It’s the time of year when many high school seniors are deciding which college they will be attending in the fall. In 2008, this decision-making has been marked by growing concerns about student loan availability during these troubled times for the
Consumer bankruptcies are obviously a major focus of this blog. As bankruptcy lawyers, we have an interest in helping consumers attain a fresh financial start from debt by showing them how filing bankruptcy may be able to help them responsibly do so.
So while business bankruptcies may not get as much attention here, we all understand what happens when businesses accumulate massive debt and struggle -- it is employees who often suffer, either through the loss of jobs during mass layoffs, reductions of hours or other repercussions.
With all this in mind, Bankaholic recently provided a nice post on 8 Easily Avoidable Causes of Business Debt. Give the post a read -- it's definitely worth the time and a primer for what employers should keep in mind when running their business and providing for their employees.
Donald Trump has done pretty well for himself financially, and that might equip him to give advice to those aspiring to become millionaires, but it appears that he's a little out of touch when it comes to issues like everyday people facing mortgage foreclosure.
Recently, The Donald decided to take a moment out to give those folks some advice on the Trump Blog, and it boiled down to this: talk to your mortgage lender.
Trump did offer one piece of advice that makes sense, telling homeowners facing foreclosure to stay in their homes while they attempted to work something out. But the rest of the post boiled down to a statement that the banks don't really want to foreclose, and will be willing to work with you.
It's an idea that makes a lot of sense in theory. Why WOULD a bank want to spend the money to foreclose on a home—especially one that's worth less than the outstanding mortgage balance—and then have to turn around and sell that home, possibly at a loss, in order to recoup any of the debt on that house? It seems, though, that when it comes to those struggling financially, Trump is stuck firmly in the realm of the theoretical; real life experience simply doesn't match his conjecture.
While Trump is cheerfully suggesting that it's easier to work things out than you might imagine, an NPR headline tells us that the Federal Reserve Chairman is urging banks to help borrowers more. And the California Reinvestment Coalition (CRC) has just released a report tellingly titled The Growing Chasm Between Words and Deeds. That study was based on the reported experiences of mortgage counseling agencies during December of 2007—a time during which podiums and news reports across the country were littered with positive statements about the great strides lenders were making toward working effectively with borrowers.
Those agencies reported both foreclosures and short sales as "very common" outcomes during that period, and indicated that the concessions lenders were willing to make were often so short-term as to merely forestall the inevitable.
While this information is unsurprising to bankruptcy attorneys, who see clients every day who have tried and failed to work with their mortgage brokers, it seems that on this issue, one of the nation's most successful businessmen has been getting his financial information from press releases.
Many commentators have suggested that President Bush's mortgage plan was intended to sandbag the effort to make home mortgages subject to modification in bankruptcy. Naturally, mortgage lenders and investors would much prefer a plan that left the decisions in their hands to one that would allow bankruptcy judges to make the final call on new terms.
If that was the intention, it's not working--or at least not yet. The effort took a giant step forward today when the House Judiciary Committee passed a compromise bill which is expected to reach the house floor early in the new year.
The bill would allow courts in Chapter 13 bankruptcy cases to modify the terms of subprime and non-traditional home mortgage loans originated between January 1, 2000 and the enactment date of the statute.
The battle is far from over, though: the bill passed out of committee by a narrow margin (17-15), and there's surely more opposition ahead.
Katherine Porter's recent longitudinal post-bankruptcy study revealed something that may be hard for the credit industry to explain--something we've all known though anecdotal evidence for a long time, but which can no longer be denied: credit card companies are very, very eager to extend new credit to families fresh out of bankruptcy.
In fact, according to Porter's study, a post-bankruptcy household receives about three times as many credit solicitations as a household where there has been no bankruptcy filing. That's no oversight, either; many of these credit solicitations specifically refer to the recipient's recent bankruptcy.
Many bankruptcy and consumer credit experts, including Harvard Law Professor Elizabeth Warren, have pointed out that there are big profit margins in dealing with a sector of society that struggles to pay its bills on time: those consumers are more likely to incur late fees, over the limit fees, and to trigger punitive interest rates.
