Interesting Interest Rates

30 Year Home Mortgage Rate Hits 17% Prime Rate at 16%+ Savings account interest reaches 12% Ancient post depression history NO - 1982

Here is a little chart of the Fed Funds Rate (the interest rate the Federal Reserve Banks charge member Banks to borrow - single day loans), the 30 Year Mortgage Rate, the Daily Savings Account Rate, and the 1 Year CD Rate (all averaged for the respective year) :

1982: Fed Funds 12.25% Mortgage 17% Savings 12%

1989: Fed Funds 9.17% Mortgage 11% Savings 8.5%

1995: Fed Funds 5.9% Mortgage 7.9% Savings 4.75% 1 Year CD 7%

2000:Fed Funds 6.42% Mortgage 8.1% Savings 5.5% 1 Year CD 6.625%

2005:Fed Funds 3.33% Mortgage 5.9% Savings 2.35% 1 Year CD 3.25

2007:Fed Funds 5.04% Mortgage 6.3% Savings 4.25% 1 Year CD 4.9%

2008:Fed Funds 1.85% Mortgage 6% Savings 2.5% 1 Year CD 2.5%

2009:Fed Funds .25% Mortgage 5.1% Savings 0.5% 1 Year CD 2%

Why are all of the numbers important? They show the level of inflation, the cost to consumers for borrowing, and perhaps most significantly, the profit the banks are making on money. For example, in 1982, while mortgages were 17% plus points, banks were being charged 12.25% by the Fed and paying 12% to depositors. Keep in mind that a deposit in a bank is nothing more than a customers loan to the bank for the rate of interest being paid on the savings account or CD.

At that time, there was a 5% margin between the cost of money and the rate that could be charged to consumers for a mortgage. The MARGIN narrowed to 2%+/- for the next 27 years; then at the height of the crisis, the margin grew to 5% again. So, in inflation and in recession, the Banks made the same margin. Rates were so stable that savings bank bankers were called "3-6-3" bankers: take it in at 3% (savings deposits) lend it out at 6% (mortgage) and go home at 3 (afternoon) (That was the time before securitization of mortgages).

There are two lessons to be gleaned from the figures other than the fact that Banks make money: 1. When the Cost of Funds (to Banks) is low Banks charge what the market will bear. It is a "free market", unlike the regulated days of the 60s and 70s, and Banks can take advantage of this era. 2. The current interest rates are so low, that as to Banks, there is almost free money. This will not stay so cheap for Banks.

With the interest rates so low, and Banks making 5% on mortgages, and more than 3% on Prime Interest Rate loans (the rate charged to the best customers (those with no risk of default - like GM, right?) why are Banks charging 19%-30% for credit card debt? This is the primary debt for consumers beyond a mortgage. The Banks are making an obscene 15% to 25%+ on the average borrower's credit card balance!!

What is worse, in anticipation of the new laws which prohibit card issuers from arbitrarily raising interest rates because of a one time-one day late payment, or because a payment was a day late on A DIFFERENT CARD, Interest Rates on credit cards have jumped 10%-20% and credit limits have been reduced by 50%-75%.

The next post will deal with the profits being made by banks in real dollar terms. Why is any of this important? The so-called recovery is only in the financial markets. Unemployment is soaring, the dollar is weak (to be explained next post) and the average consumer has seen no relief. Oh, and in case anyone has missed the news, foreclosures are still going strong.

Author's Copyright by Richard I. Isacoff, Esq, November 2009

http://www.isacofflaw.com/

A Note About "Notes"

The Judge said if you can't prove you own the loan/mortgage, then you don't get any money! The October 25th edition of the New York Times reported on a very important legal case brought in the Bankruptcy Court for the Southern District of New York. Attorney David Shaev had filed a Chapter 13 bankruptcy (repayment plan) for clients facing imminent foreclosure. In the process he discovered that no entity could prove it owned the loan on his clients' home. Judge Robert D. Drain then determined that the lack of proof of ownership by anyone of the loan meant the homeowners did not have to pay "the mortgage" at all. He erased the debt!

The servicer of the loan, PHH Mortgage, was left without any defense. In theory, it was just sending statements and collecting checks for the owner, supposedly U S Bank. Unfortunately for the bank and PHH, there was no proof of who actually was entitled to the monthly payments. It was not a situation where the Promissory Note (the I.O.U. to the Bank) was presented with several parties claiming it was theirs. What is worse, the ownership had been transferred several times, but no one had the assignment (proof of the sale) showing that PHH or U S Bank was the owner - or any other party to the action. You can be certain that the case will be appealed.

THIS IS DIFFERENT from the current street wisdom of "Gee, if they don't have the ORIGINAL note, then I get my house for free". As is often the case, the street is not very wise. In the New York case, no proof of current ownership was provided. No one was questioning whether there was a loan, just the right of U S Bank or PHH to foreclose. Neither one could even show an assignment, the legal document that transfers ownership of a note from one party to another, to either PHH or U S Bank.

If there was an assignment, the issue of the Promissory/Mortgage Note itself would have become an issue. However, even if the original note was lost but a copy could be presented with the assignment, ultimately that would have been good enough , in most states. In litigation there is what is called the "best evidence rule". Simply put, a copy, if it can be authenticated, is acceptable. Authentication would happen in trial or deposition quite simply; the bank's lawyer would ask Mr. Jones, the owner:

"Mr. Jones, do you own the house located at 123 Elm Street, Blackacre, USA?" (in case Mr. Jones wants to lie, the attorney would have a certified copy of the deed and recording information to prove Mr. Jones "owns" the house).
"Mr. Jones, did you ever borrow money to purchase or refinance the house?"
"Mr. Jones, is this a copy of your current mortgage?" (again, the lawyer would have a certified copy, just in case).
"Now, Mr. Jones, would you examine the document I am handing to you and read the title." (unless he cannot read, or it really does state something different, Mr. Jones would answer "Promissory Note" or Mortgage Note" or something similar).
"Mr. Jones, please look at the signature line on the bottom of page 2. Please read aloud the name typed under the signature line" (it will be "Mr. Jones" in this example).
"Do you recognize the signature?"
" Is that your signature?" (meekly "Yes" says Mr. Jones)
"Thank you Mr. Jones" (unsaid, "you have just authenticated the copy as being the note that obligates you to make payments in order to keep you house in Blackacre")

The loss of an original is not the end of the world, or more importantly, the DEBT. The foreclosing Bank not having the right to claim that it owns the note is the end for that proceeding. The right is proven only with the note (or authenticated copy) AND an assignment to the current owner , if there was a sale of the mortgage.

Confusing? Not in principle. The Bank needs to PROVE it owns the mortgage or has been given the right to foreclose by the real owner, and has to PROVE who is the real owner. No proof, no foreclosure (but no free house)!

Author's Copyright by Richard I. Isacoff, Esq, November, 2009

Photo Credit: http://www.ebaumsworld.com/pictures/view/80793502/

rii@isacofflaw.com
http://www.isacofflaw.com/

Money Money Everywhere But....

The money supply to Banks is there. Interest rates for Bank borrowing is still near 0%. But, homeowners are now subject to much tighter rules for borrowing because the Banks follow the BOOK, or in this case the Federal Reserve Regs. As a result, home mortgages are MORE DIFFICULT to get than anytime in the past decade or two.

There are new rules to try to reign in the high-cost, so-called "subprime" predatory loans. As of October 1st "High Cost Loans" have a new definition: any loan that is "1.5 percentage points" above the average prime mortgage rate. (Note: that is not the prime rate mortgage index but a prime rate mortgage - a mortgage given to a "prime borrower" or a so-called "a" borrower - great credit). If a loan is a "high-cost loan" under the new definition lenders must verify that the borrower can repay the loan through earnings and other income, not simply by a foreclosure or refinance.

That rule may not appear to be a departure from the "old" way but it is. The crisis we are still in was caused by some large lenders/brokers making loans to anyone who could pass a basic screening:"Can you hear thunder and see lightning?". Greedy and ignorant brokers/lenders would often give loans to borrowers without requiring any proof of the borrowers ability to pay.

Sometimes the borrowers knew exactly what they were doing and did not care - they gambled that the market for houses would keep rising and that they could refinance their way out of any problem There were no verifications of employment or verifications of deposits send. No bank statements showing a steady balance, for the self employed were requested, and often, for employed borrowers, W-2 copies were ignored or not sought.

Basically, the new rules that the Federal Reserve has put into effect as of October 1, 2009, merely force lenders/brokers AND borrowers to do what they should have been doing all along. That borrowers would fabricate income and lie on applications was ignored, or even encouraged.

Some states, like Massachusetts, Connecticut, Rhode Island, and a handful of others across the country have already put regulations in place that make the lender/broker certify that the loan is in the best interests of the borrower. In fact, Massachusetts REQUIRES this criteria be met for high cost loans, as defined by the Commonwealth General Laws. Also, many states, Massachusetts among them, have enacted legislation or have had the highest court in the state rule that certain threshold questions (like can the borrower repay and is does the loan lower payments or allow for home improvements, or lengthen the term) must be met on a refinance before the lender/broker can consider itself safe from violating such laws. UNFORTUNATELY, many of the National Banks, and some Savings Institutions governed by the Office of Thrift Supervision, claim that state law does NOT apply to them.

The Federal Reserve Rules also state, in part, that Prepayment penalties are banned if the mortgage payment can change in the initial four years of the loan. For other higher-priced, mortgage loans, a prepayment penalty period cannot last for more than two years. (this is the link to the 65 page Regulation:

http://www.federalreserve.gov/reportforms/formsreview/RegZ_20080109_ifr.pdf

Banks have over-reacted so NO MONEY TO HOMEOWNERS. Foreclosure proceedings are still climbing. The worst may not be over for the average homeowner who has a financial problem, or a first-time home buyer who does not have a high (700s) credit score.

Author's Copyright by Richard I. Isacoff, Esq, October 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Good News/Bad News - Is There a Difference?

Foreclosures are up 23% from the end of the 3rd quarter last year. Foreclosures are up 5% from the end of the second quarter this year. If the numbers continue, this year will have more foreclosures than any before. THAT'S THE GOOD NEWS!

With all of the money given (loaned) to banks, and with the likes of JPMorgan Chase having a profit for the last quarter of $3,600,000,000 ($3.6 Billion), having doubled the amount of money it has planned on for loan losses, you might think that there would be money for you to borrow to refinance your house (after all your credit is good ), or borrow for your business. WRONG - THINK AGAIN! Banks are bracing for the next wave of losses; commercial real estate mortgage backed securities failing because the loans that make up the securities are defaulting. Additionally, because of the financial crisis we are still in, the "normal" way of making loans will not work.

In the April 13th posting (and several others), the whole issue of securitization was explained. The basics: agree to buy a large number of mortgages so that the value, on paper, of what the security maker controls is huge, like $1 Billion. Rather than holding the loans in any Bank, and risking borrowers not paying the mortgage regularly, sell the loans in a package (pool) to investors on Wall Street; investors like mutual funds, individuals, pensions, and of course the Federal Government. So now the $1 Billion portfolio is owned by thousands of people, plans etc. The security eliminates the risk of loss for all of the banks involved in making the loans, because no bank owns one of the actual mortgages - not one. Investors, not lenders/banks, each own a small portion of the pool. Again, they own a security, that acts like a corporate bond, but not a mortgage.

Because of the recent losses and the enormous rise in foreclosures, no one wants to buy these mortgage-backed securities ("MBS"). If no one will buy them, then they will not be created, because the creator does not want to get stuck with a long-term investment (pooled mortgages). If they are not being created, the banks will not lend; even to good borrowers. THIS IS THE BAD NEWS.

There will be no real recovery until credit is available again. The government's mortgage lenders FannieMae and FreddieMac, FHA, have new and very strict guidelines. If you have a blemish on your credit report, NO LOAN.

Businesses use borrowed money all of the time to keep operations running, to buy new equipment, and to expand. If banks won't lend to them, the business shrinks and dies. More jobs are lost, and not just at that business. if people lose work, then they cannot spend money and other businesses fail. That is the cycle we are in for unemployment. And more unemployment means more defaults on mortgage payments, and that means more foreclosures.

The new Bank regulations that will require banks to keep more money set aside for bad loans, and the fact that only the Federal Government will buy the existing MBS and not new ones, means that Banks will not make loans, except to the very best customers. The noose gets tighter and tighter. The recent run-up of the stock market is not a reflection of consumers’ and "Main Street" types’ (us) confidence. The profits are being made by traders, Wall Street professionals, and companies like JPMorgan Chase.

So, the very kinds of investments, the MBS or pools of mortgages, that allowed the housing boon, has led us to the housing boom - it’s imploded. Breaking the cycle we are in will take time; actually a great deal of it

Stopping Foreclosure When the Lender Says "NO!"

(THIS IS A RE-POSTING FROM AUGUST 12, 2009)

Bankruptcy is a good option if you are facing foreclosure and cannot get the lender to accept reasonable terms for a modification; terms that will allow you to either catch up on back payments over time, or which will put the arrearage at the back of the loan.

The filing of any type of Bankruptcy, which is asking for protection from creditors, will stop ALL actions for money, foreclosures, repossessions etc, against you. BUT, for most consumers, only a Chapter 13 will give you the ability to spread out payments for the arrearage over a period of up to 60 months. So, assuming you are 6 months behind in payments of $1,500 each, and there are $3,00 in legal fees because you are in a foreclosure status, and you have $300 in late fees, and the lender has paid $1,200 in taxes for you because your escrow account (where the lender collects money to pay real estate taxes each month as part of the mortgage) is short because you haven't paid in 6 months - you owe the bank $13,500.

Most of us do not have that amount of pocket change, and if you did, you wouldn't be 6 months behind. Spreading that amount of money over 60 months adds only $225 per month to your expenses. Please understand that there is no misunderstanding about a desperate financial situation, but if the arrearage occurred because of a temporary drop in income, for whatever reason, you can get caught up. Too many people give up once they get that far behind because they know they cannot pay $13,000+/- all at once, and once the foreclosure starts, the lender is not inclined to "make a deal".

The Bankruptcy Laws were established so that people could get a "FRESH START". The whole concept is to give people who get into a financial bind a way out, without losing their home, car, retirement accounts etc. Details of the protections a Bankruptcy gives you are on my website www.isacofflaw.com . Once in a Chapter 13 Bankruptcy, the United States Bankruptcy Court controls what a creditor can do. If you make payments on time, including the $225/month in the above example, the lender can only sit by a wait until you finish the Plan of payments. If you make all of them, your loan is put back into "regular" good payment status.

Also, if you miss a payment due to a temporary problem (broken arm with no sick time available from your job or a seasonal drop in hours so the overtime you have been counting on isn't available) the lender CANNOT just foreclose. It must ask the Bankruptcy Court for permission and there will be a hearing on the request. There, your lawyer (don't try a Chapter 13 Bankruptcy on your own) can explain the situation to the Court and usually work some type of compromise with the lender. The Bankruptcy Court is there to protect Debtors, provided the Debtors do what they promise.

Further, if you have equity in your house of $30,000, and your payments are $1,000 per month, the Court normally will not allow a foreclosure even if you are 2 or 3 months behind. While that is not specified in the Bankruptcy Code, the concept, called "adequate protection", is clearly spelled out. In essence it states that if the lender is not at risk of losing anything by waiting and using some of your equity to guaranty the arrearage will be paid, then the Court WILL NOT allow the lender to foreclose. The lender has no risk in waiting so you get a chance to get caught up again.

The Bankruptcy laws are complex, but the concept is not. If you are behind in your mortgage payments, and the lender wants to foreclose, and the lender will not "make a deal" with you, and you do not have a lump sum to pay all of what you owe from payments not made, a Chapter 13 Bankruptcy filing can be used to save your home. You can find a qualified Bankruptcy attorney by going to the website of the National Association of Consumer Bankruptcy Attorneys www.nacba.org , www.abi.org, or by calling my office for a "no charge" referral.

Author's Copyright by Richard I. Isacoff, Esq, August 2009

www.isacofflaw.com

rii@isacofflaw.com

"Making Home Affordable" Program Is Not Working

The Obama administration's Making Home Affordable program, you know the one to stop foreclosures on millions of homes, is missing the mark. As was reported in the New York Times by Peter Goodman in today's edition, "The Congressional Oversight Panel, created last year to keep tabs on taxpayer bailout funds, said the Obama administration’s program would prevent fewer than half of predicted foreclosures." (To read his full story go to http://www.nytimes.com/2009/10/10/business/10modify.html ).

Mr. Goodman's article discusses the overriding problems with the program, but does not deal with the situation from a day-to-day point of view. In reality, the Obama Program, as it is called, (which is really named Making Home Affordable ("MHA"), and has under it two programs - Home Affordability Modification Program "HAMP" and the Home Affordability Refinance Program "HARP") does not accomplish the goal of home preservation.

Basically, if a homeowner is behind now, but was current as of January 1, 2009, and meets other criteria, the homeowner should be eligible for a loan modification. The modification allows the participating lender to set up a 3 month trial period wherein the borrower makes affordable payments based on actual financial information submitted to the lender, after which the lender can decide to modify the loan or not. The terms are dictated by the lender and may not ever become permanent.

The most disturbing part of the situation is that homeowners are going into foreclosure at a record rate, and the programs at best are being outpaced by the foreclosures by 3 or 4 to 1. Elizabeth Warren, head of the TARP Oversight panel, estimates that even when everything is working at full speed, the programs will lose the battle against foreclosure schedules by 2 to 1. The honest homeowner who "bought" a mortgage without really understanding the terms and was sold "a bill of goods", like thinking he/she had a 30 year fixed mortgage when in reality the rate changed after 3 years, has no recourse.

The lenders, Wall Street folks, and investors, who pushed and packaged these loans, and now do not want to take any loss of income, are not being held accountable. They still have no risk of loss. Taxpayers, meaning the homeowners who are in trouble, are the ones paying the entire cost of the programs, YET CANNOT EVEN GET HELP IN MOST CIRCUMSTANCES.

With the jobless rate being reported at near 10%, which means it is probably over15% (people off benefits and not looking anymore are not reported), and layoffs continuing, more and more people will be a situation where foreclosure is inevitable. The MHA could work, but not without the full cooperation from the lenders and mortgage servicers. With no one being in charge to enforce ACTIVE participation in MHA, and there being no regulator with teeth to force compliance, the people who own the loans will not allow the programs to work. They will lose money if modifications become permanent. Guess who wins this battle.

For now, it's the only game in town. If you are facing foreclosure, apply for an MHA program. Once it's determined you are eligible, any foreclosure action is put on hold while your application is considered.

(A correction from 9/28/2009 post: I incorrectly stated that Rep. Barney Frank was from Western MA. He is, of course, from Eastern MA)

Author's Copyright by Richard I. Isacoff, Esq, October 2009

rii@isacofflaw.com
www.isacofflaw.com

Credit Cards - Rep. Barney Frank's Frustration (Mine Also)

Rep. Barney Frank (D), Congressman from Western MA, wants to "push up" the effective date of the new Credit Card regulations. He is prompted by the frenzy of card issuers raising rates, cutting limits, changing terms, and adding fees, all to beat the starting date of the laws. The laws merely set limits on how and how often card companies can change the terms of the agreement you have with them, without prior notice.

The standard argument, that there is no contract unless both sides agree, is not able to be put forth, because in the agreement you signed originally you gave the company the right to make all of these changes, even to your detriment. Is it fair? NO!, Is it legal? Yes, but only until the first of the year.

Congressman Frank's frustration is understandable, especially if you have a card and have been "slammed" by the card company with rates and fees you never anticipated. That these same companies, CitiBank, Bank of America, Chase, all have Federal Money from the bailout is beside the point. As stated in an earlier post, this is how they were able to report record earnings last quarter.

Congress will not change the date to October as Congressman Frank wants, but at least the issue is again being discussed. Unfortunately, the Congressman may suffer a decline in his credibility with his colleagues, but he will have a boost from his constituents.

Right now, everyone should be examining his/her cards and statements to determine if the terms have suddenly changes, if rates are higher, credit limits lower. If you need a card try a local financial institution. If none issue cards, shop for a new one, if yours is not playing fair. Be certain that you read the "Agreement and Terms" disclosure that will be your contract, BEFORE you use the card. Do not hesitate to decline the card even after it is issued to you. Be certain however, that you follow the rules on terminating the relationship or you could find an open credit line, detracting from your credit score, all the while believing that the card account was closed.

To be safe about credit, whether it is cards, loans, mortgages, joint accounts, "authorized user" cards (where the credit is based on someone else who has given you a card to use), get at least one credit report every six months. They are free from http://www.annualcreditreport.com/ .

Check to be certain that only the cards you use are open. Close everything else. While there may be a slight drop in your credit score (see posts of 7/27/09 and 6/11/09), the risk is far less than if you have unused and unwanted open credit lines affecting your score and overall credit standing.

Author's Copyright by Richard I. Isacoff, Esq, September, 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

Foreclosures; Another Shoe is Dropping

Currently, in the City of Pittsfield, MA, there are 190 properties in some stage of foreclosure; 69 are currently in default, 30 are Bank owned, 16 are awaiting a foreclosure sale date, and the rest are in some part of the process (such as sale completed but deed not yet recorded or waiting for the sale with a date set).

For a city the size of Boston, or Atlanta, or even Springfield, MA, that number might not be worthy of note, but in a city of 40,000, to have 190 HOMES in some state of being taken from the homeowner is alarming. What is more concerning is the fact that there is no action on the part of the city to assist those homeowners in trouble. There are no meetings inviting homeowners to learn how to protect their home which is probably their biggest investment; the local community college, which offers courses and seminars in all types of subjects, has no offerings to educate homeowners about how to avoid the common pitfalls that lead to defaults and foreclosure. There isn't even a hotline that is well publicized, that a homeowner in trouble can call to get emergency legal assistance/counseling.

What is most disturbing is that the situation in Pittsfield is not the exception, but the rule. This issue pervades the country and, yet, because we have moved to a new news cycle, gets no attention anymore. The stock market is nearing 10,000 again; the dollar is low so exports are high; oil is over $70/barrel but not too much; gold is over $1,015 per ounce but that is because of the weak dollar; inflation is under control; and the Federal Reserve is continuing to give the banks cheap money to lend. The fact that it isn't being loaned to consumers or small businesses also goes undetected.

We are facing a real housing crisis. As has been commented on and explained in earlier postings, the next wave of adjustable rate increases is about to hit - the so-called Option-Arms, were "prime" borrowers could get a mortgage, and pick a payment for the month. Well, that period of pick as you may is starting to change. Most had that scheme for 3-5 years. The 3 year period is beginning to end (2006-2008) was most of the activity, so we will start to see loans that have to have PRINCIPAL & INTEREST PAID each month for the remainder of the loan term (27 years generally). That will be coupled by a rate increase of 2%-3%, based on the contract (mortgage documents).

So, will the better qualified borrowers start to default and hit the statistics as a "property in foreclosure"? Not all of them but YES, many will! Keep in mind that many of these borrowers no longer have the jobs they did when they got the loan, or hours have been cut, or the second job is gone, or there is no overtime. This will start another decline in home prices and cycle of panic.

Mortgage lending has already slowed to a trickle of what it was. That is not all bad, but when people cannot refinance or buy a new home, even when they have a steady job and decent income, but only a 670 credit score (680 being the line between prime/regular and the evil sub-prime borrower) we have a major problem.

In many areas, local banks and credit unions are trying to fill the void, but the demand is greater than the supply of loans. And, many institutions have new financial requirements to meet per FDIC, OTS, OCC and the rest of the alphabet; the locals have little to lend on anything but the best prime loans.

One hidden factor regarding the recovery of home prices and the market: banks that have foreclosed on homes, many homes, are NOT putting them on the market for sale, hoping for a recovery in pricing and not wanting to flood the market and further depress prices by increasing the supply of "existing" homes beyond the demand.

So much for the good news!

More On Modfications - The Borrowers' Hidden Costs

Mortgage Modification, as stated in earlier posts, can mean anything from allowing a late payment without a fee attached to it, or reducing interest and principal substantially. Unfortunately, most are closer to the deferred penalty than a true modification of terms which will allow the borrower to keep their home.

In today's USA Today, there is a brief analysis of the business of mortgage modifications. The article "Many mortgage modifications push payments higher" by Stephanie Armour, recites the history of 2 borrowers, but details the problems with the program. http://www.usatoday.com/money/economy/housing/2009-09-14-mortgage-modifications-not-helping_N.htm?csp=34

The MHA (Obama) program concentrates on lowering payments. This is accomplished by lowering the interest rate, and, if necessary, extending the term of the loan to 40 years, so that the payment of principal, interest, taxes and insurance, is no more than 31% of the borrowers gross income each month. HOWEVER, the amount of principal owed can actually increase substantially in the process. Per USA Today's quote of government studies "Of loans modified from Jan. 1, 2008, through March 31, 2009, monthly payments increased on 27 percent and were left unchanged on an additional 27.5 percent, according to a recent report by banking regulators." Dismal? Yes! The light might be that the new program, MHA, will do better.

For a borrower that has fallen 6 months behind with his/her $1,500/month payment, accumulated interest, penalties, late fees and other costs, such as legal and inspections, all get added to the amount ultimately owed by the homeowner. In this example, that translates to a minimum of $14,000 added to the amount owed. This in turn would normally increase the monthly payments so a balance has to be reached, generally by adjusting the rate.

