Who knew a relatively unknown state senator could have such far-ranging implications for jammed-up consumers scurrying to deal with over-the-levee unemployment rates, health-care costs and home-foreclosure levels–as well as credit-card company shenanigans?

Scott Brown (R-MA)  hasn’t been seated in Teddy’s 50-year-old chair, yet–but already he has an action figure. And some reports–notably, this one in the Christian Science Monitor– say his Republican victory in the Massachusetts race for Kennedy’s vacancy has “sent tremors” not only within the Team Obama reform effort but also “throughout the United States.” Beyond the five states the Monitor cites as candidates to follow the Massachusetts’ example, the spillover has also reached the Illinois primary–yes, a primary–in which Reuters points out “Five things to watch in Illinois” and at least one GOP-leaning blogger quotes the Reuters report then goes on to say: “The White House is paying close attention today. It’s a primary close to Obama’s heart, as it’s his former Senate seat that’s up for grabs.”

One thing for certain–any leader who can even partially help us to hack our way out of this mess deserves an action figure.

The serious, sobering certainty is that one election cost the Democrats their Senate “supermajority” of 60 votes, the implications of which are detailed in this CBSnews.com piece.

Here’s the highlights: “Basically, without 60 votes, under Senate rules, debate could go on forever and ever. This is called the filibuster. So basically, [because Brown won] . . . , the Republicans, with 41 votes, . . . have enough votes as the minority to prevent the Democrats, the majority with 59 votes, from ever bringing a final vote on health care reform or any other legislative priority to the floor. The minority [does] . . . basically control the Senate.”

Senate tactic not mentioned in Constitution

Ok, well, maybe that’s not quite true, but the point about the filibuster is accurate; and if all this self-focused in-fighting is not enough, turns out that cloture, the “procedure” that kills a filibuster, is not even a Constitutional device–in other words, even though its effects are very important to legislation that affects us all, it’s merely a procedural tactic–and limited to the Senate, at that. (For comparison, read about the Electoral College, which is in the Constitution.) This won’t be “the first time that the filibuster has been used to stop major pieces of legislation,” Fisk and Chemerinsky write, “and it’s definitely not a partisan idea–both parties, when in the minority, have used the filibuster to prevent the majority from passing everything they wanted to.

“According to law professors [Fisk and Chemerinsky] in their Stanford Law Review article from 1997, ‘The Filibuster,’ the technique was used not only to prevent civil rights legislation from passing for years in the last century, but more recently during the Clinton administration. Senate Republicans, then as now in the minority, used the filibuster to stop economic stimulus, campaign finance reform, lobbying reform and the [previous] attempt at health care reform. When the Democrats were the minority party in the Senate, they used the filibuster to stop much of the GOP’s Contract with America.

” ‘Filibusters are so ubiquitous in the contemporary Senate that it is now commonly said that sixty votes in the Senate, rather than a simple majority, are necessary to pass legislation and confirm nominations,’ wrote Fisk and Chemerinsky. “In fact, during the presidency of George W. Bush, Democrats, with Biden in their ranks, frequently filibustered some of the president’s judicial nominees for the federal courts.”

It gets worse.

Evolution of the ‘painless’ filibuster

When you think of a real-life filibuster, aren’t you getting an image at least somewhat informed by movie life? Namely, Jimmy Stewart’s “Mr. Smith” in Mr. Smith Goes to Washington. Anyone who’s ever seen the movie remembers the agonizing filibuster reel, watching the hero struggle to learn the tricks of the rulebook, while the other senators take turns dozing, coming and going in shifts.

Well, it turns out things have changed quite a bit since Capra made that 1939 movie.

The filibuster tactic nowadays is known as the “stealth filibuster.”

From the abstract of the Fisk and Chemerinsky paper: “Filibusters are ubiquitous but virtually invisible, for the contemporary Senate practice does not require a senator to hold the floor to filibuster; senators filibuster simply by indication to the Senate leadership that they intend to do so.”

In other words, a senator merely indicates that “I would filibuster, if I had to” and that takes the place of the real thing: no parched lips, no pleading bladder. *Poof* Instant roadblock, and the bill is tabled–Next!

From a May 5 piece at Huffington Post, “The Electoral College is provided for in the United States Constitution. The filibuster is not. In fact, the word doesn’t appear in any of our founding documents. Its derivation is from the Spanish filibustero, meaning ‘pirate’ or ‘freebooter.’ “

History of the tactic’s development traces to 1789, according to the Huffington piece, but for this discussion, the first important change came in 1917, when “the Senate developed a way of shutting down dilatory tactics of an obstreperous minority. It is called the cloture rule. During the closing days of the session that year, a group of isolationist senators who opposed the entry of the United States into World War I filibustered a bill which would have allowed President Wilson to arm U.S. merchant ships. The President denounced them as a ‘little group of willful men’ and called on the Senate to change its rules.”

Which it did, resulting in “a cloture rule which was embodied in Rule XXII of the Standing Rules of the Senate” . . . providing for “a 2/3 vote of all senators” that “could cut off debate.”

Whether Jimmy Stewart’s character had a problem taking a bathroom break is a question for fans of movie trivia, but the longest. actual-factual real-life filibuster on record–Strom Thurmond’s 24-hour, 18-minute ramble-thon against the Civil Rights Act of 1957–“would have gone on longer had Thurmond’s doctors not forced him to quit out of concern for kidney damage.”

More important was a deal brokered by LBJ (big surprise, right?) that resulted in a couple of new wrinkles, which in turn paved the way for a post-Watergate rule change that, among other things changed the majority requirement to a 3/5 vote and resulted in the the 60-vote supermajority requirement of today.

Inadvertent creation

Sadly, there’s more…which brings us back to Fisk and Chemerinsky, as described in the Huffington piece: “The story took a turn for the worse when, in the early 1970s, Senate majority leader Mike Mansfield — intending to dilute the power of the minority –inadvertently made filibustering easier.

“The extended speechifying made famous by Strom Thurmond and Huey Long before him has been replaced by what legal scholars Erwin Chemerinsky and Catherine Fisk have dubbed the ’stealth’ filibuster. Its genesis was the early 1970s, when it became apparent to then majority leader Mike Mansfield (D-MT) that delaying tactics such as objections to unanimous consent motions; forcing the previous day’s journal to be read aloud in its entirety; suggesting the absence of a quorum; and — of course — extended periods of time holding the floor were causing the Senate to fall behind in doing the people’s business.”

An idea emerged to let filibusters occupy morning sessions, but to reserve afternoons for “pressing business.”

Perversely, what actually developed from Mansfield’s dual-track system “has proved to be disastrous.”

——————-Next, in Part 2—————

What we have now is a system in which “the Senate has come to a point in time where it seldom takes up legislation unless the majority leadership has counted sixty votes. In other words, a credible threat that 41 senators won’t vote for cloture is enough to keep a bill off the floor on most occasions. Boston College historian Julian Zeliger puts it this way: ‘Mansfield’s measure, which was intended to promote efficiency, inadvertently encouraged filibusters by making them politically costless and painless.’ ”

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If you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”),  bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, please know the laws have changed recently. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

Even though bankruptcy in Canada is a different animal than what we’re used to in the states, some parallels apply.

During the holiday season, for example, one parallel is hugely important, namely, the pressure to buy largely…

But it’s a big mistake to let meager finances get overwhelmed by holiday pressure to buy gifts and decorations and–well, all that stuff.

Canadian bankruptcy trustee Doug Hoyes posted December 4, saying that “one of our busiest phone days of the year is the first Monday back after the Christmas holidays. I assume that January 4, 2010 will be no different: the phones will be ringing off the hook.

“Why? Because we all tend to spend too much at Christmas on our credit cards, and as the bills start to arrive in January we realize that we have a serious problem. But it’s not just the bills that cause us to worry.”

As C-day approaches, the pressure may intensify. That is, you may have resisted so far, but visions of an empty area beneath the tree can make people cave in the last few days leading up to Christmas Eve and morning.

But, remember, it’s important to resist the urge to splurge.

As Hoyes says, “If you only have $50 to spend, that’s all you have, so that’s all you can spend.”

He recommends making a plan, first recognizing that, “When you had money in the past you could spend a lot on Christmas
presents. This year that may not be possible. So be realistic.”