Still, there's no money to be made if the bills aren't paid at all, a fact that calls into question the credit industry's "deadbeat debtor" model of bankruptcy filing. If, as the credit industry has been loudly proclaiming for a dozen years, it believes that bankruptcy petitioners are morally bankrupt strategic filers who work the system to avoid paying their bills, then it makes no sense that these same credit card companies are tripping over themselves to do business with those debtors again.
No, as Porter explicitly points out, "Efforts to lend to post-bankruptcy familes are more consistent with an adverse events model of bankruptcy than the 'deadbeat debtor' model."
The debtor focus of the bankruptcy reform debate overshadowed to the point of exclusion any serious scrutiny of credit industry behavior. Porter suggests that post-bankruptcy credit marketing as it exists today is a product of existing bankruptcy law by eliminating the possibility of bankruptcy discharge for eight years and removing "competition" for those repayment dollars by eradicating past debt.
The study sets for excellent support for a completely new analysis of bankruptcy law from the perspective of shaping credit industry as well as debtor behavior to make the most of the fresh start bankruptcy provides. The entire study is well worth a read: Bankrupt Profits: The Credit Industry's Business Model for PostBankruptcy Lending
Today, the federal minimum wage increases to $5.85/hour. The increase comes after nearly ten years during which the minimum wage remained fixed at $5.15/hour, and includes two automatic increases on July 24, 2008 and July 24, 2009. Two years from now, the nation's lowest paid workers will be earning $7.25/hour. The U.S. Department of Labor offers a complete history of minimum wage increases and amendments since 1938 here: History of Federal Minimum Wage Rates
It's good to finally see some movement in the federal minimum wage, which began at $0.25/hour in 1938, but an increase of $0.70 after a decade of stagnation isn't likely to be life-altering for many workers. In fact, the number of workers impacted at all will be limited, since approximately half of U.S. states already have state minimum wage statutes which require higher rates.
For the full-time, minimum wage employee, the increase will mean an additional $28.00 per week, or $120.40 in the average 4.3 week month. That's before taxes, of course.
The Economic Policy Institute last year provided data suggesting that the average 2005 worker would need $6.27/hour to achieve a standard of living comparable to that provided by $5.15/hour in 1997. American workers will finally surpass that level in July of 2008. Of course, the cost of living isn't likely to stand still and wait for them.
This year's increase will nudge a family of four with two parents working full time at minimum wage just above the federal poverty level. Even if we accept the current federal poverty guidelines as a realistic measure--a questionable assumption at best--it's difficult to applaud a minimum wage that keeps a family with two parents both working full time poised on the sharp edge of the poverty line.
The prevalence of flipping mortgage loans and chopping them up into securitized pools is providing an unexpected benefit for many homeowners facing foreclosure proceedings. As April Charney and other attorneys across the country have discovered, many mortgage lenders and purchasers, in their haste to flip notes, failed to attend to some little details like...maintaining records. Forbes reports that in an increasing number of foreclosure cases, mortgage holders are unable to demonstrate that they are the legal note holders.
Charney, a legal aid lawyer in Florida, has been able to stop many foreclosures because ownership wasn't properly documented. But Charney only discovered the problem after noticing that a large number of recent foreclosure cases had involved affidavits of lost notes--requests that the judge take the "owner's" word for the fact that it owns the loan, since documentation isn't available. That, it seems, is not a safe assumption, and consumer attorneys fighting foreclosure should carefully scrutinize the paper trail that proves ownership on the part of the plaintiff.
In addition to sloppy paperwork that makes ownership unclear, Charney and her colleagues across the country have also discovered that in some cases, notes were purchased illegally after the mortgage notes were already in default. In those circumstances, some courts may refuse to recognize the purchaser as the legal owner of the note.
