Thursday, January 15, 2009

A Message of Hope for a New Dawn













Guess What Got Lost in the Loan Pool?

Published: February 28, 2009
WE are all learning, to our deep distress, how the perpetual pursuit of profits drove so many of the bad decisions that financial institutions made during the mortgage mania.

Times Topics: Gretchen Morgenson

But while investors tally the losses that were generated by loose lending so far, the impact of another lax practice is only beginning to be seen. That is the big banks’ minimalist approach to meeting legal requirements — bookkeeping matters, really — when pooling thousands of loans into securitization trusts.

Stated simply, the notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded.

But this seems not to have been a priority with many big banks. The result is that bankruptcy judges are finding that institutions claiming to hold the notes that back specific mortgages often cannot prove it.

On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.

With the sale set aside, Ms. Fernandez remains in the home. “We believe this loan was never assigned,” said Ray Garcia, the lawyer in Miami who represented the borrower. Now, he said, it is up to whoever can produce the underlying note to litigate the case. The statute of limitations on such a matter runs for five years, he said.

A spokeswoman for Capital One, which is in the process of acquiring Chevy Chase, did not return a phone call on Friday seeking comment.

Mr. Garcia has another case in which a borrower tried to sell his home but could not because the note underlying a $60,000 second mortgage cannot be found. The statute of limitations on the matter will expire in October, he said, and if the note holder has not come forward by then, the borrower will be free of his obligation on the second mortgage.

No one knows how many loans went into securitization trusts with defective documentation. But as messes go, this one has, ahem, potential. According to Inside Mortgage Finance, some eight million nonprime mortgages were put into securities pools in 2005 and 2006 and sold to investors. The value of these loans was $797 billion in 2005 and $815 billion in 2006.

If notes underlying even some of these mortgages were improperly assigned or lost, that will surely complicate pending legislation intended to allow bankruptcy judges to modify mortgage terms for troubled borrowers. A so-called cram-down provision in the law would let judges reduce the size of a loan, forcing whoever holds the security interest in it to take a loss.

But if the holder of the note is in doubt, how can these loans be modified?

Bookkeeping is such a bore, especially when there are billions to be made shoveling loans into trusts like coal into the Titanic’s boilers. You can imagine the thought process: Assigning notes takes time and costs money, why bother? Who’s going to ask for proof of ownership of these notes anyhow?

But as the Fernandez case and others indicate, bankruptcy judges across the country are increasingly asking these pesky questions. Two judges in California — one in state court, another in federal court — issued temporary restraining orders last month stopping foreclosures because proper documentation was not produced by lenders or their representatives. And in another California case, a borrower’s lawyer was awarded $8,800 in attorney’s fees relating to costs spent litigating against a lender that could not prove it had the right to foreclose.

California cases are especially interesting because foreclosures in that state can be conducted without the oversight of a judge. Borrowers who do not have a lawyer representing them can be turned out of their homes in four months.

Samuel L. Bufford, a federal bankruptcy judge in Los Angeles since 1985, has overseen some 100,000 bankruptcy cases. He said that in previous years, he rarely asked for documentation in a foreclosure case but that problems encountered in mortgage securitizations have made him become more demanding.

In a recent case, Judge Bufford said, he asked a lender to produce the original of the note and it turned out to be different from the copy that had been previously submitted to the court. The original had been assigned to a bank that had then transferred it to Freddie Mac, the judge explained. “They had no clue what happened after that,” he said. “Now somebody’s got to go find that note.”

“My guess is it’s because in the secondary mortgage market they have been sloppy,” Judge Bufford added. “The people who put the deals together get paid for the deals, but they don’t get paid for the paperwork.”

A small but spirited group of consumer lawyers has argued for years that the process of pooling residential mortgages into securities was so haphazard that proper documentation of the loans was never made in many cases. Leading the brigade is April Charney, a foreclosure lawyer at Jacksonville Legal Aid in Florida; she now trains consumer lawyers around the country to litigate these cases.

Depending on the documentation defect, lawyers say, investors in the trust could try to force the institution that sold the loan to the trust to buy it back. Many of these institutions would be unable to do so, however, because they are defunct. In the meantime, when judges are not persuaded that the documentation is proper, troubled borrowers can remain in their homes even if they are delinquent.

THE woes brought on by sloppy bookkeeping in securitizations will be on the agenda at the American Bankruptcy Institute’s annual spring meeting on April 3. An article titled “Where’s the Note, Who’s the Holder,” co-written by Judge Bufford and R. Glen Ayers, a former federal bankruptcy judge in Texas, will be the basis of a discussion at the meeting.