NOTHING IS FREE as we all know. Many of these mods (common slang now for mortgage loan modifications) are fixed for only 5 years, and can then adjust. The mod itself creates a new Adjustable RateMortgage ("ARM"). Is this just postponing the inevitable foreclosure? Maybe so - but at least there is a chance for the borrower (who can find new/additional employment, and can clean up his/her credit score, and can make every payment on time) to keep the house by a refinance at the 5 year adjustment period.

Other issues with modifications. There are a number of agencies, well-intended, which help borrowers at risk for foreclosure, to get a modification. The thought there is that by postponing the foreclosure at least the borrower has an opportunity to keep the house. One of the problems here is that many of these agencies are ill-equipped to go toe-to-toe with a mortgage company, be it the servicer or the actual lender. To many of the agencies, any modification is better than none - right? MAYBE!! If the agency is funded by getting modifications done, it can turn into a numbers game. A modification completed is one towards the quota for funding. Keep in mind that a modification can be simply delaying 2 or 3 payments until the end of the loan, or even creating a balloon payment at the end of the term of the loan.

Well, some may say, at least the borrower kept the house for a few more years. Well, I say, "SO WHAT"? The modification should give the borrower a real shot at keeping her/his home for as long as she/he wants.

Recapping, we have a federal program that was put into place for loan mods - fixes - to allow homeowners, who are facing imminent foreclosure or who will be falling behind over the next several months because of a job cut or an UPWARD MORTGAGE INTEREST RATE ADJUSTMENT, to keep their homes. The program allows the mortgage industry, company by company to participate or not. There is only one standard program and that is the Making Home Affordable ("MHA") plan.

Lenders can opt to modify any way they would like to, and are doing so, especially to those borrowers who do not qualify for MHA. The modification may be detrimental to the borrower in the long term but who cares? CreditSights, which is a firm that tracks such matters, states that of the more than 1/2 million mods this year, 90% have resulted in higher principal balances. Good? Bad? It would seem that just adding back interest and fees to a delinquent loan is not good. It seems and is counter-intuitive, and counter to success. It is a short term fix - a band-aid.

HERESY but perhaps there are those who would be better-off losing the house that is a constant struggle to pay for, month after month, year after year. Maybe some homeowners would be better-off losing a house, regrouping and getting finances straight, renting for a few years and saving money each month for a down payment on a house that is affordable.

Author's Copyright by Richard I. Isacoff, Esq, September, 2009

rii@isacofflaw.com
http://www.isacofflaw.com/

Mortgage Modificiations To Get More Difficult?

Countrywide, now part of Bank of America was one of the major lenders to sub-prime borrowers (that only means a credit score below 680 (or 640 depending on the day). It also packaged and sold the loans it originated, as Mortgage-Backed Securities ("MBS"). It continued to service the loans (collect money and send bills from and to borrowers) and was paid by the owners of the MBS to do so. The owners were just investors - they bought $xxxxx of a bond, not any different than if they bought a corporate or municipal bond.

When the mortgage/housing crisis hit, in large part due to Adjustable Rate Mortgages ("ARM") there was tremendous pressure on the Servicers, of which Countrywide was one, to MODIFY loans so that they were affordable for the borrowers. Some servicers modified loans, which they may or may not have been permitted to do in their contract, called a Pooling and Servicing Agreement ("PSA"), with the "packager"/"owner" of the bond. Countrywide modified loans and then, ignoring its PSA, refused to re-purchase the loans that had been modified by lowering the interest rates or even putting payments at the back of the loan. In simpler terms, Countrywide altered the amount of interest the owners of the MBS would receive.

A federal court ruled that Countrywide's motion to dismiss the lawsuit brought against it by the investors would not succeed. The Court stated that the case was one which should be brought in State Court, the the modifications were not protected by the recent legislation and Congressional acts to force lenders and servicers to modify loans. Basically, the Court said that if there is a contract, Countrywide must observe it - any quarrels with that belong in a state court on a case by case basis. No "get out of jail card" was given to Countrywide.

WHY DO YOU CARE? Because Servicers, if they aren't protected when they make modification from the investors, who expect a certain percentage return, will refuse to modify citing the Court ruling but relying on the contract they made, and arguing that they cannot breach the contract! This means more difficulty getting Servicers, which are not participating in the Federal program to modify loans, now for fear of a lawsuit.

This issue was brought up months ago and detailed in my posts of 10/25/2008 and 11/9/2008 -
http://finance-for-us.blogspot.com/2008/10/foreclosure-crisis-how-to-stop-it.html and http://finance-for-us.blogspot.com/2008/11/who-is-bailout-helping-right-now.html.

This just points out the disconnect, the lack of communications and an efficient coherent policy to deal with the foreclosures. Maybe Congress would act if it the home of a member!!

Author's Copyright by Richard I. Isacoff, Esq, August 2009
http://www.isacofflaw.com/
rii@isacofflaw.com

Mortgage Modification Mandates

As a follow-up to the last post, several important matters:

1. If you have submitted the application for a loan modification under the "Making Home Affordable" program, any foreclosure proceedings must stop. The exception is if you do not meet the basic criteria (see http://www.makinghomeaffordable.gov/)

2. To see if your lender/servicer MUST participate in the program go to http://www.financialstability.gov/impact/contracts_list.htm - if it is listed, it has to deal with the modifications

If the lender or servicer received any TARP funds or "volunteered" to be part of the Home Afforability Modification Program "HAMP" or the Home Affordability Refinance Program "HARP" it should be on one of the lists

3. If a mortgage company or servicers tells you not to send any money until the paperwork is received or not to send money for any other reason, ask for the person's name or employee number. Also, ask how you be certain that you should not send any payment. Even if you are satisfied that you do not have to send a payment "that" month, DO NOT USE THE MONEY for anything else. Set up a separate savings account and put all of the money for the payment(s) in the account. If the MHA modification doesn't work, and the lender has its own program, you WILL be asked if you have the last "X" payments, since the last one mailed.

4. If you get mail offering to help you get a loan modification, and the solicitations asks you to send in any money, even after you have called the company and spoken with a "counselor" DON'T DO IT, unless it is your lender/servicer and you have an agreement. There are hundreds of scams right now - 15% of my clients have paid money to some company that cannot help, except to help themselves.

Two expressions come to mind: "God helps those who help themselves" and "God help those who help themselves". (Interesting what one "s" can do!)

5. If you have questions, call a bankruptcy attorney or a foreclosure attorney in your area. If you don't know who to call, check http://www.naca.org/ or for a lawyer http://www.nacba.org/ OR send me an e-mail

Author's Copyright by Richard I. Isacoff, Esq, August, 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Making Homes Affordable? It's Not Working!!

In a report released by the "Making Homes Affordable Program", only 9% of those mortgages eligible (estimated) for a modification are in the process. Essentially the lenders, mortgage companies, loan servicers, ARE NOT doing their jobs.

The information through the end of July shows that of an estimated 2.7 million mortgages, all of which are 60 days+ delinquent, only 235,247 (actual) have been offered a modification or are in the process of obtaining one. This does not necessarily mean a change in all terms, but could be nothing more than the lender allowing 3 payments to be moved to the end of the loan term, but as a modification.

The lenders doing the best job are 1. Saxon 2. Aurora (small number of loans) 3. GMAC 4. JP Morgan Chase -all having in process 20% or more of the estimated eligible loans. CitiBank has 15% being worked on. BUT American Home Mortgage Servicing Inc (AHMSI) has done 0%, Wilshire 1%, Wachovia 2%, Select Portfolio 3%, Bank of America 4%, OCWEN 5%, and Wells Fargo and Citizens 6% each.

Who's fault is it - primarily the lenders/servicers. They never got ready for the program and they prefer to try to wait out the bad times, thinking, it seems, that suddenly the housing and finance markets will turn positive.

IT IS CRITICAL TO NOTE that once a borrower has submitted the necessary paperwork for a MHA Loan Modification, and has passed the initial screening (see below) FORECLOSURE PROCESS MUST STOP! - 1. home is your primary residence 2. currently employed or have other regular income 3. default caused by a hardship or there has been a drop in income or increase in expenses 4. your mortgage payment including principal interest, taxes and insurance is more than 31% of your monthly GROSS income, and 4. your loan was current at the start of 2009, you qualify for the full analysis. (Go to http://makinghomeaffordable.gov/modification_eligibility.html

If you meet the basics and have filed for a modification, and you then get a letter stating that the foreclosure process will continue during the evaluation, send a certified return receipt requested letter to the address to which you sent the documents, and state that the law requires them to STOP foreclosure proceedings.

If you are having a problem, call a qualified Bankruptcy attorney in your area (you can find one at www.nacba.org), or, contact your local Bar Association for a referral to an attorney working to stop foreclosures. In Massachusetts for example, you can contact the Massachusetts Fair Housing Center, or any of the local housing authorities for a referral.

The program is a reasonable one. I am having excellent results for my clients, but it requires a great deal of patience. As always, contact my office if you have a problem finding help.

Author's Copyright by Richard I. Isacoff, Esq, August, 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

Legal Aid Crisis - Is there a Free Lawyer in the House?

Providing legal assistance for those who truly cannot afford to hire an attorney has been taken for granted. We see the "public defenders" on TV, and hear about lawyers working, without financial compensation, for the good of the public - "pro bono".

Nationwide, legal aid programs are being ravaged by budget cuts, and in many states, due to the low interest rates. Massachusetts, like many other states, has a requirement that attorneys place clients money in a segregated account, often called an IOLTA account. If the funds will be held for any length of time, a separate interest bearing account is set up for the client's benefit. But money being held for a few days or even a week is put into the IOLTA account where the interest earned funds a large part of the legal aid programs.

Interest rates have fallen significantly to merely .5% from 5% in just 2 years. In Massachusetts for example, 2007 revenue from these accounts for legal aid was $31.8million. In 2008 it had dropped 50 $15.6 million, and as of July of this year, the interest earned was only $4.1 million - that is on track for a $7 million 2009. Couple this with the monetary cuts due to a drop in federal aid and less taxes being collected, and you have a system that can handle only a fraction of the cases it should. According to Lonnie Powers, the Executive Director of the Mass. Legal Assistance Corporation, there are and will continue to be battered women, people facing foreclosure, tenants being evicted, workers having wages withheld illegally, with NO LEGAL REPRESENTATION. Thoughout the Commonwealth there will be Thousands of people who would normally qualify for legal assistance, who will not! Even criminal cases are now lacking lawyers for defendants, so the cases take longer.

This financial problem is not unique to Mass. It's a nationwide problem and one that has no easy answers. There simply is not enough money to go around. It is like the perfect storm: lower interest rates being paid for deposits, federal money being cut due to the financial crisis, and the creation of probably 25% more work due to foreclosures, an increase in domestic violence caused by money worries, and tenants falling behind in rent with their landlords evicting them (rightfully in most cases but sometimes without following the right procedures).

In my small office alone, I could have an additional 100 foreclosure cases in a month or less if I could afford to work for free (keep in mind that small law offices are just like any other small business, with salaries, rent, insurances, and other expenses to pay).

Unfortunately, there appears to be no answer in the near future;. it is a sign of the times.

Author's Copyright, by Richard I. Isacoff, Esq, August 2009

www.isacofflaw.com

rii@isacofflaw.com

Get Protection from Creditors - But Wait, There's More!

"Protection from creditors" - just a euphemism for Bankruptcy? No, it is what filing Bankruptcy is and does. There are no more Debtors' prisons and no one has to walk around with a big scarlet "B" on his/her chest. Fine!, but what really happens, and who can file for protection? Before going any further, filing Bankruptcy WILL NOT force you to lose your house or car. In fact, it may help you to keep them.

My post of Monday July 27th discussed the need for completing a full personal budget for you and your family (if there is one to consider). Again, make a list of ALL regular living expenses, including cigarettes, gasoline, socks...EVERYTHING EXCEPT UNSECURED DEBT like credit cards and personal loans (Beneficial, CitiFinancial, HFC/HSBC etc. Then figure out your regular monthly income, including OT you ALWAYS get, bonuses you ALWAYS get, child support/alimony, pension, steady part-time jobs etc. then deduct all payroll taxes and insurance costs to get a net income. Next, if you are paid every 2 weeks, multiply the NET INCOME by 26 and divide that result by 12 to get a net monthly income.

THE MOMENT OF TRUTH - deduct your regular monthly expenses from your regular monthly income.If you have money remaining, is it enough to pay all of the minimum payments PLUS 1% of the principal for each card/debt? If the answer is yes, start by making a real month by month budget and start paying down each debt every month. Be sure to be on time, and that means the payments have to be in the mail at least 7 days before they are due, or 10 days before the start of the next billing cycle.

If you cannot make the payments and meet your expenses, then consider a bankruptcy consultation with an experienced Bankruptcy Attorney. You can find one on the web by going to www.nacba.org , which is the site for the National Association of Consumer Bankruptcy Attorneys, or by e-mailing me and we will get you a referral.

Bankruptcy is a RIGHT, not a privilege. The laws and rules are "spelled out" in Title 11 of the U.S. Code. It states clearly in Congressional intent and is sen again and again in cases, that the purpose of the Bankruptcy laws is to give Debtors, who cannot repay their debts, a "FRESH START". It is not punitive - it is a RIGHT.

For consumers, there are 2 sections of the Code that apply: Chapter 13, which is a way for people who have some money left over at the end of the month to repay a percentage of what they owe, be it 5%, 10% or 100%. The repayment period is up to 5 years, and the 30% interest rates stop immediately; and Chapter 7, where the consumer/debtor cannot make ANY payments for a 36 month period, or the amount of the payments would be so insignificant that the consumer really should keep the funds for emergencies.

Most good Bankruptcy lawyers will not charge for the initial consultation which is where she/he will help you determine if a Bankruptcy is the correct financial decision for you. The rules for filing are not that difficult to understand and the next Post will go into the details.

Author's Copyright by Richard I. Isacoff, Esq., July 2009
www.isacofflaw.com
rii@isacofflaw.com

Credit Card Rules - Explained (sort of). What to Do Until Then

On June 11, 2009, I wrote extensively about the new credit card laws - the ones that do us no good at the moment but might as the varied effective dates arrive.

Attached/Linked title of this posting, and again at the end of this entry, is a video that goes through the major points of the new rules.

None of the rules will erase any debt that has already been incurred, regardless of how unfair the borrower believes the debt to be. Interest rates jumping to 30% , late fees of $39 on a balance of $100 with a report of late payments (over 30 days) to the credit agencies, with, of course the accompanying rate increase, and perhaps the most difficult for regular card users, the arbitrary elimination of the available credit/decrease in credit line, without warning or apparent reason.

The 2 real banks, and the 1 "investment bank" (see last post for that definition) that had record profits, Bank of America, CitiBank/CitiGroup, and Goldman Sachs respectively, are the worst offenders. Yesterday, in the Sunday edition of the New York Times, there was a story by David Streitfeld dealing with Bank of America specifically, but the industry in general. In it he describes a woman who could not keep up with the higher and higher interest rates being charged. After pleading with Bank of America to lower the interest rate on her account without success, she just stopped paying her monthly bill. A wise decision? - probably not! - except in this case it was born out of desperation. The result: Bank of America called her with "deals" so she could afford her payments.

Look at the video - read the article in the Times and think about your position. Are you able to go without Credit Cards? Can you pay the minimum payments PLUS 1% of the balance owed to lower the principal and actually pay down the debt? If you can, then you may be able to get out of debt.

Factor in all of your debt - especially the credit cards. IMPORTANT!! - Put together an accurate list of your regular monthly living expenses. Include such things as cigarettes (if you smoke), a reasonable amount for food, eating out if it's unavoidable, enough for gasoline and a monthly budget for car repairs (during the entire year), all of your insurances, clothing (include shoes and underwear), income taxes expected to be paid over and above payroll deductions, student loans, cell phone, cable, Internet, utilities, rent/mortgage, and everything else that you really need to spend or save for each and every month. After all of that, can you pay the minimum PLUS at least 1% of the outstanding balance on all debts, whether each is a credit card, a personal loan from CitiFinancial/HFC,HSBC,Beneficial, or from anywhere else.

If after doing that budget exercise you can make the payments GREAT!! Do not be late on one payment or your plan might become dust in the wind. BUT try. If you cannot, seek financial counseling - not from a TV advertiser promising to reduce your debt to "pennies on the dollar" for a mere $XXXX.XX per month and a non-refundable processing fee of $XXX.XX

Author's Copyright by Richard I. Isacoff, Esq, July 2009
http://www.isacofflaw.com/
rii@isacofflaw.com

http://video.nytimes.com/video/2009/05/19/your-money/1194840368370/guide-to-new-credit-card-rules.html

They're Back!!! (With a Vengence)

Our favorite charities are back in business, but this time not asking for handouts - just taking the money from us. CitiBank/CitiFinancial/CitiGroup (well, you get the idea), Bank of America, JPMorgan Chase, Goldman Sachs, Smith Barney (whatever the full name is now), and a cast of other "BANKS", reported huge profits for the 2nd quarter or 2009. That must mean that the financial crisis that threatened life on the planet is now past! Well, yes and no or maybe, but we are not at all certain yet.

It is true that there were record earnings at some of these banks and they all did great, but it is where that got there profits that is disturbing, more so than the fact that after pleading for a bailout, they are ready to give out huge bonuses again. Little of the profits came from "banking" as consumers and small to mid-size businesses understand the term. Bank of America and CitiXxx had huge one-time profits from the sale of assets and from "investment banking". Ah ha you say - "banking is how they made money"! Not so quick grasshopper.

"Investment banking" is to "banking" (as most of us understand the word) as Burger King(R) is to a cooking a barbecued hamburger in your back yard. Char-broiled but to a different scale. Buying and selling securities, selling short, trading in commodities, dealing in derivatives, buying other businesses - and selling its assets at a profit, is what investment banking is. Making loans to small and mid-size business, or to people (unclean) is what it IS NOT.

Keep in mind that Goldman Sachs was one of the top firms that put mortgage loans into packages (securitization) and sold them at huge profits. When the value of mortgage-backed securities (MBS) began to crash Goldman "sold short. They "gambled" that the price would go down FAST and that they would fill the order to sell MBSs at the lower price. They made a small fortune while the rest of us lost millions in our 401Ks, IRAs, and had all credit stopped.

So, almost none of the money received from the government and from other financial incentives given during the crisis, went to new home mortgages, was used to modify existing mortgages to stop foreclosures, was used to keep the "mom-and pop shops" in business, or was loaned to small and mid-size firms to help them through the cycle so they would not have to lay-off 50% of their staffs, creating a nearly 10% unemployment rate. The rate of job losses is slowing, but still increasing in numbers.

The promised home loan modification process is not yet functioning. Mortgage modifications are more difficult to get than they were a month ago. Businesses keep laying-off workers because they have no business because other companies have had to minimize operations and they have reduced staff which has caused more foreclosures which has killed the building trades which has caused bankruptcies which has prevented many companies from being paid which has...

There are those economists and financial types who say now - "see, the free-market system is working". They were many of the same experts who cried foul at the bailout of AIG and Bank of America and Citi. The "free-market system" needed some help because of the lack of regulation in the late '90s and through 2007 that led to the crash from which we are trying to recover.

We have reached the point that we now know you cannot put CheezeWiz(R) back into the can.

Author's Copyright by Richard I. Isacoff, Esq., July 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Where Do We Go From Here - Bankruptcy?

Regulatory reform is upon us. Congress and the White House have signed into law legislation that should revamp the entire structure of banking and financial institution oversight. The "watchers", auditors and guardians of the economy now have a veritable arsenal to be sure we do not have another meltdown. In the meantime, what do we do to improve the situation as it effects each of us?

There are really three primary groups of people who have to deal with the economic "Katrina" we have just gone through - at least as far as the eye of the storm: 1. Those who had nothing to lose and now have nothing to fall back on and may not even be able to get satisfactory employment; 2. The wealthy who managed not to lose everything and can rebuild without a significant change in lifestyle, except for the new Benz and 4 weeks in New Zealand this year; and 3. Everyone else - struggling to make ends meet and to plan for retirement (now put off until 70 to 75 by many).

This post will try to assist the last group - those working, maybe 2 jobs, or in a family where both spouses are employed (at least for the time being). Next time, we will deal with the 1st group

The new credit card laws (see June 11, 2009 Posting) will help keep credit costs down IN THE FUTURE, but will have little effect on current debt service (monthly payments). The result of legislation, reaction by card issuers, may also severely restrict the issuance of new cards and has already cut credit limits by as much as 75% and in some cases totally. It was never a good idea to play musical cards and hope that there never was a last card, but many of us did just that. Guess what? There is a last card and we already have it!

More startling however, is a study released June 4th, done by Harvard with some top notch doctors lawyers and economists, including Elizabeth Warren, Chair of the TARP oversight committee, that determined that from 2001 to 2007, there was a 50% increase in Bankruptcy filings due to medical expenses/emergencies. In 2007, it's reported that in 62.1% of the Bankruptcies filed, medical expenses/problems contributed significantly to the need to seek Court protection. In many of these cases credit cards were used to fund the expense - in others, hospitals' and other health care providers' bills have gone unpaid and built-up that 62.1% figure.

Surprisingly, or maybe not, 77.9%, more than 3/4 of those filing because of medical issues, had health insurance at the start of the bankrupting illness. Co-pays, deductibles, non-covered procedures, and uninsured hospital stays contributed to the result.
Most of those filing bankruptcy for these reasons where homeowners (2/3) and 60% had gone to college.

Did the bankruptcy make sense? Did it fix the problem? Did the people filing for Bankruptcy protection find relief, financial and "peace-of mind"? MAYBE.

The next posts will deal (short and sweet) with the Bankruptcy process - its good and the bad, but most of all what it is, how it is done, and what it is not. As a beginning, it must be understood that filing Bankruptcy, called filing for protection from creditors, is a right, not a privilege. The law is contained in Title 11 of the U.S. Code. The effect of the filing is Debt Relief. Interestingly, when people income file taxes, few pay the maximum amount on their gross income. Normally, deductions are taken for mortgage interest, medical expenses, child care etc, or the standard deduction is used. This is called Tax Relief. The IRS Code is Title 26 of the U.S. Code.

For some reason everyone is proud to use the Tax Code to minimize what they have to pay to the Government, yet people are still ashamed of filing for Debt Relief under the Bankruptcy laws. Tax Relief - Title 26; Debt Relief Title 11. They are both Federal law and they are both there to give guidance and assistance to taxpayers/consumers. Sure, with the IRS Code the government wants money and with the Bankruptcy Code, debtors are relieved of the obligation to pay money, including certain taxes. Look, a Federal Law is a Federal Law and Bankruptcy is not a four (4) letter word.
Author's Copyright by Richard I. Isacoff, Esq, June 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Credit Card Laws - Sweeping Changes

The predictions of a difficult passage for the new Credit Card Legislation proved to be wrong. Congress, both the House and the Senate, fought back attempts by the finance industry to kill the Bill that will vastly alter the landscape of Credit Card issuance and cost to borrowers/users.

The formal name of the new law is the "Credit Card Accountability Responsibility and Disclosure Act of 2009"or the "Credit CARD Act of 2009" (note - the capitalized "CARD" is part of the actual name) Perhaps another, equally appropriate name would be the "Consumers Attempt at Revenge by Dodd Act of 2009". (Senator Christopher Dodd (D. CT) was the Senate’s primary sponsor and "pusher" of the bill.)

The details of the new law, known as Public Law No. 111-24, are yet to be finalized, as regulations have to be promulgated by various Federal agencies, but the main provisions are truly sweeping. Before briefly discussing each change or addition to the existing laws/rules, it must be noted that the Credit Card industry won one major battle. The original bills in the Senate and the House set an interest rate cap of 15% on any credit card. That provision never made it to a final vote. The industry Lobby made it clear to Congress that it would not permit such a cap on interest rates. In a compromise to get the rest of the improvements in the law passed and signed by the President (which he did on May 22, 2009), Congress dropped a cap on rates altogether.

Here are the primary provisions of the CARD Act of 2009: (Most of the "new" law is a change to the Truth In Lending Act")

1. There cannot be any more interest increases because your payment is received a day or two after the due date. Further, the increase in rate can only apply to FUTURE uses of the card - new purchases, advances etc. The balance owed at the time of the increase in the rate can only be charged the rate in effect before the change.

2. If there will be an increase for being late, you must be 60 days late, unless there are other issues involved. (The law gives the credit card issuer the right to raise a rate for future use of the card because of factors such as increased risk etc.) Even here however, the change applies to new balances only and there must be the new notice given.

3. Rate increases, in general, must be preceded by a 45 day notice and can apply only to FUTURE balances. It is important to note that the non-retroactivity of increases in rates applies here also.

4. If there is going to be a rate change, other than a change due to your card having a variable interest rate that goes up or down based on an index like the prime interest rate, or the U.S. Treasury rate etc, you MUST receive at least 45 days notice.

5. One major change is that if you or the credit card issuer terminates the card account, you MUST be given an amortization period of at least five (5) year to pay the outstanding balance OR you cannot be charged more than twice the regular minimum monthly payment. You cannot be forced to pay off the balance in a lump sum.