In that regard, the most direct and easiest thing to do is simply explain the situation to your family–perhaps briefly–but certainly letting them know that the financial crisis has hit you, too, and so Christmas is being pared back this year.

Other tips from Hoyes include enjoying the spirit of giving, without resorting to credit cards or loans. Be creative: perhaps you can make gifts from inexpensive materials already on hand. Or you give coupons redeemable for shoveling a snow-filled driveway or babysitting for a harried friend or relative. “Being there” and giving of your presence and time is often more valuable than anystore-bought gift.

And by refusing to dig a deeper financial hole, you’ll be in better shape to start the new year.

Speaking of the new year, there’s encouraging news shaping up on the home-loan modification front. One of the founding
architects of the “financial engineering” that created mortgage-backed securities is taking the lead in what we think is the first
meaningful approach to helping mortgage-crushed homeowners.

According to a December 9 Fortune piece on money/cnn.com, Lewis Ranieri is “arguably the most important figure in the creation of the modern mortgage industry that he now seeks to repair.

“At Salomon Brothers in the 1980s, Ranieri virtually invented mortgage-backed securities, the innovation that more than any other led to the explosive growth in homeownership by expanding the pool of money available for lending to buyers. As the head of the mortgage desk, Ranieri assembled a storied band of overweight, uncouth traders whose exploits were immortalized in Michael Lewis’s book ‘Liar’s Poker.’ ”

That the current relief programs are lacking is evident; so far, no program is boasting great numbers, neither the Team Obama plan, nor private lending, in general.

Maybe Ranieri feels the need to lead the cleanup of a mess he helped create: “Since his Salomon days, Ranieri has largely shunned the limelight while pursuing a variety of ventures in the mortgage business. At least until recently, when America’s real-estate-based prosperity crumbled and he went from being venerated as a legendary pioneer to being vilified for fathering the multitrillion-dollar market that went stark raving mad and sank the economy along with it.”

Regardless of the motivation, he seems pretty serious–he’s “raised $825 million from 31 foundations and corporate and public pension funds, including the South Carolina Retirement Systems, to form the Selene Residential Mortgage Opportunity Fund.”

The idea seems simplistic–and he’s not the first to think of this–”to buy delinquent mortgages at a deep discount, work with homeowners to get them paying again, and resell the now stable loans for profit.”

What is new, however, is his willingness to get off the “high center” of merely tinkering with late payments and reduced interest rates.

“To get homeowners to do their part, Ranieri is taking the radical step of substantially lowering their mortgage balances.”

The description of the team he’s assembled–as well as its goals and scope–sound even more encouraging: “The members of his team act as credit counselors, advising spendthrift borrowers to sell a second car or to change the weekly dinners at Outback Steakhouse to monthly. Selene will even pay off their credit card balances or fix the garage if it helps them pay the mortgage and keep their house.”

While Congress continues to drag its feet on reform of the Bankruptcy Reform Act, this is welcome news, indeed.

Maybe other like-minded leaders will step into the breach.

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If waiting for the various mortgage-relief programs is no longer an option, start here to read about the potential benefits of filing for bankruptcy protection.

In his most public acknowledgment of the true depths of unemployment, President Obama today said in a speech to the Brookings Institution that  he wants to use unexpected fiscal headroom in recovery-stimulus funds to create jobs.

As reported by CNN Obama said “he wants to give small businesses tax breaks for new hires and equipment purchases. He also wants to expand American Recovery and Reinvestment Act programs and spend some $50 billion more on roads, bridges, aviation and water projects.

“Obama did not give a price tag for his proposals but pointed out that there is more wiggle room in the federal budget since the 2008 financial system bailout program will cost $200 billion less than expected.”

Perhaps to be expected, some top Republicans are resistant to the idea–remember, it was the Senate where the bankruptcy “cram-down” provisions stalled after intense lobbying by the lending industry–saying any extra room in the recovery-stimulus funds should go toward the national deficit. To that, Obama responded, “”There are those who claim we have to choose between paying down our deficits on the one hand, and investing in job creation and economic growth on the other–but this is a false choice.”

The timing could not be better–with all the gushing over the November jobs data, you’d think the jobless crisis has passed.

But, no, until major change takes hold, it’s still a matter of the same ol’, same ol’: We’ve merely been shedding jobs more slowly than we were.

But you wouldn’t know it by following  the mainstream media; here’s how The New York Times reported the data on December 5: “In the strongest jobs report since the recession began two years ago, the nation’s employers all but stopped shedding jobs in November, the government reported on Friday, and they appeared to be on the verge of finally rebuilding the work force.

“The sudden and unexpected improvement surprised even the most optimistic forecasters. Instead of yet another six-figure job loss, only 11,000 jobs disappeared last month and instead of another rise in the unemployment rate, it went down, to 10 percent from 10.2 percent in October.”

Of course, it is nice that the nation’s job loss is slowing down.

The bad news is that “official” unemployment’s going to 10 percent really means the “total” unemployment rate is 17.2 percent.

Yup, as it turns out, when unemployment was reported to have reached double-digits, at 10.2 percent, that figure applied only to out-of-work folks who are actively looking for jobs.

As explained December 1 at MoneyNews.com, ” It’s bad enough that the official unemployment rate hit a 26-year high of 10.2 percent in October.

“But if you count people who have given up looking for a job – those who are really the most unemployed – and those who are working fewer hours than they would like, the jobless rate registers 17.5 percent.”

“That’s a record since the government began tabulating the statistic in 1994.”

This all comes from a table maintained by the Bureau of Labor Statistics, right there in row “U-6,” in two data sets, four columns each, showing the grim rise, in data “Not seasonaly adjusted,” and four more columns of data that has been “seasonally adjusted,” the numerals just sort of laying there like shameful secrets in an unlocked but forgotten diary–row U-6 which is labeled, “Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.”

There it is, with one row of seasonally adjusted data (mislabeled as “Nov. 2008,” when it should be “Oct. 2008″), when total unemployment was 12.2 percent, having risen to 12.6 percent a month later. By Oct. 2009, it was 16.3 percent and by last month, up again to 16.4 percent.

The seasonally adjusted data look even worse, rising monthly from July through October: 16.3, 16.8, 17.0, to 17.5 percent; then it fell in Novemeber to 17.2 percent.

Perhaps the best signal of all was discussed in another piece from The Times, a December 4 “Economy” post that discusses an un-named indicator that “is part of the monthly survey done by the Institute for Supply Management, in which manufacturing companies are asked if their business is getting better or worse.”

Described as having proven “reliable in all 10 previous recessions since World War II,” the indicator is part of the I.S.M.’s “November results, showing that for the fourth consecutive month, more companies thought business was getting better than believed it was getting worse.

“A part of that survey asks whether companies are adding or subtracting workers. It showed more companies hiring than firing in both October and November,” so if “the I.S.M. indicator is right, that means that the 10.2 percent rate in October was the cyclical high.”

So that is good, right? Finally a drop in the rate…whew.

Still it’s staggering to learn that instead of the improvement from 10.2 to 10 percent, in fact total unemployment is actually closer to 20 percent…

Some newspapers have caught onto this, but don’t seem to be bothered, as evidenced by the many headlines like this one in the Fort Worth Star-Telegram, by two AP reporters:  “Unexpected drop in jobless rate sparks optimism.” From there, it’s pretty much the same info that The Times’ would detail the next day.

For some, the route to a new job may very well entail a move to a different part of the country, as some areas, in various sectors, are coming back more quickly than others. At cnbc.com, you can watch a slideshow of the “Best U.S. Cities to Find a Job,” which not only lists the metro area but also includes the best sectors for each city.

For job stability, it looks like automobile repo work may be doing OK.  According to a December 7 Daily Finance report, “The ratio of U.S. auto loan borrowers who were 60 or more days past due on their payments increased in the third quarter over the second quarter from from 0.73% to 0.81%, according to Trans Union. The year-over-year delinquency rate at the national level increased by 1.25% in the third quarter.”

Although TransUnion expects the default rate to continue rising–projecting 0.9 percent by end of the year–to a 7.5 percent increase over the past year,  some data suggest that seeing a silver lining even here is warranted.

