Mortgage Modifications ARE Scams

Mortgage modifications are merely another bank bailout by the government.  These modifications provide government assistance to mortgage companies but mortgage companies are reluctant to approve the modifications.  There’s a trap here, and I’ll be getting to that in a second.

When the Home Affordable Modification Program (aptly, “H.A.M.P.”) hit the scene, it appeared that the program, while narrowly tailored, might yield some good results for people with bad mortgages.  Not so.

My experience dealing with clients has been that mortgage modifications NEVER work.  I have not seen one succeed yet.  I assume that someone, somewhere has had a mortgage modification be approved.

THE TRAP:

1. The hypothetical homeowner (we’ll call him “Grover.”  Grover is such a typical name, after all.) loses his job and cannot afford mortgage payments anymore.

2. Grover calls the mortgage company and asks for modification options.

3. Mortgage company rep tells him that he’s not eligible to look at loss mitigation options, including modification, until he’s behind on his mortgage.

4. Grover doesn’t pay his mortgage for a month, technically putting him in default.  Grover then calls the mortgage company back.

5.  Mortgage company offers to put Grover in a trial mortgage modification for, say, $500 per month less than he was paying.

6. Grover makes all the trial payments faithfully and on time during the six-month trial period.  Good Grover.

7. At the end of the trial period, the mortgage company informs Grover that he does not qualify for the modification AND – I kid you not – he’s $3,000 behind on his mortgage payments!!

8. Predictably, Grover has no way to bring his mortgage current and make the higher mortgage payments.  The house goes into foreclosure and Grover probably files for bankruptcy as well.

This scenario is repeated ad infinitum, ad nauseum.

AND ONE MORE THING: the web site for mortgage servicers, found here, is run by none other than FANNIE MAE!  What is this world coming to?

It makes me angry that incompetent quasi-governmental organizations are allowed to control the fate of thousands of homeowners.  Remember when Fannie Mae, Freddie Mac, and Indy Mac collapsed?  Well, we’re still footing the bill for that.

I’m doing my level best not to explode into a tirade of electronic expletives.

Mortgage Modification Scams

Under the new mortgage modification schemes set up by the federal government, homeowners in default on their mortgages are possibly getting some relief.   But a cursory look at the scheme is enough to make anyone throw up his hands in disgust and confusion.  The terms of the modifications appear narrow, and the homeowners eligible for the modification a small segment of the public.  Under the new mortgage modification regime, the mortgage lenders are necessary to drive and decode the mortgage loan modification process for borrowers.  As anyone who has ever dealt with a mortgage company knows, they can be extremely difficult to deal with.

When homeowners face default, several issues are at play.  By the time bankruptcy is considered and I talk to these people, the issues are even more pronounced.  In many ways, the problem of mortgage modification and the fear of losing one’s house is primarily psychological and cultural.  It’s simply hard to deal with a technical and complex process when one has too many intense feelings of fear going on.  Most people tend to be emotionally attached to their houses.  But for us Americans the symbolism runs deeper because our psyches are affected by our cultural values.

Houses are important in our society.  Many Americans are conditioned from a very young age to see home ownership as part of the American Dream.  And the bigger the house one has, the bigger a slice of the American Dream one possesses.  Houses can be status symbols, they can represent one’s safehaven from the outside world, one’s “castle.”

Americans are scrappy and freedom-loving.  Generally speaking, we don’t like government interfering in our business.  Houses represent our sanctuary from laws governing the rest of society.  Without a search warrant, our houses are theoretically inviolable by the police under the Fourth Amendment of the Bill of Rights.

Homeowners-in-default may feel like failures because in our society, symbols of material success have correlated with their moral worth  since the days of the Puritans.  Facing foreclosure is scary for some people, not because they are losing their home, but because their sense of their own moral value is shaken at a fundamental and sometimes unconscious level.

In some ways, the problem is a lack of technical knowledge and expertise.  When I start talking about topics relating to mortgages, finance, law, or other such “serious, business-y” things, most folks’ eyes glaze over.  People are so conditioned to believe that they are incapable of comprehending these “business-y” things that they never bother to learn the fundamentals of, say, mortgage finance.

