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Tag Archives: Chapter 13 Bankruptcy

Buying a spanking new home or a recently built used home in a housing development? CAUTION! Beware of developer 99 year “resale fees” hidden in the covenants.

The NY Times reported on September 12, 2010 that "re-sale" fees creeping into the fine print development covenants, as reported by Janet Morrissey. See Business Section 9/12/10, front page NY Times.

A WHAT????

A "re-sale fee" is a 1.0% fee that must be paid to the developer for 99 years at any time the home changes hands after the original sale to homeowner #1. They are terms that are now being quietly and sneakily drafted into the Homeowners’ Association covenants and/or sales contracts all over America.

Ms. Morrissey reports that "A growing number of developers and builders have been quietly slipping "re-sale fee" covenants into sales agreements of newly built homes in some subdivisions. In one case detailed by Ms. Morrissey concerning a family of seven (five children) who purchased in Utah, the "re-sale fee" language was ina aseparate 13-page document – called the declaration of covenants, conditions and restrictions – that wasn’t even included in the closing papers and did not require a signature by the buyers.

Sometimes the "re-sale fee" is labeled in a difficult to understand nomenclature and is then called a "capital recovery fee" or a private transfer fee".

Ms. Morrissey presents the scenario: "Someone selling a home for $500,000, for example, would have to pay the original developer $5,000. If the home sold again two years later for $750,000, the second seller would have to pony up $7,500 to the developer, and so on." Even if a home declines in value, the seller still must pay the 1.0% fee to the original developer, even years and years later.

Ms. Morrissey reports that the Federal Housing Finance Agency (FHA) is considering a proposal to prohibit the transfer fees on all mortgages financed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. 17 states have already placed limitations or bans on such "re-sale fees". However, even should such practices be eventually curtailed by a rule or law, the rule/law is unlikely to apply retroactively to older "re-sale fee" terms.

As a lawyer, I would comment wrly how ironic it is that it is often so difficult for homeowner #2 or #3 to sue a builder/developer for shoddy construction and defects in the home, yet that same shoddy contractor/developer may be able to reap rewards for 99 years from each and every homeowner that comes to own and sell the shoddily constructed residence.

See link to NY Times article: http://www.nytimes.com/2010/09/12/business/12fees.html?_r=1&scp=1&sq=developers&st=nyt

IDEAS FOR ACTION: Whenever you purchase a home: (1) secure a written acknowledgement and written representations from the selling homeowner that there is no such "re-sale fee" tassociated with the residence or condominium. (2) ensure that you closely review the "exceptions page" of the title insurance policy and all of the homeowners’ association covenants to carefully look for such "re-sale fee" language. or documents. I(3) if you are going to be the 3rd, homeowner, ask the 2nd homeowner (from whom you are purchasing) to produce a copy of the settlement statement from the prior transaction between 1st homeonwer and 2nd homeowner which should disclose any such fee paid to a developer. (4) ensure that you obtain a written representation from the seller that you have been provided with a copy of any and all documents which govern and affect your purchase, use, enjoyment, future/ongoing fees to be paid with respect to the parcel and sale of the parcel.

PIMCO Fund financial super-guru William Gross calls for the government to encourage the widespread refinancing of all underwater mortgages – even though his own investments and investors would take a financial hit.

USA Today’s Paul Wiseman and Stephanie Armour reported on September 29, 2010, that William (Bill) Gross, managing director of investment giant PIMCO urged policymakers to "quickly engineer a refinancing opportunity for all mortgages that are current on paymetns" and guaranteed by Fannie Mae or Freddie Mac. Mr. Gross is reported to have analyzed that turning mortgages now at 5%, 6% or 7% into 4% mortgages could pump up to $60 billion into the national economy and lift housing prices by as much as 10%.

Mr. Gross’ idea is remarkable as it is seems odd it is coming from Mr. Gross. If Mr. Gross is anything, he is a "super-guru" of bond, note and mortgage backed securities investing. Mr. Gross’ advice will actually cause Mr. Gross (and those investors he advises) to lose money and value in the short term, and maybe even in the long term.

Morgan Stanley analyst/economist David Greenlaw agreed with super-guru Mr. Gross, calling such a move a "slam dunk stimulus".

Mr. Gross explained his reasoning: "Whether it’s above water or below water, it’s the same house…there would be fewer foreclosures. There would be fewer defaults. There would be fewer empty homes. … You’ll improve the quality of the houses by keeping people in them rather than forcing them to leave."

