Archive for the ‘bankruptcy news’ Category
admin on March 23rd, 2009
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During the first week of March 2008, President Obama’s plan to help families keep their homes has gotten rolling. The plan will help families by refinancing their mortgages to more favorable terms in an effort to stop the foreclosure situation in this country from spiraling further out of control.
The Housing Reform Plan has three key elements and divides homeowners into 4 distinct groups.
- Those who own their homes "free and clear."
- Those whose loan-to-value (LTV) is under 80%.
- Those whose LTV is between 80% and 105%.
- Those whose mortgage payments are an unreasonably high percentage of their income.
Group 1 includes 31% of homeowners and a lower total value of all of the housing (approximately 1/4). This group is not in financial/foreclosure trouble.
Group 2 has an LTV that is not subject to receiving aid under this program. That have the opportunity to refinance their current mortgages right now and are well-advised to do so, given that mortgage rates are at historic lows.
Group 3 is the core focus of the Housing Reform Plan. The group with the LTV between 80% and 105%. Despite likely having an LTV at 80% (or better) when they purchased the home and have been paying their mortgages faithfully during this time, the reality is - the early years of a mortgage don’t allow for a lot of that payment to go towards your principle. It is primarily interest. Under normal economic conditions or even with real estate values remaining static, the LTV may only be somewhere in the neighborhood of 75%. However, in today’s economy, real estate values have plummeted substantially, in some of the largest metropolitan area - as much as 20%! This backslide has driven LTVs much higher than could have been foreseen. With these lofty LTVs, homeowners will not qualify for a refinance and that reality is what is driving the foreclosure crisis.
The reason that this magic number of 80% loan-to-value figure is important is because most banks won’t lend at levels that are higher than that. You may be familiar with the usual requirement for a 20% down-payment on your home. Most lenders require you to obtain private mortgage insurance (PMI) at figures above 80%. This was also a requirement for the "GSEs" - which is the term given to those loans purchased or backed by Fannie Mae or Freddie Mac .
If Group 3 could refinance, they would save a lot of money each year. For instance, a 1% reduction in your mortgage interest rate on a $200,000 loan would save approximately $2,000 per year. This also takes a little bit of luck as your mortgage needs to be held/backed back Fannie or Freddie. That’s about half of all mortgages out there and even though that is a requirement, over 4-million families stand to benefit from the reform plan.
Group 4 is comprised of those people close to foreclosure or already in foreclosure proceedings. The program budgets about $75-billion and uses the GSEs and the Federal Housing Administration (FHA) in an effort to prevent foreclosures. This group may have been sucked into ARMs with early teaser rates which have adjusted upward. They may also be people who lied (committing mortgage fraud) by embellishing their income at the time they purchased their homes. Of course, they may be also one of the untold numbers of people who have recently become unemployed.
The plan is directed only at owner-occupied homes. Essentially, the existing mortgage holder would have to reduce the payment to 38% of the homeowner’s income, either by reducing the interest rate, extending the term, or by reducing the principal. So, if the homeowner was paying 45% of his income, the first 7% reduction would be on the bank alone. Then the cost to bring the payment down to 31% would be split 50-50 with the government.
In return for these initiatives, lenders would get $1,000 up front and $1,000 per year for 3 years for each mortgage they modified that stayed current. This is where the controversy of the plan lies. Critics point out that it will tend to reward some homeowners that were irresponsible from the get-go - including those who lied on their original mortgage applications or who were banking on huge increases in their incomes in the future to afford the higher rates after their adjustable-rate mortgages reset. Supporters contend that if the house next door falls into foreclosure, the value of your house falls significantly. Multiply the number of foreclosed homes in your neighborhood by 3, 4, or more… and your home’s value will plummet substantially. It is estimated that this program may help between 3 and 4 million homeowners.