“Peter Turek, automotive vice president in TransUnion’s financial services group, believes the increased delinquency rate is indicative of a cyclical pattern. The good news is that seven states experienced a drop in their quarter-to-quarter delinquency rates while 22 showed a drop on a year-over-year basis. ‘The drop in delinquency is an indicator that some states could emerge from the recession sooner than others,’ Turek said in a statement released with the report.”

What it really sounds like is that the hard hit areas have been really, really hit hard, because nearly half the states have shown improvement: “So essentially, the market is shifting back to a pattern dependent on local economic conditions, with some states faring better than others. At least with 22 states seeing a drop in delinquencies over last year we can see there is some economic improvement in almost half the states.”

Still, the most encouraging sign amid all the bad news/good news is Obama’s public recognition: “Even though we have reduced the deluge of job losses to a relative trickle, we are not yet creating jobs at a pace to help all those families who have been swept up in the flood,” Obama said. “And it speaks to an urgent need to accelerate job growth in the short term while laying a new foundation for lasting economic growth.”

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In this tough economy, sometimes filing for protection under the federal bankruptcy code is a consumer’s last, best defense from creditor harassment and a chance to start over with a clean slate.  If you don’t have enough income to make payments under Chapter 13 protection, the relief offered by Chapter 7 may be your best bet–and may protect more assets than is commonly perceived.

Here’s a starting point for the basics of bankruptcy.

If you’d like to schedule a free appointment to evaluate your situation, click here.

With mixed-news noise dominating any clear signal of a consumer-level recovery from The Great Recession, at least one Senator is still hoping to make the bankruptcy code more useful to individuals filers.

On the slightly brighter side of recent announcements, the big consumer-credit players are saying that even though credit-card delinquencies rose in October, out and out defaults fell more than expected–which is a good sign.

And as Bloomberg reported Nov. 17, “Wholesale prices in the U.S. increased in October for just the second time in the past four months, indicating inflation will not be a concern for the Federal Reserve.”

(Of course, although that’s another good sign, one presumes that the inflation news applies to only the  near future: who knows what inflationary surprises lurk in the long haul?)

“The decrease in prices excluding food and energy last month was the biggest since July 2006. The core measure was forecast to rise 0.1 percent after a 0.1 percent drop a month earlier, according to the Bloomberg News survey.

“Compared with a year earlier, companies paid 1.9 percent less for goods today’s report showed. Core costs were up 0.7 percent from a year earlier, the smallest 12-month gain since March 2004.”

And for families who are planning menus for the festivities later this month,  CNBC reports good news re: the “Turkey Price Index,” in a slide show called “The Cost of Thanksgiving Dinner 2009,” with the conclusion that “the average cost of this year’s turkey dinner and all the fixings will take a smaller bite out of your wallet.” Despite CNBC’s humor–and the fact that the savings aren’t huge–it’s nice to see that not all food costs are going up.

Back at the Team Obama ranch house, meanwhile, unemployment news remains grim. Traveling in Asia, the president announced via the White House that he “will hold a forum on job creation with U.S. business leaders on December 3 and then embark on a cross-country tour to discuss economic recovery,” according to a Reuter’s Nov. 17 report.

With the national unemployment rate now in double digits, Reuters said, the “conference aims to bring chief executives, small business owners and financial experts to the White House to exchange ideas on putting unemployed Americans back to work.

” ‘We have a responsibility to consider all good ideas to encourage and accelerate job creation in this country,” Obama said in a statement.’ ”

On Nov. 16, Fed boss Ben Bernanke “predicted that the unemployment rate will get worse before it gets better,” according to the Huffington Post.

“Bernanke on Monday blamed banks for slowing the recovery and keeping unemployment high,” according to HP, quoting the chairman as saying, ‘Banks’ reluctance to lend will limit the ability of some businesses to expand and hire. Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth.’ ”

One hates to wax sarcastic, but, dang, Mr. Bernanke–it sure does seem like widespread, restricted credit could hurt job growth, especially given CIT’s troubles and that lender’s importance to small business.

Bernanke managed to find one glimmer of hope: “The best thing we can say about the labor market right now is that it may be getting worse more slowly.”

Echoing the labor market, the housing market has shown improvement, but the number of “underwater mortgages” is hardly cause for holiday cheer. According to Diana Olick,“Home prices are improving, but there is a lot of government stimulus behind that improvement. The extension and expansion of the home buyer tax credit, as well as artificially low mortgage rates backed by the Federal Reserve’s purchase of GSE loans and securities, will all expire by the middle of 2010, so it remains to be seen whether the very tenuous recovery we are now seeing in housing can endure on its own.”

Quoting a recent survey from Zillow.com, Olick says that “even in those markets where investor competition has returned and prices on the low end are beginning to stabilize, homeowners still owe far more on their mortgages than their homes are currently worth.”

The most troubled states (click here for a slideshow showing the worst cities) include California, Arizona, Florida and Nevada–a staggering piece of data, according to Olick, is that “Las Vegas leads the way with 81.8 percent of borrowers underwater on their loans in the third quarter of this year, down barely one percent from the second quarter but still up 10 percent from the first quarter.”

Olick reminds us that various government programs “do allow for modifications and refinances on homes with up to 25 percent negative equity. . . “  and that some market observers “argue that ‘underwater’ borrowers are no different than any other borrowers, as long as they continue to make their monthly mortgage payments, and as long as they continue to want to live in their homes, knowing they will have to wait out the market for home equity to gradually return.”

“But,” says Olick, “the danger is for those that need to sell, or for those who can no longer afford their monthly payments and don’t qualify for a loan modification.”

Olick also pints out that “. . . many homeowners, especially in the hardest hit regions, don’t think they will ever see equity again, and therefore see no reason to continue making payments on their loans, whether they are able to or not.

“Many are simply sitting in their homes, rent-free, as banks struggle to catch up and contact them. Others are vacating the homes, mailing in the keys, and choosing a credit hit, rather than be strapped to a home that will only ever be a liability.”

Of course, we’ve shown that granting “cramdown” powers to federal bankruptcy judges would be the most efficient method for dealing with the housing crisis. But the banks and mortgage-lending lobbies have so far been able to stymie such commonsense legislation.

But in lieu of being able to address the housing crisis, at least one Senator is challenging his cohorts to play fair with consumers who need bankruptcy protection because of catastrophic medical bills.

As reported in the Providence Journal on Oct. 21, a subcommittee of the Senate Judiciary Committee, led by Senator Sheldon Whitehouse (D-RI), convened Oct. 20 “to consider his legislation to make it easier for those burdened with medical bills to go into bankruptcy.”

Whitehouse indicated he may pursue a different tack than the preceding efforts on cramdown legislation, by working the medical-debt relief into pending health-care legislation. His main idea is that “bankruptcy filing would be permitted for anybody who owes more than $10,000 or 10 percent of his or her income in medical bills.

“Whitehouse would also exempt those with high medical debt from meeting the income tests required of other debtors seeking bankruptcy protection.”

Testimony included remarks concerning a couple, Patrick and Kerry Burns, whose 4-year-old son died in March following a long illness.

Even though the couple had insurance, they could not cover their portions of the medical expense and wound up in “financial ruin,” losing their home in the process.

Another highlight of the testimony was an interchange between recent Senate addition Al Franken (D-MN) and Hudson Institute Senior Fellow Diana Furchtgott-Roth, who wrote a commentary piece for Forbes about the incident, saying that “At a recent Senate Judiciary Committee hearing, where I was a witness, Sen. Franken disagreed with my testimony that pending health care ‘reform’ bills would lead to more bankruptcies, because higher taxes and health insurance premiums would cause more job loss, a major cause of bankruptcy.”

In tart response, Franken asked  Furchtgott-Roth about the number of medical bankruptcies last year in Switzerland, France and Germany. Forchtgott-Roth, a former chief economist at the Department of Labor, said she didn’t know but could find out and get back to Franken. He told her in each case the number is zero, then said, “The point is, I think we need to go in that direction, not the opposite direction.” A piece of the interchange is available here as well as video clip.

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Even though legislation may bring needed change to the bankruptcy code–such as the so-called “cramdown powers,” and catastrophic medical-cost relief–the laws already in place do provide strong protection for hard-pressed Americans.  To learn more about getting a new start in your financial situation, read more about “Bankruptcy Basics,” or Chapter 7 or Chapter 13 filings. If you’d like to schedule a free consultation or evaluation of your situation, click here.