The mortgage and banking industries are expected to resist Mr. Gross’s advice because many mortgages are packaged into securities and sold to investors and are not hold by the bank/mortgage sales company that originated the mortgage. A massive refinance program pushed by the government is a "non-starter. …. It would involve breaking a contract with the investor who’s holding the existing mortgage." says Mortgage Bankers Association vice president for research and economics Michael Fratantoni.

USA Today reports that the Obama administration has shown little enthusiasm for the widespread solution recommended by Mr. Gross.

Mr. Gross’ proposal is remarkable in that he invests (and advises investors similarly invested) in the bonds and mortgage backed securities that would take a financial hit by such a widespread refinance. Mr. Gross thus seems to believe that even if bond/mortgage investors take a hit in the short run, they will ultimately be better off with a less anemic economy and higher home prices.

The same USA Today article reports that "cash out refinances" are on the decline. Q2 2006 $83.6 billion was pulled out of homes. Q2 2010 a mere $8.3 billion in cash was pulled out of homes in refinances.

See USA Today, Section B, September 29, 2010, Paul Wiseman and Stephanie Armour. (Sorry, USA Today did not offer a link to this article on their website which I was able to locate.)

IDEAS FOR ACTION: Of course resist the idea to use your home as an ATM, even if you have a modest amount of equity. If you are struggling with consumer debt or unpaid taxes, consider consulting with a consumer bankruptcy attorney and learn about Chapter 7 and Chapter 13 before you trot down the "cash out refinance" road. With the HARP refinance program, note that you may be able to refinance your higher interest rate home notwithstanding slightly rocky credit scores and significant unsecured debt. Keep your eyes and ears open for changes and improvements to the HARP Fannie Mae/Freddie Mac refinance programs in case the Obama administration should see fit to partially follow at least some of the advice of Pimco investment giant super-guru William Gross.

Your employer is likely to increase your share of healthcare premium contribution by 14%, reports the NY Times, thereby taking about $500.00 out of your household budget.

Your household budget will be even more pinched, especially if you have a family. Reed Abelson of the NY Times reported on September 3, 2010 that workers’ share of the cost of a family policy jumped an average of 14 percent, an increase of about $500 per year.

Whereas the actual total cost of a policy has increased only 3.0% over last year, the employers are shifting all of this 4.0% AND MORE over to employees, thus employees losing ground against their employers. Employees are seeing much of what had been the employer’s share being shifted over to the employee, thus accounting for an are seeing an average of 14% in the amount paid out by employees.

Health care costs continue to eat into the living standard of employees. Since 2005 overall wages have increased by only 18%, but workers’ contributions to premiums have jumped by 47%. The 47% rise in workers’ contributions is almost twice as fast as the rise in the policy’s overall cost. E.g. the employer is paying a lower percentage of the overall cost of the policy than is the employee; the employer is thus shifting the cost of the policy to the employee.

Moreover, workers also are facing larger deductibles than ever before.

According to Mr. Abelson’s article, even greater health insurance premium burdens are headed towards employees. Ms. Helen Darling, president of the National Business Group on Health, an organization representing employers that provide healthcare is quoted, "There’s a sense (among employers) that we can’t keep up….we (employers) can’t afford to continue to subsidize what’s happening."

Mr. Abelson reports that, "Faced with a potential increase int he premiums paid that would bring the cost of family coverage to about$1,000 a month, the executives at a trucking business in Salt Lake City chose to switch to a plan that had a $6,000 annual deductible….to reduce their monthly premiums by nearly $200 to $647 a family…the chief financial officer (of the trucking company) acknowledged that people with chronic conditinos or the need for expensive medicines had felt the impact of the change."

A nonprofit insurance research foundation The Kaiser Family Foundation conducted a study which related that now 27% of employees suffer under a health policy with a deductible of $1,000 or more, up from 22% in 2009.

Some states are authorizing "insurance exchanges" which allows small employers to give employees a fixed amount of money to purchase a policy. The Utah legislature has authorized such an exchange which allows an employee to select between 60 different policies to find a policy which best suits the employee’s needs. In this way, the employee can choose a lesser cost policy if there is no need for a "cadillac" policy.

IDEA FOR ACTION: Check with your state Insurance Commissioner’s office to see if an "insurance exchange" program is authorized should you work for a small employer and have modest family healthcare needs. If you have a high family healthcare needs, open a channel of communication with your employer to explain your analysis of the harmful effect of an increasing deductible. You may be able to discuss with your employer some way to avoid a shift of costs to your wallet by perhaps offering to take on some modest additional work duties.

