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