We left the Phat Lady of the Turnaround headed back to her dressing room, not yet ready to sing the praises of the end of the Recession and the start of a shiny future.

In fact, foreign observers may have a better feel for the plight of the U.S. consumer than do many domestic pundits and measures that just don’t seem to get it.

For example, an Oct. 26 report from MarketWatch tells us, “A broad gauge of U.S. economic activity rose above the level that typifies recessions, the Federal Reserve Bank of Chicago reported Monday.”

But here’s an account from Oct. 28…from Ireland, mind you, showing a better grasp of the situation:

“The US recession is expected to be declared over tomorrow but economists insist that it is still too early to start celebrating.

“When gross domestic product (GDP) estimates for the third quarter are released at 8.30am local time (12.30 Irish time), they are likely to report that the economy is growing again, ending one of the deepest slumps since the Great Depression.”

Of course, that report did not materialize, but even if it had,  imagine the bitter taste and hollow comfort “to the millions of people left unemployed or who have lost their homes as a result of prolonged economic downturn–especially as economists suggest that more jobs and houses are to go before real improvement is realised.”

And here’s this…from The Globe and Mail, in Canada: “Fresh figures due out Thursday are widely expected to show that the U.S. economy grew in the third quarter for the first time in more than a year – long-awaited confirmation that the recession is over and recovery has begun.”

But a few grafs down, here’s the kicker: “But temper the enthusiasm: The main driver of the economy – U.S. consumers – are still in a deep funk, relying heavily on temporary government incentives to get them to spend.”

At least the president seems to have a grasp.

As we know, the recession’s end was not announced Thursday, but still the AP reported, “Helped in large part by federal support for spending on cars and homes, the economy grew at an annual rate of 3.5 percent from July through September, the government said Thursday.”

Although Obama called the numbers “welcome news,” he also said, ” ‘The benchmark I use to measure the strength of our economy is not just whether our GDP is growing, but whether we are creating jobs, whether families are having an easier time paying their bills, whether our businesses are hiring and doing well.’ “

So, maybe the numbers are simply saying that the recession is over for the Big-Shoe Boys on Wall Street, where business continues as per usual?

Remember the teeth-grinding despair in certain circles when the gummint “turned its back” on Lehman Brothers while bailing out everybody else? Well, have a look at Kevin White, one of Lehman’s “architects” of the so-called “securitized” debt that helped create the Recession. In a Fortune report via CNNMoney.com, we learn that White was “head of the global structured finance syndicate at Lehman Brothers ([before being]  . . . promoted to a different job in 2006), [when he] created the kind of collateralized debt securities that fueled the financial bubble–and still bedevil many bank balance sheets.

“Now White runs a firm that’s doing a nice business in cleaning up the mess: Spring Hill Capital Partners specializes in buying, selling, deconstructing, and investing in structured finance products.”

And get this–he sounds proud of it: ” ‘The securitization process locked a lot of assets into mortgage-backed securities or CDOs,’ says White. ‘As the underlying collateral ran into trouble, the complexity of securitizations has paralyzed investors, lenders, and borrowers.

But we made a lot of these products, and we’re skilled at taking them apart, valuing them, and in some cases restructuring them.’ “

Kinda sounds like Stanford Kurland, who spent nearly 30 years at Countrywide before leaving in 2006, then subsequently starting PennyMac (along with a cadre of other Countrywide alumnae)–and to do what? Why, to specialize in distressed properties…

As might be expected Kurland puts distance between his role at Countrywide and its riskier business practices, as shown in this March 2008 account at MSNBC.com: “Kurland, who left Countrywide in late 2006, said he wasn’t to blame for problems faced by the company as a result of subprime loans made to people with shaky credit histories.

“ ‘My leaving Countrywide has a lot to do with having a different strategic view,’ Kurland said. ‘I have a reputation in the market that, unfortunately, is tainted by things that transpired after I was gone.’ ”

Not everybody bought into that, according to MSNBC:

“The irony was not lost on analysts.

“ ‘He won’t be the first or the last person trying to make money on both sides of a trade,’ said Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc. who covers Countrywide [since absorbed by Bank of America].

“ ‘On the one hand you could make the case that he was (with) the company that made all these loans. On the other hand, what we need right now is to find some buyers for these assets,’ Cannon said. ‘Is it fair? Hard to say.’ ”

(CNBC has an interesting slide show here, a “where-are-they-are-now?” update on (in)famous figures from the financial crisis, including Countrywide founder Angelo Mozilo, who is fighting the SEC in a civil suit alleging fraud and “misleading investors.”)

By the way, it’s these guys who will “officially announce” the end of the recession; as you can see as of 10-30-09 (on the right-hand side of the page), the current recession has no end date, but merely a question mark. Meanwhile, as end-of-Recession talk buzzes, unemployment, foreclosures and filings for bankruptcy protection continue unabated.

This, from Oct. 28 The New York Times, “Unemployment is Higher Almost Everywhere”:

“Unemployment rates were higher in September than a year earlier in 371 of the 372 United States metropolitan areas, according to the Bureau of Labor Statistics.”

Not too long ago, the concern was that unemployment might blow past 10 per cent. In some areas, the new concern is it may breeze on 20 per cent. “The greatest increase in unemployment over the last year was in  Detroit-Warren-Livonia, Mich., where joblessness grew 8.4 percentage points to a total rate of 17.3 percent in September 2009. The second-greatest year-over-year increase was in  Muskegon-Norton Shores, Mich., where the rate rose 6.8 percentage points to 16 percent.”

And it gets worse: in a couple of areas, 20 per cent is in the rear-view mirror: “In September 2009, the overall highest metropolitan rates of unemployment (again, not seasonally adjusted) were in  El Centro, Calif., and  Yuma, Ariz., where rates touched 30.1 and 24.2 percent, respectively. These two areas, which both border Mexico, are highly agricultural.”

On the foreclosure front, perhaps the worst hardest-hit areas have bottomed out, but the damage seems to be spreading according to RealtyTrac data reported by American Banking News.” ‘Rising unemployment and a new variety of mortgage resets continue to gradually shift the nation’s foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave,’ said James J. Saccacio, RealtyTrac’s CEO in the Metropolitan Foreclosure Market Report. “Per the report, filings for foreclosures rose five percent in the third quarter, and 23 percent over last year. This includes auctions, bank repossessions and defaults. Taking into account the unreported abandonment by homeowners of their houses by banks so they don’t have to include it as an accounting event, and the numbers are even more staggering, to say the least.”

Consumers seeking relief via bankruptcy petitions are filing in waves, unmatched since the rush to beat the “reform” deadline in 2005.

Google “personal bankruptcy news” and the results read like a fill-in-the-blank: numbers rising in _____________  (Massachussetts, Connecticut,  Georgia).

An Oct. 2 Wall Street Journal post sums it up simply as “Personal Bankruptcy Filings Soar”: “Consumer bankruptcies topped one million for the first nine months of this year, the highest point since the system was overhauled in 2005.

“The number of personal bankruptcy filings for the nine months rose to 1,046,449 as of Sept. 30, the American Bankruptcy Institute, an organization made up of attorneys, accountants and other bankruptcy professionals, said Friday, using data from the National Bankruptcy Research Center. There were 773,810 personal bankruptcy filings for the same time period in 2008.

“September’s filings reached 124,790, 41% higher than the same month last year.”

Looks like the Phat Lady of the Turnaround has even left the dressing room and headed home–if she still has one.

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Bankruptcy protection offers a chance for a new start, as well as methods for protecting certain assets–and even improving one’s credit score over time. To asses the value of bankruptcy for your individual situation, you should seek counsel from a trained, experienced bankruptcy attorney.

Here’s some online resources:

U.S. bankruptcy court

Federal Trade Commission, consumer credit

Bankruptcy Corner, overview portal

Bankruptcy Corner, principles of bankruptcy

For those who are considering selling their homes as a way to avoid bankruptcy, two recent reports are contradictory–except for a few, select markets. One Oct. 19 account at CNBC mentions renewed confidence in the housing market, including data from “the Case-Shiller Home Price Index showing an unprecedented reversal from negative to positive growth in the summer months.” But a CNNMoney piece finds otherwise, in fact singling out the Case-Shiller data as too optimistic.