Mr. Ayers, who is a lawyer at Langley & Banack in San Antonio, said he expects that these documentation problems will halt a lot of foreclosures. That will mean pain for investors who hold the securities. The problem for those who expect to receive the benefit of the note, Mr. Ayers said, is that they “may not be able to show to the judge they have a right to foreclose.”

“It’s a huge problem,” he added. “It’s going to be expensive, I don’t know how expensive, ultimately to the bondholders.”

Next Article in Business (30 of 31) »A version of this article appeared in print on March 1, 2009, on page BU1 of the New York edition.


Normally blogs start with the end, chronologically, but in order to fully appreciate the content of mine, start with the beginning - after you read these articles, if they are of interest to you.

Start from the beginning of this blog. Please.

Can Bankruptcy Help Save Your Home From Foreclosure

By Susanne Robicsek, North Carolina Bankruptcy Attorney on Jan 17, 2009 in Benefits of Bankruptcy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, North Carolina

Bankruptcy can help save homes from foreclosure in a few ways. Under the present laws, filing either a Chapter 7 or a Chapter 13 bankruptcy will stop a foreclosure, but you will have to cure the mortgage somehow. Chapter 7 is a temporary stop to the foreclosure, but might give you a short time to sell or refinance the property. Chapter 13 will give you up to five years to catch up the missed payments, or a longer period to sell or refinance. Exactly how this would work must be looked at on a case by case basis, and you should speak to an experienced bankruptcy lawyer in your town to determine what you can do.

Most people who want to save their home will file Chapter 13 bankruptcy to get time to cure the mortgage arrears. They normally have to be in a position to make the ongoing (regular) payments in addition to whatever Chapter 13 plan payment is required.

Right now, If someone has residential mortgage payments that they can’t afford to pay, even Chapter 13 bankruptcy can’t help modify the payments. Lamm v. Investor's Thrift, 211 BR 36 (Bankr. 9th Cir. 1997)* Under current bankruptcy law, you can’t modify a residential mortgage in bankruptcy, except to provide for the cure of the past due payments. That is expected to change soon, since Congress is looking at changing banruptcy law to allow mortgage modification which would allow bankruptcy judges to oversee modification of residential home mortgages. If passed, the law is expected to allow mortgage modification by changing interest rates, payments, times and lowering the balance due under the right conditions.

* Except in California and Western states in the US Ninth Circuit Court of Appeals, junior mortgages that are, because of current market conditions, wholly underwater (unsecured as a practical matter) caselaw empowers bankruptcy courts to "lien strip" those mortgages in a Chapter 13 plan "cramdown".

Can you survive the trauma of a bankruptcy?
2009: Perchance to Dream
New Years is a time when many make resolutions. Some resolve to quit smoking. Some resolve to lose weight. The list of resolutions is endless. Personally, I think many resolutions are pretty useless. I didn’t stop smoking because of a resolution (but I did quit... a few Novembers ago), and I have not exactly kept up with resolution diets. I’ve been racking my brain trying to come up with something appropriate to write about for New Years. The last thing I want to do, especially today, is sound trite. It’s not like you can simply “resolve” to get out of bad mortgage or you can “resolve” to get a better job when companies are laying off. But then yesterday, I had a surprise visit from an old client who helped my thought process move along.

My client went through a long chapter 13. At times, it was not particularly pleasant. But all plan payments were paid and the discharge was received a few years ago. Now, she’s dedicated to her business and determined to keep make it grow in a difficult economy.

During our brief meeting, I noticed something different. Was it the hair color, I thought? No. Did she have her teeth done? No, not that. Then it dawned on me. It was something more.

She was happy. She was smiling. While she was not a particularly unhappy person while the case was open, I think it’s fair to say the chapter 13 was not a particularly happy period in her life. But now, the chapter 13 case is behind her and yesterday she sat before me smiling, happy, and talking about the future.

As an attorney, while I try to get my client’s perspective, I really can only get so much. I can only put myself so far into a client’s shoes. So I asked her, now that her case is behind her, now that she is moving forward with her life in new directions, what were her feelings about the bankruptcy process now that she was “on the other side of it."

She didn’t hesitate with her response. (I can’t quote, but I did take a few notes.) She told me that going through that difficult process allowed her to dream again. That now she could dream and that making those dreams a reality again seemed possible. Her dreams were no longer mired down in a chaos created by debt that had spiraled out of control. She told me that she felt freer than she had felt in a very long time.

The minute these words flowed, I could feel a smile growing on my face....and a bit of a lump in my throat. And then, it dawned on me: ‘this is what I’ve been itching to write about for the New Year.’

Many are looking at 2009 with a sense of foreboding and trepidation. World events are not exactly fueling optimism about the future. Perhaps 2009 will not be a year when dreams will come true. Perhaps things may get worse.