We saw an "open letter" this morning from Marie McDonnell, who has been documenting mortgage fraud since 1991. After sixteen years in the trenches, Marie has some interesting things to say about what's really going on in the mortgage industry and the extreme measures required to put a stop to it. With her permission, here's what she had to say:
We need Congress to enact an emergency "disaster relief" program, overseen by HUD, to prevent the tsunami of foreclosures that is now in progress due to the unbridled greed launched and authorized by the Garn-St. Germain Act of 1982 which, according to the FDIC, was the first non-homeowner friendly federal legislation in history.
We need to start talking about this in terms that people can understand:
"The only thing necessary for the triumph of evil is for good men to do nothing."
Marie McDonnell
THE MORTGAGE COUNSELOR
Raising the Standard of Truth in Lending
through Auditing, Education and Advocacy
With mortgage foreclosure rates skyrocketing across the country and projected to increase even more as hundreds of millions of dollars in ARMs adjust in the coming months, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, "Preserving the American Dream: Predatory Lending Practices and Home Foreclosures". Senator Dodd introduced the hearing with a list of concerns about industry practices that put mortgage borrowers at risk of failure, including:
Harry Dinham, President of the National Association of Mortgage Brokers, referred to the various non-traditional loans that have emerged over the past several years as a benefit that allowed people who would otherwise not be able to purchase a home to do so. He said that these variations on traditional mortgages had been an effective answer to President George W. Bush's 2002 Homeownership Challenge, wherein the President stated the goal of increasing homeownership opportunities for minorities.
However, a recent report by the Center for Responsible Lending projects that as many as 20% of those loans are ending in foreclosure, and many others are repeatedly refinanced, stripping what little equity the borrowers have been able to accumulate and generating new fees each time the loan is rewritten. "Creative" subprime loans can't be considered an effective solution to the "Homeownership Challenge" if they allow Americans who could not previously have qualified for mortgage loans to take that leap, only to have the home torn out from under them in a few years. Even worse, it appears that many minority borrowers who could qualify for more favorable loan terms are falling victim to these "creative" solutions.
In the November ABI Journal , Part I of Professor Charles Tabb's examination of consumer bankruptcy trends examined filing rates and the Chapter 7 / Chapter 13 balance. In Part II this month, Professor Tabb makes a clear prediction: Filing rates probably will soon return to the range of pre-BAPCPA levels. Tabb doesn't expect, however, that those rates will continue to climb. That's because his research shows a clear correlation between the level of revolving consumer debt (primarily credit card debt) and bankruptcy filings, and the revolving credit market seems to be largely saturated.
Tabb's analysis is full of interesting details, including the fact that the correlation of bankruptcy filings with revolving debt as a whole is much stronger than the correlation between bankruptcy filings and delinquencies, or between bankruptcy filings and debt-to-income ratios. Overall debt correlates with bankruptcy filings, but not as closely as revolving debt. The bottom line: the level of credit card debt in America appears to be the clearest predictor of the bankruptcy filing rate. Based on that correlation, we can expect filings to climb back to pre-BAPCPA levels in the near future.
For all its interesting data, the article is as worthy of a read for Tabb's delivery of stunning information such as "The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt." This, Tabb suggests, shouldn't have come as a surprise to Congress. Of course, those members of Congress who spearheaded the 2005 bankruptcy reforms have shown themselves to be quite easily surprised by the obvious. Bob Lawless talks about a recent example--one that would be entertaining if real federal legislation hadn't sprung from this kind of ignorance--on the Credit Slips blog: Senator Grassley Struggles to Understand the Means Testing Forms
We talked back in July about the growing impact of ARMs reaching their "shock points" during 2006 and 2007. Last week, a study released by the Center for Responsible Lending substantiated those fears with data collected through the study of 6,000,000 subprime mortgage loans.
In a press conference held in conjunction with the National Association of Realtors and the Leadership Conference on Civil Rights, the Center for Responsible Lending announced dismal findings:
If an adjustable rate mortgage, interest-only mortgage, or other non-conventional mortgage structure wreaked havoc with your finances, you may have a unique opportunity to tell your story to the public.
And if you're a consumer bankruptcy attorney, you've certainly seen clients losing their homes and being forced into bankruptcy by these mortgage loans.