Fed and FDIC Testimony on Dodd-Frank Financial Reform Legislation: Lessons Learned

Federal Reserve Chairman Ben S. Bernanke praised the new Dodd-Frank financial regulation legislation and offered a frank appraisal of his mistakes since 2006 in September 2, 2010 testimony before the Congressional Financial Crisis Inquiry Commission.

It should be noted that September 15, 2008 (just next week) marks the two-year anniversary of the bankruptcy filing of Lehman Brothers. NY Times columnist Sewell Chan notes that the Lehman failure was the “nadir”, or lowest, moment of the financial crisis.

“The Dodd-Frank legislation gives the Federal Reserve Bank oversight over the largest financial institutions, including those that are not banks (such as American International Group, or “AIG” – JHM). It gave the Fed a prominent role in the Financial Stability Oversight Council, a body of regulators with the power to seize and break up a systemically important company if it threatens economic stability. The Federal Deposit Insurance Corporation would manage that [breakup] process, known as resolution.” writes Mr. Chan.

Mr. Bernanke recounted his errors, indicating that he was wrong in 2007 when declaring that the subprime mortgage crisis could be contained and would not infect nor destabilize other parts of the financial system. Mr. Bernanke denied allegations that the Federal Reserve bank was at least partly responsible for the housing price bubble by keeping interest rates too low during the 2002-2004 period. An implication of Mr. Chan’s summary of Mr. Bernanke’s testimony before Congress appears to be that Mr. Bernanke now believes that trying try to identify a “bubble” in the economy early enough is part of the Fed’s charter. If such a “bubble” could be identified early enough to justify Fed action, the Fed could decide to increase interest rates so as to slow down the growth of the bubble.

Here is the link to the interesting NY Times, September 3, 2010 article.

Ideas for Action: Few of us have the resources and knowledge available to Mr. Bernanke. However, starting to keep a family budget, carefully monitoring your spending, and creating a savings plan for both retirement and “rainy days” are among the prudent steps that we all can take to keep financial problems from becoming too big to handle.

Is Bankruptcy the same everywhere? An Irish perspective.

Is bankruptcy the same everywhere? Let’s compare Ireland with the USA. All of the statistics that follow are from 2009 data.

– Population: USA 310,178,000. Ireland: 4,178,000.

– Bankruptcies: USA: 1,572,597. Ireland: 17.

– Bankruptcies as a percentage of population: USA 0.5% (one-half of one percent); Ireland: 0.0004% (four one-millionth of one percent). In other words, USA had 12,500 percent more bankruptcies than Ireland.

The bankruptcy process in Ireland is nearly non-existent. Ireland does not offer its citizens a “fresh start” like America’s Chapter 7 bankruptcy process, nor does it offer a reasonable partial debt repayment plan like America’s Chapter 13 bankruptcy process.

In Ireland, people cannot use bankruptcy as a meaningful tool to deal with their debts. Irish debtors are vulnerable to constant lawsuits, harassment and garnishments because the Irish bankruptcy process is so strict and inflexible.

Should you file bankruptcy in Ireland, you are forced to repay creditors for at least twelve years, and only then if your creditors agree by a majority vote that such a “short” period of twelve years is reasonable, and that the amount you propose to repay is reasonable. Even worse, once you start a bankruptcy in Ireland, you cannot get out of the bankruptcy nor end it until your creditors agree by a vote that you should be allowed to exit the Irish bankruptcy system. Irish debtors have been known to be required to stay in bankruptcy, repaying their creditors, for as long as 29 years.

Reform legislation is pending in Ireland, but even the proposed law changes in Ireland are worse than what American bankruptcy law provides for its citizens today. The new Irish proposals still have no “fresh start” like America’s Chapter 7. The new Irish proposals suggest that debtors be forced to remain in bankruptcy for at least six years, repaying substantial portions of income to creditors, in what might be called an “earned start”.

“Current Irish bankruptcy laws misunderstand the nature of debt in [Ireland]. They’re designed to protect the general public from Dickensian villains who won’t pay their debts, not designed to facilitate the desperate thousands who can’t.” writes Patrick Freyne in “The Irish Times”. “It was a case of saying ‘listen, let’s make him bankrupt and don’t let him into business [for at least 12 years while he repays his debts] so others don’t lose money.’ But 90 per cent of those in trouble are honest decent people who lost money through no fault of their own.” says Irish chartered accountant Jim Stafford.

Many people are no less in debt in Ireland than are many Americans. Irish consumers had very little consumer debt in the 1980s, but this changed dramatically through the 1990s and into the 2000s. Many families and small businesses in Ireland now face the same level of debts as do struggling American families, as they have borrowed against (now disappearing) home equity and taken advantage of easy-to-obtain consumer credit such as vehicle loans and credit card loans.