6. Unless you get a low introductory rate (teaser rate), there can be no interest rate increase for the first year. The exception is if you pay more than 60 days late.

7. The monthly interest/finance charge can not be calculated using the prior month’s balance if there has been a payment on that balance before the new statement date. That is a major change as many companies computed interest against balances that had been paid-off during the month.

8. No fee can be charged for going over your credit limit unless you specifically, and in writing, permit the card company to allow charges over your limit. Further, if there is a fee, you can only be charged once in the current billing cycle. So, if you go over limit 4 times during the month, you can only be charged one over-limit penalty fee.

9. If you pay by telephone or over the internet, you cannot be charged a service fee unless the company expedites the payment for you. So, if the payment is normally credited the next day if received after 2pm, but if you pay by a check by phone at 4pm and get the payment credited to your account that day, you can be charged a reasonable service fee.

10. When you make a payment more than the minimum amount due, all amounts over the minimum must be applied to the highest interest rate items in your balance. A simple example: you owe $1,500 for purchases which has an interest rate of 10%, and you owe $1,000 for a cash advance with an interest rate of 15%. You have a minimum payment due of $50, but you pay $200. After applying the $50 minimum payment amount in whatever way the company and you "agreed to" in the "contract", the rest of the payment, the remaining $150, goes to pay down the cash advance because the interest rate being charged is higher than for the purchases.

11 Your statements will be different. Every statement must show the current balance and the interest rate being charged for each type of card use (cash advance, purchase etc). Further an most important, the statement must illustrate how long it will take to payoff your actual balance assuming you make only the minimum payments and what the total cost in interest will be. The same document only also show how much interest you would pay in total if you pay off the card in 36 months (both assume no further card use)

12. Any one under age 21 must have a parent, guardian etc co-sign for him/her unless the under-age person can demonstrate with proper financial disclosures, that he/she has the ability to pay the debt that may be incurred by him/her-self.

As with all laws, the devil is in the details. Here, the details will be set by the Federal Reserve Board which will enact regulations to "fill in the holes", provide definitions like what is the proper financial statements for under 21 borrowers, and what the new statement should look like, and what rules have to be in place for the "reasonableness" of all fees etc.

Finally, certain provisions take effect on 90 days, some in 9 months and some 9 months after the rules are made which has to be done within 15 months. In general ALL of the provisions requiring new notices become effective at the end of August 2009. The others ... hopefully we will have firm dates in the near future.

Author's Copyright by Richard I. Isacoff, Esq., June, 2009

http://www.isacofflaw.com/

rii@isacofflaw.com

Buying at Foreclosure May Be Less Than You "Bargained For"

With the rise in foreclosures and the resultant drop in real estate prices, coupled with the lower interest rates available for "qualified" borrowers, an increasing number of people are buying property at foreclosure sales. The idea is to purchase a house at the "distress" sale price, and end up with a bargain.

As in any other business transaction there are issues that must be considered, aside from the matter of having financing/available funds ready at the time of the foreclosure sale. Some can turn what seems like a "great deal" into a nightmare. For instance:

1. There are no guarantees or warranties that accompany the house. You buy what you see - no more, no less. Further, there is no obligation on the part of the foreclosing party or the auctioneer to point out flaws or defects with the property

2. It is imperative to have an attorney or title company (depending on the state where the property is) check the land records to determine if the foreclosing entity has good title through its sale. In essence, can the company legally foreclose?

3. Getting financing BEFORE the auction is critical. You will have to place a rather large deposit in order to be a successful bidder, and that IS NOT refundable because you discover, later, that you cannot obtain a loan. How can this be done? One way is for you to have your local bank view the property with you. You will have to get an appraisal from a company approved by the bank, and have the full title report available. In addition, it would be wise to get a home inspection - obviously this is not possible if the house is occupied.

4. If the house is occupied by the owners or tenants at the time of the sale, once you buy it it is YOUR responsibility to have the tenants or former owners (who have just become tenants) leave the property. This might well mean eviction, a process that can take, without any major fighting,3 months. With arguments and the tenants trying to stretch out the time they have before they have to vacate, you might not get possession for 6 months.

5. Consider an alternative to buying at the foreclosure sale. You can contact the owner, or the realtor who might be trying to sell the house pre-foreclosure, as make your offer. If it is less than the amount owed, typical in most foreclosures, you might suggest that you want to make an offer directly to the lender for a "short sale". This is where the lender takes a loss, but gets rid of the house. Keep in mind that the lender will have to pay at least 15% of the balance owed, just to foreclose - and then it has to pay taxes, maintain the house, market the house for sale etc. This way you can get an inspection, have time to get financing, and not have to evict the owners because they will leave by agreement when you buy the house.

Last - let the buyer beware

Author's Copyright by Richard I. Isacoff, Esq., June 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Foreclosures Skyrocket - Help Doesn't

(NOTE: For reasons that are obvious to most of us, the majority of the financial information published, in print or by broadcast, has been about the economy in general, the mortgage crisis and the "fix" to it, the looming credit card disaster, or the stock market's on-going saga. Consequently, nearly all of the postings to deal with these issues. Other legal matters have not been forgotten)

We have all heard about the various federal plans to help homeowners keep their homes. Unfortunately, nearly all of the programs have had little impact to date, which has left borrowers who are in trouble at the mercy of the lenders/mortgage companies or the manager of the mortgage backed security ("MBS") that really owns the mortgage.

According to an article in the New York Times, published on May 14th, 55,000 homeowners have signed for assistance with one of the federal mortgage-relief programs. At first glance that may seem like a good response. Put into perspective though, in April there were 342,000 foreclosures. The point? The programs are not working. (see the chart from the New York Times above)

The Senate, without any support for the Senate Bill 61 from the White House to pass it, voted down legislation that would have made the mortgage lenders and the MBS managers pay attention and try to fix this country's biggest economic problem. The Bill would have given Bankruptcy judges the power to modify loans that were deemed unfair and predatory in nature. Lenders would have had to compromise or face the Courts. The Banking lobby killed it.

As long as the housing market continues to slide, and as long as foreclosures continue to climb, we will not see a major recovery in the general economy. One might argue that it is the 650,000 lost jobs last month that is the root cause of the recession (5,000,000+ jobs lost in the past 8 months). BUT, the crisis started when the mortgage market collapsed, loans that people could not afford adjusted, and the MBS that were being held nationally and internationally became worthless overnight. The MBS and CMBS (Commercial Mortgage Backed Securities), both of which are derivatives, represented trillions of dollars - yet the downfall of one "Bank", Lehman Brothers, began the chain reaction that has brought us to our knees.

There is little that can be done on the national political level, except for writing our elected representatives and asking that work for their constituents instead of the lobbyists. However, there are other steps that can be taken to help stricken borrowers.

The New York Federal Reserve Bank and the New York City Bar Assn. have set up a program to train lawyers to help victims of predatory lending practices, or the economy as it relates to home mortgages. The courses, offered at no cost to the participants provided each takes at least one pro bono (no fee based on the homeowners financial hardship) case in the next 12 months, will give the attorneys the knowledge to review all phases of the loan transaction to determine if the Lender/Broker/Originator took advantage of the Borrower, or if the Servicer is now committing violations of the Federal or State rules regarding collections, notices, foreclosure procedures, etc.

In Massachusetts, The Boston Bar Association has run similar type training, although not as comprehensive, as has The Mass Fair Housing Association in conjunction with the Hampden County Bar Assn ( western Mass) Foreclosure Task Force. Further, attorneys with experience in the field are handling those cases which come to them either on a pro bono basis, or if the borrower can pay, for a fee based on the ability to pay. The idea here is to do as much as we can to save houses.

At any given time, I have 5-8 predatory lending/hardship cases in process. The results are good so far, but each case takes a great deal of time, mainly on the telephone, on hold (listening to bad music). Each Lender and Servicer has different procedures that have to be followed; that is easy once you know what they are. The biggest issue is speaking to someone, on behalf of my client(s), who can make a decision or at least refer me to someone else who can do so. When I am doing a training course, I caution attorneys to just try to get their client(s) back to the place that the client really bargained for, and to have the attorney's fees paid by the Lender; not to try to get a big judgement against the Lender etc. The goal is to stop foreclosures and keep homes.

For example, I have a couple who Borrowed from Wells Fargo through a Broker, Direct Finance, whose representative (originator) promised a $1,200 per month payment, matching the existing loan. My clients were getting cash out of the closing to payoff credit card and medical debt. The closing where my clients actually signed all of the paperwork was a farce. The attorney that actually was the settlement agent (closing attorney - all of whom represent the Lender technically) was filling in for the Lender because the attorney that was supposed to do the work had a conflict in his schedule. The closing lasted 15-20 minutes. There was no way that the attorney could explain all of the documents and the terms of the loan to the borrowers in that time. In fact, the borrowers, my clients now, were just given paper after paper to sign - the attorney had another appointment.

When my clients finally received documents with the actual figures on them, the payment was $1,900 per month PLUS taxes and insurance, for a total of $2,200. This was $1,000 above what had been promised. My clients had been told that the rate would drop from the 7.75% they had, to 5.75 % which would make up the difference for the "cash out" portion of the refinance. Further, the Originator cannot be found - by me, the Broker, or the Lender. However he did the same thing, working for a different broker, to a couple to which he was referred by my clients. This indicates that there was a pattern and practice of fraud and deceit, at least by the originator and quite possibly by the Broker.

My sole job in the matter above is to make a deal so my clients can keep their home. We are not asking for punitive damages, or compensation for the stress, anxiety and "conscious suffering" my clients have been enduring since receiving a foreclosure notice. e simply want was my clients thought they were "buying", and my fees which a nominal in the context of the loan itself and the Lender's attorneys' fees.

If you are facing a foreclosure and the reason is not simply that you haven't paid the mortgage company, but could have, but is because of irregularities in the lending process or what you believe were problems, contact your State or local bar association for a referral to an attorney who is handling these type of cases. If you cannot find an attorney, feel free to contact us at the email address below, and we will try to get you a referral to competent counsel

Author's Copyright by Richard I. Isacoff, Esq., May 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

Who To Trust - Federal Judges or Wall Street

THIS IS A RE-POSTING OF THE MARCH 18TH ENTRY DUE TO THE RECENT SENATE VOTE

The United States Senate has referred the one bill, S. 61, that could break the log jam of mortgages tied up in "TOXIC ASSETS" to "Committee" for review and reconciliation with the House version. The short version of the bill is that it would give Bankruptcy Court judges the power to modify residential home mortgages. The homeowner/debtor would have to prove that the loan was patently unfair, that the lender/broker/originator used Unfair and Deceptive Trade Practices, or that the borrower never received the proper documentation to know what product he/she was buying. The assignment to the committee will assure that there will be a delay in getting the bill to the full Senate for a vote. Keep in mind that the House of Representatives has already voted favorably on giving the judges the powers needed.

Unfairness? Didn't the borrower read the documents before signing them, and if he/she/they did not understand everything fully was the closing attorney asked for information or clarification? Unfortunately, many of the closings were done without any attorney present - representing the lender or the borrower. Just a notary was there to be certain the all of the right places were signed and that there was proof the the person(s) at the closing were in fact the person(s) borrowing the money. These are called "Witness Only Closings" and were commonplace during the boom years from 2004-early 2008.

Real Example: clients came into my office Monday ready to file a Chapter 13 Bankruptcy to save their home. The documents they brought, although unsigned, told the story of how a $1,326 monthly payment grew to nearly $2,300. They had contacted a broker who had helped them, in an earlier transaction, with a major lender. Because of the prior experience, the borrowers trusted that the closing would be okay. The entire transaction took less than 20 minute for a full mortgage refinance, and that was at a local sandwich and ice cream restaurant. Virtually nothing was explained despite questions from the borrowers.

I can state from doing hundreds of closings that an attorney cannot explain all of the documents, including mortgage, mortgage note, HUD-1 Statement, Truth-in Lending, Good Faith Estimate, and all of the other disclosure required by state and federal laws in an hour; not in 20 minutes less the time to be seated. This closing went so fast that no one even ordered a coffee. What is worse is that the loan was not a common loan.

The borrowers were told that they were getting a loan with a fixed payment for 2 years, and that after two years the rate would change periodically. They were not told that the loan was an "Interest Only" loan for the first five (5) years, so that none of the payments made during that time would be applied to principal - the amount borrowed. Further, they were not told nor were the papers explained to them, that the interest rate could move up as much as three percent (3%) at the end of the first two (2) years. It could not go down regardless of the market. Nor did they comprehend that after the first two (2) year period, the rate would be adjusted every six (6) months.

It was only after receiving the first bill from the lender that they found out that there would be a tax escrow in excess of $300 each month. They thought that the taxes were included in the $1,326 amount. Instead of paying $1,326 they paid $1,626. At the end of the two (2) years, though they had been promises that they could refinance as they were getting this great loan, the payments increased to $1,700+ without the $300 tax escrow. They were now paying $674 per month more than they had been led to believe they would pay.

The loan provisions, Fixed Rate for the first two (2) years and then variable/adjustable for the next twenty-eight (28),, is a common product. The interest only feature is rare for middle, middle class borrowers. Combining the 2/28 fixed/adjustable structure and coupling it with a five (5) year interest only provision, and NOT EXPLAINING it to the borrowers is why we have the mess we do.

The above real-life, in my office example, is the reason that the Judges have to be given the power to modify bad loans. They can eliminate the excuse/reason too often given that "it's not allowed in the contract... yeah, the one the Wall street guys made for us.

Author's Copyright by Richard I. Isacoff, Esq., March, 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Senate Votes Against Homeowners' Rights

Photo from Article by By Mike Lillis in the Washington Independant

What could have been the best and least costly way to fix the housing market and to save countless homes from foreclosure has been snatched away. A piece of legislation that had become known as "The Durbin Bill", actually Senate Bill 61 which was sponsored and championed by Sen. Richard Durbin, has all but been permanently defeated when only 45 Senators voted to end a filibuster on the bill this past Wednesday (Note: A filibuster is a procedural rule that allows the opposition to proposed legislation to prevent it from being voted upon, by continuing the debate forever. It takes 60 senators to end the filibuster and stop the delay).

The bill, following the House or Representatives' lead, would have given Federal Bankruptcy Judges the authority to modify unfair primary residence first mortgages. First, it must be stated that the Judges have the authority and use it every day on almost every other type of loan. Sometimes the Lender is happy because the Judge will not modify the loan, and sometimes the borrower is happy because needed relief is okayed by the Court. Why then has this proposal brought about such intense debate and one of the most "gloves off" lobbying effort in a long time?

The simple answer is greed, but that does not really explain the full picture. Having worked in the Banking industry, as a banker, regulatory enforcer, and part-time lobbyist, I can attest to the power of the banking and finance lobbies. Why would this sector of the economy which has received billions of dollars, in fact, a trillion dollars, oppose the ability of a Federal Bankruptcy Judge to modify an unfair home mortgage? The explanation lies in the nature of home mortgages in today's financial market and in the new definition of a "Bank". The "banking" industry includes companies like Goldman Sachs, which do not make consumer loans, do not take deposits, do not have checking accounts, do not have ATMs, do not have branches, and do not have customers/depositors, except those few customers who buy SECURITIES. These so-called banks are really securities firms which put pools of mortgages together and sell them to pension plans, large companies, mutual funds etc.

Earlier posts have discussed the securitization of home mortgages into a type of derivative called mortgage backed securities. This pooling of hundreds of millions of dollars of mortgages into packages has caused them to cease being a loan from a bank to a homeowner, and to become a source of income, each mortgage contributing its fair share, for investors who bought not the mortgages, but the right to receive income from the pool of mortgages, the Mortgage-Backed Security (we will refer to these as MBS for the rest of this post).

The argument runs like this: Because the rate of defaults has risen well above predictions, the flow of cash is threatened to a point where the investors may not get what they "were promised"when they paid for their fractional share/piece of the MBS. It is critical to keep in mind at all times when thinking about this issue that the MORTGAGE as we think about it HAS CEASED TO EXIST for the purposes of the investment MBS.

The investors in the securities called MBS,do not want to have the value of their investment decreased. If enough mortgages in the package have the terms changed to lower the payments, the entire package will pay less than expected/promised, and therefore the entire package will be worth less than the investors paid for it. Also, we are referring to a pooling of mortgages where each pool might be $500,000,000 (1/2 billion dollars) or more. The financial stakes are enormous. This in fact is why the term "toxic assets" sprung up - toxic because they would harm or kill the value of the MBS AND no one knew to what value. Therefore the assumption was that they were worth nothing, or close to it.

Okay. So what does that have to do with the Durbin Bill to allow Bankruptcy Judges to change terms? EVERYTHING! If a borrower obtained a loan that had an interest rate which was at the market rate of maybe a bit higher, and it was an Adjustable Rate Mortgage (ARM) where after two years the rate would go up and where the loan could never go down below the original rate, the mortgage could be sold at a premium even if, in reality, it cheated the borrower who never was told about the rate increases. By allowing a Judge to determine that the mortgage was sold to the borrower under false pretenses, and misrepresentations, and therefore permitting the Judge to CHANGE/LOWER the interest rate, the owners of the MBS that owned the loan would lose, as explained above.

Again, if a Judge can state that a loan was unfair, and that the lender cheated the borrower, and therefore the terms have to be changed to make the mortgage fair, the entire structure of the MBS falls apart. If that happens, the "banks" who own them or have sold them, lose millions of dollars. This is because no one knows what the end rates will be or the amount of income any loan will pay, because a Judge could change it. There is NO CONCERN about the family, losing its home and being evicted because they were tricked into taking a loan with a moderate interest rate, not realizing that it would go up after 2 years by 3%, and then adjust every 6 months thereafter. The variations on the theme of bad loans have been discussed in earlier posts ( see the following postings: 3/18, 3/7, 2/21, 1/29, 1/3)

The "banking industry" lobbied the Senate not to allow Judges to make the determination that the loan is unfair. The attitude is that a borrower should have known better; that once you make a deal you MUST live with it, even if you were misled, lied to, cheated etc. What is lobbying? In its nice form it is just talking to members of Congress and expressing the opinion of the lobbyists client. In it TRUE form, it is pressuring Congress on a member by member basis to vote the way the Lobbyist/persuader wants by some of the following: threatening to move a large banking operation to another state; threatening to make no more campaign contributions if the vote isn't the "right" vote; threatening to support the Senator's/Congressman's opponent; threatening to pay for ads like the "Swift Boat" ads that hurt Sen. Kerry's presidential campaign; AND flat out bribery - money, houses, trips to where ever etc.

There are other players as well, like the companies that "RATE" the MBS, in a sense "kick the tires" to see how solid the investment really is. The companies have huge amounts of liability if the rating of the MBS market has been a sham. The stakes are huge -Billions of dollars for the investors,"banks", and the rating agencies!. Motive? "YOU BETCHA!" (thank you Governor Palin for the words to use)

Author's Copyright by Richard I. Isacoff, Esq, May, 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Recession: What To Do While It's Here

The Recession is showing signs of lessening. The Recession will continue into 2010. The recovery from the Recession will be the steep upward move that the economy went down, like a "V". The recovery will be longer because it won't be a "V" but a "U". Doesn't anyone know - The President; the head of the Treasury; the Chairman of the Federal Reserve; your brother's wife's third cousin who delivers the Wall Street Journal?

What should you do if you have debt problems, or have a mortgage that has adjusted up in rate and cannot afford the new payments or have a credit card or two that has increased your rate from 6.99% to 15.99% (you were 1 day late and paid the $39 late fee) but Lawrence Bossidy, former CEO of Honeywell, says he has no concern about people who make a contract and won't stick by their agreement?

Here are some suggestions that might help you out of the money bind:

1. Ignore the headlines - no one knows when the Recession will end or how fast the recovery will be. Rather than panicing and then fainting, read the whole article - more than one. Try to get a balanced perspective on whatever the front page big bold type means by checking at least several sources.

2. If you listen to a business channel(s) compare and contrast several opinions and several channels

3. Prepare a realistic monthly budget for you and your family. Determine how much income you have left (if any) after regular monthly expenses - without and with debt service.

4. How much of a reserve do you have for emergencies, like a temporary job loss. You should have at least 3 months and really at least 6 months

5. If your mortgage is an Adjustable or Variable Rate Mortgage ("ARM"), can you afford the payment if the rate goes up the maximum permitted when the rate changes? If not, you should start trying to contact your lender. Most of the Federal Programs that are in place are NOT for delinquent borrowers, but are for those who might fall behind unless . . .

6. Credit Cards: Pay down as many as possible. If that is not realistic, pay $25 more than the minimum payment on each. Be sure to ail your payment at least 7 days before it is due. It is critical that you are not 1 day late. You rate will skyrocket and you will have the privilege of paying $39 as a reminder

7. Credit Cards: Don't keep moving balances to get a lower rate. If you have a very high rate card, move that balance as a transfer to a new card AND CLOSE THE OLD ONE. Again, do not be 1 day late in your payment or you will be back into double digit rates.

Do not wait for the GOVERNMENT to help. The Senate has all but killed the chance that the House-passed amendment to the Bankruptcy Law, which would allow Bankruptcy (Federal) Judges to modify home mortgages, will ever become law. This was due to intensive lobbying by the banking and finance industry. The same fate awaits the Consumer Credit Card reforms the House just passed by more than 4 to 1 ( see the next post for details on both)

Author's Copyright by Richard I. Isacoff, Esq, May 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Money For Foreclosure Relief: An Expensive Fiction

An Associated Press story in the New York Times on April 16, 2006 headlines "SIX LENDERS TO GET HOME LOAN AID", specifying in the body of the story that the recipients of the $9.9 billion are JPMorgan Chase, Wells Fargo & Co, GMAC Mortgage (which owns the Ditech entity), CitiMortgage, Select Portfolio Servicing, and Saxon Mortgage.

A FRONT PAGE story in the Wall Street Journal the day before read "BANKS RAMP UP FORECLOSURES". Guess who this article refers to as "ramping up": JPMorgan Chase, Wells Fargo, and FannieMae and FreddieMac. Citigroup stated that it had stopped foreclosures until March 12th at the request of the Obama administration but has gone back to business as usual. If a borrower is a "good candidate" for a modification as determined by CitiGroup, which means that it must own the loan - no securitization - it will wait and see what happens. GMAC too had stopped actions at the Administration's request, is back foreclosing. It stated that 10% of the mortgages in some state of foreclosure may be eligible for a federal program.

It seems that the government is rewarding lenders to foreclose. They are giving additional $$billions to the same companies that are not using the funds to help homeowners, but rather are using the funds to beef-up their balance sheets. It is not even being done under the guise of some Federal program like "HOPE NOW", which has had little impact on solving the problem, but at least gives the aura of respectability. One can at perhaps admire the honesty of these companies which do what they want, with seeming impunity. Select Portfolio and Saxon Mortgage are two of the most difficult entities with which to deal. Wells Fargo, while professing to be helpful is a throw-back to the old joke about banks lending you money when you don't need it - the have taken that addage to heart with mortgage bailouts.

Why is this issue being dealt with here, where the posting have tried to educate and explain? Because this is an education also. The much publicized "homeowner relief plan" was just for PR. If you have a home in danger of foreclosure, DO NOT WAIT for the government to help you. Assume that money is being spent, but more likely than not, to pay for the deficiency balance which remains after a family is evicted from their home which just went through foreclosure, fetching 60%-70% of the outstanding balance of the mortgage. We cannot have the Banks losing any more money, can we?

Your best bet is to contact an attorney who has experience in debt counseling, foreclosure prevention, and depending on your situation, bankruptcy. A competent lawyer can answer your questions about your risk of losing your home and can suggest several courses of action which might bring you a good resolution. At least, you will have someone on your side!

Author's Copyright by Richard I. Isacoff, Esq., April 2009

http://www.isacofflaw.ccom/
rii@isacofflaw.com

How Money is Derived from Derivatives Called "Mortgage Backeds"

The Chart above shows how Mortgage Backed Securities "MBS" come into existence.
(Chart author/designer unknown)

Terms used - (Green = $$$):
a. Originator=Lender
b. Arranger=the "putter together" of the mortgages
c. Trust=Holder of the MBS money
d. AAA-Purple=the MBS itself
e. Investors= buyers of the
MBS/I.O.U.s
f. Manager= Loan servicer
g. Houses= collateral for the MBS)

Hopefully, you have some idea of what a "Derivative" is and that a "Credit Default Swap" is really a kind of "Derivative". Further, that "Mortgage Backed Securities" are just sophisticated I.O.Us, where the "Arrangers" of the MBS say to the investors (mutual funds, banks, of just retail investors) that the "Arranger" wants to borrow money and will pledge mortgages as collateral. But, rather than pledging a mortgage at a time, the creators group thousands together and sell them as one big I.O.U. The pieces may be $1,000, $10,000 or $10,ooo,ooo (Think of a large pie sliced into some large and some tiny pieces).

Here is a restatement of the past posts about these topics:

1. Thousands of mortgages are put together.

2. The creator of this pool of mortgages offers to sell the right to receive income from the pool at a pre-determined rate of interest.