If you have a story you'd like to share, please contact us TODAY.
The national median income rose slightly last year, according to a U.S. Census Bureau report, but that's probably scant comfort to consumers in Washington, D.C., where the median income has declined by about $10,000 for 2, 3 and 4 person households. Although the District of Columbia saw the largest decline, the median income for a family of four in Idaho dropped by about $5,000, and the same size family in Mississippi saw a $4,000 decline. New Hampshire median incomes declined for 2, 3 and 4 person households, with 2 person households losing about $4,000 annually.
While these states suffered the largest drops, they're far isolated. 37 states saw a decline in median income in at least one family-size category, and five states showed losses across the board for 2, 3 and 4 person households.
The declining economies in those states undoubtedly create hardships for the consumers who live and work in them. The picture of an improving economy painted by the federal government undoubtedly adds to that stress. But soon--probably as early as October 1--the government will add injury to insult when the U.S. Trustee adopts these new median income figures for use in Chapter 7 means testing.
Then, debtors already impacted by declining income will find themselves subjected to more rigorous testing before Chapter 7 filing, and in some cases be disqualified altogether.
As foreclosure rates across the country rise and the number of new bankruptcy petitions is steadily climbing back toward pre-BAPCPA rates, local media blame everything from rising gas prices to mass layoffs to a leveling off of property values. Each of those factors likely impacts the foreclosure and bankruptcy rates we're seeing, but the proliferation of subprime lending, and in particular Adjustable Rate Mortgages (ARMs) in the early 2000s is surely a critical factor.
In 1995, fewer than 100,000 subprime mortgage loans originated, with only 21,000 ARMs among them. Over the next few years, however, those numbers escalated rapidly. From the early 1990s to the late 1990s, subprime mortgage lending grew from .74 % of the overall mortgage market to more than 8%. At their peak in the early 2000s, more than 1.5 million subprime mortgage loans were generated in a single year, including 866,000 ARMs.
Subprime loans provide access to home ownership to people whose credit would otherwise not support a mortgage, but there are heavy risks associated. ARMs typically carry a fixed interest rate for 3 or 5 years, and are then subject to adjustment. Many of these loans are "interest only" during the fixed period, creating an even more significant shock when the rate changes and principal payments commence simultaneously. Unfortunately, many ARMs-about 80% of those generated between 2000 and 2002-carry prepayment penalties that make refinancing difficult or prohibitive.
Consumer bankruptcy attorney O. Max Gardner III
Many consumers are simply unable to absorb the increase, particularly since subprime lenders most often work with borrowers who have lower credit scores or down payments and may not qualify for traditional mortgages.
The ARM "boom" of the early 2000s is coming back to haunt us, as literally millions of ARMs originated during 2001-2003 are reaching their "shock" points simultaneously. The Mortgage Bankers Association reportedly estimates that approximately $330 billion in ARMs have adjusted or will adjust in 2006, with an addition $660 billion or more by the end of 2007. That $1 trillion in ARMs, at an average loan value of $300,000, represents more than three million homeowners nationwide now facing dramatically increased mortgage payments.
The Federal Reserve-yes, that same institution that reassured us all last month in its Report to Congress on the Practices of the Consumer Credit Industry in Soliciting and Extending Credit and their Effects on Consumer Debt and Insolvency that "the aggregate growth of consumer debt has not entailed a threat to the household sector of the economy-released statistics this week indicating that outstanding non-mortgage consumer credit had increased by $4.4 billion in May. That $4.4 billion is the latest in a string of increases-seven consecutive months-and the largest single-month increase since October of 2004. The net increase since the end of 2005 if more than $64 billion, with no indication that the pace is slowing.