Of course, to paraphrase the cliche, all real estate is local. Still, unprecedented reversal sounds pretty good. But the CNBC piece also mentions observers who sense another housing bubble already forming.

In a decidely “definite-maybe” passage of the “Investor Agenda” piece, Robert Shiller (” . . . Professor of Economics at Yale University and Chief Economist and Co-founder of MacroMarkets LLC ” who is also “the other half behind the Case-Shiller U.S. Home Price Indices”),  was asked whether “this uptick was a result of the first time home buyer credit.”

Shiller said he couldn’t be sure “given that ‘we’re seeing other signs around the same time.’ ”

That sure doesn’t sound like unprecedented confidence. I’m taking that to mean he’s not hearing the Phat Lady of the Turnaround warming up.

Asked about his response to concerns of another bubble in the making, Shiller’s response is classic CYA:

“I look at the data and think it might be happening because it’s such a sudden turnaround. But my instincts say no.”

Shiller also noted that cities in the frothiest part of the bubble have yet to show any sign of a turnaround, presumably a good thing in that we might be more suspect if those areas suddenly got fired up.

The most concrete response is saved for the end of the piece: “Finally on the important question on mortgage rates and how much longer they can remain this low . . . Shiller ended by saying that ‘Fed is still buying up mortgage… and they said they’ll extend that into next year, but when that stops, if it does stop, that’s when we might see a major change in the market.’ ”

An Oct. 20 report from CNNMoney escorts the Phat Lady back to her dressing room, no need to warm up.

The sub-hed doesn’t seem so bad: “National home prices are forecast to shrink another 11%. Miami, Las Vegas and Phoenix will record steep declines, but a few cities will actually post gains.”

But the main deck is chilling: “Home prices: About to get much cheaper.”

CNNMoney says the report it cites (from “Fiserv, a financial information and analysis firm”) is “at odds with the past few months of the S&P/Case-Shiller Home Price index.

“That report,” CNNMoney says of Case-Shiller, “has given hope that most housing markets may have already stabilized because the composite index of 20 cities rose in May, June and July. Nationally, it found that home prices have gained 3.6%.”

Other economists also dispute the Case-Shiller findings.

“Brad Hunter, chief economist for Metrostudy, which provides housing market information to the industry, is quoted as saying, ‘I’m afraid Case-Shiller may be just a temporary reprieve.’

“He pointed out that the tax credit for first-time home buyers helped support prices during the three months of Case-Shiller gains. By the end of November, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, according to estimates by the National Association of Realtors. But the market assistance ends when the credit expires on Dec. 1.”

Fiserv projects that “a plunge” in home values “in 342 out of 381 markets during the next year,” and that “[o]verall, the national median home price is predicted to drop 11.3% by June 30, 2010 . . . For the following year, the firm anticipates some stabilization with prices rising 3.6%.”

CNNMoney also quotes Mark Zandi, chief economist with Moody’s Economy.com:  “I think more price declines are coming because the foreclosure crisis is not over.”

Hunter, the Metrostudy economist, “also sees a new wave of foreclosure problems coming from higher priced loans and prime mortgages. He expects a high failure rate for option ARM loans that were issued to prime customers so they could buy homes in bubble markets, such as California and Florida. In those areas, prices for even modest homes had skyrocketed.”

Fiserv has good news for a “handful of metro areas [that] will buck the trend . . . . Six markets will remain flat, and 33 will actually post gains. The biggest winner will be the Kennewick, Wash., metro area, where home prices have ramped up 8.9% over the past three years and are expected to increase another 3.4% by June 2010.

“Fairbanks, Alaska, prices are anticipated to rise 2.5%, while Anchorage will climb 2.1%. Elmira, N.Y., prices may inch up 1.8%.”

Fiserv also reports here the results of a consumer survey that asked respondents how “financial activities have been impacted by the prolonged recession, and how financial institutions can help them gain a greater sense of control of their finances.”

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If you’re wondering whether bankruptcy is a viable alternative to protect assets or stop harassment or get a new start in your financial situation, read more about “Bankruptcy Basics,” or Chapter 7 or Chapter 13 filings. If you’d like to schedule a free consultation or evaluation of your situation, click here.

If you’re trying to save your home, you should realize that you might qualify for bankruptcy protection. If this applies to you, you really, really need to read this–and I mean all the way through. We’ve covered several of these topics before, but spread over several posts. Today we’re going to gather in one post some very specific points from an April 2009 paper by Adam J. Levitin, titled “Resolving The Foreclosure Crisis: Modification of Mortgages in Bankruptcy.”

Basically, Levitin challenges “the economic assumption underlying the policy against bankruptcy modification of home-mortgage debt.” The law that keeps bankruptcy judges from being able to modify loans on primary residences is based on the idea “that protecting lenders from losses in bankruptcy encourages them to lend more and at lower rates, and thus encourages homeownership.”

Here’s the first thing wrong with that picture: the U.S. bankruptcy code is not supposed to be used to protect lenders. As Levitin says, “Traditionally, bankruptcy is one of the major mechanisms for resolving financing distress.” Now, don’t take that to mean that simply because you’ve got debt is an excuse to game the system, to abuse the bankruptcy laws. But U.S.-style bankruptcy is our society’s way to allow, as Levitin writes,  for working out “the problems created when parties end up with unmanageable debt burdens. Although the process can be a painful one for all parties involved, bankruptcy allows an orderly forum for creditors to sort out their share of losses and return the deleveraged debtor to productivity; a debtor hopelessly mired in debt has little incentive to be economically productive because all of the gain will go to creditors. Moreover, the existence of the bankruptcy system provides a baseline against which consensual debt restructurings can occur. Thus, for over a century bankruptcy has been the social safety net for the middle class, joined later by Social Security and unemployment benefits.”

In other words, in this country, we have recognized that sometimes people just simply need help, instead of being sent to debtor’s prison–where it’s impossible to be a functioning, tax-paying member of society. We recognize that debtor’s prison (and other Draconian methods of punishment, still embedded in other countries) is outmoded, impractical and inefficiently costly in the long run.

But here’s the problem: “The bankruptcy system, however, is incapable of handling the current home-foreclosure crisis because of the special protection it gives to most residential-mortgage claims. While debtors may generally modify all types of debts in bankruptcy—reducing interest rates, stretching out loan tenors, changing amortization schedules, and limiting secured claims to the value of collateral—the Bankruptcy Code forbids any modification of mortgage loans secured solely by the debtor’s principal residence. Defaults on such mortgage loans must be cured and the loans then paid off according to their original terms, including all fees that have been levied since default, or else the bankruptcy stay on collection actions will be lifted, permitting the mortgagee to foreclose on the property. As a result, if a debtor’s financial distress stems from a home mortgage, bankruptcy is unable to help the debtor retain her home, and foreclosure will occur. The absence of a bankruptcy-modification option also reduces the incentive for creditors to engage in consensual nonbankruptcy debt restructuring. Because of bankruptcy’s special treatment of principal residential mortgages, the legal mechanism on which the market depends for sorting through debt problems cannot function properly,and this is exacerbating the impact of the mortgage crisis.”

In other words, let’s say a person has become wealthy by devising a viable business plan and growing a successful company. Along the way, this business person has maintained a healthy FICO score and thereby has been able to amass quite an estate, plus the income that keeps all notes current on two vacation homes, one on the coast with a yacht moored nearby, and another in the mountains, complete with ski equipment and four snowmobiles.

But then some economic event occurs that requires both 1) the company and 2) the business owner to seek Chapter 11 protection (beyond a certain asset level, Chapter 13 is not an option). That way the company gets time to restructure, work with creditors in an orderly manner and to keep employees on the payroll, thereby limiting further damage to society and the economy.

Under bankruptcy protection, the stay order stops foreclosure on the main home is stopped, as well as all the harrasing phone calls and demands from credit card companies and other creditors. Additionally, the bankruptcy judge can modify terms of the loans on most of the “goodies,” including both vacation homes, the yacht, and all the snowmobiles.

Working from the data collected by the business owner’s bankruptcy attorney, the bankruptcy trustee, and the creditors, the judge can order “cram down” or “strip down” arrangements that modify the loans on all that stuff–what many of us would call luxury items–so that the business owner gets to keep everything as long as the monthly payments are made.