Read about the Irish personal debt crisis and the historical reasons why Irish bankruptcy law is so strict and difficult.

Ideas for action: Accept the gift of what the US Government has declared available, which is a “fresh start” in Chapter 7, or a much gentler partial debt repayment in Chapter 13. While you are at it, thank God for the US of A.

American Bankruptcy Institute–14% increase in bankruptcy filings during Jan to June 2010 compared to same period in 2009

According to an article posted on the American Bankruptcy Institute website on 8/23/10:

“The total number of U.S. bankruptcies filed during the first six months of 2010 increased 14% over the same six-month period in 2009, according to data released today by the Administrative Office of the U.S. Courts.

Filings were up 20% over the past year to 1,572,597, up from 1,306,315 filed in the 12-month period ending June 30, 2009. Total filings reached 810,209 during the first half of the calendar year of 2010 (January 1-June 30), compared to 711,550 cases filed over the same period in 2009. The totals represent the highest number of filings for the first six months of a calendar year since 2005, when the Bankruptcy Code was amended.

The 422,061 new cases filed in the second quarter represent the highest total since the fourth quarter of 2005. Business filings decreased 4% for the six-month period ending June 30, 2010, to 29,059 from the first-half 2009 total of 30,333.

Chapter 11 business reorganizations registered the sharpest decrease, as the 6,152 filings during the first half of 2010 represented a 17% drop from the 7,396 total chapter 11 business filings during the first half of 2009. Chapter 7 business liquidations remained nearly unchanged, as there were 20,385 in the first half of 2010, a half percent increase from the 20,375 business chapter 7 filings during the same period in 2009.

Filings by individuals or households with consumer debt increased 15% to 781,150 for the six-month period ending June 30, 2010, as compared to the 2009 first-half total of 681,217. Consumers filing for chapter 7 protection increased 17% to 571,417 during the first half of 2010 from 489,128 during the first six months of 2009. Consumer chapter 13 filings increased as well, rising 9% as 208,778 consumers filed for chapter 13 in the first half of 2010 from 191,458 during the first half of 2009.”

Full disclosure: The Law Firm of James MaGee, Washington Bankruptcy Attorney, is a proud member and supporter of ABI, the leading national bankruptcy professional organization.

Ideas for Action: It’s no secret that many people and families are struggling in today’s economy. Bankruptcy is a Prudent Step Towards Rebuilding Your Life. You should not feel guilty or embarrassed for having filed bankruptcy. Popular folklore holds that Henry Ford filed for bankruptcy five times! Psychologists say families, relationships and marriages fail most often because of financial pressures. If financial strain is damaging your health and personal relationships, you should consider bankruptcy.

“Business” bankruptcy is often a waste of time for mom & pop businesses–just file a personal bankruptcy case and move on, says Wall Street Journal columnist

Here is the link to a short but helpful article about small business bankruptcies in The Wall Street Journal. I am pleased that what I have suggested for many years finds favor with a Wall Street Journal columnist.

With most of my small service-based business customers, including businesses as varied as residential construction and restaurants, it usually makes sense to look at a Chapter 7 Bankruptcy case filed as a personal case. I recommend this approach because in most cases, the small business’ debt is personally guaranteed by the business owners, whether the debt consists of Small Business Administration guaranteed loans, vehicle title loans or credit cards. Frequently, the business can keep right on operating, but of course you should consult with a qualified attorney before launching off into any sort of bankruptcy filing.

Ideas for Action: how do you find a qualified bankruptcy attorney? I suggest three ways.

First, ask the attorney how many cases he or she filed in the calendar year January 1, 2006 to December 31, 2006; the attorney can easily consult the computer program used to prepare the documents to find out how many cases were filed each year, and if fewer than 70 or so cases were filed by the attorney in 2006, then I say beware. You may have an attorney who just started out after the 2005 law change took effect but didn’t attend any of the important 2006 era seminars when the best education about the new 2005 law was then available.

Second, ensure that the attorney is “connected” professionally via memberships in both the American Bankruptcy Institute as well as NACBA, the National Association of Consumer Bankruptcy Attorney.

Third, ensure that over the past five years, the attorney has attended no fewer than five seminars for a total of no fewer than 50 hours of bankruptcy education since 2005.

These three suggested standards should help you ensure that you have engaged an experienced, professional attorney.

