years ago. Settlement ads offering financial salvation blanket radio and late-night television.
Consumers who turn to these companies sometimes get help from them, personal finance experts say, but that is not the typical experience. More often, they say, a settlement company collects a large fee, often 15 percent of the total debt, and accomplishes little or nothing on the consumer’s behalf.
State attorneys general are being flooded with complaints about settlement companies and other forms of debt relief. In North Carolina, complaints doubled last year, while in Florida they tripled, spokeswomen for the state attorneys general said. In Oregon, complaints have quadrupled since 2006.
The rapid rise of debt settlement is the result of two colliding forces: Americans owe more on their credit cards than ever, a result of the spending binge of the last decade. But as the recession deepens, their ability to pay is declining.
Kaulkin Ginsberg, a consulting firm, estimated that the amount of consumer credit at risk of default increased in February by $5 billion, to $24.5 billion.
High credit card rates and fees have been a point of contention for consumer advocates. On the NBC program “Meet the Press” on Sunday, the administration’s chief economic adviser, Lawrence H. Summers, said President Obama planned to crack down on abusive credit card lending that forces Americans to pay excessive interest rates.
For many consumers, their only hope for solvency is to get their balances down to a manageable level. But the card companies — concerned for their own solvency — are not inclined to let them off the hook.
Debt settlement companies claim they help both creditor and consumer by bridging the abyss between them.
“There is overwhelming demand for this service,” said Robby H. Birnbaum, a lawyer who is a board member of the Association of Settlement Companies, a trade group. “People want to avoid bankruptcy, and this is their last resort.”
In practice, however, the debt settlement firms frequently manage to please no one. An executive of the American Bankers Association, representing the credit card industry at a recent forum, labeled debt settlement companies “very harmful” to both creditor and consumer. Even debt collectors are upset, saying the settlement companies prevent them from collecting.
The premise of debt settlement is simple: A consumer stops trying to pay even the minimum on his cards. Instead, he accumulates money in an account that the settlement company promises to use to strike a bargain with creditors. Confronted with the certainty of some money now versus the possibility of no money later, the card company settles for 40 cents on the dollar or less.
Even if the goal makes sense, achieving it can be difficult.
Once the consumer stops paying the minimums, the card companies increase efforts to collect. Their fees and interest charges do not stop. They may sue. The consumer’s credit score falls through the floor.
Long before making any attempt at a deal with creditors, the settlement companies take a fee. Credit Solutions deducted $233 from the Carters’ checking account for three months, and then $116 a month for the next 27 months — a total of about $3,825 by early this year.
It was a fee Mrs. Carter and her husband, Willard Carter, a miner who retired after he was injured, could ill afford — especially since, by their account, the company put little effort into their case.
“After they got their money, they ran,” said Mrs. Carter, 51.
The Carters went to the West Virginia attorney general’s office in January, joining a flood of that state’s citizens complaining about debt relief schemes. “We’re being overwhelmed,” an assistant attorney general, Norman Googel, said.
Since 2005, Mr. Googel and his colleagues have successfully pursued cases against 14 companies promoting debt relief and debt settlement, resulting in refunds to 3,443 consumers, and they are pursuing more. And yet, he said, the complaints keep coming.
On March 26, Credit Solutions was sued by the State of Texas, which accused it of engaging in “false, deceptive and misleading acts and practices.”
The suit says the company misrepresents its success rate, noting that the company’s own data “show that over 80 percent of the debts enrolled in the program do not settle.” Those debts that are settled, the suit says, are for higher amounts than the promised 40 cents on the dollar.
Credit Solutions said it would not comment on pending litigation.
The settlement companies are the latest response to an old question: How can debt-ridden people avoid bankruptcy?
The first answer was nonprofit credit counseling, which began in the 1960s. The counselors, financed by the credit card industry, helped consumers formulate debt management plans and negotiated lower interest rates.
Counseling lost some of its appeal after creditors largely stopped offering the concessions needed to get people solvent again. The National Foundation for Credit Counseling, an umbrella group for legitimate counseling services, announced last week that the country’s top 10 credit card issuers had agreed to make changes to provide additional relief.
The diminishing effectiveness of nonprofit efforts created an opening for commercial settlement companies. Debt settlement is not regulated by federal law, as debt collection is, though general fraud and deceptive-marketing laws may apply. The Federal Trade Commission has successfully pursued seven cases against debt settlement companies since 2001, but one of the agency’s commissioners, J. Thomas Rosch, said that such cases take time and staff.
“I favor self-regulation that’s not a fig leaf,” Mr. Rosch said.
After inquiries from The New York Times, Credit Solutions sent a full refund to the West Virginia couple, the Carters, saying it was committed to customer satisfaction. The company blamed “communications problems” for troubles with the Carters’ account.
The Carters need every penny of their refund. They now owe much more than when they enrolled with Credit Solutions three years ago. For instance, interest and fees have increased the balance on one of their cards to $18,000, from $8,000.
“I was trying to do the right thing,” Mrs. Carter said, “but it didn’t work that way.”
Copyright 2009 The New York Times Company. All rights reserved.
By DAVID STREITFELD
Tyna Carter, burdened with $25,000 in credit card debt, did not want to be a deadbeat. After looking for help on the Internet, Mrs. Carter, a West Virginia homemaker, wound up in the hands of a sweet-talking “credit specialist” from Texas.
He claimed his company, Credit Solutions of America, could set her on the road to a debt-free life. But what really happened, Mrs. Carter says, is that Credit Solutions pocketed nearly $4,000 of the couple’s income, a little bit each month. Now they are in a deeper hole than ever.