3. An investor can buy up to 100% of the pool.

4. The investor will be paid interest on the amount of the pool he/she buys

5. No one actually is buying any of the mortgages that make up the Pool, just the right to receive income from the Pool, based on the average of the interest rate for all of the mortgages in the Pool, after all costs, losses, and profits are deducted

6. The creator of the Pool/Mortgage Backed Security will sell the investor the I.O.U. based not on the actual cash received from mortgage payments, but merely on his/her/its promise to pay. (It's not like all of the money gets collected and someone divides it up into a thousand or two thousand little piles).

7. In case all else fails, IN THEORY, there is collateral for the Creator of the Pool, not the investors. The collateral is the homes that are mortgaged. The Creator of the Pool can liquidate homes that are the collateral for the mortgages that default, and use that money to pay the investors each month.

8. The Creator/Seller of the MBS, is selling the right to receive an I.O.U. which pays interest to the "Buyer" of the I.O.U. (Investor) based on the hopeful profit from the mortgage payments.

THIS NEXT PIECE IS WHERE I MIGHT LOSE YOU (if I haven't already) - IF THAT HAPPENS, READ 1-8 AGAIN PLEASE!

9. The right of the Investor to receive the money for the I.O.U. is DERIVED from the Mortgage Backed Security, which has the right to collect money DERIVED from the underlying Mortgages, which is DERIVED from the Mortgagor's (the original borrower/homeowner) I.O.U. to the Bank/Lender. All of this is based on the sale value of the real estate that has been mortgaged by the Homeowner.

If you are still confused, refer to the chart at the top of the post. If you are still confused, join the ranks of MOST lawyers, accountants, stock brokers, and most of Congress.

The next post will deal with the Administration's first step to getting some of the BAILOUT mortgage money to regular homeowner-type people.

Author's Copyright (Text Only) by Richard I. Isacoff, Esq, April, 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

"Credit Default Swaps" - Insuring Against Oblivion

We were dealing the the issue of DERIVATIVES. Okay - So I put too much into the last posting. Let's start this one in the middle; without the preamble.

Let's get an example that most of us understand more easily - LIFE INSURANCE. When you buy a life insurance policy, you are betting an insurance company that you will die before you have paid more in premiums than the policy will pay to your beneficiaries. The Insurance Company takes the BET, because they know that on average, very few policy holders dies before either paying in more than the death benefit, or simply let the policy lapse after many years of paying. The insurance company, having hundreds of thousands,or millions of other people buying and dying, have sophisticated mathematicians (actuaries they are called) who prepare statistics on the probability of someone dying.

For example, if you are healthy and 30 years old, and do not race cars, and want to buy a $25,000 policy, the company will say "fine" and charge you a modest monthly premium. They can do this because they have statistical proof that very few 30 year old healthy people die. If you are 70, the chances of death before paying a lot of premiums is far greater, so the payments are much higher.

REGARDLESS OF THE SITUATION, YOU ARE BETTING THE COMPANY YOU WILL DIE WHILE YOU ARE INSURED AND BEFORE YOU HAVE PAID A FORTUNE, AND THEY ARE BETTING THAT YOU WON'T. That is gambling/betting/buying chances... The company can do this because they sell hundreds of thousands of policies and the statistics prove them right enough of the time. Basically, you and hundreds of thousands of others pay premiums, and the Insurance Company pays relatively few claims. They get to keep the profit!

To be certain that the Company has guessed correctly, it will bet another and bigger insurance company that the insurer might be wrong. The bigger company which has even more statistics takes the bet and collects easy money. It has bought a derivative - a bet not on the life of the insured, but a side bet on whether the first company will have to pay the claim. This second bet is DERIVED from the first bet -the insurance policy itself. It is equivalent to the bet on Tiger's golf game (see the prior post - great analogy & reading).

BUT, what would happen if a disease struck all of the 30-40 year olds and they died, leaving the older people only - the people who have less time to live (and pay premiums according to the math guys)? Easy - the company would not be able to pay all of the claims. The bigger company which had to pay the smaller company who issued the insurance policies might default. Both companies might go bankrupt. So, the bigger company bets with even bigger company etc. What happens is that there might be 7 bets that the 30-40 year olds will live long. If they don't, 7 companies have to pay and 7 companies might file bankruptcy.

Were any of the assumptions wrong? It was a first time event, all those young premium payers dying, but they did die. Would that make all policies bad? No. It does point out that betting that a mortgage will go bad (OKAY CALL IT INSURING AGAINST IT GOING BAD) or any other such bet is fraught with potential disastrous problems. The biggest of these is the fact that there could be 5,6,7 or 100 bets on that 30 year old's life or those mortgages.

With MBS, and the underlying mortgages, the type of Derivative is a CREDIT DEFAULT SWAP. It would be more accurate to it Credit Default Insurance, or (longer name here) "My BET that your loans will not default for which you pay me a lot of money." IT IS A SWAP OF RISK FOR MONEY. Nothing more -nothing less

How did we get here, and where do we go? (understand that there are more than $40 trillion in these Swaps and other Derivatives). The Final installment of the series will focus on how to keep the $40 trillion from wrecking (for real this time) the world economy

Author's Copyright by Richard I. Isacoff, Esq., March 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

The Real Toxic Assets - Derivatives (whatever they are)

This posting will begin a 3 part series, to be finished by week's end, where we try to make understandable the un-understandable. Obviously the topic continues to be the "Stimulus Package", TARP, TALF, and the latest entry into the lexicon of acronyms, the PPIFs. PPIF stands for "Public Private Investment Funds". These are going to be the repository of those evil and lurking "Toxic Assets".

(cartoon from The New York Times)

A short recap: - mortgages were sold that had the interest rate adjust ("ARMs"), on both prime and sub-prime borrowers, to the point that some homeowners could not pay the monthly payment. These, along with perfectly fine loans were then bundled together in $500,000,000 or larger pools, and sold to Wall Street firms which made them into saleable securities akin to a bond. They were then resold as investment quality bonds, in smaller pieces, to investors all over the Country and the world. After all, what could be safer than an investment, paying interest, that was backed by Home Mortgages. Everything was fine until the adjustments started to occur and delinquencies looked as if they would be greater than expected. The investments, Mortgage Backed Securities, "MBS", were no longer worth as much as everyone thought they were because of the fear of more defaults and foreclosures, so panic selling began, until no one would buy any of these MBSs. Because no one knew the exact value, IT WAS DECIDED, that the value would be ZERO, or something close to it and they became "Toxic Assets". (RECAP OVER)

The assets were no more toxic then than they were at the start. In reality, the true asset was the underlying collateral - home mortgages. How many would go to foreclosure and how much would be recovered was unknown, but there are a lot of percentages between 0% and 100% - none were used!! There were 2 hidden issues: 1. With the mortgages being bundled as MBSs and sold as bonds to investors (earlier posts please) no bank or lender or any one who sold them was at risk. The investors might lose some money, like they might on any corporate bond or a mutual fund, but the lenders were home free. 2. A little understood evil was waiting to steal the souls of all who succumbed to good interest rates - DERIVATIVES.

What is a "Derivative"? Simply put - a BET, a gamble that something will happen based on something else; like during the World Series, betting not on which team will win or lose but whether the score of both teams will be higher or lower than the number of strokes Tiger Woods takes in the first 3 holes of his current tournament. THIS STUFF REALLY HAPPENS!!! Here, it was a bet that mortgages would default in record numbers. It seemed like a safe bet to take, and had been for the past 50 years; mortgages had a more or less constant and predictable default/foreclosure rate.

Let's get an example that most of us understand more easily - LIFE INSURANCE. When you buy a life insurance policy, you are betting an insurance company that you will die before you have paid more in premiums than the policy will pay to your beneficiaries. The Insurance Company takes the BET, because they know that on average, very few policy holders dies before either paying in more than the death benefit, or simply let the policy lapse after many years of paying. The insurance company, having hundreds of thousands,or millions of other people buying and dying, have sophisticated mathematicians (actuaries they are called) who prepare statistics on the probability of someone dying.

For example, if you are healthy and 30 years old, and do not race cars, and want to buy a $25,000 policy, the company will say "fine" and charge you a modest monthly premium. They can do this because they have statistical proof that very few 30 year old healthy people die. If you are 70, the chances of death before paying a lot of premiums is far greater, so the payments are much higher.

REGARDLESS OF THE SITUATION, YOU ARE BETTING THE COMPANY YOU WILL DIE WHILE YOU ARE INSURED AND BEFORE YOU HAVE PAID A FORTUNE, AND THEY ARE BETTING THAT YOU WON'T. That is gambling/betting/buying chances... The company can do this because they sell hundreds of thousands of policies and the statistics prove them right enough of the time. Basically, you and hundreds of thousands of others pay premiums, and the Insurance Company pays relatively few claims. They get to keep the profit!

To be certain that the Company has guessed correctly, it will bet another and bigger insurance company to bet that the insurer might be wrong. The bigger company which has even more statistics takes the bet and collects easy money. It has bought a derivative - a bet not on the life of the insured, but a side bet on whether the first company will have to pay the claim. This second bet is DERIVED from the first bet -the insurance policy itself. It is equivalent to the bet on Tiger's golf game.

What would happen if a disease struck all of the 30-40 year olds and they died, leaving the older people only - the people who have less time to live (and pay premiums according to the math guys)? Easy - the company would not be able to pay all of the claims. The bigger company which had to pay the smaller company who issued the insurance policies might default. Both companies might go bankrupt. So, the bigger company bets with even bigger company etc. What happens is that there might be 7 bets that the 30-40 year olds will live long. If they don't, 7 companies have to pay and 7 companies might file bankruptcy.

Were any of the assumptions wrong? Yes and no. It was a first time event, all those young premium payers dying, but they did die. Would that make all policies bad no. It does point out that betting that a mortgage will go bad (OKAY CALL IT INSURING AGAINST IT GOING BAD) or any other such bet is fraught with potential disastrous problems. The biggest of these is the fact that there could be 5,6,7 or 100 bets on that 30 year old's life.

These DERIVATIVES, these side bets, are some of the main issues that "broke" A.I.G.

What happened in the financial markets that have left us with trillions in debt is next in this 3 part series.

Author's Copyright by Richard I. Isacoff, Esq., March 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

Credit Cards and Credit Crunch - the Other Monster Under the Bed

It is official - credit card default rates are higher, as much as 30% higher than last year, and higher than the experts thought they would be. Okay, how much of an expert did you have to be to know that. All you need to have, to know the defaults are getting worse, is a CREDIT CARD, or two or three or four or...

What are the reasons? That may require an expert. Could it be the loss of 4 million jobs, or the increase in interest rates even when the Banks are paying next to nothing for the money they are lending, or people using credit cards just to buy food and pay for heat until the cards max out, or homeowners making the last few mortgage payments they will be able to make with the credit cards, or is it just cardholders being irresponsible and using the cards to pay for filing bankruptcy?

It has been reported that the total outstanding amount of credit outstanding for credit cards, used or unused credit, will decrease by 50% or $2 trillion by 2011. Card companies are cancelling cards, jumping up rates (see earlier post), and telling card holders that the cards will not be renewed. Okay, let's just fold up our tents and go home. These are the same financial institutions that got bailed out again, today, by the Treasury. The thanks?

Advice for those of us who will need or think we will need to use revolving credit (credit cards) goes something like this.

1 Pay down or even off the cards that are charging you the highest rate.

2. DO NOT be late on any card payment - the issuer can cancel your card or increase the rate.

3. Do not apply for any new cards - the applications you make will not only affect your credit score but existing card issuers might look at this act as a need for more credit, and they are afraid you will not be able to pay

4. Review your credit reports carefully to be certain only real credit is reported, that only your debts are shown, and that closed accounts are reported properly. Go to the web site http://www.annualcreditreport.com/ and order one report from each of the 3 bureaus - Experian, Equifax, Transunion. Be sure you do not ask for your score - it will cost you to get that,while the report itself is free. Do get fooled by other sites like freecreditreport.com as you will probably end up paying for something

5. Decide if you really need credit cards, beyond a small limit card for emergencies. Try living without them now because you might not have them later anyway.

6. DO NOT TAKE A HOME EQUITY LOAN TO PAY OFF CREDIT CARDS. You are changing unsecured debt into secured debt, and the security is your home.

7. See a credit counseling service or a good debt counselor to help you determine the amount of credit you will need month to month. Even if the lesson costs $250, it is far less than the interest on even a modest balance when the rate is 30%.

Is there an end in sight to the craziness? No! Maybe a halfway point? Yes

Author's Copyright by Richard I. Isacoff, Esq., March 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Lessons Not Learned

The lessons our financial leaders should have learned from the "mortgage crisis" but did not, show how slow we are as an economic structure to react by anticipatory behavior. It does matter whether the financial markets overheated because of a giant Ponzi scheme hundreds of times the size of Madoff's, unknowingly and unwittingly perpetrated by its very victims, or due to a lack of regulation, or having as a cause the unbridled greed of the now oft ill thought of "Wallstreeters". Of course, one could also point to the failure of the economists to predict and discern the emerging pattern which ended in an implosion in the world of imaginary numbers - not the type to which mathematicians refer, but to the type hedge fund managers, speculative investors, commodities traders, bankers needing to satisfy stockholders, and just every day people with 401k plans, used as their calculus.

The concern we should all have is not only to identify when the recession began and when the regulators should have stepped-in, but rather how to see the next "black hole" which will threaten the fabric of our financial world. We have turned our telescopes on the past; we should also look at the present to see the future. Easy mortgages were the symptom of the securitization flu. The effect of the burst of mortgage-backed securities and credit default swaps et al has been a shut-down of credit: that will be the killer.

As the Wall Street Journal pointed out, the next credit crunch will be credit cards and similar smaller, but just as widely used lines of credit like over-draft lines, HELOCS (home equity lines), the ubiquitous 90 day note, etc. These means of keeping consumers and small businesses running when cash is tight, are being shut down. Jobs are being lost and housing defaults are rising which are causing more lines to be closed or limited as a pre-emptive strike against larger losses. Yet there is no regulatory concern about there being no credit available to "just ordinary people" and "just ordinary small business".

Understandably, the emphasis is on saving the patient - the hell with a few limbs: perhaps a more cogent analogy however would be that the sacrifice of the few to save the many is okay, not necessary but OKAY. It's great if you are not one of the few. The "few" here are consumers - both businesses and individuals. If there is no credit, and jobs are being lost, people will horde. If there is hoarding, small businesses will fail, which will cause larger businesses to fail...

The same Banks that are taking billions to "stimulate" the economy are limiting credit to people and small businesses. In fact, they are withdrawing credit and calling loans, reminiscent of the late 80s & early 90s. Further, interest rates are sky-rocketing creating spreads that loan sharks would pay ½ of their "vig" to get. Borrow from the Fed/Treasury at 0% or maybe 0% plus 25 basis points and lend it out at prime plus 18.99%. Default rates are still up into the 30% range. Worse is that people will use every last dollar of credit, creating huge defaults, which the industry can predict but "Who cares? We'll just securitize it and sell 'em"

[NOTE: The following link will bring the reader to Wharton School of Business' website where a recap of Federal Reserve Chairman Ben Bernecke's recent speech is contained] http://knowledgetoday.wharton.upenn.edu/2009/03/changing-the-rules-.html

Mortgage Rescue Plan - What's Missing?

The last post entailed a discussion of the President's basic loan modification plan to help 1 in 9 homeowners. The plan is comprehensive and deals with loans that are owned by a bank, FannieMae (FNMA), FreddieMac (FHMC), or the Federal Housing Administration (F.H.A.). The problem arises, as often stated here, when the mortgage loan is sold into a securitization pool which strips the mortgage loan of its individuality.

It is no longer a "regular" loan; it is part of a large pool of loans, each loan providing a small part of the means to pay interest to the people who buy the pool by buying little pieces of it called bonds (fancy name is Mortgage Backed Securities), and each mortgage itself, giving the collateral to be certain the interest will be paid. After all, home loans are the safest in the world! Right?? Remember, the loan (or mortgage loan) is the I.O.U. that you give to the lender; the mortgage is you giving your house as collateral for the I.O.U.

Currently, the housing market and the loan market are in a downward spiral. Even if there is a loan modification to make a mortgage loan more affordable, by lowering the interest rate, thereby lowering the payments, if the house has decreased in value from $200,000 to $160,000, the Borrower is paying for value that has disappeared. Sure, the Borrower took the money and the evaporation of value is not the Lender's fault. However, Borrowers could probably pay the normal interest rate if the amount of the loan was reduced to the actual market value.

On the other side of the matter of fault, assume that the lender is one of the good ones and has done nothing wrong. The lender is being asked to lose $40,000 (in the example). Who would want to do that and it isn't fair. Life isn't fair. The was no contract at the time of your birth that you, or a parent-type person, signed stating that "LIFE WILL BE FAIR". Not trying to be humorous or cavalier, that is reality.

What is also reality is that a borrower who owes 20% more than a house is worth, is likely to just walk away if the borrower's financial situation gets worse. Why try to save a house that won't have equity for 10.5 years ($200,067 loan principal at 5% interest for 30 years will not pay down to $160,000, the amount of the value of the house for 10.5 years). Yes, there is no appreciation of value in the house calculated so maybe in 9 years the mortgage and house will have the same value.

Reality check: If someone is pushed to the wall because of a loss of income, or increased energy costs, or due to illness/healthcare expenses, WHY WOULD THAT PERSON KEEP A HOUSE THAT IS NOT WORTH THE MONEY HE/SHE OWES??

The current Presidential plans do not address the problem of the Loans that are part of securities ("MBS"). The difficulty is that there are dozens of contract involved in each one. NO ENTITY IN THE CHAIN OF OWNERSHIP HAS THE RIGHT TO MODIFY THE LOANS UNLESS SPECIFICALLY ALLOWED IN ALL OF THE AGREEMENTS.

The House of Representatives has passed a bill that would allow Bankruptcy Judges to modify the loans, essentially changing the contracts. These same judges do this every day on virtually every other kind of contract, including mortgages - just not mortgages on primary residences. Hopefully, the Senate will pass the same bill or once that conveys the same powers to the Courts.

There are no easy answers to the mortgage crisis, especially since it was allowed to get out of hand. Yes, there are bad borrowers who will "milk" the system. But, there are millions of borrowers who were swindled when they got their mortgages, and have been hit hard a second time with prices plummeting.

Links are provided below for further information on the Senate Bill, and the effects of the issues on several homeowners.

************************************************************

Bloomberg News Article on the Senate Bill

http://www.bloomberg.com/apps/news?pid=email_en&refer=home&sid=akFgFGFBhDp0

************************************************************

Reuter's Article on the Effects of the Bill and a Bankruptcy Judge's Opinion

http://www.reuters.com/article/GCA-Housing/idUSTRE5247PZ20090306?pageNumber=1&virtualBrandChannel=10112

Author's Copyright by Richard I. Isacoff, Esq, March 2009

rii@isacofflaw.com http://www.isacofflaw.com/

Mortgages, Mortgages, Everywhere, Yet Not A Drop For Me

We finally have the basics of the Mortgage Bailout for Homeowners -at least for some homeowners. The Administration crafted a plan, touted in the mainstream media as "Plan Could Aid 1 in 9 Homeowners". This program is designed to help people who might face foreclosure, keep their homes. This is great news! With inertia being the strongest force in the universe (at least ours), a step forward is truly a huge one. There is at least one significant gap however. BUT FIRST, the good news -PLAN BASICS:

1. Plan applies ONLY to primary residence
2. Mortgage balances cannot exceed $ 729, 750.00 - (this doesn't affect my clients)
3. You will only qualify if your total monthly mortgage payment (principal, interest, taxes, insurance) is more than 31% of your PRE-TAX monthly income. Example - you (and spouse if married) take home $750 every week, but your wages BEFORE TAXES are $900 every week, Using the BEFORE TAX figure of $900-

a. multiply it by 52 (number of pays in the year), which equals $46,800 (yearly PRE-TAX income;
b. divide that by 12 (months in the year) to get the monthly PRE-TAX income amount, here equaling $3,900;
c. multiply that figure, $3,900 by 31% (.31) = $1,209

If your total monthly mortgage payment is more than $1,209 , you would be eligible for the program. It does not matter if you are current in payments or behind, but you cannot have a large stash of cash in the bank or under the mattress.

Income WILL BE VERIFIED - Borrowers will have to sign a form allowing the Servicer/Lender to get a copy of the Borrower(s)' federal tax transcript (Form 4506-T) AND, if you are employed you will need 2 months of pay stubs; If self-employed then third-party proof of earnings in addition to the tax information. Everyone will be on the lookout for fake income figures and other FRAUD.

The concept behind this approach is to have the Lender reduce the monthly payment to an amount of not more than 38% of BEFORE TAX income, with the Treasury sharing the cost of reducing the payments to not more than 31% of BEFORE TAX monthly income.

Here is the bad news: While Borrowers with loans through FHA, VA or owned by FannieMae (FNMA) or FreddieMac (FHMC), will have no problem if the otherwise qualify (above guidelines), IF YOUR LOAN IS IN A MORTGAGE-BACKED SECURITY, and if there is a Servicer, the modification can be done only if the agreement( called the Pooling and Servicing Agreement or "PSA") among the investors, lenders, servicers, trustees, etc. allows the changes. Keep in mind, that as explained in earlier posts, no one expected this collapse, so most of the PSAs are not written to allow much in the way of modifications. Also, participation is voluntary. The majority of the Adjustable Rate Mortgages made to so-called sub-prime borrowers are in this category.

The full details of the plan, the "HOME AFFORDABLE MODIFICATION PROGRAM GUIDELINES", are available at http://www.financialstability.gov/ which is the official Treasury website. It is 19 pages, most of which gets fairly technical. At the same site there is a Summary of Guidelines called "MAKING HOME AFFORDABLE".

If you are in trouble with your loan, or soon will be, call the company that sends you the monthly statements. If they are of no help, call the "Hope Hotline" at 1-888-995-4673, or contact my office.

Author's Copyright by Richard I. Isacoff, Esq - March, 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Mortgage Modification - Court Ordered

Below is a letter I have written to the U.S. Congressman from my district, outlining the reasons I believe that the measure being taken up by Congress, to give Bankruptcy Judges the right to modify primary residence mortgages, should be approved. If you can, write your Congressman to ask his support, the letter, I believe, is self-explantory

RICHARD I. ISACOFF, P.C.
ATTORNEY AT LAW
100 NORTH STREET
SUITE 405
PITTSFIELD, MASSACHUSETTS 01201
____________
e-mail rii@isacofflaw.com

TELEPHONE (413) 443-8164 TELECOPIER (413) 443-8171

VIA FACSIMILE 202-226-1224

The Hon. John W. Olver
U.S. House of Representatives
111 Longworth HOB
Washington, DC 20515

Dear Congressman Olver

I write not only as a constituent, but also as an attorney who represents distressed homeowners in our area who are trying to save their homes from foreclosure. This is a genuine and urgent crisis that demands immediate and targeted congressional action. As such, I encourage you to support H.R. 200, legislation that would provide relief to these homeowners.

Too many families in this District and throughout the Commonwealth are on the brink of losing their homes to foreclosure. Across the country, it is estimated that 8.1 million homes will be in foreclosure over the next four years if Congress does not act. As devastating as foreclosure is for the individual families whose homes are threatened, the effects of this foreclosure epidemic are felt throughout the economy. Indeed, virtually every economist has recognized that the financial crisis gripping the country can be resolved only by dealing with the root cause –the escalating millions of foreclosures. I will gladly send you detailed and summary materials on this issue.

H.R. 200 would help families save their homes by giving them more flexibility to restructure the mortgages on their primary residences. The bill would fix current law, enacted in 1993, that prevents judicial modification of primary home mortgages, but allows such changes to virtually all other loans. Why shouldn’t Judges be able to correct “bad faith” loans – regardless of which side acted in bad faith?

Sadly, the magnitude of the foreclosure crisis dwarfs the response to date from Washington. The very clear lesson of the last two years is that foreclosures will not be curbed through top-down voluntary efforts on the part of the financial services industry alone, no matter how many incentives are provided. Courts must be empowered to implement economically rational loan modifications where the parties are unwilling to do so on their own. Loan modifications through the bankruptcy courts can be accomplished on a sufficient scale and time frame to have a meaningful impact. The mere threat of judicial modification may, in fact, lead to more meaningful voluntary loan modifications.

OLVER, REP./CON’T
February 21, 2009
Page 2

President Obama recognized Chapter 13 judicial mortgage modification as an effective approach to stemming the foreclosure tide and expressed his support for legislation that would accomplish this. While the Mortgage Backed Securities investors and market-makers might lose some value, getting a modification that pays 80% of the loan with interest, is better than a foreclosure sale yielding 40%-50% of the investment cost.

Please support the Bill – campaign for it. I worked with you in the days of the BNE collapse and RECOLL Mgt.; I would be honored to do so again. If you need additional information, please contact me at my office on (413) 443-8164, my private cell phone (413) xxxxxxxx or by e-mail.


Sincerely,



Richard I. Isacoff, Esq




RII/mpb
cc: Maureen Thompson, NACBA


Website:www.isacofflaw.com

BLOG: http://finance-for-us.blogspot.com

Mortgage Rescue Plan: Does It Need a Rescue?

Now we know what the monsters are under the bed: partisan politics, inertia, greed, and despair. The economy keeps getting worse and every program that is announced to help gets roundly criticized by the Press, Pundits, and Politicians. How about injecting some hope into this quagmire?