Or perhaps in spite of that, you can find a way to knuckle down, stand straight, bite your lower lip, bide your time, and get through a journey that brings you to the other side of it: a side where you can dream once again. I know it may all sound silly, but I know this place exists. Yesterday, I was fortunate to be reminded that for my clients in or facing bankruptcy, there can be a life afterwards. And that life can be wonderous. The only assurance I can give you is that the big smile on my client’s face proves that anything is possible.

With that, I wish you all a very Happy New Year.

From Bill McLeod's blawg

* in California and parts of the West - the 9th Circuit - caselaw authorizes bankruptcy courts in Chapter 13 cases to "lien strip" junior mortgages that are wholly "underwater.". Lamm v. Investor's Thrift, 211 BR 36 (Bankr. 9th Cir. 1997)

(c) copyright 2008 - 2009 New Dawn Law all rights reserved

Sunday, January 11, 2009

Will New Bankruptcy Law Save Your Home?

Senate Bill 61 (Durbin)


Section by Section Summary

Section 1. Short Title. Section 1 sets forth the short title of the bill as the “Helping Families Save Their Homes in Bankruptcy Act of 2009.”

Section 2. Eligibility for Relief. Bankruptcy Code section 109(e) sets forth secured and unsecured debt limits to establish a debtor’s eligibility for relief under chapter 13, currently equal to just over $1 million. Section 2 amends this provision to provide that the computation of debts does not include the secured or unsecured portions of debts secured by the debtor’s principal residence, under certain circumstances. First, the exception applies if the current value of the debtor’s principal residence is less than the secured debt limit. Second, the exception applies if the debtor’s principal residence was sold in foreclosure or the debtor surrendered such residence and the current value of such residence is less than the secured debt limit. Without this provision, many struggling homeowners in high-cost areas such as California would be ineligible for relief.
In addition, section 2 amends Bankruptcy Code section 109(h) to waive the mandatory requirement that a debtor must receive credit counseling prior to filing for bankruptcy relief, under certain circumstances. The waiver applies in a chapter 13 case where the debtor submits to the court a certification that the debtor has received notice that the holder of a claim secured by the debtor’s principal residence may commence a foreclosure proceeding against such residence.

Section 3. Prohibiting Claims Arising from Violations of Consumer Protection Laws. Section 3 amends Bankruptcy Code section 502(b) to disallow a claim that is subject to any remedy for damages or rescission as a result of the claimant’s failure to comply with any applicable requirement under the Truth in Lending Act or other applicable state or federal consumer protection law in effect when the noncompliance took place, notwithstanding the prior entry of a foreclosure judgment.

Section 4. Authority to Modify Certain Mortgages. Section 4 amends Bankruptcy Code section 1322(b) to permit modification of certain mortgages that are secured by the debtor’s principal residence in specified respects. The modification authority applies in a chapter 13 case where the debtor’s principal residence is the subject of a notice that a foreclosure may be commenced. New section 1322(b)(11) allows the court to modify the rights of a mortgagee by: (1) providing for payment of the amount of the allowed secured claim as determined under section 506(a)(1); (2) prohibiting, reducing, or delaying any adjustable interest rates applicable on and after the date the case is filed; (3) extending the repayment period of the mortgage for a period that is no longer than the longer of 40 years (reduced by the period for which the mortgage has been outstanding) or the remaining term of the mortgage beginning on the filing date of the case; and (4) providing for the payment of interest at an annual percentage rate calculated at a fixed annual percentage rate equal to that used for conventional mortgages as published by the Board of Governors of the Federal Reserve System, plus a reasonable premium for risk.

Section 5. Combating Excessive Fees. Section 5 amends Bankruptcy Code section 1322(c) to provide that the debtor, the debtor’s property, and property of the bankruptcy estate are not liable for a fee, cost, or charge incurred while the chapter 13 case is pending and that arises from a debt secured by the debtor’s principal residence, unless the holder of the claim complies with certain requirements. These requirements consist of the following: (1) the holder files with the court an annual notice of such fee, cost, or charge (or on a more frequent basis as the court determines) before the earlier of one year of when such fee, cost, or charge was incurred or 60 days before the case is closed; (2) the fee, cost, or charge is lawful under applicable nonbankruptcy law, reasonable, and provided for in the applicable security agreement; and (3) the value of the debtor’s principal residence is greater the amount of the claim, including such fee, cost or charge. If the holder fails to give the required notice, such failure is deemed to be a waiver of any claim for fees, costs, or charges (as described in this provision) for all purposes. Any attempt to collect such fees, costs, or charges would constitute a violation of the Bankruptcy Code’s discharge injunction under section 524(a)(2) or the automatic stay under section 362(a).
Section 5 further provides that a chapter 13 plan may waive any prepayment penalty on a claim secured by the debtor’s principal residence.