Technical knowledge is hard to obtain.  Sometimes it requires many years to learn because the jargon is too thick.  With access to Suze Orman, MSN Money, and a free internet account available at the local public library, there’s really no excuse not to learn.  One of my favorite proverbs comes from Turkish: “bilmemek ayip degil, ama ogrenmemek ayip.”  It translates to: “it’s not shameful not to know, but it is shameful not to learn.”

Because of these factors, many homeowners who find themselves in default are easily persuaded to pay lots of money to people who can “guarantee” a successful loan modification.  Surely there’s an element of caveat emptor, but at the same time, these people need to quit trying to defraud homeowners-in-default out of their hard-earned (and probably scarce) money.

What should you do if you’re a homeowner in default on your mortgage(s)?

1. By all means, call your lender and see if you qualify for a loan modification!  Here’s how.  Play computer solitaire while you’re on the phone with the rep – it’ll help keep you from getting emotionally engaged in the discussion and perhaps saying something prompted by your own anxiety.

2. If the lender route isn’t working, or they’re being predictably difficult to deal with, the Department of Housing and Urban Development (“HUD”) may have additional information to determine whether you’re being taken for a ride by your mortgage lender.  A good FAQ is here.  (Some vocabulary you may need to know to decipher the site: mortgagor = the homeowner; mortgagee = the lender.)

3. If you’re making no headway with the lender after several serious attempts (I’d recommend at least three), you may want to contact a lawyer who does both Chapter 13 bankruptcies and negotiates with creditors.  Most lawyers do free consultations, and can advise you of the options available to you.

4. Under no circumstances should you hire someone to modify your mortgage loan for you unless they’re licensed to practice law.  Yes, you might say, I’m just looking out for lawyer-kind, but keep in mind that lawyers are subject to extremely strict oversight by their state bar authorities.  In this way, you have some kind of recourse if they bungle things unreasonably or fail to act on your behalf.  You can always grieve your lawyer (I’m not recommending this unless they really screw up), but you are much less likely to see justice done to a rogue sales outfit that grifted you out of your money.

5. If all else fails and you have the income to swing it, you may want to look at a Chapter 13 Bankruptcy (repayment plan).  If you already did step 4 above, your lawyer will be able to advise you whether you qualify.   Your lawyer is not going to sugar-coat the truth that you are just not able to afford your current residence.

6. Keep in mind that in Colorado at least, if you can come up with all the money owed before the date of your foreclosure sale, you get to keep the house.  For that reason, your lawyer might advise you to file a Chapter 7 (wipes out your debts) and save your pennies to snatch your house out of the foreclosure.

7.  Even if you do lose your house, and even if it was very important to you, there is life after foreclosure and bankruptcy.  The key is knowing that things will eventually bounce back.  Much has been written on this topic.  Information is not difficult to find.

I’ll leave you with a true story that makes me happy in my heart whenever I think of it:

Once there was a very nice family that lost their house to foreclosure, and due to a long stretch of unemployment, had to file bankruptcy as well.  This happened to them twice in twenty years.  Today, the family is very well-situated.  The husband and wife are financially independent for the rest of their lives now because of a successful business venture.  And they lived happily ever after.  The end.

Medical Bankruptcies? Really?

Al Franken recently cited some statistics saying that 62% of consumer bankruptcies were caused by medical debt. The source for these statistics appears to be here.

Interestingly, the study was done by Physicians for a National Health Program.  After reviewing the methods used in the study, there do not appear to be any enormous holes in the methods themselves, although it is possible that some fudging may have occurred.

Several problems arise with this study, however.  A recent critique of the study can be found here.  To the article, I would add a couple of points:

1. The courts don’t track the characterization of the debt – that is, they do not differentiate between credit card debt and medical debt.

2. If credit cards were used to pay for medical expenses, separating the different kinds of debt becomes nearly impossible.

Based on my own personal experience and observation, most bankruptcies have a small medical component to them, but the medical component is merely contributory, not the primary cause of the bankruptcy filing.  In other words, medical bills did not cause the bankruptcy filing.  Usually the cause is something other than medical bills – either a mortgage issue, a car loan issue, or credit card debt.  Or sometimes all three.  Rarely do I recall filing a bankruptcy for someone who had overwhelming debt of a predominantly medical nature.