The latest rant is against the Mortgage Bailout for Homeowners. For the most part, those leading the charge seem to be talking about borrowers who KNEW that they were borrowing more than they could afford to pay back, or the borrowers who got a mortgage loan where the borrower could make minimum payments (interest only or some other lower amount) hoping/expecting the house to rise in value so the borrower could refinance again, or the borrower who lied on his/her mortgage application in order to qualify for the loan without realizing that at the very first rate adjustment, she/he would not be able to afford the payment if it went up, but prayed for a raise/new job/no rate increase/ or divine intervention (or is that intervention by the intelligent designers?).

Below is the content of an e-mail I sent to CNBC's morning business show, SquawkBox, about the call for a financial revolution against the President's plans. You can see the clip where Rick Santelli, a Trader at the Chicago Mercantile Exchange attacks the Homeowner Mortgage Bailout, by going to the web address provided: http://www.cnbc.com/id/29283701

THE E-MAIL

Dear Becky, Joe and Carl (please excuse the use of the familiar but…),

I am a private-practicing sole practitioner attorney in Western Massachusetts. My background is banking, S&L work-outs for the State of Maryland and with FSLIC, Regulator in connection with the S&Ls, and part-time lobbying in the mid-80s for the Mutual Savings Bank industry. I relocated back to Western Mass to run the Berkshire County portion of the ill-fated Bank of New England and ended up working for the Fleet/FDIC workout group, RECOLL Mgt. (Great career move – I resigned as President and CEO of a de novo FSB [federal savings bank] I had started in Ellicott City, MD.).

I take extreme exception to Mr. Santelli’s commentary, his logic, and his outlook.

I represent people, statewide, who are presently losing their homes. Not one has a Lexus or other such luxury car, and if having 1 bathroom with inside plumbing is a luxury, then I guess all of my clients have a luxury.

Just for perspective, the President’s yet fully clarified program will help my clients: the short-form facts of some are as follows:

1. Husband and wife – both working for the same molding company, both laid-off the same day. For the past 18 months, only one has been able to get a job at a time. Husband hired, wife hired, Husband laid-off. Husband gets job, wife gets laid off, etc. Mortgage with Beneficial (which is under a consent decree in Mass. for bad lending practices). Interest rate high; clients “sold” insurance (life, AD&D, disability); loan adjusts up but the disclosures show a downward adjustment by .25% each year “if for a 12 month period all payments made on time” (day due, not 15 day grace period). Repeated calls to Beneficial have yielded no help in a modification

2. Single woman in late 50s. Religious Ed teacher at Catholic High School. Loan from BankUnited, FSB in FL, through a local broker. Initial year’s payments based on 1.7% teaser rate but interest rate, not payments, adjusted month 2 to index (6 mos LIBOR) plus margin (6.75%). Payments increase by 7.5% per year. At end of first year, Orig principal of $159,000 is now $163,000. At month 43 of loan payment is $700+/-. Month 44 –payment is $1,400.30 for rest of loan. Becky will be Pope before this woman will understand the loan she was sold. Oh, by the way, the Broker lied, in writing, and is no longer in business. Closing costs/fees to Broker and Lender - 6% making it a “High Cost Loan”

3. First time home-buyer with 720 FICO. Mortgage Broker puts her in 2/28 LIBOR ARM –tells her the rate will go up and down like prime. Never tells her first adjustment will be 3%. She tries to refi and is told her income is not adequate. House is a two-family but because she rents to family member, Lender will not count the income. She has “banked” payments for the period after the second adjustment, based on the original payment. Money is available to Lender. Lender went to sell at foreclosure. I stopped it, but no response from Lender. All we asked for was original deal – as presented by broker – 30 year fixed 7% - accept monies held by me in escrow, capitalize thew arrears, if any, after recalculating the balance by applying the original rate and actual payments.

4. HFC sells 30 year fixed rate loan. Borrowers have ability to pay with acceptable ratios 32/36 DTI. Loan is billed as a “conventional 30 Year Fixed”. Loan is, in reality a “Simple Interest Loan”, so interest runs every day. There are no 15 day grace periods – pay on the 2nd of the month and get an additional day’s interest charged. Pay on the 16th, which would normally require a 3% of the payment penalty, and pay the penalty PLUS 15 days interest. RESULT: Negative Amortization – off the books – run as a ledger accrual account. $425,000 loan - $22,000 accrued, not paid, interest in 18 months. No payment ever went 30 days – all made by 15th day.

I have a dozen more like these. I have filtered out the guy who has refinanced 13 times since 1985, and now want to get out of the 14th loan – an Option Arm – he can no longer afford. This is the person Santelli should attack. This person kept “cashing out” the equity and is now in a bind due to a 25%-40% drop in prices in the Boston metro area.

One last note – why are people afraid of a judge determining if a loan was made by a lender in bad faith? Misrepresentation goes both ways, and the borrower is the weaker party. Maybe the Lenders should have watched their originators more carefully.

I watch the show every morning from 6-6:45 –get to my office at 7:05 and grab it on CNBC Plus while I go through the e-mails and loan docs. Great show, but how about some better balance. Darwin was right, but to use his theory as a life approach is ignoring basic decency. It is like the “let them eat cake” of the 18th century French elite. Santelli does not sound French.

Richard Isacoff

(end of the e-mail)

It is difficult to convey the details of the President's plan at this point, because thee are none. It is not that the program isn't outlined in detail, but the who qualifies, how does someone apply for help, how do you communicate with your lender, etc, has not been finalized. We are supposed to receive the operational details on or about March 4th. In the meantime the next post will have a summary taken from the Whitehouse Press information, stories in the Wall Street Journal and the New York Times and other publications.

Author's Copyright by Richard I. Isacoff, Esq, February 2009

e-mail: rii@isacofflaw.com

website: http://www.isacofflaw.com/

Mortgages, Foreclosures, and Other Monsters Under Your Bed

NPR had a piece on the 13th discussing the issues dealt with here in days past, namely the mortgages servicers/securitization problems. Specifically, the inability for anyone to do anything until the "government" passes a law or buys the Mortgage Backed Securities from investors at "market value" and then passes that savings to homeowners in a refinance.

The issue is that the investors, which may be individuals or mutual funds or retirement funds etc., who own the securitized loans, want the high returns they were promised; they do not want to take less, nor do they want to have the MBS sold for less than 100% of the "face value" (the outstanding balances of principal and interest of all of the loans in the MBS) of the security. Remember, as confusing as this is, that a MBS is like a corporate or municipal bond. It is merely a way for mortgage lenders to spread the risk, of loans they have made, among literally thousands of individual or corporate investors. (see 1/3/09 posting ).

Congress carefully avoided the question in the most recent stimulus package. The President is at a loss because of all of the competing interests, both in government and out. "Wall Street" wants the Government to guarantee 100% of the investment, as do all of the pension plans, mutual funds, and others who own Mortgage Backed Securities. (Ownership, as I write of it here, may mean nothing more than $1,000 of a worker's 401K, invested in the XYZ Mutual Fund that owns $5 million of MBS out of a fund of $100 million. The individual therefore owns 1/1000th of 1% of the $5 million of MBS that his/her mutual fund owns. The more staggering numbers are that the $5 million of MBS that the worker's mutual fund [the ENTIRE FUND, not just that worker's share] owns is only 1% of the entire Mortgage Backed Security which was worth $500 million when it started.) So, some "shares" or ownership rights are as small as 1/100th of 1/1000th of 1%

The others who have a stake in the outcome are the brokers who buy and sell the MBS as securities, the companies who service the loans in the MBS, the Banks who act as Trustees for the MBS, and the HOMEOWNERS / BORROWERS who are being foreclosed, and the lobbyists for all of the aforementioned.

Right now, nearly all of the Lenders have put a hold on foreclosures - some under March 6th (JP MorganChase, Morgan Stanley, Bank of America), some until the 12th (CitiGroup) and others, voluntarily, maybe, as requested by John Reich, who is the out-going Director of the Office of Thrift Supervision (Federal Savings Banks "FSBs", state-chartered Savings Banks with FDIC Insurance, Savings and Loans "S&Ls" etc) in a memo to all regulated thrift institutions on Feb 12th.

Mr. Reich summed up what we the issue with which we have to contend. Everyone is hoping that the President's team will have a plan - within weeks. The problem took years to get where it is and our new administration is supposed to have the quick fix ready by March 6th?. Perhaps the banks and Thrifts that have made loans and still own them can work with a simple payment reduction formula. They still own and control the loan so it is a case by case decision made by the LENDER.

Congress has not been able to agree on much of anything - they are now going to try to tackle the Wall Street conundrum of Mortgage-Backed Securities and all of the voices that will be shouting, "Let someone else take the loss - we just made the investment and we WILL NOT ALLOW any reduction in our return on our investments. By the way, everyone who has his/her retirement money in mutual funds that own the MBSs will say the same thing. Someone has to accept a loss or the federal government will spread the loss to all of the taxpayers in the country.
What's fair? Nothing, but we have to do something.

Author's Copyright by Richard I. Isacoff, Esq, February, 2009

rii@isacofflaw.com
http://www.isacofflaw.com/

Mortgages, Foreclosures, and Help for Homeowners

According to RealtyTrac, a company that watches foreclosures nation-wide, the rate of foreclosure increases has dropped. While there was only an 18% increase in foreclosures during January of this year as compared to January 2008, that is still a hefty increase. Put in perspective though, they also report that 1 in every 466 US homes is in foreclosure. Startling? Sure, but that is only two-tenths of one percent or .2%. Is this high - yes but, we have not gone beyond the point of no return.

Perhaps this view will be against the trend, but I believe that there will be another spike in foreclosures in March. Homeowners have had the "luxury" of moratoriums on new foreclosures is a loan is with FannieMae or FreddieMac; that ended on January 31st. Additionally, many states had stopped all actions against homeowners to give everyone time to figure out what to do. NO ONE DID!

The new "Stimulus" bill, passed last night will help the economy in general, and therefore ultimately help homeowners, especially those who are currently out of work. BUT, the trickle-down effect will take time and 1000s of homes will be lost in the interim. The basic question remains: How do we (the government) stop foreclosures, or a least give the average homeowner a fighting chance?

The problem traces right back to Wall Street when mortgages were securitized, when no one had any risk except investors in the financial markets. The worst part of the securitization, after taking into account that the elimination of risk allowed dreadful loans, is that no one entity has any authority to allow real modifications on the mortgages that are in these bundles packages called "Mortgage-Backed Securities"(please refer to prior posts, specifically December 22 and January 3.) The people borrowers deal with when they call for help is the Servicer. They just collect checks, send bills, make sure taxes are paid etc. They do all of the administrative work but HAVE NO AUTHORITY to change terms of the loan.

Many of the attorneys who represent Mortgagees(Lenders) against Mortgagors (Homeowners) have stated that they would and will recommend a modification in line with my suggestions but their client, the SERVICER, does not have the right to change the terms enough to matter. The agreements among the Servicers, Trustees (the banks who manage the MBS and "hold" the assets for the benefit of the investors), Financiers (the companies/banks/lenders that puts the package of loans together for sale) specifically prohibit a change in the rate, principal amount etc.

Congress must provide Mortgage Servicers with some type of guaranty that they will not be sued if they modify loans. Congress can reform the Bankruptcy Laws and give Judges the right to determine if a mortgage should be modified; they can pass a law that indemnifies Servicers for Modifications assuming the modification is based on a full evaluation of the Borrower's circumstances; or what ever other solutions the Treasury, the Federal Reserve, Congress, or Wall Street determines will allow Servicers to make the changes necessary to stop foreclosures that are being forced by adjustments up in rates and down in housing values.

At least we are moving forward. Congress has taken the first step; the second one better come quickly.

Author's Copyright by Richard I. Isacoff, Esq, February 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Credit Card Companies - Legal Loan Sharking?

The last post discussed the Debt Collection practices of many credit card companies. As the economy tightens even more, many people will turn to their credit cards as a last resort to buy necessities, like food, medicine, and gasoline (to get to work if they still have jobs). An earlier post discussed the companies raising interest rates for no other reason than they can.

The majority of the card companies are owned by banks In some cases these are the same banks which are trying to recover losses incurred in bad loans; often, improper mortgage lending practice results. So, "Let it go forth throughout the land that WE, who can offer 0% financing and raise the rate the next day, have determined that NOW is the time to strike. The masses need us more than ever and we can cash-in".

LOSE HERE, MAKE IT UP THERE!

Cynical - no - realistic. I was in the business and know how it used to work. Consequently, I understand all to well the need for a profitable business line in the Bank to offset losses. Citibank, as an example, has let business many customers know, that at the expiration of the current card, the interest rate will go to the prime rate (the rate the best businesses get from banks) PLUS 18.99%. Even now, with the prime rate extremely low, the effective interest factor on one of those business cards would be 22.24%. And that is for business which pay every month, and pay more than the minimum. Others are being told that they are no longer welcome, and to find another lender.

What makes this difficult is that the same approach is being taken in the retail side, with ordinary people who pay every month, with maybe a late payment (5-10 days) once in a while. They get charged a late fee of $29-$39 depending on the card, and then, if they are late at all, the card issuer raises the rate to the "Default Rate" which is between 24.99% and 31.99%. Further, in all of the card agreements the issuers state that they have the right to raise the rate to the Default Rate if, in the opinion of the issuer, the card holder has a change in financial circumstances. This translates to "if you are late on any card, even once, we can jump your rate from 6.99% to the Default Rate. The term for this provision and practice is the "Universal Default Provision".

Delinquencies are rising quickly, not because people do not want to pay, but because of a late payment the interest rate has jumped 400%, and the card holder can no longer make even the minimum payment. If he/she has more than one card, the effect is multiplied by the number of cards. Now come the collectors!

COLLECTORS - THEY DEMAND THE 30 PIECES OF SILVER - OR ELSE!

Most collectors receive a commission on what they collect. Some collectors are paid strictly on a commission basis. To make a living, the collectors will lie, insult, threaten, call family members, neighbors, ask for post-dated checks, and do many of the things that are illegal under federal or state laws, or both. (see the post dated February 8, 2009 for details).

If you get behind and the calls start "when will you be sending in you payment? If I don't get it by then I will repossess your dentures", do not panic. Keep track of who call, when the call takes place, and the basic content of the call. Again, please refer the the Feb. 8th posting for details.

Try to determine if you can enter a payment arrangement, not with an individual creditor if you have multiple cards, but with all of them. Contact "Consumer Credit Counseling Services", or "Money Management International". They are the only 2 true non-profit organizations that have good relationships with most card issuers and which charge a nominal fee for services. They DO NOT charge a large up-front fee. Run from places that do.

AGAIN, E-MAIL OR CALL ME IF YOU HAVE SPECIFIC QUESTIONS AND NEED HELP.

Author's Copyright by Richard I. Isacoff, Esq, February, 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

FAIR Debt Collection

While we are waiting for Congress to decide if the economy is worth saving, making up their minds if home ownership is a thing of the past, we should all be aware of what DEBT COLLECTORS can and cannot do LEGALLY. (While some of these rules are Massachusetts specific, many are not. Where possible annotations will be made. The Massachusetts Regulations are being used as a base because they are actually more stringent and strict than the federal Fair Debt Collections Practices Act - "FDCPA")

The primary difference, between many states' and the federal rules, is that the federal rules apply to Debt Collectors which specifically leave out a collector in the employ of the actual original creditor. For instance, a Debt Collector is an agency, call it the "XYZ Collection Agency", working for the "Bank of Wherever". On the other hand, if a bank employee, from the bank's own collection department calls trying to collect a debt, the FDCPA does not view that as a Debt Collector, which would trigger many of the protections. Massachusetts law regards employees of a creditor and collection agencies in the same light.

(NOTE: For the sake of ease, where the Federal Rule is stricter the note "FR" will appear after the item)

Collection Agencies and Creditors MAY NOT

1. Call you at home about one debt more than twice in any 7 day period, or more than twice in a 30 day period at any place else, like your place of work

2.Call you at work if you ask that they not. Unless the request is put in writing by you, the request is only good for 10 days. Put it in writing and send it certified return receipt requested. Then unless you specifically allow such calls, they are banned totally.

3.Call you without identifying the name of the creditor and collection agency for which the call is being made, and the name of the person calling. He/she can use a fake name, but the creditor/agency must be able to state who the person really is.

4. Contact you at all if you state that you are represented by an attorney (give them the attorneys name as a safety measure)

5.Use profanity or obscene language FR

6.Threaten you with legal action that the creditor/collection agency or does not take or expect to take "FR"

7.Tell anyone, except an attorney whose name you have given to the collector, about your debt, or that you even have one. The exception is if you give the collector written authority to do so.

8.Mail you anything that would lead anyone to believe that you have a debt (sending a postcard or using a return address like "XYZ Collection Agency, 5 Nasty Lane,..." or "XYZ Visa, Collections Department, ...."

9.Ask you to send post-dated checks "FR"

10.Call you outside of normal waking hours. If the caller does not know, 8am-9pm is allowed. If you state that you work nights and sleep days, any call during the day will be a violation

As delinquencies and other late payments increase, collectors, both in-house and working for an agency, will become significantly more aggressive. That has already started. Many collectors work on a strict commission basis, so getting you to send anything is good for the collector. Even getting a promise to send money by a certain day can bring the collector a commission. Remember, when all is said and done, a collector is a salesman - he/she is selling you the need to pay, even if you cannot.

Do not fall for the line "Well, I see on your credit report that you still have $1,200 left on the ABC Mastercard. Why don't you use that to pay us. I will be glad to take your card information over the phone. That will stop us from taking you to Court next week" DO NOT DO IT!!!! In addition to taking money that you cannot pay back, you are allowing yourself to be bullied and are permitting the collector to act illegally. Get his name, the company name and a return telephone number. Send the information to the Attorney General's Office, Division of Consumer Affairs, or the equivalent in your state.

More about creditors, and credit card companies in particular, within a few days.

As always, if you have a specific question, e-mail or call me. Please state that you have a question related to this BLOG.

Author's Copyright by Richard I. Isacoff, Esq, February, 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

The Bill is Passed - No Relief for Homeowners

The Senate passed their version of the stimulus package which now has to be reconciled with the House's stab at it. All this means is that now the 2 branches of Congress have to see if they can agree on a compromise to each other's ideas on how to put money into the economy.

Startling... or maybe not... is the fact that there is no direct relief for homeowners facing foreclosure. Congress has not approved a change in the Bankruptcy law that would allow the Court to modify residential first mortgages. Further, they have not set up any new mechanism to help homeowners at risk of losing their homes due to adjustments in interest rates, or due to loss of jobs (3.6 million in 14 months), or for any other related catastrophic economic problem now facing a family in a house with a big "FORECLOSURE SALE" sign in the front (or back) yard.

John Olver, the Congressman for this District, a man who I admire and who has worked hard for his constituents, has said nothing. His office, specifically his Legislative Assistant responsible for the finance and banking portion of the Congressman's long list of pending issues, has not returned calls. There has not been a single press release dealing with what is being done to keep people in their homes, and to stop the slide of the economy caused by the acceleration of foreclosures and the resulting loss of value of other homes in the area. This also affects the value of the "Toxic Assets" called Mortgage-Backed Securities.

Until Congress addresses the housing issue in a meaningful way, and until the affect on the financial markets allows stability, we will be in this downward cycle that keeps gaining speed. in reality, Congress is faced with dealing with the symptoms, not the cause. Perhaps they believe that the bleeding must stop before the patient dies, and then they can treat the cause. Based on history, even if the hemorrhage abates, and the bleeding of the economy seems to get better, the cause is so severe (bad loans, lax regulations, fraud etc), that the patient (our economy) will die of complications: foreclosures; banks getting more and more property that no one can buy; no loans except to credit-perfect borrowers; and banks hoarding the cash they got from the government to make loans rather than lending money to help real people.

THERE ARE NO EASY ANSWERS. The only thing we do know is that normally you look for the cause of a problem and fix it/them one at a time. Here, home mortgage lending was the primary reason the markets crumbled and lending became a thing of fairy tales and nothing is being done to fix it.

One last illustration: HOPE NOW, a federally funded program to assist homeowners to save heir homes, which anticipated helping 400,000 foreclosure risks, has has TOTAL APPLICATIONS of 451 and has finished 25 loans. THE PROGRAM IS A FAILURE. What is being done to fix it?- Nothing!

Author's Copyright by Richard I. Isacoff, Esq February 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Help on Stimulus Bill

Have you received the latest communication for your U.S. Senator, or from your Congressman, about the economic problem and what he/she is doing to fix it? Neither have I, because there has not been one! President Obama, in is address to the nation last night said, to Congress, that it is time to stop playing games. I do not believe for a minute that anyone thinks it's a game, but the President was right: Congress is playing politics. Does the "stimulus package" have to be perfect? No, but THERE HAS TO BE SOMETHING FAST!

This blog has been mainly about the mortgage and surrounding financial crisis, and for the time being it will have an emphasis on that issue, which is and will be the most significant issue confronting all of us in the U.S., and the world, for the next few years. I will continue to try to explain what is happening in terms that we all can understand. Right now, politically, we are seeing old time Republican v Democrat fighting. No progress, just bickering. The commitment of money to Iraq took less time than Congress has been deciding whether fixing roads is a better program to help the economy than giving tax cuts to business so they can reinvest.

Some ideas and suggestions: Spending on infrastructure like roads and highways has a great positive effect on the entire economy. There are road contracts that cause hiring. The contracts also create new jobs. The contractors have to buy materials which helps the manufacturers and suppliers. Then they have to employ people. Those people getting hired, need to have good transportation, eat lunches etc. They have to buy work clothes. Stores get to sell clothes, and restaurant (even take-out) food. And the cycle get going.

THERE ONLY WRONG DECISION RIGHT NOW IS NO DECISION. The financial markets are waiting for the U.S. to get our act together and do something. At this point, whether we commit $100 billion more or less to the program does not matter. If we do not spend what we can now to shore-up the economy, the 500,000 jobs that will be reported as lost in January, and the 2 million jobs that were lost in the past 4 months will have been the tip of the iceberg. Just remember the ending of the movie Titanic - as has been written here before, "HOW LONG CAN YOU TREAD WATER?"

CALL YOUR CONGRESSMEN/WOMEN AND YOUR SENATORS. ASK HOW THEY ARE VOTING. IF THEY SAY THEY HAVE TO OPPOSE THE PRESIDENT'S PLAN ASK WHY!

Author's copyright by Richard I. Isacoff, Esq, February 2008

http://www.isacofflaw.com/

rii@isacofflaw.com

Foreclosures: When Will Someone Do Something?

As has happened before and will again and again, Congress and the Administration state they want to help homeowners facing foreclosure, due to job loss or predatory lending, but no one can figure out how. The problem, I believe is caused by a total disconnect with the problem facing people and the problems being caused by the major economic upheaval we are experiencing.

The financial markets, our own and those world wide, are in chaos, due in large part to the actions of Wall Street fund managers and the disintegration of loans based on the lenders' risks. Washington is viewing the problem as a challenge to the system, not as a hardship for homeowners/people. The logic cannot be faulted in a view from the top down. BUT, from the bottom up, meaning from the view of families, the fight must become top down and bottom up, at the same time.

As posted before, many mortgage servicers, the folks who collect our payments, have no authority to modify loans; at least that is their view. They would be subject to suits from those who have invested in the gigantic pools of mortgages, and find their return on their investment diminished. That can be fixed by giving Courts the right to adjust unfair mortgage terms, or by passing a law that allows or mandates that certain contracts, namely the contracts regarding these mortgage pools, can be changed without liability (within certain parameters). Heresy to a free market? Maybe, but a little bit of deviant behavior is better than the death of the system.

The vote on January 28th in the House of Representatives, to approve or not approve the President's stimulus package, was decided solely on party lines. ALL Republicans voted against it. Were any members required to vote with the President? NO! However, it is not reality to think that not one Republican agreed with the bill. Politics of the worst kind is preventing true relief from making it to homeowners. Understand that the Democrats have no bills before Congress to actually stop foreclosures by modifying loans, that is by forcing those controlling the mortgages to negotiate in good faith with borrowers, so an affordable payment can be paid each month.

There is no simple, one size fits all, answer. Giving the Bankruptcy Courts the power to modify mortgages is part of the solution; relieving servicers from liability for modifying loans is another; a third might be to have a federal agency refinance, or underwrite the financing of homeowners in trouble. DOING NOTHING IS THE ONLY REALLY WRONG DECISION, yet, that is where we are.

Author's Copyright by Richard I. Isacoff, Esq, January 2008
http://www.isacofflaw.com/

rii@isacofflaw.com

Stop the Foreclosure: How?

Since the last posting, very little has come of the stories about bailout money being available to stop foreclosures. Loan modifications are obtainable, but, without patience and a knowledge of the process, the task is nearly insurmountable. What is worse is not just that the pace of foreclosures is increasing, but that the moritoriums are over and all of the borrowers who thought that a solution would be reached, before the sale date, are being rudely surprised.

The argument that the President Obama will institute programs that will be the lifesaver for which everyone is waiting has merit; but what do we do about all of those homeowners who lose their homes in the meantime? If you have any concern about a soon-to-happen foreclosure, please read the post of December 22, 2008, which deals with stopping the process.