At the same time, McClatchy Newspapers is reporting that last year credit card companies-the ones the Federal Reserve assured us were "carefully pre-screening" those to whom they extended credit offers-sent out more than 6 billion solicitations. And those solicitations aren't just offers of credit, either. According to McClatchy, 58% of those offers included some kind of "rewards" for the use of credit. Those incentives rarely work out to the consumer's benefit, since interest on a purchase not paid off within the grace period will often more than consume the "cash back" associated with the purchase. Such programs would have been very relevant factors for consideration by the Board of Governors of the Federal Reserve in responding to Congress's concern as to whether credit card companies offered credit "in a manner that encourages consumers to accumulate additional debt"-had the Board decided to address that concern at all.
Congress-no friend to the debtor in the 2005 bankruptcy reform-was nonetheless compelled to acknowledge some apparent culpability on the part of credit-issuing banks. Section 1229 of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) says, in part:
SEC. 1229. ENCOURAGING CREDITWORTHINESS
(A)SENSE OF THE CONGRESS.-It is the sense of the Congress that-
(1)certain lenders may sometimes offer credit to consumers indiscriminately, without taking steps to ensure that consumers are capable of repaying the resulting debt, and in a manner which may encourage certain consumers to accumulate additional debt; and
(2)resulting consumer debt may increasingly be a major contributing factor to consumer insolvency.
In short, Congress suggested, right in the bankruptcy statute, that credit issuers might be at least partially to blame for the increase in bankruptcy filings. Congress went on to order the Board of Governors of the Federal Reserve to conduct a study of such practices and their impact on consumer debt and insolvency.
Indiscriminately, without taking steps to ensure that consumers are capable of repaying
On the first two issues-whether lenders were issuing credit "indiscriminately" or "without taking steps to ensure that consumers are capable of repaying the resulting debt", the Board summarily concluded that they were not. Citing the two-step process in which most consumers are "pre-qualified" before receiving credit offers and then individually screened upon application, the Board determined that "lenders analyze consumer financial behavior carefully before offering credit, and they consider consumers' ability and willingness to pay in making decisions about extensions of credit."
Unfortunately, the report fails to take into account a number of critical facts. For instance, those pre-screening processes are just as easily used to target consumers who are in desperate straits and likely to accept egregious credit terms. Many credit card lenders make their fortunes on annual fees, "start-up" fees, and high interest rates that would never be accepted by the truly credit worthy. In fact, the Board's concluding paragraph points out that "risk segmentation enables providers to price for risk...".
Likewise, a lender's assessment is based on profitability of the account, and with fees, high interest rates, late charges, and over-the-limit charges, delinquent accounts can be quite lucrative for credit card issuers. In fact, the borrower who pays at or near his minimum payment level, carries a high balance, and makes occasional late payments is a much bigger moneymaker for the lender than a responsible borrower who pays off his balance in full each month.
In a manner which may encourage certain consumers to accumulate additional debt
The Board dodged the issue of lenders encouraging consumers to accumulate additional debt, concluding that, "the aggregate growth of consumer debt has not entailed a threat to the household sector of the economy." We could argue that the statement itself is inaccurate, but that's hardly relevant here, since Congress didn't ask whether the aggregate growth of consumer debt entailed a threat to anyone-Congress asked whether credit card company practices encouraged consumers to take on additional debt.
In an effort to provide support for the idea that the leap in credit card debt and usage was attributable to other factors, the Board largely contradicted its first two findings, pointing out that "credit cards have become more widely available to all groups, including lower-income consumers and to populations with a wider range of credit risks." Translation: people who are less likely to be able to repay can now obtain credit cards more easily. This statement, at least, is supported by data. Consumers with incomes below the 40th percentile are carrying 21% of the total outstanding credit card balances, and more than 60% of those in that income category who use credit cards are carrying balances from month to month.
The biggest evasion on this issue comes in a single sentence relating to concerns about whether consumers have enough information to make good decisions and avoid unexpected costs: "These concerns are beyond the scope of this report." It's difficult to understand how the Board might have considered understandable disclosures to consumers "beyond the scope" of whether or not credit card issuers encouraged consumers to accumulate additional debt.