The creditors may not like it, but still they’re getting a better return than they would if all the stuff were disposed of in a
fire sale. Meanwhile, the company recovers, the employees don’t have to lose their jobs, and the yachts and snowmobiles and vacation homes are still in the family.

Now, our erstwhile business owner is no different than Joe Schmoe as far as the main house goes. That loan can’t be
modified. But our  business owner at least has a shot at keeping the luxury items, which are now being paid off at better terms than the original loans called for.

Contrast that scenario with all the Joe Schmoes, who have no vacation homes or yachts. They simply want to keep the one house, the family home–which is really all they’ve got, except for maybe a bass boat and *maybe* some kind of RV. But in the main, when wage-earner Schmoe winds up in tight straits, the chief concern is hanging on to the one home, the only home.

In those cases, when bankruptcy is the answer, then bankruptcy provides a great deal of protection. For instance, in certain cases, you can file Chapter 7 and still keep your home. Chapter 11 is a legal possibility for less well-heeled consumers, but the creditors have a bigger say than they would under Chapter 13, which will stop foreclosure.

And foreclosure is a huge problem. As Levitin says, “At no time since the Great Depression have so many
Americans lost their homes, and many millions more are in jeopardy of foreclosure. Nearly 1.7 million homes entered foreclosure in 2007, and another 2.2 million entered in the first three quarters of 2008. Over half a million homes were actually sold in foreclosure or otherwise surrendered to lenders in 2007, and over 900,000 were sold in foreclosure in 2008.  At the end of 2008, more than one in ten homeowners were either past due or in foreclosure, the highest levels on record. By 2012, Credit Suisse predicts around 8.1 million homes, or 16 percent of all residential borrowers, could go through foreclosure. Expressed differently, one in every nine homeowners—and one in six households that have a mortgage—will lose their home[s] to foreclosure.”

In fact, it could be worse: one of the sources for Levitin’s numbers is a study published by Credit Suisse, which Levitin
quoted only partially in his footnotes. The full quote from the December 2008 Credit Suisse report goes thus: “At the time, most viewed our [April 2008] forecast as being overly gloomy. However, based on the trends in delinquencies we were observing, the growing negative equity and our home price forecast, the forecast seemed reasonable. In this report, we update our forecast to 8.1M, or 1.5 million foreclosures greater than our earlier forecast. Further, this forecast doesn’t fully take into account the consensus increase in the unemployment rate to 8%. Adjusting our forecast for the rising unemployment rate, results in an increase to 9.0M.”

(It’s worth mentioning that Credit Suisse was also too optimistic in assuming that unemployment would top out at 8 per cent.)

Now it’s bad enough from the individual perspective that millions of individuals get forced into foreclosure, but perhaps even more dangerous is the toll on society. Levitin uses academic terms to talk about the ripple effects: “Both the increase in, and the sheer number of, foreclosures should be alarming, because foreclosures create significant deadweight loss and have major third-party externalities. Historically, lenders are estimated to lose from 40 to 50 percent of their investment in a foreclosure situation, and in the current market, even greater losses are expected. Borrowers lose their homes and are forced to relocate, often to new communities, a move that can place extreme stress on borrowers and their families. Foreclosure is an undesirable outcome for borrowers and lenders.”

But the damage is not limited to borrowers and lenders. “Foreclosures also impose costs on third parties. When families
have to move to new homes, community ties are rent asunder. Friendships, religious congregations, schooling, childcare, medical care, transportation, and even employment often depend on geography. Foreclosures also depress housing and commercial-real estate prices throughout entire neighborhoods. For example, a study on foreclosures in Chicago in the late 1990s concluded that a single foreclosure depressed neighboring properties’ values between $159,000 and $371,000, or between 0.9% and 1.136% of the property value of all the houses within an eighth of a mile. For Chicago, which has a housing density of 5,076 houses per square mile, or around 79 per square eighth of a mile, this translates into a single foreclosure costing each of 79 neighbors between $2,012 and $4,696.

“The property-value declines caused by foreclosure hurt local businesses and erode state and local government tax bases. Condominium and homeowner associations likewise find their assessment base reduced by foreclosures, leaving the remaining homeowners with higher assessments. Foreclosed properties also impose significant direct costs on local governments and foster crime. A single foreclosure can cost the city of Chicago over $30,000. Moreover, foreclosures have a racially disparate impact because African-Americans invest a higher share of their wealth in their homes and are also more likely than financially similar whites to have subprime loans. In short, foreclosure is an inefficient outcome that is bad not only for lenders and borrowers, but for society at large.”

So the question becomes: Given all the disadvantages of foreclosure, why in the world does the bankruptcy code provide special treatment for mortgage lenders? The question becomes even more pressing in light of today’s “securitized” loans, in which “mortgage servicers” either can not or will not renegotiate terms, and all too often the actual owner(s) of the note can not be determined.

“The Bankruptcy Code’s special protection for home-mortgage lenders reflects a hitherto unexamined economic assumption. The assumption is that preventing modification of home-mortgage loans in bankruptcy limits lenders’ losses and thereby encourages greater mortgage credit availability and lower mortgage credit costs, in turn encouraging the homeownership that has been a major goal of federal economic policy for the past half century. As Justice John Paul Stevens noted when the Supreme Court of the United States addressed the Bankruptcy Code’s antimodification provision in 1993: ‘At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual’s interest in retaining possession of his or her home than of other assets. The anomaly is, however, explained by the legislative history indicating that favorable treatment of residential mortgagees was intended to encourage the flow of capital into the home lending market.’

“According to Justice Stevens, Congress intended to promote mortgage lending by limiting lender losses in bankruptcy. Justice Stevens’s assertion has scant support in the legislative history, but has nonetheless become the dominant explanation for the Bankruptcy Code’s mortgage antimodification provision. Underlying the economic assumption embedded in the Bankruptcy Code’s antimodification provision is another assumption—that mortgage markets are sensitive to bankruptcy-modification risk. This Article empirically tests the policy assumption behind the Bankruptcy Code’s prohibition on the modification of single-family primary-residence mortgages. It marshals a variety of original empirical evidence from mortgage origination, insurance, and resale markets to show that mortgage markets are indifferent to bankruptcy-modification risk.”

In other words, the “official view” is, yes, it’s strange to not protect people’s homes, but that’s the way it has to be keep mortgage lenders happily making loans: Allowing bankruptcy judges to modify loans on primary residences would make mortgage rates go up to offset the risk of potential bankruptcy modifications.

But, wait, says Levitin. Proving once again the brilliance of simplicity, he realized that if the official view were true, then lending rates should be higher for properties with loans that can be modified. But in the main that’s simply not the case.

Levitin  constructed an elaborate test (he thoroughly explains his methodology) that involved comparing rates in a variety of states; using various credit scores from low to high; for single-family homes through four-family, owner-occupied units, vacation homes and investor-owned propoerties. The results? For conforming loans with 20 per cent down,  [i]nterest rates, points, and APRs were identical for these property types, despite the variation in bankruptcy-modification risk. Uniformly, however, investor properties had higher interest rates and points.”

The higher rates for investor property is not surprising, says Levitin, because they come with risks that single-family and vacation homes don’t have–but those risks have nothing to do with the potential for bankruptcy. He also made comparisons among the various scenarios but with only 10 per cent down. He also examined Private Mortgage Insurance rates for sensitivity to risk of bankruptcy. He noticed a slightly different pattern but still found that “[c]urrent mortgage-origination rates indicate that mortgage-lending markets are indifferent to bankruptcy-modification risk, a conclusion confirmed by PMI pricing.”

Levitin also looked at historical data (mostly pre-securitization), and there he found some differences, but concludes that even though are minor to the overall market, the higher rates suggested might also provide answers to the rampaging predatory lending that helped fuel the current crisis: “Taken together, the historical data and current market-pricing data indicate that mortgage markets are largely indifferent to bankruptcy modification outcomes. The current market data suggest almost complete indifference, whereas the historical data [from a time when far fewer mortgages were securitized] show some sensitivity, particularly for higher-price and higher-LTV (i.e., riskier) borrowers. These findings indicate that permitting strip-down or other forms of modification for all mortgages would be unlikely to have anything more than a small impact on interest rates or on mortgage-credit availability.