If there is any question about whether a property will be sold at a foreclosure action, contact an attorney or a legal aid organization. If there is no time left, and if there is a sale tomorrow, file a Chapter 13 Bankruptcy. The Clerks at every Bankruptcy Court can help an individual file the basic documents to get the Bankruptcy started, thereby STOPPING the sale.

The offer is open and will remain so - contact me through my website or directly by e-mail and I will try to assist through a referral to an attorney, or by "walking you through" the filing process.
Author's Copyright by Richard I. Isacoff, Esq, January, 2009
http://www.isacofflaw.com/

rii@isacofflaw.com

CitiBank and Mortgage Modifications

MORTGAGE - MODIFICATION - FORECLOSURE - BAILOUT - TARP

In a stunning and surprising turn-around, CitiBank has agreed to support Sen. Richard Durbin's bill to permit Bankruptcy Court judges to modify mortgages (see the most recent posting - January 3, 2009).The term being used is "Cram-Down", which has a technical meaning and a common sense one.

First, common sense: the Bankruptcy Court Judges will have the right to push mortgage changes down to the owner(s) of the mortgage, regardless of how many layers separate the Borrower/Debtor and the original Lender. The Legal usage is normally restricted to a Bankruptcy context. The theory allows a Debtor to ask a judge to permit the Debtor to alter the terms of a loan. The most common application has been automobiles, boats, etc, and second-homes. By statute Congress prohibited Bankruptcy Court judges from cramming-down mortgages on a debtors primary residence.

The modifications can be a nominal as allowing a small change in the interest rate, to reducing the PRINCIPAL OF THE LOAN, the AMOUNT OWED. Normally, if there is a reduction, it is to a level that is equal to the current value of the house, if it has lost all equity, or to a level that is fair based on the transaction itself. This cram-down based strictly on fairness is reserved for cases when there has been bad faith and bad conduct on the part of the Lender; in fact what is called egregious behavior.

Giving the Judges the right to modify loan terms would eliminate the risk, to a Loan Servicer or Trustee of a Mortgage Backed Security, of being sued by investors or other parties who bought a slice of every mortgage in a pool of loans. Further, it would encourage Lenders/Servicers/Investors to modify loans BEFORE there ever was a Bankruptcy. Almost every one of the Chapter 13 Bankruptcy filings I do is to protect a primary home. In the past 6 months, not one has come across my desk where the issue was not some how involved in a Lender refusing to modify the loan. While there has been no cram-down, a Chapter 13 allows up to 60 months for a Debtor to repay the amount he/she has fallen behind.

All to often, I am seeing loans that should not have been written the way they were. Adjustable Rates that has huge changes after 24 months; rates based on obscure formulas; and loans where the borrower pays less than the true interest that accumulates each month so that the Borrower actually owes more each month than what was owed the prior month (negative amortization).

The other major problem is the CRASH of housing prices. While not that critical in this Western part of Massachusetts, there are areas of the state where the value of a house has plummeted 30% or more in 12 months, and other parts of the country have faired worse.

Modifying loans to make them affordable and more in keeping with the value of a house so that the owner has a vested interest in struggling to keep his/her/their home makes all of the sense in the world. This can be accomplished by lowering the interest rate, extending the term of the loan, or REDUCING THE AMOUNT OWED. The last option must only be done with care, and on a case by case basis. The Bankruptcy Courts are equipped to do this, and have been doing it to all other types of loans right along.

As there will be daily developments in this key area for the time being, there will be daily postings to this Blog as well. As always, if you have a question about this or a related topic, e-mail or call me. Just follow the link at the end of the posting.

Author's Copyright by Richard I. Isacoff, Esq., January 2009

http://www.isacofflaw.com/

rii@isacofflaw.com

Why Loans Cannot Be Modified

MORTGAGES - FORECLOSURES- BAILOUT - MODIFICATIONS

The last posting discussed the problem with ARMs, and why a great number of borrowers are finding it impossible to make payments. The simple answer is to have the lender change the terms of the loan, MODIFY the agreement, so the Borrower does not end up facing a foreclosure. Houses generally sell for a maximum of 1/2 to 2/3 of their value at a foreclosure auction. The Lender wants money, not a house. The Lender especially does not want to own a house, waiting for the right buyer. During that period the house is a non-earning asset for the Lender, and the Lender has to pay for heat, upkeep, etc. Regulators, like the FDIC, do not like non-earning assets.

As was posted earlier (9/30, 10/25, 12/3) the Lender of the money no longer owns the loan. No ONE does. Loans are now packaged and sold $500,000,000.00 at a time. Investors bought little pieces of the who group of mortgages; they bought a tiny piece of each mortgage. The Lender hires a Servicer, a company to send bills and receive payments. The entities lawyers, government officials, and Borrowers talk to when trying to modify a mortgage, is the Servicer. This entity has very little authority to alter the terms of the contract with the Borrower (see last post). Even if the request from the Borrower to help him/her keep the home is to cut the interest rate to a more reasonable rate, and to allow all back payments, if any, to be paid after the regular term of the loan is over, Servicers DO NOT have the authority to make those deals.

The words I hate from a Servicer or its attorney, when I am trying to get a modification for a client facing foreclosure, are "I will have to check with my investor". The chart shows who does what, and who owns the Loan. Like I stated -NO ONE - it has become part of a security, a bond; it has been sliced and diced and cut into a million tiny pieces, owned by hundreds of investors. If you have Mutual Funds in a 401K, or IRA, or just held in your name, which own(ed) Mortgage Backed Securities ("MBS"), you owned a teeny tiny piece of many mortgages. You might have need an electron microscope to see how much of a loan you owned, but own it you did.

An explanation of the Chart from the top:

1. The Originator/Seller is the Lender with whom you dealt and from whom "bought" your loan.

2. The Special Purpose Entity ("SPE") is just a corporation set up to own the mortgages until they are sold. The SPE pays the Lender for the loans. The only assets in the SPE are the mortgages the Lender has made/originated.

3. The QSPE/Trust is the entity that ultimately puts the $500,000,000.00 of mortgages together and gets them ready to sell to investors; big investors like mutual fund managers, or little investors like you and me.

4. The Trust/QSPE (the "Q" is for "Qualified") is responsible for managing the assets through a Trustee, typically a bank like Wells Fargo or Deutsche Bank.

5.The Trustee has a duty to the investors who buy the pieces of this big pool of mortgages, which is now called a "Mortgage Backed Security". The Trustee has no duty to any Borrower, unless the Servicer, hired by the Trustee, really makes a mess of things. It is at this stage that the Mortgage Backed Securities are sold; sold in tiny pieces of the whole pool

6. The Servicer is the company/bank that actually sends payment notices to Borrowers, collects payments from borrowers, keeps track of real estate taxes and insurance on each property securing the mortgage note (the I.O.U. you sign to get the money to buy the house), and hires the law firm to foreclose if payments are not made. The Servicer has a duty only to its boss, the Trustee. It has very little authority to do any modification. THIS IS WHERE THE PROBLEM LIES.

7. The investors buy pieces of the MBS put together by the Trustee of the QSPE itself. They demand payment in full of both interest and principal. They do not care about a homeowner because they don't own a mortgage from the homeowner. They own a piece of paper that states they own $25,000,000.00 of this MBS. If it is a mutual fund, then thousands of people own the teeny tiny portions I mentioned above, because they invested in the Mutual Fund. Most people still have no idea of what a mortgage-backed security is, or how it works. The Mutual Fund that does know all about them, however, has no idea, and never had any idea, of the quality of the MBS. By quality I mean the probability that the investment will not lose value and will pay interest as promised.

The Borrower and owners of the loan are so far removed from each other that it is literally impossible for a Borrower to talk to the real owners of the mortgage, because there are thousands of them for each loan. Remember, 1000, 2,500, 5,000 or more loans get mashed together to make the MBS.

IN ORDER TO MODIFY LOANS IN ANY CONSTRUCTIVE WAY, IN A MANNER THAT WILL HELP STOP THE FORECLOSURE PROBLEM, THE SERVICERS HAVE TO BE GIVEN THE AUTHORITY TO MODIFY LOANS ON BEHALF OF THE INVESTORS. WITHOUT FEAR OF BEING SUED. This will take a Federal law.

The alternative, which is being hotly debated in Congress, is to give Bankruptcy Judges the right to modify loan terms which can be shown to be too harsh; or where the value of the property has gone down so far that there is a huge gap between the amount of the loan ($125,000 for example) and the value of the property ($90,000), or $400,000 loan and a current value of the house of $300,000. This issue, coupled with the kinds of loan discussed in prior posts and set out in detail in the post from earlier today, can be fixed by a law that allows Federal Judges to keep people in their homes by making the mortgages more realistic and not fraudulent or misrepresentative.

There is no answer that will make everyone happy. Our economy, in fact the world's economy depends on stability. We do not need the MBS to pay out 100% of what was invested, but rather to know what the value is and to know that there is a mechanism to stop the foreclosure debacle.

Author's Copyright by Richard I. Isacoff, Esq, January 2009

http://www.isacofflaw.com/

More About Foreclosures & Mortgage Modifications

FORECLOSURE - MORTGAGE - BAILOUT - TROUBLED LOANS - FORECLOSURE SALE

2009 - a New Year! A better year for homeowners and mortgage owners? NO!, unless there are significant reforms made quickly. While I have explained the issue of modifications to mortgages in earlier posts, little if anything, is actually happening.

The Wall Street Journal on the last day of the year, December 31, 2008, published an excellent article by Michael Corkery entitled "Mortgage 'Cram-Downs' Loom as Foreclosures Mount". Mr. Corkery described in detail the failure of the loan modification programs instituted by various Federal agencies: The HOPE program which was supposed to help 400,000 homeowners facing foreclosure is less than limited success. As of his writing, only 357 people have signed up. HUD (the Department of Housing and Urban Development) admits that the program has, quoting Mr. Corkery, "been encumbered by high fees and narrow eligibility requirement". Another program FHASecure which was supposed to help 80,000 people facing foreclosure get help, has only met 5% of its goal, 4,100 homeowners. The program stopped taking new applications from desperate homeowners, those who are delinquent and facing potential foreclosure in the near term, as of the 1st of this new year.

The mortgage industry is, on its own, doing loan modifications with borrowers. They report that 37% of those modifications fail within 6 months. According to the chief lobbyist for the Mortgage Bankers Association, an organization with which I am familiar, claim that "Our members have modified 2.8 million loans". NOBODY IS DEFINING "MODIFICATION"! The Mortgage Bankers Association is counting ANY modification, even if it is to defer one payment, let one payment be late.

A mortgage is a contract between a borrower and the lender, or the lender's representative/agent, often the servicer (the folks who send out the bills, collect the checks, and order the foreclosures). A modification is simply ANY CHANGE IN THE TERMS OF THAT CONTRACT - ANY CHANGE!. I can say with certainty, because I deal with getting modifications for my clients and reviewing lender offered and accepted modifications for many clients, who are facing a foreclosure and a bankruptcy to stop it, that the mortgage industry's idea of a modification and everyone else's are at variance.

The industry, very ofter servicers, will typically offer to allow 1 or 2 payments to be put at the end of the mortgage, or might allow an "interest only" payment for a few months, or even lower the interest rate, until the next adjustment, by 1%, like from 9.875% to 8.875%. It might be a big concession for the servicer, and on a temporary basis help the borrower make another few payments, but is doesn't address the real issues with the loan. The problem loans are, by a huge majority, ADJUSTABLE RATE MORTGAGES "ARMS". Many have a base rate, called the index, and a margin which is the amount above the base rate that the lender is charging the borrower. In a sense, it is the lender's profit.

As an example, the typical ARM in trouble today is a 2/28 or 3/27, 6 month LIBOR ARM. Translated, the loans have a fixed rate for 2 or 3 years, and then adjust every six months for 28 or 27 years. The adjustment is determined by the London Interbank Rate for US dollar-denominated deposits - the rate that banks charge each other for money when it's borrowed. The typical 1st adjustment has a maximum of 2% or 3%; adjustments follow every 6 months thereafter, moving up or down by no more than 1%.

I know the next paragraph is numbers intensive, but it shows a real example of why suddenly people cannot pay their mortgages:

Concrete example: Date - May 2004; $125,000 mortgage; 2/28 loan (2 year fixed rate then changes for the next 28 years); interest rate set at the LIBOR plus margin of 6.5%; starting rate 4.5%, (the rate the borrowers payments are based on) which was a "teaser rate" because it was below the rate as determined by the actual formula; formula states 6 month LIBOR which was 1.3862% (April 2004 - always use the prior month), PLUS the MARGIN of 6.5%, equaling a rate by the formula of 7.8862%. The starting payment at the teaser rate was $633.36, plus taxes and insurance. The rate per the formula would have been $907.31. That is $273.95 higher. For 2 years the borrowers are happily paying the $633.36 monthly payment, plus their taxes and insurance, let's say $200, or a total of $833.36. At the 2 year mark, May 2006, the rate changes. The formula calls for the LIBOR, which is at that time, 5.2879%, PLUS the MARGIN of 6.5%. The total is a staggering 11.7679%. The borrowers are saved a little, because the formula also has the 3% maximum rate increase provision. BUT, the increase maximum is taken from the formula rate, not the teaser rate. So, the true formula rate when the loan was signed was 7.8862%. It can only go up 3% on the first adjustment; that means 10.8862% or a payment of $1,179.67 plus $200 for taxes and insurance for a total of $1,379,67 per month, compared to the first 2 years at $833.36. That is a 65% increase!

The figures above are real and the formula is real and they came from a real mortgage. Please understand that not all adjustable rate mortgages are that heavy-handed. Many adjust the same way but the margin is 2.5%. That would lower payments by $280.88 per month. That is one of the modifications that should be made, along with possibly making the loan a 30 year fixed rate loan. IT HAS BECOME ALL ABOUT GREED. Everybody wants what he/she is "entitled" to receive. Unfortunately, these mortgage owners, who are large investors, may get nothing if the house is sold at foreclosure. If we do not get the ability to force modifications, the housing market will continue downward because more and more foreclosed properties will be put up for sale by the lenders.

Some of the why no one will really modify a loan in the next post.

Author's Copyright by Richard I. Isacoff, Esq, January, 2009

www.isacofflaw.com

Stopping Foreclosures

FORECLOSURE - MORTGAGE CRISIS - SUBPRIME - PREDATORY - MORTGAGE

You have fallen behind in your mortgage payments and you wonder how long it will be before the mortgage company or bank sends you a notice that they are foreclosing on your home. How long do you have before you are evicted? How can you save your house? Who do you call? What do you do?

I had a biology professor, who was also the football coach, who was fond of saying:

"When in danger
When in Doubt
Run in Circles
Yell and Shout!"

You may feel like doing that but if you are worried because you haven't made all of your payments and are behind more than 1 month, I recommend a different course of action. Some of the suggestions will seem like common sense BECAUSE THEY ARE. That does not mean that everyone pays attention.

1. Figure out why you are behind. That may be simple as "I missed a month of work because of my accident and had no money coming in" or as complex as "I've been falling behind a little each month, and now that the credit cards want more and I am paying higher minimums, I am even further behind". Knowing why you have fallen behind is critical to not losing your house, as I will explain as we go along.

2. As soon as you know that you are going to miss a payment, determine when you can make it, "for sure", and call your mortgage company/bank and let them know. Your file will be noted which will let a collector know that you are being responsible and are aware of the fact that the missed payment is a problem. By telling them a "for certain" date that the payment will be made and making that payment, you will eliminate needless calls and letters to you and let the lender know that you are doing your best to manage your money and have every intention of honoring the mortgage terms and keeping your home

3. If you suffer a work layoff or lose a job, or if you have a two-income household that has suddenly become one income, and believe that you are going to start to fall behind, call the lender and let them know. They may be able to give you additional time, grant a one-time forbearance, and move the payment or maybe even two payments to the end of the loan, so you can get caught-up, or make other arrangements. As this is being written, there are some mortgagees who will do hardship loan modifications because of layoff

4. Assuming that the above issues have been dealt with, or you have gone beyond the point of anticipating a default in payment and have missed 2 or 3 or them, expect to get a "Notice of Default" from the lender.

5. Every state has its own rules, but there are some big commonalities. The Notice will state how much is owed to get caught up, including interest, late fees, actual costs (such as an attorney's fee, a title report, possibly a real estate tax document from the city or town, etc.) and the missed principal payments. In Massachusetts, once that Notice is given, it MUST allow the borrower 90 days to cure the default, and during that period the lender can take no action against the borrower. Other states have differing time period, but almost all have one to give a borrower a chance to catch up. ONCE THAT NOTICE IS RECEIVED, THE CLOCK IS TICKING. In reality it has been right along, just more quietly.

6. If your state is a "Non-Judicial" foreclosure state, such as is the case with Massachusetts, there DOES NOT have to be any court proceeding to foreclose on your property. You gave the lender the right to foreclose, for non-payment and other things, in your mortgage document itself. There are legal requirements, set up by state statute, but a Court hearing is not one of them. This means that you probably WILL NOT have your day in Court to plead your case to a judge. In most situations it may not matter, but if there are irregularities in the mortgage process, or if there are documents showing the lenders right to foreclose that have not been put in the public record as the law requires, you NEED a Court to stop the process. If a foreclosure is imminent, CALL AN ATTORNEY. Most will give you some basic advice of what to do, without charge.

7. If you believe that your mortgage is not what you thought you were getting/buying, and the payments went up faster and higher than you were promised they would, contact the LOSS MITIGATION department at the lender/servicer. If you have a legitimate case, you may find that a modification, to get your payments reasonable and deal with the back payments that are owed, can be accomplished without outside intervention. If you have no luck, DO NOT WAIT - GET HELP.

8. If you believe that something is wrong with the mortgage, and for that matter even if everything appears to be okay, GATHER ALL OF THE DOCUMENTS YOU RECEIVED AT YOUR MORTGAGE CLOSING -PURCHASE OR REFINANCE. Anyone who will be helping you will want to see the paperwork you were given, both signed and unsigned. If you do not have a copy, call the attorney or company who did the closing and ask for a copy. You have a right to the documents, but if you were given a copy at closing, you might have to pay a copy cost for the second set.

9. Once you know that there is a problem in making timely payments, prepare a realistic list of your MONTHLY EXPENSES, such as mortgage, auto insurance, gasoline, electricity, heating fuel, food, clothes, car payment, etc. Then, prepare a list of your income. Include all sources - wages from employment, child support, alimony, food stamps, any form of disability income, unemployment compensation etc. Be certain that the figures are accurate and that you can supply documentation for every item you claim as income, or as an expense. The reason for this preparation is that the lender will want that information, along with your most recent taxes, as it considers any request for a modification or forbearance agreement. You do not want to wait one minute longer than you have to in starting the process, so get ready ahead of time.

10. If you DO NOT have luck with direct contact with your lender, call an attorney who handles debt problems. The attorney may have experience in bankruptcy, or real estate, or debtor/creditor work-outs, or a number of other classifications. Just ask when you call as to whether the attorney deals with mortgage problems. In all likelihood, if your mortgage is delinquent, other bills are also, especially credit cards, if you have any. Have that list ready when you speak to the attorney or the person doing intake.

CAUTION: DO NOT FALL FOR THE INTERNET/RADIO ADVERTISING "GET OUT OF DEBT FOR PENNIES ON THE DOLLAR" COMPANIES. Most, but not all, are charging for services they cannot provide

11. Think long and hard what sacrifices you are willing to make to keep your home. You will probably have to devote ALL non-essential income to catching-up on mortgage payments

12. You may be advised that the only way to save the house is through filing for Bankruptcy Protection and opting for a Chapter 13 Debt Repayment Plan. The Bankruptcy laws are in place to protect people who get behind in payments/"get over their heads' in debt. Assuming you are not trying to cheat creditors by hiding assets (fraud) or running up bills purposely, knowing that you are going to file bankruptcy, IT IS YOUR RIGHT TO USE THE LAW TO PROTECT YOU AND YOUR FAMILY.

I will post telephone number s of various organizations which are available nationwide, which can direct you to a local or federal agency to help with a loan modification. AS OF THIS DATE THERE IS NO FEDERAL BAILOUT FOR BORROWERS - JUST THE BANKS. (see prior posts)

IF YOU HAVE NO ENTITY OR PERSON LOCALLY WHO CAN HELP YOU, SEND ME AN E-MAIL AND I WILL REFER YOU TO AN AGENCY OR ATTORNEY WHO SHOULD BE ABLE TO ASSIST
Author's Copyright by Richard I. Isacoff, Esq - December, 2008
http://www.isacofflaw.com/

Foreclosures Continue

FORECLOSURE - TARP - BAILOUT - MORTGAGE CRISIS - CREDIT CRISIS - PAULSON

Secretary of the Treasury Paulson has informed Congress that the second half of the $700 billion bailout money has to be released for use NOW, because the first $350 billion has been used, none to help homeowners in foreclosure. More outrageous is that none of the remaining funds are being set aside to stop lenders from taking borrowers homes.

The pace of foreclosure sales is going to accelerate after the 1st of the year; the mortatoriums put in place by many states will be expiring, letting the Mortgage Servicers move against delinquent borrowers. Neither Congress nor the Treasury, which controls the TARP money (bailout), is taking any action to save homes. Despite warnings, from economists, the FDIC, housing industry experts, and investment market experts, that the credit crisis and economy's crisis will not abate until the housing issues are addressed, the present Administration and those entrusted to fix the problem have chosen to continue on the course of action initally taken -money to financial industry entities.

There is a logic behind this approach in theory, but reality has shown it not to work. Congress thought that by giving money to financial institutions there would be a "trickle down" to homeowners; that banks would lend money to individuals, enact loan modifications to save homes, and generally ease credit (the easing of credit to be addressed in a later post). Instead, money is being hoarded by the banks which are recieving the funds. They are solidifying their balance sheets, increasing their reserve of cash, but not lending, especially not lending to homeowners for loan modifications.

When this matter is brought up, the near unanimous response is " we cannot modify loans because there are no loans, just securities, and the investors will not permit modifications". Why is Congress and the Treasury silent on this issue. The "problem" can be fixed but not without political fallout. Would there be isues with the investment community, sure, but any dislocations are minimal compared to the downward spiral we are going to continue to endure if the housing crisis is not fixed.

As we consider why our friends, neighbors, and we lose our houses, we must put pressure on the Treasury and Congress to stop the financial insanity of allowing more and more homes to be sold at foreclosures, ensuring losses to the lenders, or investors, and increasing the glut of homes for sale, thereby driving down prices further, forcing more institutuions to need bailout money.

Putting aside politics and government inaction, the next installment will deal with credit and how to save your home.

Author's Copyright by Richard I. Isacoff, Esq - December 2008

http://www.isacofflaw.com/

The New Villian? C.R.A.?

FORECLOSURE - MORTGAGE CRISIS - BAILOUT - HOUSING - MORTGAGE

Surprisingly, or maybe not, there was an Op-Ed Opinion in the December 11, 2008 edition of the New York Times, blaming, to a large part the CRA (Community Reinvestment Act) for the current mortgage crisis. In fairness, in the 7th paragraph, the author states "One cannot say with any certainty whether the more important cause of the current housing crisis was affordable-housing mandates or the actions of investment banks and rating agencies."

The Community Reinvestment Act was passed in 1977 to stop banks from continuing a lending practice called "redlining". Simply put, this was a practice where lenders (almost all Banks at that time) would take maps of their marketplace(s) and draw a red line around the less desirable areas, predominately minority neighborhoods, and NOT grant loans to people in them. Was this aimed at minorities? In some cases yes; in many it was aimed at an economic issue. The fact that a disproportionate number of the people affected were minorities did not seem to matter.

The CRA did not mandate bad loans, but rather is forced Banks to go out into the community and figure out a way to make good loans more available to anyone in these "redlined" (circled) parts of town. Later, FannieMae and FreddieMac were supposed to grant a large percentage (approx. 25%-33%) of their loans to low and middle income potential homeowners. It DID NOT require that loans should be made to people who could not afford the monthly payments. Innovative lending programs and grant programs were encouraged. That DID NOT mean ARMs with initially artificially low (teaser) interest rates, but low fixed rates mortgages coupled with grants for long-term home ownership; and the use of available federal housing funds along with good lending policy to assist lower-income people to buy a home that they COULD AFFORD, basically substituting a mortgage payment, and insurance and tax payments, for paying a landlord rent.

There was nothing radical about the CRA except that it recognized that low and moderate income people, often minorities, were purposely or inadvertently excluded from home ownership. For 25 years all went well. The line of demarcation, when the mortgage business fell off of a cliff, was the point when mortgages were securitized. People and institutions buying these securities, backed by mortgages, relied on rating agencies to state whether there was risk, and if there was, how much. These companies that placed a grade on the securities backed by mortgages (MBSs), did fine at the start. HOWEVER, once the players, mortgage originators, mortgage brokers, mortgage lenders, and all of the others in the chain, realized that if the mortgages were sold to investors packaged in bundles of $300 million or $500million ... or more, and no one lender owned a mortgage, no one could lose if a mortgage failed and the property was sold at foreclosure. No one but the holder of the security - and, of course, the individual homeowner

Was this the fault of the CRA? NO!!! It was a failure of the rating agencies and others to recognize that once no one making the loans would lose anything, so that they would make any loan possible. REVERSE RED-LINING BEGAN. Rather than avoid certain areas, lenders, now primarily NOT banks, purposely went after people in those neighborhoods promising the American dream - Owning your own HOME. The practice of enticing people to buy a loan at a low initial rate, hiding the fact that the rate would JUMP, became commonplace. This practice WAS NOT confined to low and moderate income people. It became pervasive in the mortgage industry. Buy NOW, Pay later - or never if you can keep refinancing your home as values increase.