Section 6. Confirmation of Plan. Section 6 amends Bankruptcy Code section 1325(a) to provide certain protections for a creditor whose rights are modified under new section 1322(b)(11). As a condition of confirmation, it requires a plan to provide that such creditor must retain its lien until the later of when the claim (as modified) is paid or the debtor obtains a discharge. In addition, the court must find that the modification is in good faith.

Section 7. Discharge. Bankruptcy Code section 1328 sets forth the requirements for discharge. Section 7 amends section 1328(a) to clarify that a claim modified under section 1322(b)(11) is not discharged to the extent of the unpaid allowed secured portion of the claim.

Section 8. Effective Date; Application of Amendments. Section 8(a) provides that the Act and the amendments made by it, except as provided in subsection (b), take effect on the Act’s date of enactment. Section 8(b) provides that the amendments made by the Act apply to cases commenced under title 11 of the United States Code before, on, or after the Act’s date of enactment.

This appears to be the problem: it seems to be limited to future foreclosures, not present foreclosures, or foreclosures already started and pending:

It excludes the majority of homeowners who struggle with adjustable rate mortgages, predatory lending loans, and unaffordable upside-down-the-property-is-not-worth-as-much-as-the-loan loans. It excludes people who are already in foreclosure or have been in foreclosure and had their case dismissed by a scrupulous judge who demanded to see proper loan documentation or have had default judgments entered against them but have not been removed from the property.

S. 61 only protects those people who have a claim for a loan secured by a security interest in the debtor’s principal residence “that is the subject of a notice that a foreclosure may be commenced”.

“May be commenced” does not cover has been commenced. “The subject of a notice” does not cover those who are not the subject of a notice, those who have not been threatened with foreclosure but have been subjected to every other type of collection harassment, including work out scams, and phony loan modifications that add unnecessary fees, but do little to lower the monthly payment or interest rates.

This bill only serves those people who receive a notice that they might be sued for foreclosure. Arguably, Congress knows that foreclosures are a problem and if Congress wanted to apply this bill to existing foreclosure cases she could have stated so in clear and unambiguous words.


Should I File Bankruptcy Now if the Law is Going to Change?
By Nicholas Ortiz, Boston Bankruptcy Attorney on Jan 31, 2009 in Bankruptcy Protection & Automatic Stay, Chapter 13 Bankruptcy
Congress is debating a change to Chapter 13 of the Bankruptcy Code to allow homeowners with “negative equity” in their homes to reduce the amount owed on their mortgages to the amount of their home’s value. This is the “cram down” legislation, which has failed on many occasions due to the the banking industry’s strong opposition. However, the political and economic environment now gives it a fighting chance. Indeed, even Citigroup has signed on and supports the legislation.

Consequently, someone with negative equity who is facing foreclosure or just overwhelmed by debt might wonder if they should wait and see if the law passes before they file. The answer to this depends on need, of course. If help is needed now, then there may be little choice. The good news, however, is that for most people already in bankruptcy, if the new law passes they will be able to dismiss their pending Chapter 13 case and re-file a new one. There are two primary issues to be aware of when doing this.

1. When dismissing a Chapter 13 case, one must make sure that the 180-day bar to refiling does not go into effect. This bar can arise due to a willful failure to obey court orders, but it usually is implicated after a debtor seeks dismissal after a motion for relief from stay has been filed. If a motion for relief has been filed, often the best way to deal with the problem is simply to wait for the trustee to make a motion to dismiss for failure to make plan payments. If the dismissal enters as result of the trustee’s request, not the debtor’s, there is no 180-day bar to re-filing.

2. The other main issue relates to the imposition and preservation of the automatic stay in the new case. If a new law passes, a debtor will usually have filed only their current case within the last year. If this case is dismissed and re-filed, the stay will only last 30 days in the new case. However, if the debtor’s attorney goes to court within 30 days of filing the new case and ask for a continuation of the automatic stay to show that it was filed “good faith as to the creditors to be stayed” the stay will be continued. The focus of judges at these hearings tends to be simply to decide whether the new case will work. When a case is re-filed to take advantage of a new law, but is otherwise fundamentally sound, this test should be met. The standard gets much tougher when the new case is the third (or fourth, etc) in one year. In these circumstances, dismissing and re-filing is likely a bad idea.

The bottom line is that filing a case now will usually not deprive a debtor from taking advantage of whatever legislative changes may come in the future.


Present Bankruptcy Law Affords You Some Mortgage Relief: Cramdowns and Lienstripping

The Automatic Stay of Bankruptcy ( not so automatic if you had a bankruptcy case dismissed before within one year)