“The impact, if any, would be primarily on marginal borrowers, which might be a good thing because, prospectively, it would help discourage the aggressive lending (such as nodocumentation and low-documentation loans, and high LTV ratios) and irresponsible borrowing (such as borrowing based on an assumption of refinancing before teaser rates expired) that is at the root of the current mortgage crisis.”

The next section of the paper looks at the staggering costs of foreclosure and attendant damage to neighborhoods, not only physically but fiscally. He cites one case of a lender recovering only about $100 thousand on a home that sold for $300 thousand–and says that some data suggest there might be another $50 thousand tacked onto the average foreclosure in various fees. Levitin believes that consumer finance legislation in general has been outstripped by the evolving, ever-more-innovative products from the consumer finance industry: “. . .because of diversification among millions of borrowers, risk-spreading through securitization and insurance, and fee-based profit models, the scope of the bankruptcy discharge has very little impact on the price or availability of credit except at the margins. If this theory is correct, then we must both update our thinking about the effect of bankruptcy law on consumer finance and rethink consumer-bankruptcy policy from the ground up, with an eye to expanding the scope of the discharge. As consumer finance becomes more complex, it is time to update the model of the effect of bankruptcy law on consumer finance. The theory and modeling of consumer finance can serve as a meaningful policy guide, but to do so, it must account for the actual structure of the evolving consumer-finance industry.”

The bottom line is that bankruptcy modification is much better than foreclosure, not only for homeowners and lenders but also for society. In fact, says Levitin, “permitting modification of all home mortgages in bankruptcy stands out as the best of all possible solutions proposed to the mortgage crisis. Unlike any other proposed response, bankruptcy modification offers immediate relief, solves the market problems created by securitization, addresses both problems of payment-reset shock and negative equity, screens out speculators, spreads burdens between borrowers and lenders, and avoids both the costs and moral hazard of a government bailout. As the foreclosure crisis deepens, bankruptcy modification presents the best and least invasive method of stabilizing the housing market.”

Levitin does his homework, and this paper should be required reading for every U.S. Representative and Senator–and every member of Team Obama, too.

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Bankruptcy protection might your best route, not only to protect your home and assets needed to make a living (as well as many personal effects) but also for a legitimate chance at new beginning. Here’s a good place to start reading. If you’re ready to schedule a free consultation with a trained, experienced bankruptcy attorney, click here.

Fibs, lies, and statistics: the old saw popularized by Mark Twain, and said to trace to Disraeli, is certainly a jumping-off point for recent news and discussions.

Case in point–are we turning around the financial crisis? Or not?

Recapping a Reuters Television appearance today of the outgoing Morgan Stanley John Mack, CNBC posted the headline, “Worst Over for World Economy: Morgan Stanley CEO.” And here’s a Sept. 15 clip of Fed Reserve Chairman Ben Bernanke saying he thinks the recession “has very likely” bottomed out. More optimism is borne out in the equities market, with one CNBC account mentioning “the meteoric run-up” of the current stock rally while a CNN piece says “Stocks flirt with new highs.”

But more headlines today paint a darker picture for folks needing jobs, with Bloomberg’s saying two states hit record levels of unemployment, CNBC’s saying three hit record levels and CNN’s take that five states breached the 12 per cent mark.

Bloomberg says: “Unemployment rose in 27 U.S. states in August, with California and Nevada reaching record levels of joblessness.

“Rhode Island rounded out the list of states with the highest level of unemployment since data began in 1976, the Labor Department reported today in Washington.

“California’s unemployment rate reached 12.2 percent and Nevada’s climbed to 13.2 percent.”

Despite their differing headlines, the CNBC report pretty much agrees with the Bloomberg view, adding that overall the rate “. . . rose from July in 27 states and the District of Columbia, declined in 16 states and was unchanged in seven others, according to the Labor Department.” CNN agreed with CNBC about the record levels in three states, chipped in that five states “posted jobless rates above 12% in August,” and summarized the states with best unemployment news: “North Dakota posted the lowest jobless rate in August, at 4.3%. It was followed by South Dakota, at 4.9%; Nebraska, with 5%; Utah, at 6%, and Virginia, at 6.5%.”

CNN also included an explanation by way of an econmist at Wachovia. “The losses tend to be heavy in states that have a high concentration of manufacturing jobs or were hit hard by the housing bust,” said Mark Vitner, economist at Wachovia. “The states with the lowest rates tend to have fewer metropolitan areas,” . . . Vitner said.

“When you consider how a city like Las Vegas dominates Nevada’s economy, you can see how that weakness could devastate a state.”

So all that kinda makes sense. To be fair, when Bernanke told the Brookings Institution, “From a technical perspective, the recession is very likely over at this point,” he also cautioned that new economic growth will not keep unemployment from rising.

And when Mack said in Russia that “The good news is that I believe the economic fear, the crisis is over,” he also was paraphrased by CNBC as saying “the capital markets [are] open and all asset classes now [have] liquid markets except for securities backed by commercial real estate assets and residential mortgage-backed securities.”

It does seem a little odd that lack of liquidity for the latter two asset groups is not so much a problem, given the blame laid directly on the hearths of millions of troubled households that got swept up into dizzying arrays of securitized “tranches.” But I suppose they’re both saying Our Fat Lady of  the Crisis has sung, so now we wait and wade through the aftermath of the lag-effect and hope that our clients and bosses and contractors start hiring again.

What I still don’t get is the myriad views of how we got here and why U.S. consumers don’t have some legal whiz cueing up for a class-action lawsuit to the tune of Big Tobacco Got Slammed–Why Can’t We do Some Slamming, Too?.

For example, I read “The Failure of Bankruptcy Reform” in a Sept. 15 “Business” post at The Atlantic and wonder how on Earth the U.S. screwball Senate gets away with refusing to go along with the move to fix the Bankruptcy reform act of 2005.

As  Mike Konczal writes: “The goals of the controversial 2005 Bankruptcy Reform were to both lower the number of those filing bankruptcy and also to increase the amount recovered post bankruptcy by forcing consumers into Chapter 13 bankruptcies. Seeing the latest data, it is clear that both of these goals have been failures–however the unique way in which they have failed is worth investigating.”

Part of the credit-card industry’s message was that w-a-a-y too many shiftless plebes were abusing the Bankruptcy Code by filing Chapter 7 petitions and thereby skipping merrily lah-de-dah into the guilt-free twilight for yet another round of consumer excess–oh, and, uh…also stiffing the erstwhile credit card companies who were simply doing their patriotic best to provide retail-level liquidity. How do we spell “moral hazard”?

As Bankruptcy Corner readers know, the number of recent Chapter 7 filings has astounded and confounded experts. But what I’m only now learning is the stated goals of the act may not have been the actual goals. (I know–dumbfounding, right?)

As Konczal explains, if the metrics were such that the credit-card industry were paying its lobbyists to reduce bankruptcy filings overall and to steer the remainder toward Chapter 13 filings, why then it’s pretty obvious that it’s been a dismal failure. In that light, he asks, “Since lobbying is costly, if you were the CEO of a credit card or financial company, would you have fired the team responsible for writing this bill for Congress?”

And the surprsing answer?

“Actually no,” writes Konczal, “you’d give that team a giant raise.”

Huh?

Well, it turns out that actual goal may have simply been to string out consumers, to put hurdles in the bankruptcy filing process.

Again, Konczal: “Many of the features of the bill–including ‘credit counseling’, raising filing fees, debt-relief agencies, etc.–are designed to raise the time barrier between financial distress and the act of filing a bankruptcy. And what happens during that time? The person in question is paying triggered high-interest rates on credit card loans.”

And where is Konczal coming up with these crazy notions? From Ronald J. Mann, an award-winning author, scholar and professor of law, who wrote a little essay back in 2006 called “Bankruptcy Reform and the ‘Sweat Box’ of Credit Card Debt,” which you can read here or here.

Now, just to be clear, Mann does not seem anti-credit card, at least not in a Dave Ramsey sort of way. Indeed, in Mann’s conclusion, he says straight up: “The credit card is perhaps the most important financial innovation of the twentieth century; it introduced substantial efficiencies in both payment and borrowing markets.”