The final element of the plan is to revise the bankruptcy code , so judges can modify the terms of mortgages when the homeowner declares bankruptcy. Lobbyists for the financial industry are irate about this proposal, but their cries scream of hypocrisy. The priority of this administration is to try to do what is necessary to stop and ultimately reverse this financial debacle. Currently, only primary residences are excluded from being revised by the judge. That, of course, is almost always the biggest debt that the person filing for bankruptcy has.
First American Corelogic reported that an estimated 8.3 million homes, or almost 25% of all homes with mortgages on them, are currently underwater. If housing prices fall another 5%, an additional 2.2 million homes will slip below the waves. Another 5% decline in home values nationwide is almost a certainty at this point, with a further decline of 10 to 15% highly likely. That certainly puts this crisis in perspective.
The total value of all homes in the U.S. fell to $19.1 trillion at the end of 2008, from $21.5 trillion at the end of 2007. Half of the total decline in value was in the state of California. Now, not everyone that is underwater is likely to walk away from their house, but there are 2.2 million homes that are deep underwater, with LTV’s of more than 125%. Those folks are very likely to default, particularly if their mortgage payments are eating up most of what they make. These deep and medium-depth (more than 105% LTV) people are the final group and likely won’t be able to be rescued.
In short, this plan will not totally solve the mortgage problem, but it will significantly improve it. To the extent that the rate of foreclosures is slowed, it may have more impact on stabilizing the banks than all the cash that is being thrown at them directly.
Blame can been spread far and wide - on both the lenders and consumers. The lenders were the ones who were supposed to be and act professionally. They were the ones making the big dollars. Unfortunately, some will unjustly benefit some to save the system. It is far better to have some of the benefits go to the borrowers, rather than it all going to the lenders.
admin on March 23rd, 2009
With personal bankruptcies reaching a level not seen since just before the bankruptcy laws were reformed back in 2005, pundits are beginning to point to the reform efforts as an unmitigated failure. The intent of the 2005 reforms was to prevent abuse and to stem the rising tide of bankruptcy filings.
As our economy continues to falter and more people than ever continue to suffer financial devastation, the current bankruptcy laws are being eyed for further reform. Though lawmakers’ immediate focus is stopping the alarming rate of home foreclosures (and altering laws to permit judges to alter some mortgages to keep citizens in their homes) - if they manage to achieve success - their attention will shift to the bankruptcy reform efforts of 2005.
Those critical of the reforms enacted in 2005 are concerned with the difficulty and rising costs associated with personal bankruptcy filings, adding that the reform benefited the financial institutions at the expense of debtors. Further, they believe that there has been a direct correlations between those reforms and the current home foreclosure crisis.
Detractors and supporters of the reforms do agree that the economy relies on consumer spending. Bankruptcy is a tool to help debtors work to regain access to credit in order to contribute to the ailing economy. Obviously, it is necessary to prevent against fraud and abuse, but those efforts have hurt the majority of those suffering who are honest, but have been adversely affected by the economy and, oftentimes, unexpected circumstances on the home-front… usually and unexpected medical situation or job loss.
In the 10-years preceding the bankruptcy reforms of 2005, personal bankruptcies increased dramatically, exceeding a record 2-million filings. After the reforms, filings feel substantially, as was anticipated. Part of that was due to the rush of people to file before the reforms were enacted. However, according to information provided by AACER (Automated Access to Court Electronic Records), last year’s filings jumped over 30% to more than 1-million. This year, they are expected to hit almost 1.4-million or more.
Prior to the 2005 bankruptcy law reforms, Chapter 7 bankruptcy was the choice for consumers seeking relief. It allows the debtor to discharge all unsecured debts, including credit card bills. This would possibly allow a family to pay their mortgage and retain the family home. However, the main purpose of the reform was to push people to file Chapter 13 bankruptcy which requires a repayment of all or a portion of their debts over several years in accordance with a payment plan.
The problem? That didn’t really happen. In 2008, Chapter 7 filings continued to exceed Chapter 13 filings by a significant margin, totaling 76% of all personal filings. In 2005 that figure was 80% and in 2004 - 72%. The incomes for those families are virtually identical to those who filed before the reforms.
