Bankruptcy Filings Increase Due In Part To Appraisal-Demand Gap

Buyers cannot obtain loans for homes that do not appraise for the sales price. Appraisal values have decreased significantly in this down market. This has created opportunities for some buyers, and the demand for homes has significantly increased from the lows of 2008-2009. In some communities within Southern California , buyer-demand has increased the sales price of homes. The problem is that the appraisal values are not rising accordingly. Appraisal values are staying low, partly due to the consistent number of foreclosures, short-sales and REOs, as well as the tightened industry regulations. The result is that sales prices are overstating appraisal values, and the seller is left with the decision whether to sell at a price less than buyers are willing to pay. Many sellers are choosing not sell, which is reflected in the decreased market inventory. Other sellers don’t have a choice due to high loan amounts that also exceed appraisal value. Ultimately, the market is left in idle, and the home owner is left with less options. Prices cannot go up, because the banks will not lend for the higher price. Prices cannot go down, because demand exceeds the appraisal value. If the home owner cannot afford to keep the home, and cannot sell the home, bankruptcy becomes a more desirable option.

Unemployment Rate Tops 10%

Last month, the unemployment rate rose to 10.2%. The total number of unemployed individuals in the U.S. now exceeds 15.7 million. Some economists predict that the the current unemployment rate will stay above 10% through at least Spring 2010.

This is only the second time in American history that the unemployment rate topped 10%. The last time the unemployment rate topped 10% was in 1982. The rate stayed above 10% for ten months. The unemployment rate peaked at 10.8% in November 1982.

Senate Bill 94 Deters Attorneys From Assisting Homeowners

California State Senate Bill 94 was passed to protect homeowners from loan modification scams. It may also have an unintended consequence - eliminating a homeowner's ability to retain an attorney to help them save the homeowner's home.

Senate Bill 94 prevents attorneys from receiving fees until after the contracted services have been rendered. While the actual language of the bill is vague, the bill could be interpreted to mean that attorneys will only get paid for services after the many months of negotiation with the lenders, and only if successful.

Recent studies have shown that only about 9% of qualified mortgages have been modified by lenders. Bank of America only modified about 4% of eligible mortgages. The loan modification process can take up to around 6 months. It is not economically feasible for an attorney to work for a homeowner for 6 months for only a 4-9% chance of getting paid. This will basically leave homeowners without representation, and alone to fight their lenders. That was not the purpose of Senate Bill 94. Unfortunately, that is the likely result.

The Economy Appears to be Recovering; but Debt will not Disappear

Causation is a simple concept that some people do not understand. If you dig a hole, there is going to be a hole; everyone comprehends that. What some do not understand is if you stop digging a hole, and instead start climbing a mountain, there is still going to be a hole. Our economy is recoverying. The stock market is rising. However, when we look at individual and business debt, the large majority of debt is still outstanding. At some point that debt will become due. Between 2012 and 2014, 85% of the $518 billion in current leveraged loans outstanding will become due (according to S&P). What will happen when that debt can't be paid back? I doubt the economy will react favorably. Some companies (such as GM) are restructing or filing for debt consolidation through bankruptcy court. Some other companies (such as Sungard and Cablevision) are trying to negotiate extended repayment terms. That sounds a lot like a home "loan modification" to me. What does this all mean? It means we are all in the same boat - individuals and large businesses alike. And it means our boat is not going anywhere fast. Individuals cannot ignore their debt problems just like the larger business cannot. Debt issues should be met by proactive debt relief strategies to help curb future debt disasters - both at home and on Wall Street.

Bankruptcy is Teaching Individuals How to Live Within Their Means

Many American's at all income levels fail to properly live within their means. However, Americans in general are saving more now than at anytime since 1993. This shift in the consumer spending trend will hopefully have a lengthy effect following rescession recovery. The younger adults are part of the generation that, until recently, never truly experienced economic turmoil in this country. Spending habits over the last couple generations have become increasingly risky. Americans had become increasingly leveraged. The recession is teaching people the hard way how to save and prepare for the rainy days/months/years. Many of those people who did not plan for financial security in an economic downturn are seeking bankruptcy for a fresh start. Thankfully, Bankruptcy also teaches people how to save. As we all know, bankruptcy damages credit. The inability to obtain credit forces bankruptcy filers to learn how to live within their means. This is a valuable lesson, and perhap a consequential benefit to bankruptcy. I expect Americans to become increasingly conservative with their spending as the rescession continues and bankruptcy filings continue to increase.

Credit Card Company Practices Curbed

The Senate approved sweeping restrictions on credit card companies. Under the bil. starting in February 2010, credit card companies will be banned from charging consumers to pay by phone and from making sudden increases in interest rates. Credit card companies will be required to give 21 days notification of payment due dates, identify how many payments would need to be made to pay off the balance if the borrower paid only the minimum payment due, and identify the total interest paid over time if only the minimum payment was paid. The general result will be increased transparency and fairness for consumers in the credit card industry.

Senate Rejects Mortgage Bankruptcy Bill

The Senate recently defeated a plan to spare hundreds of thousands of homeowners from foreclosure through bankruptcy, a bill President Barack Obama had embraced. This was a victory for the banking industry, who strongly opposed the bill. Meanwhile, the House overwhelmingly approved a bill backed by the Obama administration that would limit the ability of credit card companies to freely charge high fees and penalties.

U.S. DOJ Targets Loan Modification Fraud

The U.S. Department of Justice issued a press release today announcing a new coordinated effort between federal and state government and private sector agencies to target mortgage broker loan modification fraud. The FTC has filed 5 new cases to halt illegal practices of real estate brokers and companies offering loan modification scams, including one company that spent $9 million on TV and radio ads over the last year. The FTC also sent 71 warning letters to operations using deceptive tactics. Apparently, many "loan modification companies" offer guaranties that are too good to be true. Others fail to ever contact the lender and never attempt to obtain a loan modification despite their customers providing full payment and all requested information. Such companies that take advantage of vulnerable home owners will finally be punished. Borrowers needing loan modification assistance should obviously avoid these companies, and instead contact an attorney. Free assistance is also available, such as via the Homeowner's Hope Hotline or the governments Making Home Affordable web site.

GM May Be Saved By Bankruptcy

The Obama administration has recently urged General Motors to consider bankruptcy. GM is carrying too many bad assets on its books and is heavily in debt. A Chapter 11 bankruptcy will allow GM to stop its downward spiral and restructure its assets so that the new restructured company can survive. This is similar to what many individuals are now doing under Chapter 13, only on a much smaller scale. What is good for the goose is good for the gander. Our government knows very well that bankruptcy is not an end, but a means to an end, and that end is a fresh start. If GM is permitted to restructure it’s debts under bankruptcy laws, then individuals should have no shame in doing the same.

Borrower Beware of Loan Mod Companies

The California Department of Real Estate has issued warnings to consumers regarding loan modification companies. Some are practicing in violation of law, and the DRE is in the process of performing loan modification company investigations and audits. If an advance fee agreement is required, or if a company purport to assist borrowers even after a Notice of Default has been issued, then consumers should be wary to ensure the company is compliant with legal restrictions on advance fee agreements and post-NOD representation. Both borrowers and brokers should consult an attorney to ensure compliance.