There are plenty of people and organizations and laws to blame. Most just didn't get it - many loved the big paychecks they received. People forgot the principle that whatever goes up, will and must come down. And yes, that applies to home prices. Further, once the teaser rate of 3% or 4% went away/expired and the real rate, of 8%,10%, or even 11% set in, the monthly payments WERE NOT affordable.

I have case after case where I am trying to save homes because of that very scenario. Do the buyers and mortgaged owners want to give up their homes? Did those folks know they wouldn't be able to pay? Do the majority of them not care and just give up the house and move-on? NO to all the the posed questions.

We all need a CRA, but a much broader one now - a National Reinvestment Act - programs to save housing and allow new buyers to do so.

Author's Copyright by Richard I Isacoff, Esq - December 2008

http://www.isacoffflaw.com/

Homeowners & Mortgages & Foreclosures & TARP?

FORECLOSURE - TARP - MORTGAGE - BAILOUT - SUBPRIME

(Note: This post refers to earlier writings. You are urged to read those submissions)

This is one of those times when a confession is necessary: I have a subscription to the Wall Street Journal, in fact both print and online! Now, in ordinary times, I would not have even mentioned my reading habits but, as I have stated before, these are not ordinary times.

The WSJ has published two editorial pieces opining that the FDIC proposal to get funds to homeowners by modifying mortgages would cost more than the $24 billion originally estimated. The Journal cited Treasury Department and White House critics that are purported to have shown the actual cost could be as high as $70 billion. This is to save houses; to end the cycle of foreclosures and stabilize the economy. This, it was deemed, was too much to pay for stability in the marketplace. Here, the marketplace does not refer only to the real estate market, but, to some extent, to the securities market as well, and, in reality, OUR ECONOMY.

Remember the Mortgage Backed Securities that are being called "toxic assets"? The toxicity is the inability to value these interest bearing bonds, derived from mortgages (hence called "derivatives"). The entire market for MBS was based on the sales pitch, by Lehman Bros, Goldman Sachs et al, that HOMEOWNERS WOULD ALWAYS PAY 100% of their debt. That may have been true when, if there was a problem, the homeowner/borrower could meet with the LENDER, discuss the problem and work out a solution. Mortgages have become rare - they have become securities. There is no owner, no banker, no lender to whom you can ask for help and advice.

The FDIC proposed refinancing borrowers and maybe even paying the loan servicers, the entities that collect monthly mortgage payments and sent them to the investors. The idea is that the servicers have no incentive to do more than send bills, collect money, and pay the investors. The PSAs (see earlier posts) define, in extreme detail, precisely what Servicers can do. The investors want the interest that they were "promised" and they will not accept anything less. That attitude will get them far less than if borrowers pay most of what is owned, or perhaps 100% of what is owed but at a lower interest rate.

If the FDIC has it wrong, and the investors are not thinking clearly due to a near panic, what is the solution? Solution? What is the issue? FORECLOSURES. Whether the reason a homeowner facing a loss of his/her home is "at fault" for reaching beyond his/her monthly income, or if the reason is that the borrower was sold a loan product that was affordable for the first two years and then had the monthly payment jump hundreds of dollars, is DOES NOT MATTER; it is irrelevant. We have to stop the accelerating the loss of homes by foreclosures.

Elizabeth Warren, a noted Professor at Harvard School of Law, and the newly appointed head of the House Advisory Committee to Oversee TARP, has taken issue with the Treasury Department's cure-all of giving money to Banks as the magic pill. She is quite clear that, while that may be part of the answer, stopping foreclosures is the major step we need to take. Offering low interest rate mortgages for first-time homebuyers is great, but if the housing is continuing to drop in value because of the level of foreclosures, no one is going to buy now. Everyone will wait for the bottom which, as a result, gets lower and lower.

We need a balanced approach. Pass laws to allow Servicers to negotiate with mortgagor-homeowners who are in trouble. This means Congress has to take-on the very nature of the Securitization of mortgages and the resulting PSA contracts. Offer incentives for Servicers to do the extra work. Set up a new Federal Mortgage Corporation, similar to that from the 1930s to increase the accessibility to affordable refinancing for homeowners who can pay, but perhaps not at the higher rate that were sold.

There is no easy answer. There is no way for lawmakers to assure that they will be able to brag, at election time, that they "did the right thing". Congress cannot keep worrying about being re-elected and therefore afraid of offending the monied interests. It is time to help homeowners. Investors knew, or should have known the risks. Critics will argue that MBSs are in average workers 401K plans,and comprise a large portion of pension plans. Using an overused medical analogy, perhaps we had better not worry about the broken leg until we restart the patient's heart!

Author's Copyright by Richad I Isacoff, Esq -December, 2008

http://www.isacofflaw.com/

How Long Can You Tread Water?

FORECLOSURE CRISIS - CREDIT CRISIS - BAILOUT - MORTGAGE ISSUES

Those of you who are fans of William Cosby, EdD, a/k/a Bill Cosby comedian, might remember the line from his "Noah and the Lord" routine. That is the position we are in now with regard to the mortgage crisis (ongoing). The wild swings in the stock markets have grabbed the headlines on nights that the 3 automakers have not. Guess what? It all seemed to start with the mortgage mess. If you have not already done so, I suggest that you read my previous posts that have dealt with the credit and mortgage crunch. In reality, the mortgage difficulties are really securities markets problems, as I have explained before.

Below is my contribution to a discussion which is taking place on Wharton School of Business's online Journal Knowledge@Wharton. The article in its entirety can be read by using the link immediately following the text of this post. While it is written in a more technical fashion that I post, a careful reading will put many issues into perspective; at least into some perspective (although not all of them).

Since my submission to "Knowledge", there has been a flurry of activity of Sheila Bair's (head of FDIC) proposals to help stop the foreclosure slaughter. I will be posting my analysis of the criticism to the idea that mortgages be modified with the Federal Government underwriting part of the losses incurred by lenders and loan servicers, within a day or two - I am just waiting for some dust to settle, or more in keeping with the title above, until the flood waters recede.

(see link at end of this posting for full article entitled):

The Fairness Issue: How to Cope with the Flood of Foreclosures
Published: November 26, 2008 in Knowledge@Wharton


(my commentary) In "The Fairness Issue" article an excellent job was done in presenting nearly all views of the mortgage scene. As with views of anything however, the viewer's perspective determines what is seen, and what is not seen. The problems are set out well, but if one relies on the economists' and bankers' views, one will get only the macro financial picture.

There is no taking into account the effect on actual homeowners and their effect on the economy as a whole. One could argue that the micro analysis, the review of individual mortgagors, does not really matter, because no one of them matters in the scheme of the economy, ours or global. The argument would miss the point while being correct a the same time; it was this logic that gave us "toxic assets", mortgage-Backed Securities.(To me, the concept of an asset being "toxic" is an oxymoron and would only apply to enriched uranium and the like anyway). William Frey's comment that no one anticipated a catastrophic meltdown is exactly on point, but we had such a crash. If millions of individual mortgages created the problem, then why would there be a global solution?

Professors Guttentag and Wachter are correct in the assessment that the housing market should be the primary concern. If so, a semblance of normalcy can be restored; then maybe confidence can also recover. I have seen this with my clients. At the present, most of my time is spent trying to save homes, not just houses-- but homes. The fear, anxiety, and recriminations created by a foreclosure destroy families. Working with mortgagees, and their appointed servicers empowered by PSAs has proven to be a challenge. There are no rules; the government has let the servicers determine what happens in our economic life. Ms. Bair's [Chair of the FDIC] proposal through the FDIC, flawed as it may be, at least gives a ray of hope and a view towards Main Street rather than Wall Street.

Mr. Smetters' sentiment is a valid position, but begs the question: We cannot fix the housing markets, determine the value of mortgage-backeds, and effectively put in place long-term solutions by taking a broad brush approach. The Federal Government, has to back-stop the losses; it has to allow the MBSs to be taken apart, if necessary, to modify loans through write-downs of principal, interest, or both. The regulators are in place. FDIC, OCC, and the Treasury just to start; and we could always resurrect the RTC (Resolution Trust Corporation). I make no claims of originality in my ideas, but I ran failed S&Ls in the mid-80s, for the State of Maryland and with FSLIC, where there were depositors who could not get their money for months, and where loans were just as volatile as the ones in the MBSs. There was no "one size fits all" solution then, and there is not one now.

Last, if we are concerned about cost, we have already given the markets many times more than it would take to shore-up the MBSs by underwriting a portion of the losses an investor might realize. As Bill Cosby, certainly not an economist, so aptly stated in a routine, "Noah, how long can you tread water?"(asked the Lord). We had better ask ourselves that before the flood of foreclosures drown us all in unquenchable debt. The fire would be easier to handle.

full article at http://knowledge.wharton.upenn.edu/article.cfm?articleID=2104&post

Author's Copyright by Richard I. Isacoff, Esq., December, 2008

http://www.isacofflaw.com/

Credit Cards Profit Margins Getting Larger

CREDIT CRISIS - BAILOUT - FINANCIAL MARKETS CRISIS - RECESSION

The Credit Card Crisis is getting closer and closer. Homeowners who mortgage payments got too high, have been using their credit cards to pay the bills. Additionally, it is the Christmas shopping season, when many shoppers use credit cards hoping to pay later for what they buy today. The Credit Card industry - BANKS - are raising their interest rates, at a time when they can borrow money from the Treasury for almost nothing, or possibly get part of the $700 billion TARP (bailout) handout.

Now, for a bit of background. To a Bank, a deposit account of any kind is a liability - it is actually borrowing money from depositors. At the same time, a loan it makes to a Borrower, with depositors money, is an asset. Traditionally, banks have based their profit margins on a 3%-5% spread or margin between deposits and loans. In fact, going back a number of years, a Savings Banker was known as a 3-6-3 Banker. Take it in at 3% (deposits) Lend it out at 6% (loans) and go home at 3 (pm). Strange, but we had gotten back to that formula, at least for mortgages made by Banks.

Banks got larger and felt that they could exploit the revolving credit market - Credit Cards. Here, the Bank (card issuer) give a credit limit that a card holder (borrower) can use and pay, use and pay etc. Because the amounts started out to be small and the debts were unsecured (no collateral), in comparison to a car loan or home mortgage, Banks charged a higher interest rate for Credit Card interest. But the spread began to increase so that Banks had gross margins (before losses and costs) of 8%-10%.

As the traffic would bear, the rates increased so that before the current crisis, it was not unusual to have a Credit Card Issuer (Bank) paying 2%-4% for deposits and charging 14%+/- for interest to average card holders. Sure, there were the promotions for 0% interest, but the majority of those "come-ons" ended with the Cardholder paying one day late, or the Credit Card issuer (Bank) holding a payment for a few extra days, so the Cardholder was charged a late fee of $39 AND HAD THE INTEREST RATE JUMP TO 19.99%-30.99%.

Now, Banks are trying to make up for bad loans in mortgages, in commercial loans, in investments for the Banks portfolio (Mortgage-Backed Securities come to mind), and financial uncertainty. So now even "good" customers are getting charged higher interest rates for keeping a balance on the Credit Card. CitiBank has just sent notices to the bulk of its Cardholders notifying them of a change in the rate. Regardless of the prior rate, the new rate is now the Prime Interest Rate (rates that the best borrowers pay to Banks) plus 8.99% WITH A MINIMUM OF 14.99%. Cardholders can opt-out of the change so long as they pay-off the card balance by the time the card renewal dates comes around. If one opts-out, at the renewal date, Citi will close the account and either demand payment in full or force the Borrower to pay the ten current rate on any balance.

Citi is not alone. If you pay regularly, but have a balance for more than 2 years, JP Morgan Chase will charge a monthly fee, and increase the minimum monthly payment from 2% of the balance to as much as 5% of that balance. The list of card issuers (Banks) goes on but the basic theme is the same: Borrow money from the Treasury or Federal Reserve Bank, paying .5%(1/2% ), or from depositors paying about the same rate, maybe .5% higher, AND LEND IT OUT TO CREDIT CARDHOLDERS FOR 15%-25%, while making the minimum payments twice what they have been. The Consumer portion of the Credit Market is going to pay for the commercial losses and bad investments - Main Street is paying for Wall Street. And do not forget about the Universal Default Rate - be late on one card, and the rest of the Cards can move your interest rate to its default rate.

This explanation is a bit over-simplified, but not much. Margins in the Credit Card business are at all-time highs. What will happen in February when all of the Christmas gift generated Credit Card bills come in? Who will be able to afford them? And, if the credit lines get closed by the Banks, how will the homeowner/credit card holders pay to live in the house?

This formula spells disaster for Cardholders (consumer and small business borrowers) and as a result will probably lead to a new round of mortgage defaults and foreclosures, and certainly a spike in Bankruptcy filings as more and more Cardholders find that a 5% minimum payment is so far out of reach that it makes no sense to even try. A good portion of my practice is in the fields of Bankruptcy and Debtor workouts, but I shudder when I think of the disruptions to families, losses of homes, the payment defaults will bring.

Congress could act to stop the gouging by Credit Card issuers (Banks), regulate the issuers which are not Banks, and provide the needed Mortgage Relief that would eliminate some of the need to use the Cards.

I encourage every Credit Cardholder to read carefully all of the information she/he receives to be certain the change, if there will be one, can be at least anticipated and plans made to deal with the "financial dislocations" (unpaid bills and blown budgets) which result.

Please feel free to e-mail through the website link at the bottom of this post if you need a calculation or advice. The service is free and the margin is less than 0% (My contribution to the cause)

Author's Copyright by Richard I. Isacoff, Esq - November 2008

http://www.isacofflaw.com/

Sub-Prime? The Next Generation! FHA? (really?)

SUB-PRIME - PREDATORY - LOANS LENDING - BAILOUT -FINANCIAL CRISIS


They're Baaack! Just when we thought it was safe to go into the wate.. no no no, I meant the mortgage market! This time, FHA loans are the mark.

With the drying-up (or is that drying-down?) of the credit and especially the mortgage market, as announced, the Federal government is trying to re-start the housing market. One way to do that is to use already existing programs, like VA, FHA, USDA Rural Home, etc. Each of these programs is very good at what it does, and with all three of them it is to make loans, specifically mortgage loans to current or existing homeowners.

There is always a catch - some mortgage brokers are committing the same kind of fraud with FHA loans as were prevalent with other loans, such as those made by IndyMacBank, Wells Fargo, Option One, Ameriquest et al. Mortgage applications and documentation is not meant to be an exercise in creative writing. Unfortunately too many mortgage originators do not understand that.

The tricks are the same -altering an application after the borrower has signed it so income can be added to make the loan more attractive to an underwriter. Getting someone in a Bank to falsify Verifications of Deposit or Verifications of Mortgage, also works well to fool the folks making the decisions. Having fake appraisals done, where the value is placed well above the market is another favorite. In June of 2008, the Massachusetts Attorney General announced that the principals of Direct Finance Corporation, which was licensed by the Division of Banks, and at least two employees of community banks were indicted for mortgage fraud and various other matters, for doing just those things.

FHA was too trusting of its originators because they were usually trustworthy. Once the "bad guys" lost the ability to do conventional non-agency loans, like to the lenders mentioned above, these middlemen/women just took the same techniques and applied them to the VA/FHA/USDA field. We might think that these groups would have been more vigilant but...

In the 1980s, while I was working with the Maryland S&L crisis, running failed S&Ls I came across a true story about mortgage fraud that seems both comical and sad now. There were two older women who had been in the mortgage business for years. Keep in mind, that in the mid 80s interest rates were in the mid teens, like 15% for a NORMAL residential mortgage rate.

These women worked with FHA and VA loans almost exclusively. To make a loan more appealing, they would alter an application, make up Verifications, change documents before, during and after closings. Remember, PCs were just getting started so the method was the comical (now) side. They had no fewer than 10 typewriters of different manufacture so they could match the type style. Additionally, they had several IBM Selectrics, the ones with the little interchangeable steel ball, so they could use a hundred different type faces and fonts. They were caught by chance and went to jail for several years (the sad part). Point is that the mortgage fraud business has always been alive and well.

Author's Copyright by Richard I. Isacoff, Esq - November 2008

http://www.isacofflaw.com/

Tinkerbell, Where Are You?

CREDIT CRISIS - MORTGAGE BAILOUT - TOXIC ASSETS - CREDIT CARDS


I had planned to move full force into the new tactics by the Credit Card Industry to help it even out its, and its parent companies', losses. Unfortunately, we are coming face to face with the reality of the current crisis, and why it just will not stop generating scary headlines; the kind that send financial markets, stocks, bonds, entire businesses, and through job losses the public in general into a tailspin.

This weekend CitiCorp, the parent of CitiBank, CitiResidential Mortgage, and Citi this and Citi that, (when combined they do business in 100 countries, and employ 375,000 worldwide), was deemed to be on the edge and in need of a massive infusion of government money or some other type of intervention. It seems that what was touted as a failure of the residential mortgage backed securities ("MBS") market, has been disclosed to be a breakdown of all types of Pooled Loans. You may read about derivatives such as CDOs (Collateralized Debt Obligations), and Credit Default Swaps. (Derivatives are just a name for products that allow investments in loans and other types of financial transactions, by buying not the loan, but the right to share in the profits from the interest earned. Of course the idea is that the loan or transaction is secured by collateral, not unlike the arrangement in a simple home mortgage.)

With the second or third largest banking organization in the country in trouble, everyone who already hasn't, loses faith in the underlying assumption that his/her investment, assets, have any value: THERE IS A FURTHER EROSION OF CONFIDENCE. Once the spiral downward began, and the Government did not prevent it from accelerating (by saving Lehman Bros. with their portfolio of MBS and other derivatives), we had the IndyMacBank takeover by FDIC, because of a run on the bank (see earlier posts), and here we are.

What we have found out about the CitiCorp fall is that through its multiple entities, the organization had, at risk, $2 trillion, much of it being "off the books". The risk was partially in MBS but only t relatively small percentage when looking at the entire picture. A view develops that might explain why the Mortgage Backed Securities issue created an immediate firestorm. Financial institutions like Citi, JPMorganChase, and Bank of America had invested enormous sums in high yield, high risk investments. Not only did they have MBS, but they were holding all nature of derivatives, especially credit default swaps.

This was essentially a bet that there would be defaults in loans, and therefore the bank had to hedge its bets. In essence, bet against itself, with other institutions buying the investments derived from the loans made by the bank. It was selling part of each loan in a portfolio, with the Seller protecting itself by sharing the risk, and the buyer trying to out-guess the Seller, paying a discounted price for what might turn out to be a perfectly solid loan. This was not done loan by loan, but by billions of dollars worth of pieces of loans, all at once.

As it turned out, when the spiral down began, even good loans turned bad because businesses, which had been solid, began losing orders, and as credit became almost non-existent with no one knowing who would be available tomorrow to pay back a loan taken today, the speed increased until it over-powered all reason. Panic set in, and while the panic has subsided, the anxiety has not. Just as the run on the bank (see earlier posts) was and remains due to a lack of confidence in the system rather than a failure of the system, the market plunge was due to everyone trying to sell "bad" stocks all at the same time. Was there a reason for concern? YES. Panic? NO.

WE NEED THE TINKERBELL PROJECT. Remember in Peter Pan, when Tinkerbell was weak and in danger of dying, and Peter asked everyone to believe in Tink, and to say so out loud so Tink would know that everyone believed, and she would live? Well, we need to believe in the system. Is it flawed? YES. Dead? NO. Will we recover- certainly, but the price will have been steep. Tens of thousands of jobs lost, companies forced into liquidation because no one wanted its stock, pension and other retirement plans devastated by securities losses (remember the MBS issue).

Interestingly, those who were the first to stop believing were the biggest losers (financially), including many of the largest investment houses and banks in the Country. The rest of us were dragged along for the ride.

When the system stops believing in itself, when the so-called market makers and money brokers lose confidence and bet against themselves and others of their kind, panic will inevitably start. This has been the worst realization of that fact since the Depression. Perhaps, and hopefully, the worst is over. Just keep repeating "I DO BELIEVE, I DO BELIEVE, I DO BELIEVE..."


Author's Copyright by Richard I. Isacoff, Esq., November 2008

http://www.isacofflaw.com/

Homeowners Not To Get Bailout Money

F.D.I.C. - MORTGAGE CRISIS - BAILOUT - MORTGAGE BACKED SECURITIES

It comes as quite a surprise to many, like the 535 members of Congress, that the recommendation and plans put forth by the F.D.I.C. regarding the way in which to help homeowners and stabilize the housing market is being ignored by the Administration's Secretary of the Treasury, Henry Paulson.

Now, truth be told, Secretary Paulson is probably a good bit smarter and experienced than I am, but perhaps some of his advisers and employees are not. More to the point, I suggest that F.D.I.C., suggesting a direct to homeowner mortgage aid program, may have the correct perspective. If the complaint is accurate, that the problem started due to adjustable mortgages being sold to and "bought" by sub-prime borrowers leading to Mortgage Backed Securities ("MBS"), then fixing those mortgages should alleviate the worst of the problems.

The securities markets, those entities that buy and sell literally millions of mortgages after they are bundled into MBS, have determined that the assets, because the true Fair Market Value is unknown, are worthless. That is as absurd as stating that they are worth 100% of the principal and interest owed on each underlying mortgage. EXTREMES - both views. There will be losses, but if they can be quantified by F.D.I.C. or any other agency of the Federal government, the investors in MBS should be more secure, have a sense of balance restored, and allow the markets to return to a sense of normalcy.

The F.D.I.C. program, in its entirety is at, http://www.fdic.gov/loans/loanmod/index.html. The basics are to underwrite a portion of the outstanding mortgages where there is a default, so that the holders of the MBS know that the value is still there. The basics of the program, which the Treasury is fighting despite the rules for use of the Bailout funds, is to MODIFY EXISTING MORTGAGE LOANS

1. Pay servicers $1,000 to cover expenses for each loan modified
2. FDIC/bailout funds would share up to 50% of the losses if a modified loan re-defaults

FDIC projections state that 2.22 million loans could be modified, having a book value of $444 billion with a total program cost of only $24.4 billion. Assuming a 33% default rate 1.5 million foreclosures could be avoided

One might also believe that while the people working for Secretary Paulson are working around the clock and are very bright, some of them in key spots have no experience in this type if crisis. If you have never worked-out failed assets (loans) in real-life, not just through computer modeling, nor as estimated by economists, actuaries, financial analysts, and Goldman Sachs/Wall Street, you may miss critical details. Here, to fix the problem, the problem must be understood: it is not securities; it is the inability to pay mortgages and the resulting erosion of home values.

THERE IS NO EASY ANSWER! That does not mean that we should have had to panic, lose confidence in the system itself, and, by stampede, cause the securities market drop like a rock.

author's copyright by Richard I. Isacoff, Esq. - November 2008

http://www.isacofflaw.com/

Who Is The Bailout Helping Right Now?

FORECLOSURE - BAILOUT - PREDATORY & SUB-PRIME

For days and even weeks, aside from the election, the headlines were about the financial bailout package the government was establishing for large banks and other financial entities, so that lending would begin again. Credit had gotten very tight, meaning that borrowing was difficult, even for corporations. Especially hard hit was and is the mortgage industry.

With all of the talk about "Toxic Assets" (see prior posts) banks and Mortgage Backed Securities ("MBS") holders were scrambling to avoid being the kid who, while paying musical chairs, finds him/herself without any place to sit. In this case perhaps anyplace to hide would have been more apt. There was and still is a fear that the MBS will be worthless. If they are valued at less than 90% of the pre-hysteria price, it is NOT due to value, but rather to a continued state of anxiety. Anxiety, by the way, has been described, at least in part, as fear without an object or real situation of which one is afraid. It's kind of like "free floating fear" - or "A Fear without a Cause" (excuse me James Dean).

The money is SUPPOSED to be used for loans, INCLUDING loans to homeowners to stop foreclosures, especially if the problems relate to rates adjusting upward. JPMorganChase announced that it would suspend foreclosures for a 90 day period; Washington Mutual (WAMU) had set up special procedures to assist in mortgage modifications to prevent foreclosures; Bank of America, which recently acquired Countrywide Home Loans & Countrywide Mortgages et al, has settled actions brought against Countrywide by 22 states for predatory lending practices. This settlement is claimed to be a lifeline for homeowners in default, or in danger of default; Wells Fargo Bank, Wells Fargo Financial, Wells Fargo Home Mortgage etc have each established an executive office for loss mitigation to keep homeowners from losing their houses.

Is Any Of This Working?

Based on the dozen or so loans with which I am working, I can say "MAYBE", in some cases. The problem still remains - MORTGAGE BACKED SECURITIES. There are contracts between and among servicers, packagers, securitizers, brokers, investors ... None of these parties wants to accept less than 100% of what the contract states that it will be paid, yet they are each certain that the MBSs are worth far less than face value; and will cause economic ruin if the government doesn't buy them from the entities which hold them; and buy them at face value, with the government taking any losses. WHAT IS WRONG WITH THIS PICTURE?