One of the keys to the reforms of 2005 affected the high-income debtors. As a result of the reforms, high-income debtors have to undergo a means test , which requires providing copies of their most recent tax returns and several pay stubs in order to prove that their income is what they claim. The amount of paperwork required is significant and some of it, people aren’t used to retaining. Additionally, they have to file and substantiate a detailed budget of their expenditures. If you don’t pass the means test - you can’t file for Chapter 7 bankruptcy.
Adding insult to injury, filing fees are increased due to the complexity and time involved in today’s post-reform process. Debtors are also required to pay for credit counseling and debtor education courses that are required to complete the process. This leads to further delays in filing for bankruptcy and oftentimes increases the debt, making the situation worse for both the creditors and debtors alike. Some legislation being considered would eliminate the means-test requirement for people hit by excessive rates.
Information provided by CardTrak (a credit card research firm) shows that credit card industry profits have soared. They’ve earned nearly $20-billion from penalty fees in 2008 - and increase of 30% from 2005. Their pre-tax profits have increased by about the same percentage from 2005 to 2008.
While these bankruptcy reforms helped shield the financial institutions from greater risks, there has been no relief provided over that same period from the credit card companies. There have been no rollback on credit card fees, grace periods have been pared down, and rates are as aggressive as ever despite a significant drop in the prime rate. While the punitive rate has remained nearly static at just under 31%, the prime rate has dropped from 7% to 4%, creating what experts have called an unprecedented rate spread. So, the credit card companies have received significant rewards from the 2005 bankruptcy reforms while the consumer has suffered.
Time will tell what new future potential reforms will do to change things in the interest of helping those truly suffering in today’s difficult economic times while at the same time keeping the clamps down on fraud.
admin on March 18th, 2009
Credit default swaps are being thrust into the limelight, most especially due to the AIG disaster and hearings going on at Capitol Hill today.
Here is a (hopefully) simple explanation of what a credit default swap is:
Borrower Bill borrows $1,000 dollars from Loaner Jim. Loaner Jim wants to obtain insurance on that debt in the event that Borrower Bill goes bankrupt. Loaner Jim goes to Insurer Ida and asks for insurance on the $1,000 loan. Ida agrees and sets a figure of $50 per year to insure that loan.
Effectively, Insurer Ida is placing a bet that Borrower Bill will make the payments back to Loaner Jim. Insurer Ida even made sure to check Borrower Bill’s credit rating and determined that it was outstanding. What happened here? Insurer Ida wrote a credit default swap, which is an unregulated derivative. This derivative was created by JP Morgan way back in 1995.
Oh, but then some problems occur with Insurer Ida’s business and she isn’t even in a position to pay Loaner Jim the $1,000 in the event that Borrower Bill goes belly-up. Now, the premiums paid have vanished. Soon thereafter, credit agencies discover the problem and tell Insurer Ida to find some new infusion of cash or her credit rating will take a hit. When Insurer Ida can’t do this, her credit rating takes a direct and devastating hit and she goes bankrupt.
Now, Loaner Jim is in big trouble. The debt which was previously insured no longer is. Loaner Jim, as a result, gets downgraded by the credit agencies. Loaner Jim is in such bad shape that he now has to declare bankruptcy. Of course, by this time, Loaner Jim has gotten in on the credit default swap action, having written countless "policies" of his own on many debts owed to his friend, Buddy Bob. When Loaner Jim’s business collapses, pressure then falls on Buddy Bob and, like a snowball rolling down a very long hill, the cumulative effect is devastating.
How is it that things unfolded this way? Well, it would appear that the ratings used to assess each other’s debt-worthiness was farcical. Everyone took a chance, a gamble, an extreme risk and the proverbial chicken is coming home to roost… and not in a good way. Not good at all.
Where does AIG fall into this equation? Well, AIG apparently wrote $78,000,000,000 worth of credit default swaps.