However, that insight is immediately followed by this (numerals indicate his footnotes): “The credit card, however, is associated with increases in spending, borrowing, and financial distress.117 It is not clear why that is the case, although academics have suggested it may be due to cognitive impairments, compulsive behavior, unfair advertising, or fraudulent contracting practices. Reform-minded governments around the world currently are struggling with how to respond to the problems with credit cards without undermining the efficiency of payment and lending markets.119″ Some responses focus on the payment functionality. Because credit cards might encourage consumers to spend too much, and perhaps more than they can repay out of monthly incomes, credit card use can lead to unplanned debt.”

A few lines following he writes, “Because the credit card is so easy to use (that is, the transaction costs of credit card lending are so low), borrowers underestimate the risks associated with future revenue streams. The response is to intervene in the market for consumer lending or adjust the types of relief available in bankruptcy.121

Although policymakers around the world are loosening the rigor of their consumer bankruptcy systems—in large part due to the introduction of American-style consumer credit—the legislative desire to protect the credit card’s unique place in the U.S. economy was one of the most important motivations for the bankruptcy reform statute. Oddly enough, the credit card industry successfully convinced bipartisan majorities in both the House and Senate that there were serious deficiencies in the American bankruptcy system within which the card has had its phenomenal success. Thus, the central idea behind the ‘fresh start’—the complete liquidation of all debts—has shifted towards a presumption in favor of repayment.”

Now here’s Konczal’s take on the Mann essay: “I’ve written about how the extremely high interest rates can’t be justified on financial engineering risk-measurement quantifications, and are more likely either a way to force consumers to pay off their loans immediately or soak them for what they are worth. Mann runs a quick number experiment (p. 18): Picture a distressed consumer with $2,000 in a credit card. If the cost of funds is 3%/year, interest is 18% for the first 3 months, 24% next three months, and 30% onward, minimum monthly payment is 2%, 2%+$50, and 2.5%+$50, for those time periods, and the borrower has a $40 fee every other month for whatever reason starting in the seventh month. Typical right? If the consumer pays this off for 2 years, the balance on the credit card is still $1,270, but if you look at the economic total (from the cost of capital) the loan has been paid off with $6 to spare. I replicate this in a google spreadsheet here.

“This is why keeping consumers paying off high fees and high interest for an extra year or two can be so profitable, and why it is worth all the lobbyist money even though the stated goals got lost in the shuffle somewhere. Stringing consumers along for another 2 years+ is a great business improvement, even if it doesn’t change a single other thing under equilibrium. And sure enough, it looks like the two years it has taken to get back to the previous numbers is reflective of this newfound, incredibly profitable, lag.”

In our various explorations concerning how we got in this mess, we’ ve learned that mortgage companies have plenty to answer for, especially why they seem so balky-mule resistant to renegotiating outrageous loan terms when–yet the mortgage industry is rabidly opposed to new legislation that would allow bankruptcy judges to modify loans for primary residences. Now we see that the credit-card industry may also be using the new bankruptcy act to soak its least fiscally able customers.

If Our Fat Lady of the Crisis has finished her aria, when do we get to hear the Phat Lady warming up?

[Editor's Note: Next installment of Mike Hinshaw's coverage will return to Adam Levitin's work, first posted here, expounded upon here and revisited here.]

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Well, I’m starting to like Diana Olick.

The preceding post discusses why news of the recovery may be premature.

In Thursday’s “Realty Check,” Olick paraphrases a radio news item as saying, “Good news on the housing front! Foreclosures are moderating, potentially signaling an end to the housing crisis.”

Says Olick, “This is why people don’t trust the news.”

Indeed.

Here’s a summary from another CNBC post on Thursday: “Home foreclosures in August jumped 18 percent from a year ago, but decreased 0.47 from the previous month, according to a new report by RealtyTrac, an online marketplace for foreclosure properties.”

So, yeah, as Olick points out, we saw a .47 per cent decrease from the record high set in July, but the August rate is still nearly 20 per cent higher than a year ago.

Of course, that is better news than yet another record month–but no reason to get giddy. There’s still plenty to come, and there’s still many people who face some tough, tough decisions about dealing with foreclosure, addressing medical debt, looking for work, and whether to file for bankruptcy protection.

In fact, as posted Wednesday at USAToday.com, nationwide bankruptcy filings in August were 22 per cent higher than in the same month a year ago: “From January to August, national bankruptcy filings reached 954,911, up from 703,732 in the same period of 2008, according to Automated Access to Court Electronic Records.”

Now, there’s a few crucially interesting items showing up in light of these data.

One is hinted at the sheer number of projected bankruptcy filings by year’s end, now expected by some experts to reach 1.45 million–which would put us near the record levels established in the period leading up to the so-called Bankruptcy Reform Act of 2005, when the credit-card lobby rammed through changes designed to make it tougher for consumers to file bankruptcy. As the USA Today post continues, “After the bankruptcy law changed in 2005, filings had slowed.

” ‘But we’re now heading back close to where they were before the law was enacted,’ Lawless says. ‘It’s not surprising, because the 2005 law did nothing to change the underlying economic reality of why people file for bankruptcy.’ ”

That’s important enough to repeat:  “. . . the 2005 law did nothing to change the underlying economic reality of why people file for bankruptcy.”

For point two, we’re back to Olick and a post from Wednesday: “The House passed it, the Senate defeated it, but you had to know the idea of bankruptcy judges getting into the business of mortgage modifications would not go gently into that good night. Today the Treasury Department released its latest progress report for the Home Affordable Modification Program (a.k.a. the housing bailout).”

Previously Olick has come out against new legislation that would allow bankruptcy judges to modify terms of a loan for a primary residence, perhaps most noticeably here, where she writes what I consider the takeaway: “Personal bankruptcy is really no better, which is why I have trouble understanding why lawmakers are pushing for bankruptcy judges to modify loans. That would just give borrowers more incentive to file for bankruptcy. I guess the argument is that they have no choice, and at least bankruptcy could keep them in their homes.”

But in Wednesday’s piece, she follows the mention of Treasury’s report with a table showing results of major lenders’ modification efforts as relevant to Team Obama’s Home Mod plan. Following the table, Olick summarizes thusly, “Some of the results are pretty abhorrent, like Bank of America, the lender with the largest number of eligible delinquent loans, starting modifications for just 7% of those loans.”

She ameliorates BoA’s numbers a bit, but then quotes Congressional testimony from Asst. Secretary for Financial Institutions Michael Barr that ends, “There is unevenness in performance as you can see from our public reports, unevenness in performance among and between the servicers involved. We think all the servicers could do more than they are doing now.”

Olick also quotes House Financial Services Committee Chairman Barney Frank as saying, “The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of modifying mortgages. If they do not improve their performance, then they improve the chances of that legislation.”

So, point two is that that dragging out the loan modification process may well enable Congress to re-address real bankruptcy reform, in a meaningful way. As we’ve stated repeatedly, it simply makes no sense to allow judges to modify terms of loans on vacation homes and other luxury items while preventing the same judges from modifying terms on primary residences.

This also brings up another point. As discussed here, the companies who actually service mortgage loans might prefer to foreclose rather than modify loans, because the loan servicer has “perverse incentives” to collect more fees by handling the foreclosure rather handling the loan modification.

And as discussed here, loan servicers can actually face lawsuits from investors if the loan servicer agrees to modify a home loan.

So, for point three, let’s just say it’s abominably astounding that no official program addresses these two concerns.

Furthermore:

• If mortgage-loan servicers really do have perverse incentives to foreclose rather than modify, then we need to get that fixed.
• If mortgage-loan servicers really are subject to bona fide lawsuits from downstream investors, then we need market-reform legislation to address that, too.

And that brings us full circle on the bankruptcy issue: Maybe the simplest answer after all is to simply grant the loan-mod powers to bankruptcy judges that they should already have.

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You may be facing extended unemployment, imminent foreclosure, overwhelming medical bills or unworkable credit-card debt–or a combination of all these. Regardless of your situation, filing personal bankruptcy can offer you legal protection and relief from stress while also providing a way to better credit in the future. Whatever your circumstance, the sooner you get advice from a competent, experienced bankruptcy attorney, the sooner you will have facts to help you decide what’s best for you and your family. Here’s some links to get started.

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