So where are all these “medical” bankruptcies coming from?  I suspect that they have been manufactured to bolster certain political opinions within this nation.  On the other hand, the American Enterprise Institute has produced a working paper which contradicts the Physicians’ study cited above.

The long and the short of it is this: the courts do not track the kinds of information upon which people are relying to inform them on the health care socialization debate.  Therefore the public has virtually no way to gauge the veracity of these studies’ statistics.

As Benjamin Disraeli put it and Mark Twain popularized it, “There are three kinds of lies: lies, damned lies, and statistics.”

Proposed Reforms

Admittedly this is a repost from a conversation on Livejournal about Congress’s proposal to allow bankruptcy judges to change the terms of a mortgage loan like they can with a car loan or other Purchase Money Security Interests.

Yes, it’s true that under Chapter 13 (personal, as opposed to business reorganization), judges can modify the terms of existing contracts in a procedure known as a “cram down.”  There are very specific terms in which this has to be done, and this is only available under Chapter 13.  This is not available under Chapter 7 (total liquidation of debts/assets) which is the vast majority of all bankruptcy filings.  Usually you find it done with cars.

Let’s say that a debtor has a car that’s worth $10,000 fair market value, but they owe $15,000 on the vehicle. The judge can knock off that $5,000 which is not secured by the value of the car.  Please keep in mind that usually the lender, with interest, has already recouped most if not all of the sticker price of the car.  Cram downs are only available for vehicles or items purchased more than 910 days before the date of filing under the 2005 BAPCPA reforms.

Local debtor’s counsel here in Colorado is pretty unanimously for this option.  Being able to cram down homes is not a new idea.  It’s an old fight that a lot of bankruptcy attorneys have been pushing for and mortgage lenders have been resisting.  This has gone on for years.  Keep in mind that there are so many caveats to eligibility that the true impact of this bill would be relatively small, but it would be helpful for debtors and mortgage companies.  Everybody wins.

Of course I’m for the proposed changes because I work in the field and it’s good for my personal bottom line.  But the changes proposed are neither revolutionary nor sweeping.  They make good sense and will prevent further losses by our already ailing mortgage industry.

Bollywood

I love Mumbai’s film industry.  This prolific set of movie makers is starting to be well know in the West (it’s about time) because Bollywood movies are a seriously good time.  Even here in Denver, Colorado, the fan base is growing steadily.

There are some masterpieces and quite a bit of dreck, so in that way Bollywood mirrors Hollywood.  Last night my husband Tony and I watched Main Prem Ki Diwani Hoon and although it was seriously dreckful, it had some huge names: Kareena Kapoor, Hrithik Roshan, and (my darling!) Abhishek Bachchan.   Regardless of the dreck quotient, these movies always make me smile.

My very favorite movie of all time, Bollywood, Hollywood, or otherwise, is Tashan.  Tashan means style.  What a lot of cheesy fun.  This movie is the most over-the-top road/gangster/romance/heist/musical adventure I’ve ever seen.  It also produced two quotes of which I’m particularly fond:

“Dude, this is India.  There’s a song for everything!”

also,

“The ishtyle, the goodluck, the pharmoola.”

Out of context it’s hard to see why this is cool.  That’s why everyone should watch Tashan, because then you’ll get it.

One of the best things about Bollywood is that where there is a critical mass of Desis (Indians), there is Bollywood.  Here in Denver you can see first-run movies in the theater on the same date they’re released in India.  There’s only one outfit I’m aware of providing this service locally.  On a crowded night, going to the theater is a very organic cultural experience.  This is especially true if you smuggle some samosas and chai into the theater.

Mortgage Companies

It turns out that my friend and mentor Tara made it into the New York Times with her work fighting mortgage companies that pull a variety of shady things.  Specifically, Tara has been sticking it to mortgage companies who have tacked on a bunch of questionable fees and made a hash of the loan servicing side of things.  Apparently the case Tara most recently won, In re Burrier, has been appealed.  It’ll be interesting to see how this pans out.

In bankruptcy it becomes hard to make mortgage loan servicers accountable for the payments they’ve received – whether or not the mortgage was in default at the time the bankruptcy was filed.