Oh, but it’s not just AIG. Many financial and insurance companies used these derivatives not just to insure against defaults, but to bet on whether or not other companies would fail. These swaps were used to in an effort to make money and not simply as the insurance policy as originally intended.
From the Time Magazine article on March 17th, the scope of the issue is laid out in stark detail:
The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges. "It could be another — I hate to use the expression — nail in the coffin," said Miller, when referring to how this troubled CDS market could impact the country’s credit crisis.
It cannot be ignored that this was allowed to happen by a government run by politicians whose bank accounts were fattened with the generous donations from big bankers and insurers. They looked the other way.
A default on simply 10% of the above detailed $45,000,000,000,000 would mean certain economic disaster. Even more scary news? It’s all but certain to take place.
The scariest news of all? The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars. This was made possible by the fact that these "insurance policies" are unregulated. So, the reason that all of this betting was permitted to go on was because there was nothing in place to stop them. No regulation. No oversight. No nothing. Considering that the gross domestic product of all the countries in the world is only about $60-trillion dollars, the potential for an economic disaster of epic proportions is far more likely than anyone cares to admit.
While everyone seems to have their sights set on AIG… the real culprits here are the people in Congress. Congress made back room changes back in February which allowed the bonuses to be paid by AIG (which were known and permitted by members) despite all of the debate and discussion on Capitol Hill. Now, everyone is denying responsibility, even those who are chairing the committees responsible for the changes. The denials and finger-pointing are nauseating and we can only sit back and watch our pockets continue to be picked by all of those responsible for doing what happened and worse - allowing it to happen.
admin on March 18th, 2009
That’s right. Don’t rush. Don’t be in a hurry. We wouldn’t dare say don’t worry and don’t stress. We would say - don’t do it for long. Take the body blow, feel the pain, and then work to inhale deeply. Stand up straight, and get to work. Being unemployed can be harder work than being employed. The reward for working hard and working smart during an unexpected layoff can be great.
You are not alone. Millions of people across the country are receiving the same bad news, often in an emotionless, "all-business" fashion that leaves you with an instant emptiness in your stomach that is hard to forget, even long after it has gone. It’s not just a financial shock, it’s an emotional one, too. Don’t let it paralyze you to the point of inaction. Now is the time to bounce-back.
Much like filing for personal bankruptcy can feel like a personal failure, quite often, a job loss can come with the same feelings. Recognize this - absent misconduct or poor performance on your part - it was out of your control. "It’s just business." It’s all about the economy right now and everything is far from rosy and bright.
Find ways to keep your emotions in check. Lean on friends and family. Visit a spiritual advisor or consider seeking some personal counseling. However, don’t let much time lag between the layoff and getting down to the business of getting back in business. A couple of big tips that require urgent attention:
- File for unemployment compensation right away. The recent stimulus package has actually added $25.00 per week in unemployment benefits.
- If you are paying child support - file for a modification as fast as you can. In many states, child support orders can be retroactive to the date of filing. Delays on your part could worsen your financial situation.
Next, you need to take action regarding your health care situation. Can you go without? Can you find and afford private coverage? Should you go with COBRA? Did you know that the recent Federal Stimulus Package also has a provision that subsidizes COBRA premiums for an involuntary layoff? It is possible to find less expensive coverage than what COBRA may afford you, however, you need to understand that changes may be required (doctors, pharmacy, hospital, etc.) If you have less than perfect health or a pre-existing condition, private insurance is likely not a viable option, in which case, retaining the employer’s health insurance through COBRA may be your best bet.
Next up - it’s time to cut back. Less income must translate into less spending. Sacrifice the premium satellite television package. Eliminate the "unlimited text messaging plan" or any other luxury services that your cell provider has persuaded you to purchase. The idea here is we’re dealing with a short-term situation. Don’t go out to dinner. Reduce or eliminate adding more money to your investments. Create a new budget!