Why would it not be reasonable for the Federal Government - Congress for example - to pass a law, to permit these contracts for MBSs to be broken, and the individual loans modified? After establishing a post-depression like Federal Government Agency, not like a FannieMae or FreddieMac, but like the FHA or Rural Housing (part of USDA), this agency could rewrite the truly troubled loans in a portfolio (MBS), making the payments affordable to the homeowner, and taking the toxicity out of the MBS asset. The same agency could originate new loans for "credit worthy" borrowers, giving them the government rate for their loans, and eliminating the worst of the ARMs. This entity could also encourage first-time home buyers by offering great rates, and a slightly higher than normal loan-to-value ratio WITHOUT mortgage insurance premiums. (The issues presented are not meant to be a panacea for the problems; however they can work, if placed in context with other legislation)

But Is It Working?

Yes for me and my clients! But in general,NOT REALLY! I am regularly hearing from lenders Counsel, "The investor will not permit modifications" and from the loss mitigation departments themselves,"Send us our loss mitigation package and we will consider it. IF IT LOOKS LIKE WE CAN HELP, we will call off the foreclosure sale". My answer is "Can't you postpone the sale, which is scheduled for next week, NOW?" The response is, too often, "NO". Typically, I can get to a person who can assist my client, but that is because I am an attorney and I have an extensive banking and mortgage industry background. I know how the business works, and I can empatize with the people on the other end of the telephone. But for others, even other lawyers, NO! Of the cases I have, 1/2 are referrals from other attorneys.

The pace of sales is still escalating although we don't hear about it as much. That is due to the fact that there was an onslaught of "Notices of Intent" sent to borrowers, putting them into foreclosure status. Now the volume has stabilized, so it is not news (we also had an election in the middle - how dare they). Please note that I said that the volume has stabilized, not that is going down, or that fewer borrowers are losing homes, or that sales have stopped. I merely stated that things are staying the same - it is just that we are numb to it - unless of course the victim/borrower in trouble is us!

To be fair, Lenders/Servicers are caught in the middle. The owners of most of the loans are mutual funds, retirement plans, 401K plans, private investors, all looking for a pre-determined return on the amount invested. No One wants to give up anything, but Everyone is clamoring for the other party to fix it, or for the Bailout to work.

Until there is a Federal solution, mandated by Congress, the crisis will continue. Is there a recession? Ask an economist for the technical answer. In REALITY, which in this case is based PURELY ON PERCEPTION, not the data or true financial information, YES. Are MBSs worthless? NO! Will anyone believe that? No enough of them!

The Next Wave of The Consumer Finance Crisis

CONSUMER DEBT - CREDIT CRISIS - FINANCIAL CRISIS

The other shoe is about to drop. Everyone is concentrating on the mortgage debacle and the stock market slide, justifiably so. However, the Next Wave is coming and it might be a mid-level tsunami.

Households, consumers in other words, have been weathering the storm of mortgage payment hikes, jumps in gasoline prices, higher heating bills, and losses is their IRAs and 401Ks etc, by relying on CREDIT. Unfortunately it is not small town bank credit: it is Credit Card Credit.

Now, credit cards are not inherently evil, any more than a car loan or home loan or student loan is inherently evil. However, because of the easy access to money that the borrower doesn't have, and may never be able to pay back despite making payments every month, CREDIT CARDS are the "drug of choice"! And, as always, it is the fine print that "gets you".

Buried in the disclosure information you get when you receive a new or renewed credit card, is language that says the company can raise the rate of interest you pay for nearly any reason, but particularly for 1. a drop in your income 2. the fact that you have too much outstanding credit, even if it is unused credit (a line of credit on which you owe nothing) 3. You have defaulted on any of your credit cards or other credit payments(that means being even one (1) day late in your payment, even if you pay the late fee). This last item is called a 'UNIVERSAL DEFAULT RATE" , and nearly every issuer has a policy that sets a default rate that get charged, without anyone looking to see what really has gone on in the account. Many of the card issuers, including Bank of America which is the largest issuer, have the default rate set at 29.99% or even 30.99%.

Your 9.99% card suddenly is 29.99%, and every other card moves to its default rate as well, just because of being one (1) day late on one (1) card!

To give you an idea of what this means in real terms, assume that you have a $10,000 balance on one (1) card. You pay $250 per month. If you pay ON TIME every month, and you do not charge even $1.00, you can pay the card balance in full in 49 months. If you can pay $275 per month, then it only takes 44 months to pay off the card. But, if you are one day late, and the rate goes to the default rate of 29.99%, with your payment of $250 it will take you forever to pay off the debt -literally!! If you raise the payment to $275 per month, it will still take you 98 months, more than 8 years, to eliminate the balance. Multiply this by the two or three cards that you might have and there is a nightmare because of rate jumps to the UNIVERSAL DEFAULT RATE.

So what does that mean? No more credit cards to use to buy groceries and medications, and pay for doctors' visits? Maybe! And if you have been using the card so that you can make your mortgage payments with your paycheck, you are stuck, really stuck, and it is time to get professional help. To whom do you turn? Well, not to the internet advertisers ("We can cut your payments in half and eliminate your debt") as a general rule.

I suggest that, if you are in a situation like the one I described, you go to a "Consumer Credit Counseling Service of (insert name of city/county/state)". If they can devise a plan and you can make the payments without giving up food and toothpast and..., then try the plan. The CCCS people are generally very good. If you are told that they cannot help, or if you feel that the payments are beyond your ability to continue to make after trying, or even before trying, seek advice from an attorney who handles Debt workout, debt counseling, and bankruptcy: and who gives an initial consultation for free. [ more on this next post]

www.isacofflaw.com

author's copyright by Richard I. Isacoff, Esq October 2008

Foreclosure Crisis - How To Stop It

FORECLOSURE CRISIS - PREDATORY LENDING - MORTGAGE BACKED SECURITIES ("MBS")


Why do we have a foreclosure crisis, beside the obvious reason that payments are not being made? Quite simply because the mortgage industry changed the rules! In fact, the mortgage industry itself no longer has any say in the matter. As stated in earlier posts, mortgages have been packaged and sold as securities, so it is the managers of the securities who have control.


In a New York Times news story appearing 10/25/2008, some of these investors/managers have threatened to sue (not sure who or what) if the mortgages in securitized pools (the bunches of mortgages that have been put together and sold as shares of a bond -see earlier posts) are renegotiated. They will sue if a lender tries to change terms of a loan, even if to stop a foreclosure and salvage value for the "pool" by keeping the homeowner able to pay.


In the past, a borrower could call the bank, or his/her attorney could call, and discuss modifying the terms to avoid a foreclosure. NO MORE in many cases because no bank owns the loan - the investment world and thousands of investors each own a tiny bit of every loan that has been securitized. The SEC and other agencies are, and should be, looking into a way to force the issue. WHY? The means are already in place. We have the Securities and Exchange Commission (SEC), and the IRS.


The SEC regulates the public sale of securities, and that's what mortgages have packaged as - Mortgage Backed SECURITIES (MBS). The folks putting the pools together and some of the initial investors get tax breaks, so the IRS already has some authority there.


Perhaps the concept is too simple but - why can't the MBS be "taken apart" and restructured? When a mortgage loans, which are part of a MBS go delinquent, why can't the MBS be forced to permit a rewrite/modification of that loan? IRS could waive penalties, and the SEC could allow/force the restructure of the MBS. Investors might get a slightly lower return on the investment but that is better than the devaluation that is occurring now.

We now have "Toxic Assets"! What is meant by that specifically are MBS - no one KNOWS the value of a securitized pool because no one is certain of how many loans will "go bad". How many foreclosures will there be, and will they overwhelm the loss assumptions made when the pool was originally sold to the public? The loss will be minimized if the underlying collateral, the houses that the mortgages secure, do not go to auction. If the owner/borrowers keep paying, at worst, the return on the investment is lessened, but only minimally. If too many Borrowers stop paying, for whatever reason, the return goes to zero. How to stop it? Stop the foreclosure. Allow mortgage modifications -restructure the pools if necessary. There are loss reserves built into the pools. There are ways to keep them from being exceeded, but not by insisting that an MBS cannot be touched.

www.isacofflaw.com

author's copyright by Richard I. Isacoff, Esq October 2008

So Much For Lawyer Jokes

PREDATORY LENDING - MORTGAGE MELTDOWN - FINANCIAL CRISIS

In past posts, I have tried to explain the mortgage side of the current economic crisis, and how it occurred. For individuals, as opposed to the larger investment world, much of the blame should be placed on 1. borrowers who wanted cash and didn't care how much it cost, 2. the predatory lenders who lied and misled money-hungry borrowers, 3. the new financial structure called Mortgage Backed Securities ("MBS"), where no lender had any risk if the loan failed - if the borrower did not pay ( no one cared if the borrower cold pay 2 years later!), and 4. the lawyers who did the closings .

Now, being an attorney and working as one, I have two sides of this issue to tell. First, many of the closings which occurred, were set by Internet-based mortgage brokers/lenders, or by direct mail and telephone marketers. In most states, no attorney was NEEDED to perform a closing. There were thousands of "witness only closings" where a notary or similar official, witnessed the borrower(s) sign the loan documents, "acknowledged" (witnessed) the signatures. That's it!! No explanation of what anything meant, no chance for a borrower on a refinance to find out what the "Notice of Right to Cancel" meant and how it should be used; just a witness to the signing.

A typical mortgage company closing package consists of 70 pages of documents for a single loan. Virtually no borrower, who has not had several closings before, can even fathom what all of the documents mean. Specifically, few, if any, borrowers read and understood the Adjustable Rate Notes (the I.O.U.s), especially where there was a discussion of rates being set to an "Index" of the "LIBOR" and a "Margin" which was added to the "Index". Worse were the very misleading terms like "Simple Interest Mortgage" which described the interest calculation but was anything but simple to comprehend.

The other documents were equally difficult: Truth-In-Lending (TIL) disclosure which could be more misleading than what the broker/originator/lender said; the Notice Of Right to Cancel; the Good Faith Estimate; the Mortgage itself, which is a very detailed document, that gave the right to foreclose following the law, but without judicial review in many states (Massachusetts being one of them); and the HUD-1 Settlement Statement, which shows all of the numbers/costs/fees; and on and on. If they are so difficult, who was there for the Borrower to explain? Certainly not a notary or other "witness only".

In most states, Massachusetts included, the attorney acting as the Settlement Agent, actually represents the LENDER, not the Borrower, even though the Borrower pays the cost! In my practice, I tell Borrowers that the law states that I represent the Lender, but that I will consider myself representing the Borrower as well, if the Borrower so desires, and that in the case of a conflict, I will stop the closing, contact the lender, and have the Borrower and Lender work out the problem, with me acting as the go-between. In reality, taking the position I do, I keep the Lender safe from a suit for bad practices, and keep the Borrower safe from a Predatory Lender. Seldom is this matter really explained to Borrowers.

By far the biggest shortfall in the process, is that Attorneys DO NOT explain all of the documents to the Borrower. I have heard attorneys tell a Borrower, "This is the mortgage - it means that your house is collateral for the loan and if you don't pay your mortgage, the bank will take your house -Sign here and here and here". The attorney's assertion was basically correct, but then why are there 15 pages? ATTORNEYS ARE NOT DOING THEIR JOB IF THEY DO NOT EXPLAIN EACH PARAGRAPH OF THE KEY DOCUMENTS!!! I believe that it is fair to say that many Borrowers relied on the closing attorney to warn the Borrower of problems, and to explain exactly what the terms of the loan were. Many attorneys did not, and still do not, understand the various types of mortgage loans, and therefore cannot explain the myriad of products that hit the market within the past 4 years.

In closing, there is plenty of blame for all - attorneys however should have been more vigilant; lenders should have been less greedy; and borrowers should have said "Please explain this stuff to me - I do not really understand", but the money killed the curiosity (which killed the cat I guess).

www.isacofflaw.com

author's copyright by Richard I. Isacoff, Esq. October 2008

Mortgage Fraud: A Two-Way Street

PREDATORY LENDING - MORTGAGE LOAN CRISIS

I am currently representing a dozen or so clients, who borrowed money, mainly through mortgage brokers, and cannot continue to pay back the debt. In some, in fact most, of the cases, the mortgage broker or lender sold the borrower one thing, and delivered something else. But there are cases where the borrower knows the deal and proceeds anyway, through misplaced faith in the ever-increasing market price, the mortgage broker being his friend, or simple greed to be worried about when it comes time to worry. WE ARE THERE!!!

Two quick examples:
Bad Lender
1. Borrower has a credit score into the mid 700s. She is a "prime", not sub-prime, borrower. The broker she goes to is creative. He eliminates certain rent received by the borrower in the other portion of her house, and tells her that she qualifies for an Adjustable Rate Mortgage ("ARM") with a starting rate of 6.625%. Her rate will be fixed at the 6.625% for 2 years and then will change periodically for the rest of the term. He goes on to tell her that the rate will go up and down every now and then like the prime rate does. The Truth-In-Lending Disclosure ("TIL") required under the law to be given to a borrower both before and during the closing confirms the assertion of the broker. In fact, it shows 24 monthly payments of $1,117 and 336 payments of $1,159. This dollar amount increase translate to a rate hike of only .375%, making her maximum rate of interest 7%.

Unfortunately for my client she bought a 2/28 6 month LIBOR¹ loan. This means that after the first 24 months, the rate will change, the first time a maximum of 3%, and then will change every 6 months. The formula for the change is the London Inter Bank Offering Rate (LIBOR) PLUS a margin. That is set by the lender to determine its profit. A reasonable margin is 2%-2 1/2%. My clients margin is 5.875% . The LIBOR was at 5.3215%. Combine the 2 and you have the potential rate of 11.1875% and payments of $1,705.90. This is an increase of $588 or 52.7%Luckily, the 3% maximum over the original start rate took over. But after 6 more months, the rate moved up again by 1% and was at the 11% mark.

What was affordable for my client no longer is, due to the huge increase in payments - 52%!! She wanted the house and signed where the lender's attorney told her to sign. She didn't even know what questions to ask. Her mortgage broker was at the closing as she believed that if he thought the loan was okay for her, then it must be fine.

My client missed two critical points - she did not question what an adjustable loan was by insisting that the broker explain it in depth, and she did not have an attorney working for her, or at least with the mindset that he/she had to explain all of the terms to my client. In my client's defense, the TIL looked fine - a one time $42 adjustment for the term of the loan.

Is the lender responsible to fix the financial mess? I believe YES and am in negotiations with the lender now to try to prevent a foreclosure.

Bad Borrower
2. This second example is a situation quite different. The borrower, a prospective client, took a loan that had a low teaser rate, a rate that was good for a month/year/3 months etc. This particular loan had a provision like the one I detailed in an earlier post, where the payment stayed the same but the rate moved the second month. After the first year, the borrower owed more than he/she borrowed because the payment as based on a very low (2%) teaser, while the actual interest rate that determined the amount that was owed each month, changed to a standard market rate the second month.

Was this client told of the hazards? NO!! HOWEVER, this is the 13th refinance in 25 years. It will be difficult to convince anyone that the borrower was not sufficiently sophisticated to either understand the terms or hire an attorney to advise him/her. In similar cases I have seen that the borrower has inflated his/her income, or assets, or.... whatever makes the loan get approved.

In the first scenario, the lender is totally at fault, perhaps through the broker but certainly there is no fault on the part of the borrower except naivete. In the second situation, the borrower knew or should have known what he/she was getting into, or should have known that he/she needed professional help to explain the terms. This is why I call this a two-way street.

In the vast majority of cases I review, the broker, lender, servicer, etc has taken advantage of the borrowers ignorance, naivete, or even arrogance. The borrower, unless well-versed in mortgages has not a prayer of getting a good deal if the lender etc is not totally honest and committed to Good Faith and Fair Dealing.

The next post will delve into the "bailout" and its ever changing character, and WHY YOU NEED AN ATTORNEY to advise you, especially if you believe you have a "bad" loan.


¹ [It is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. The 6 month LIBOR rate is normally 1/2%-3/4% above the 1 year Treasury bill rate which is the other rate that could be used. They usually move at the same pace although the LIBOR is more volatile.]

http://www.isacofflaw.com
authors copyright by Richard I. Isacoff, Esq 2008

The Bailout ("TARP") - What Does This Mean To Us

PREDATORY LENDING - SUBPRIME LOAN CRISIS


In the last several posts, I have tried to explain what has happened, and how it happened, to the finance markets, especially residential lending. What I will try to do here is show what it means to us now, and in the near future.

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

TROUBLED ASSETS RELIEF PROGRAM ("TARP")

Congress has given $700 billion to the financial industry to help them stave off a meltdown o the U.S. economy. Maybe it will work or maybe it won't; time will tell. What is being done for our friends, neighbors, co-workers ad all of the others who are facing foreclosure NOW - NOTHING! Well, that may be a bit harsh, but only a bit. There are no programs being established to ACTUALLY slow the pace of foreclosures, except on a state by state basis, if at all. And, those programs are just giving additional time to homeowners to try to get the current holder of the mortgage or the servicer or the Pooling entity to modify the individual mortgage. If you have read this Blog, or just followed the news, you will have concluded that the process is not working on any reasonable scale.


We must have a change in the MBSs to permit them to make the best deals possible so as to avoid taking homes. We must hold mortgage brokers, lenders, appraisers, and borrowers accountable for their actions. But, we have to help save homes. The 4 letters hated by banks and other mortgage lenders are O-R-E-O, which stands for "Other real estate owned" - foreclosed property held by the lender. Those houses do not earn money, in fact that eat it -fast. Banks and other lenders are all about money, not houses.

Specifics:

The bill as passed will subsidize losses suffered by the Mortgage Backed Securities by buying these "bad assets", and therefore subsidizing the major investors in them. That is not all bad as many 401ks, pensions, IRAs and just investments made by everyday people, as well as investment house company giants. Unfortunately, this translates to "when people cannot afford their mortgage payments, regardless of why, and the loan is considered "bad" (technically both in default and "non-performing") the government will do nothing to help the homeowner, but will buy the bad loan. Are there any provisions to rewrite bad loans? NO! Will the securities that own 2,000 loans in one MBS, "too many" of which are bad, try to work-out the problems and modify the terms of the mortgage? NO! Will Foreclosures stop or even stop? NOT NECESSARILY! The are no provisions in the bill for any help for homeowners in trouble.

In fairness, by the time Congress paid attention to the issues, something had to be done to stop the economy from dropping further. However, the only real mandate that will deal with consumer finance issues, specifically mortgages; For companies in the government program, Secretary of the Treasury Paulson will be required to implement a plan to encourage lenders to modify mortgage loans through existing federal home-ownership programs.

One alternative would have been to have HUD or FHA guarantee the loans that comprised the MBSs. If the homeowner-borrower could make the payments of a 30 year fixed rate mortgage, for the current market value of the property, at 6% interest, then that loan is re-written, brought current, and put back into the portfolio. The losses would be quantified and the average citizen in trouble would be helped.

The way things are set now, a number of my clients face a huge uphill battle to save their homes. One, a 60 year old, single, 32 year experienced teacher in a local parochial school, had to file bankruptcy to save her house. The loan, now part of a MBS, has an interest rate that adjusts every month. The disclosures showed that her payments stayed the same each month for each 12 month period with payments increasing once a year, but only by 7%. A $600 payment could only increase $42. The interest kept building though. At the end of the first year, she owed $4,500 more than she borrowed. Her payments stayed moderate until the 43rd month when the jump would go from $700 per month to $1,400.30 per month. The loan will be considered "bad"; the MBS will get its money from the bailout; my client, the homeowner will lose her house. The bankruptcy, a last resort will allow the removal of a second mortgage that was put on based on a fake value, by inflating reality $30,000. This client literally had no clue about what was happening. She went to a broker, got a loan, was lied to, and now the broker just wants to say, well we can probably appraise it higher and rewrite the entire amount into a new loan. No modification, in fact, no return calls from the lender's legal counsel.

Another client also got a loan based on a quick sell and no information. The loan was a "full documentation loan" meaning that the lender has tax returns, W-2s, a full and accurate application, and an appraisal commissioned by the broker. The adjustment of rate was disguised because of the way the disclosures for ARMS are allowed to be completed. Although payments could double within 3 years, the Truth in Lending Disclosure showed a mere .375% increase, or $49, over the entire 30 year period. The response to a call to fix the obvious misrepresentation, and unfair and deceptive practices,was to tell me that "This cannot be modified. This is part of a Pool and the modification is not permitted". While I await a copy of that agreement, my client is pending foreclosure. Oh, and by the way, this client was NOT a sub-prime borrower. Her credit score exceed 710

Hopefully, all of these issues about which I have written so far, have been made a little clearer to you, the reader. The analysis will continue, trying to make complicated financial issues understandable. Comment, suggest, criticize if necessary.

http://www.isacofflaw.com/

author's copyright by Richard I. Isacoff, Esq 2008

No Confidence in the System? Let's Create a "Run on the Bank"

SUBPRIME LOAN CRISIS -PREDATORY LENDING CRISIS

(NOTE: A few definitions are necessary and should have been set out in the first posting:

1. There are no subprime loans. There are subprime borrowers -this is governed solely by the FICO credit score. Under 680 and you are subprime. Do you pay your bills on time, have a good and steady job, have equity in your home, have a promotion coming up along with a raise? IT DOESN'T MATTER; if your score is low - you are subprime. Maybe you have too much credit, or not enough, or have closed a number of credit card accounts - all of these things affect the score.

2. There are no predatory loans. The are loans that are used by not-so-nice originators who prey on borowers. Therefore, no predatory loans but Predatory Lending and Lenders)


In the last post, I postulated that only 4% of the value of all of the loans, now part of huge securitizations, called mortgage-backed securities, will be lost. Is a 4% loss a crisis? Are all of the loans made to subprime borrowers going to be worth $0.00? The answer is NO to both questions. If that is the case, then what is the problem? How much is an acceptable loss?

Imagine a small to medium sized "local" bank. Imagine every depositor showing up at all of the bank's offices on the same day demanding their money, in cash. Can the bank pay everyone? NO! The deposits have been invested in all kinds of normal loans and other earning assets, like overnight loans to other banks. What happens to the bank when all of its depositors demand immediate cash? THE BANK FAILS, and FDIC steps in to pay depositors what was in their accounts. That is essentially the Indy-Mac Bank scenario. There, FDIC rather than closing the bank figured it would just take over, everything, and fix the reason for the "RUN ON THE BANK". That is the term to describe what depositors did.

Due to the failures and the uncertainty surrounding the subprime loans/predatory lending, banks do not know how to value assets that they hold. Further, if no one can determine the value of a mortgage-backed security ("MBS"), then the investors do not have anything that can be sold. Banks that are holding MBSs are stuck. The pools are static. Banks wii not trust each other because no one knows which bank will fall next!

This lack of confidence, created somewhat artificially by hype about subprime loans etc, has left depositors shaking, not knowing what is safe, banks not lending to other banks which stops everything because there is no liquidity, and the stock and bond markets, here and abroad, extremely violatile because everyone is looking for CONFIDENCE that everything is not worth nothing. Again, I will state over and over that even if the misnamed subprime loans are defaulting at a higher than average rate, higher than that which would be seen in a "normal" loan portfolio in "normal" times, these loans do not make up the entire world of mortgages.

Step back for a moment (watch your step though) a think about billions and billions of dollars of residential mortgage loans where some, not all, and mainly originated since 2004, will have a higher loss ratio than should be expected. The MBSs are not comprised of only these "toxic" loans (I suppose swallowing enough inky paper would be toxic, but otherwise the term is just more inflammation). They are a subset of all of the loans put on the books during the same period. The MBSs are made up of all types of loans - most are a more or less random assortment.

OKAY, SO WHAT IS THE PROBLEM AND CAN IT BE FIXED?

The problem is the MBS structures. As dealt with earlier, the Pooling and Servicing agreements that bind these MBS packages and get SEC approval, restrict the ability to modify individual loans owned by the pool. There are legal issues involved in disturbing the pool beyond a certain point, and tax issues for the investors, servicer, and the MBS itself.

One possible solution is for Congress to pass legislation that mandates the MBSs be opened and the indiviual assets managed. IRS could deal with the tax issues later. Getting the ability to really determine the value of the particular security would restore confidence to the markets. It would also permit a so-called "mark to market" - valuation of the portfolio based on the real up-to-date figures and loan histories. THE TASK WOULD BE ENORMOUS, but so is dealing with the lingering loss of confidence, bank failures, tightening of credit due to liquidity problems, and handling the volitility of the market and having pensions wiped out due to another 777 point plunge.

I personally oversaw the workout of several S&Ls in the mid-80s. I know the work that lies ahead to address the core issues. But, there are those in and out of government who also dealt with the S&L crisis which could have been a $1 trillion mess. Perhaps, instead of just a bailout, our leaders should use it to stop the bleeding, and then immediately move towards the steps outlined above.

(NEXT UP: WHAT THIS MEANS TO 2 FAMILIES IN WESTERN MASSACHUSETTS)

http://www.isacofflaw.com/

author's copyright by Richard I. Isacoff, Esq 2008