Consumer debt as a contributing factor to insolvency
The Board cites a 2002 study to support the startling notion that the best predictor of whether or not a household will file for bankruptcy protection is the financial benefit of doing so. The connection between the financial benefit of bankruptcy and the level of unsecured consumer debt relative to income and assets is glossed over. The Board does concede that consumer debt is one of many factors that may play into insolvency, but concludes, "the decision to file for bankruptcy is complex and tends to be driven by household distress arising from unforeseen adverse events such as job loss, divorce, and uninsured illness."
It's too bad Congress didn't ask this question before making those sweeping changes to the Bankruptcy Code to root out the "deadbeats".
That increase in consumer credit reported by the Federal Reserve earlier this month isn't reflected in the returns of major credit card issuing banks. Several major banks reported first quarter earnings this week,and some of the largest credit card issuers reported surprising downturns.
Many issuers of consumer credit reported losses during the last quarter of 2005, but expected profits to rebound after losses associated with the October rush of bankruptcy filings were absorbed.
Now, creditors who pushed hard to make consumers "more responsible" about credit card debt have received an ugly shock: it worked. It's unclear whether or not the recent bankruptcy reform impacted the trend, but consumers are doing more than keeping their minimum payments up to date. Instead, many are paying their accounts in full.
During the first quarter of 2006, J.P. Morgan reports a decline of $8 billion in outstanding credit card debt. Citigroup reports a decline of $5.7 billion.
The credit industry might have wanted to ensure that credit accounts were paid, but it certainly didn't intend that they be paid off--or even necessarily on time. The industry's profit depends on interest charges and fees associated with late payments and charges beyond established credit limits.
According to Dow Jones's MarketWatch, officials at both banks admit that these timely payments of outstanding balances present problems for the banks.
Not surprisingly, the column also reports that some issuers are already increasing other fees to compensate.
According to a report released by the Federal Reserve last week, total outstanding consumer credit in February stood at $2,166,200,000,000--up $4 billion from the third quarter of 2005, the last quarter before the rush of bankruptcy filings in the fall of 2005.
The report also shows revolving credit up more than $9 billion since the third quarter of 2005, to $804,100,000,000.
The total outstanding consumer credit is 1.87 times as high as it ws just ten years ago.
The 6th U.S. Circuit Court of Appeals recently held that debt-collection attorneys who file affidavits to obtain garnishments can be sued under the Fair Debt Collection Practices Act.
The court ruled that the immunity that typically applies to witnesses in judicial proceedings did not extend to attorneys filing garnishment affidavits.
Consumer attorneys report that such affidavits are regularly filed without any supporting documentation. Whether that's due to fraud or simple carelessness, those attorneys have a lot more at risk following the 6th Circuit decision in Todd v. Weltman, Weinberg & Reis Co., No. 04-4109 (6th Cir.).
This is good news for debtors, who have had little recourse when attorneys filed false affidavits and obtained garnishment orders. Not surprisingly, however, collection firms are taking quite a different position, and there appear to be some viable grounds for challenging the ruling, and a motion for rehearing has already been filed.
Wages are weak across the board-according to the Economic Policy Institute (EPI), the wages of most U.S. workers, when adjusted for inflation, declined in both 2004 and 2005. A significant portion of the American workforce, though, finds itself in even more dire straits. Approximately 7.3 million working Americans are earning minimum wage, currently $5.15/hour. The minimum wage rate hasn't increased since September, 1997.
In 2005 dollars, a worker needs to earn $6.27/hour to have the same purchasing power $5.15/hour brought in 1997. Millions of Americans haven't seen a dime of that increase, and more than 70% of them are adults. In fact, more than 700,000 minimum wage earners in the United States today are single mothers with minor children in the home. In addition, EPI estimates that more than 8 million additional workers earn within $1/hour of the minimum wage. Those workers earning minimum wage to $6.15/hour and working a 40 hour week 52 weeks a year earn between $10,712 and $12,792 annually.
These two groups of workers make up more than 10% of the U.S. workforce, while another 7.5 million people are unemployed. Given these numbers, it's not surprising that the would-be bankruptcy petitioners currently being routed into credit counseling are being advised-at a rate of more than 95%--that they have no realistic option but to file bankruptcy.
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