Tapping the right resources to help manage your situation is critical. Avoid the costly impact of hitting retirement or 401K accounts, along with their taxes and penalties. These are mostly untouchable if you reach a point of bankruptcy proceedings. If you have that emergency slush fund, manage it diligently, remember - this is a period of focusing on NEEDS and not wants. Borrow if you can, consider a loan against the car you own free-and-clear. This suggestion is here only because the interest rates are often smaller than credit cards (which should be avoided).
Doing the post-mortem on the job is important. Recognizes areas where you were weak and work to improve them. Whatever you do - leave the job on good terms! You’re leaving a facility full of potential contacts, referrals, and pats-on-the-back for your next job opportunity. Also, don’t rule out the possibility of being rehired. It happens!
Forward-looking is forward-thinking. Remember - there are still a lot of jobs available for you. Don’t give up. Don’t spend too much time watching television and playing video games. If you treat your day like you’re at work, you’ll remain in the groove. Get up like you normally do. Shower. Get active. Even dress for work. You’ll be surprised how it makes you feel and just think… you’ll be ready to go to an interview on a moment’s notice! Stay active in your job search.
Additional tips:
- Remember that any job-hunting expenses, including but not limited to: mileage, travel, copying, mailing… are tax-deductible provided you’re staying in the same occupational field.
- Supplement your income. Be creative. Don’t rule out everything. Consider offering baby-sitting services, do housecleaning, landscaping/yardwork, mow lawns, shovel driveways, consult work in your area of expertise.
- Increase your education! Believe it or not, some state schools and community colleges have programs that offer FREE TUITION for people who are laid-off/unemployed. Look into it. This is another one of those proverbial "windows that open" when a "door closes."
- Check your state’s website for programs out there for assistance. You will be surprised at the types of help you might find.
Good luck!
admin on March 18th, 2009
For an ever-increasing number of citizens in this recession, filing for bankruptcy becomes a way of managing the mounting financial crisis, even when it means losing the family home. It really becomes a matter of survival for faced with this decision.
New legislation proposed in Congress includes provisions that allow bankruptcy judges to cut the principal and interest rates on first-mortgages as well as extend the terms of repayment. The measure, known as the "The Judicial Mortgage Modification Bill," was approved on March 5th, 2009 by The House of Representatives. Senate approval is all that stands in the way of making this bill - law.
Still, for too many people, time is of the essence and waiting for this bill to become law is not an option. They need to obtain relief through the existing bankruptcy system, even though the ability to impact mortgage debt is severely limited - for those trying to keep their homes. Filing for bankruptcy can delay foreclosure proceedings, but barring a change in circumstances, it is only a matter of time before that process takes hold.
Across the country there has been a 33% rise in personal bankruptcies last year, totaling over 1-million filings, according to the American Bankruptcy Institute . The most common types of personal bankruptcy filings are Chapter 7 and Chapter 13.
Chapter 7 proceedings — virtually wipe out unsecured consumer debt, such as credit card debt, a leading cause of bankruptcy, along with divorce, unemployment, and medical conditions. Chapter 7 offers mortgage relief only for people who are prepared to surrender their home.
Chapter 13 bankruptcy proceedings, which also can help people reduce, if not totally eliminate, credit card and some other types of debt, - has provisions in place to allow people to get current on overdue mortgage payments. It does not currently allow for a reduction in principal, interest, or the length of the loan for first mortgages. A person will still be required to repay everything. However, it helps people make up overdue payments, usually over 3- to 5-years, by paying an additional amount with each regular mortgage payment. Please note: You must establish, in advance, you have sufficient income to handle such an arrangement.
Consumer advocates like ACORN , are lobbying hard in support of the mortgage relief legislation now before Congress. ACORN claims that banks have not acted reasonably in renegotiating mortgages in the current financial crisis. However, many banks and other financial institutions claim that the legislation would unfairly change mortgage contracts at their expense. This, at a time when they’re in serious financial trouble of their own.