It is a pervasive problem these days. With the economy on the ropes, hundreds of thousands of consumers are turning to “debt settlement” companies like Credit Solutions to escape a crushing pile of bills.
As many as 2,000 settlement companies operate in the United States, triple the number of a few years ago. Settlement ads offering financial salvation blanket radio and late-night television.
Consumers who turn to these companies sometimes get help from them, personal finance experts say, but that is not the typical experience. More often, they say, a settlement company collects a large fee, often 15 percent of the total debt, and accomplishes little or nothing on the consumer’s behalf.
State attorneys general are being flooded with complaints about settlement companies and other forms of debt relief. In North Carolina, complaints doubled last year, while in Florida they tripled, spokeswomen for the state attorneys general said. In Oregon, complaints have quadrupled since 2006.
The rapid rise of debt settlement is the result of two colliding forces: Americans owe more on their credit cards than ever, a result of the spending binge of the last decade. But as the recession deepens, their ability to pay is declining.
Kaulkin Ginsberg, a consulting firm, estimated that the amount of consumer credit at risk of default increased in February by $5 billion, to $24.5 billion.
High credit card rates and fees have been a point of contention for consumer advocates. On the NBC program “Meet the Press” on Sunday, the administration’s chief economic adviser, Lawrence H. Summers, said President Obama planned to crack down on abusive credit card lending that forces Americans to pay excessive interest rates.
For many consumers, their only hope for solvency is to get their balances down to a manageable level. But the card companies — concerned for their own solvency — are not inclined to let them off the hook.
Debt settlement companies claim they help both creditor and consumer by bridging the abyss between them.
“There is overwhelming demand for this service,” said Robby H. Birnbaum, a lawyer who is a board member of the Association of Settlement Companies, a trade group. “People want to avoid bankruptcy, and this is their last resort.”
In practice, however, the debt settlement firms frequently manage to please no one. An executive of the American Bankers Association, representing the credit card industry at a recent forum, labeled debt settlement companies “very harmful” to both creditor and consumer. Even debt collectors are upset, saying the settlement companies prevent them from collecting.
The premise of debt settlement is simple: A consumer stops trying to pay even the minimum on his cards. Instead, he accumulates money in an account that the settlement company promises to use to strike a bargain with creditors. Confronted with the certainty of some money now versus the possibility of no money later, the card company settles for 40 cents on the dollar or less.
Even if the goal makes sense, achieving it can be difficult.
Once the consumer stops paying the minimums, the card companies increase efforts to collect. Their fees and interest charges do not stop. They may sue. The consumer’s credit score falls through the floor.
Long before making any attempt at a deal with creditors, the settlement companies take a fee. Credit Solutions deducted $233 from the Carters’ checking account for three months, and then $116 a month for the next 27 months — a total of about $3,825 by early this year.
It was a fee Mrs. Carter and her husband, Willard Carter, a miner who retired after he was injured, could ill afford — especially since, by their account, the company put little effort into their case.
“After they got their money, they ran,” said Mrs. Carter, 51.
The Carters went to the West Virginia attorney general’s office in January, joining a flood of that state’s citizens complaining about debt relief schemes. “We’re being overwhelmed,” an assistant attorney general, Norman Googel, said.
Since 2005, Mr. Googel and his colleagues have successfully pursued cases against 14 companies promoting debt relief and debt settlement, resulting in refunds to 3,443 consumers, and they are pursuing more. And yet, he said, the complaints keep coming.
On March 26, Credit Solutions was sued by the State of Texas, which accused it of engaging in “false, deceptive and misleading acts and practices.”
The suit says the company misrepresents its success rate, noting that the company’s own data “show that over 80 percent of the debts enrolled in the program do not settle.” Those debts that are settled, the suit says, are for higher amounts than the promised 40 cents on the dollar.
Credit Solutions said it would not comment on pending litigation.
The settlement companies are the latest response to an old question: How can debt-ridden people avoid bankruptcy?
The first answer was nonprofit credit counseling, which began in the 1960s. The counselors, financed by the credit card industry, helped consumers formulate debt management plans and negotiated lower interest rates.
Counseling lost some of its appeal after creditors largely stopped offering the concessions needed to get people solvent again. The National Foundation for Credit Counseling, an umbrella group for legitimate counseling services, announced last week that the country’s top 10 credit card issuers had agreed to make changes to provide additional relief.
The diminishing effectiveness of nonprofit efforts created an opening for commercial settlement companies. Debt settlement is not regulated by federal law, as debt collection is, though general fraud and deceptive-marketing laws may apply. The Federal Trade Commission has successfully pursued seven cases against debt settlement companies since 2001, but one of the agency’s commissioners, J. Thomas Rosch, said that such cases take time and staff.
“I favor self-regulation that’s not a fig leaf,” Mr. Rosch said.
After inquiries from The New York Times, Credit Solutions sent a full refund to the West Virginia couple, the Carters, saying it was committed to customer satisfaction. The company blamed “communications problems” for troubles with the Carters’ account.
The Carters need every penny of their refund. They now owe much more than when they enrolled with Credit Solutions three years ago. For instance, interest and fees have increased the balance on one of their cards to $18,000, from $8,000.
“I was trying to do the right thing,” Mrs. Carter said, “but it didn’t work that way.”
Copyright 2009 The New York Times Company. All rights reserved.
Monday, April 20, 2009
Bankruptcies surge despite law meant to curb them
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.
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.
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.
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