This is true regardless of whether the bankruptcy is a 7 or a 13.  Partly it’s a structural problem peculiar to bankruptcy.  Once a debtor files for bankruptcy protection, he is no longer legally liable for the mortgage on his home.  However, as long as the payments are made on time, the bank cannot foreclose.  Depending on whether a debtor wants to stay in his home, the loan-to-value ratio of the mortgage, and a plethora of other factors, the debtor can decide to either keep the property (called “retain and pay”) or walk away.

Many mortgage companies stop sending statements to borrowers since those could be construed as an attempt to collect a debt for which the client is no longer liable.  The mortgage company collecting a debt is a violation of the bankruptcy protection afforded each debtor under the Bankruptcy Code.  Thus, these companies are stuck between a rock and a hard place since they cannot use normal collection methods but the debtor can wash his hands of the property at any time after the bankruptcy is filed.

A Mock Business Plan

Mock Business Plan

Here is a mock business plan for a hypothetical law firm.  Our group of seven students created it for our Business Law Practicum at the University of Denver Law School.  While not all of the assumptions may be correct, there are issues dealt with here that all small law firms have to face.  This plan is a good starting point for thinking about the business of running a small bankruptcy practice.

L’histoire

Hi kidlets!  History can be pretty boring, at least in the way we’re usually introduced to it in school.  But learning on your own – when you’re learning about stuff you actually care about – is somehow different.  Actually interesting, right?

So what about the history of bankruptcy?  Where did this come from?

Perhaps bankruptcy is rooted deeply in philosophy underlying Christianity.  You know that line in the Lord’s Prayer, just after the daily bread bit, that says, “forgive us our trespasses as we forgive those who trespass against us?”  I’ve also seen some variants that explicitly include the word debtors, and I’d be willing  to bet money that you have as well.  Write-offs are fundamentally Christian.  There’s a great article about bankruptcy and the Bible reproduced here by one helluva lawyer.

Meanwhile, what’s the deal with the word bankruptcy itself?  Kind of a strange word, don’t you think?  Here’s what Wikipedia has to say about the origins of the term bankruptcy, the first explanation is one I’ve seen corroborated elsewhere:

The word bankruptcy is formed from the ancient Latin bancus (a bench or table), and ruptus (broken). A “bank” originally referred to a bench, which the first bankers had in the public places, in markets, fairs, etc. on which they tolled their money, wrote their bills of exchange, etc. Hence, when a banker failed, he broke his bank, to advertise to the public that the person to whom the bank belonged was no longer in a condition to continue his business. As this practice was very frequent in Italy, it is said the term bankrupt is derived from the Italian banco rotto, broken bank (see e.g. Ponte Vecchio).

Others choose rather to derive the word from the French banque, “table”, and route, “vestigium, trace”, by metaphor from the sign left in the ground, of a table once fastened to it and now gone. On this principle they trace the origin of bankrupts from the ancient Roman mensarii or argentarii, who had their tabernae or mensae in certain public places; and who, when they fled, or made off with the money that had been entrusted to them, left only the sign or shadow of their former station behind them.

Fast forward to the 1780s when the US Constitution was written and ratified.  Article 1, Section 8, Clause 4 of the Constitution gives Congress the power to create  “uniform laws on the subject of bankruptcies throughout the United States.”  A lot of bankruptcy debtors I talk to don’t seem to realize that bankruptcy is even mentioned in the Constitution.  For some reason this usually makes them feel better.  At any rate, it sure beats the heck out of debtors’ prisons or poorhouses.

And it’s certainly better than the Yassa under Ghengis Khan, which mandated that anyone who became insolvent three times be put to death.

Hello world!

Thanks for checking out my little corner of the Web!  I’m glad you’re here.  Please make yourself comfortable.

This blog was started partly on a very good suggestion from a good friend.  I’ve got the concept, I’ve got the cyberspace, now it’s all about generating the content.  This is a learning blog.  This is the dry run for the web site I plan to do later.  This is the experiment, the content generator.   If you have any tips or constructive criticism, please feel free to share.

If I’ve learned nothing else in life, it is that we need each other to survive and thrive.  Sharing information is absolutely essential to generating win-win outcomes for everybody.    And, as blogging so concretely points out, information wants to be free.  You can’t unring certain bells.  So let’s go ring a bunch of bells!