Mortgage modifications failing, meeting only 16% of intended goals, says NY Times

NY Times columnist David Streitfeld reports that the dropout rate from the Making Home Affordable Program (HAMP) is very high. 96,000 trial modifications were canceled by the lenders in July 2010. The number of canceled trial modifications now exceeds 616,000.

Those numbers are leading some housing experts to call the program, which modestly rewards lenders for modifying mortgages, a failure.

About 422,000 mortgage modifications overseen by the government were considered permanent as of July 2010, up from 389,000 in June. But the pool of candidates is shrinking rapidly. Only 17,000 trial modifications were started in July, down sharply from the 150,000 enrolled in September 2009 when the program was new according to a report by NY Times columnist David Streitfeld.

After reviewing the new data, Calculated Risk, a popular financial blog, wrote, “Those borrowers are still up to their eyeballs in debt after the modification,” and many will default again.

“My concern is that if we have another protracted housing dip, it’s going to bring the economy down.” Mr. Feder, chief executive of the real estate data firm Radar Logic explains, saying that he expects prices to ‘get whacked’  in the Fall of 2010.

“If consumers don’t think their houses are worth what they were six months ago, they’re not going to go out and spend money. I’m concerned this problem isn’t being addressed,” says Mr. Feder as quoted in the article by Mr. Streitfeld of the NY Times, published on Saturday, August 21, 2010.

Mortgage modifications well below target: Americans need more help says NY Times 300,000 foreclosure filings for third month in a row — 92,858 homes repossessed in July, 2010

“As repossessed homes are put up for sale, house prices are likely to fall further. As prices fall, more borrowers end up “underwater”–they owe more on their mortgages than their homes are worth. That’s a big risk factor for default.

Moody’s Economy.com estimates that 1.9 million homes will be lost this year, down only slightly from 2 million in 2009.

So far only 398,198 loans have been permanently modified, and only $321 million of the $30.1 billion allocated to the home modification program has thus far been spent.

Part of the problem is poor administration. Homeowners, who apply to their bank or mortgage service company, complain about confusing procedures and lost paperwork. Banks have complained of frequent rule changes from the government.

Another big problem is that many lenders, whose participation in the program is voluntary, have been reluctant to aggressively rework bad loans. Reducing a loan’s principal balance–rather than lowering interest levels or extending pay out periods–is often the chance of keeping underwater borrowers in their homes. Banks have been loath to accept the bigger losses that come with lowering principal. Fearing that banks will drop out of the program altogether, the Treasury has not pushed them hard enough.”

The August 20, 2010 NY Times OpEd piece proposes that the use of the states to give money directly to temporarily unemployed or under-employed individual homeowners to make mortgage payments through the Hardest Hit program (part of HAMP, which is part of TARP), through about which 4.1 billion has thus far been disbursed, may be a better route than the loan modification programs emphasized thus far to date.

Ideas for Action: Don’t expect to modify yourself out of a bad situation. You will never see a mortgage loan principal balance deduction. If you don’t mind a temporarily lower payment but still remaining underwater on your home, then I suppose a mortgage modification is not so bad. You might want to consider a “lien strip” through Chapter 13 bankruptcy if you have a second mortgage and if the value of the home is less than the amount owed on the first mortgage.

10 Cents on the Dollar: How to pay off your home equity line of credit

NY Times columnist David Streitfeld’s article entitled, “Debts Rise, and Go Unpaid, as Bust Erodes Home Equity”, published in The New York Times on August 12, 2010, asserts that most investors expect less than 10 cents on the dollar for defaulted home equity lines of credit such as second mortgages.

“Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote of on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter. Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. ‘People got 90 cents for free,’ Mr. Combs said. ‘It rewards immorality to some extent.'” Mr. Combs is a realty lawyer in Phoenix, AZ, who tries to negotiate deals with home equity line of credit HELOC loans.

Utah Loan Servicing chief executive Clark Terry buys defaulted home equity loans from lenders, and reports that he does not pay more than $500 for any one loan, regardless of how big it is, “Anything over $15,000 to $20,000 is not collectible. Americans believe that anything they can get away with is O.K.”

The delinquency rate on home equity loans was an astonishing 4.12% in the first quarter of 2010, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping, according to Mr. Streitfeld.

Mr. Streitfeld reports that during the “great boom” homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their homes as loan security. With the money now spent, some homeowners cannot pay. Surprisingly, it seems that delinquencies on this type of debt is greater than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard. Mr. Streitfeld cites info from the American Bankers Association on this point.

Ideas for Action: Is it time to contact your second mortgage company and negotiate–offering 5 to 10 cents on the dollar?