Summer 2009 review: Foreclosure relief still sorely lacking while other concerns jostle onto stage of national debate

July 20th, 2009 by Mike Hinshaw

[Editor's Note: This is the first of a three-part series focusing on domestic bankruptcy for summer 2009.]

Foreclosure of primary residences remains in the forefront of topics concerning consumer bankruptcy filings, but the spotlight is increasingly being shared with debates about overwhelming medical costs, rising unemployment and commercial bankruptcies that can ripple through the economy.

According to July 2 press release from the American Bankruptcy Institute (ABI), personal bankruptcy filings in the U.S. during the first half of 2009 climbed 36.5 per cent higher than the number of filings in the first half of 2008. Relying on data from “the National Bankruptcy Research Center (NBKRC),” ABI says that “[t]he overall June consumer filing total of 116,365 was 40.6 percent more than the 82,770 consumer filings recorded in June 2008″ and also points out a minor note of encouragement: Although “the June total represented an increase over the previous year, it was a 6.8 percent decrease from the May 2009 total of 124,838 consumer filings.”

However, “Chapter 13 filings constituted 27.7 percent of all consumer cases in June, a slight increase from May.” The dark side of that coin is, presumably, perhaps nearly 70 per cent of filings may be Chapter 7 cases–which means more folks are liquidating rather than working out payment plans.

“As unemployment, foreclosures rates and health care costs continue to rise, more consumers are turning to bankruptcy as a last financial resort,” said ABI Executive Director Samuel J. Gerdano. “We expect that there will be more than 1.4 million new bankruptcy filings by year end.”

Meanwhile Team Obama’s plan to help homeowners stay put has helped a few–but the initiative has had a tough time gaining significant traction. As the San Jose Mercury News reports July 16, “Banks say they’re swamped with inquiries and are just now completing the first mortgage ‘loan modifications’ under the Obama administration’s Making Home Affordable plan, the program begun in April requiring borrowers to make three months of renegotiated payments before securing new loan terms.”

But the hideous reality is that “frustrated borrowers are still battling red tape and delays in their attempts to negotiate lower payments, even as hundreds of thousands of them lose their homes every month.”

One San Jose homeowner described in the piece sounds like a poster boy for Those Who Deal with Mortgage Companies: “Angelo Gallo, 46, of San Jose, sought help from his bank lowering his monthly payments in January, before the Obama plan was announced. He said he and his wife, Mary, worked with their lender for five months, fulfilling numerous requests for more documents, but recently they were told they had to start over. ‘I was so frustrated,’ Gallo said. ‘Every time you call it’s a different person, and it seems like the files are all over the place.’ “

Anyone who’s tried to deal with mortgage problems in the years since lenders began shuffling loan packages off to Wall Street–rather than keeping their loans in-house–can relate to Gallo’s bewilderment. Perhaps among the reforms Team Obama is pursuing there should be a requirement for the servicers of home-mortgage loans to assign a project manager to a bloc of loans, such that one person somewhere in the bureaucracy can be at least somewhat familiar with the background of the case. Certainly the present system is utter chaos.

“There is an amazing lack of staffing to support the flood of modification requests the banks are getting,” said San Jose bankruptcy lawyer Norma Hammes, past president of the National Association of Consumer Bankruptcy Attorneys. “Lenders lose stuff all the time, and they ask for stuff they don’t need. We have to jump over hurdles and through hoops.”

Bankruptcy lawyers, the article says, “are particularly critical of the banks. The banks’ current efforts are ‘largely a farce,’ according to Cathy Moran, a bankruptcy lawyer in Mountain View, CA. She said most of her clients have been unable to modify their home loans.

‘I don’t think the people in the loan modification departments at banks are empowered to make deals,’ Moran said.”

That may well be the case–as outlined here, many loan servicers may not be willing (or able) to modify loans because of downstream contracts with investors who bought into the so-called securitized tranches that help fueled the economic meltdown in the first place. Indeed, San Jose bankruptcy lawyer James “Ike” Shulman is quoted thusly: “I’m seeing several people each week with the same hard-luck story of how mortgage lenders have led them on for months, lose the paperwork and then find one excuse or another to turn them down.”

Of course, bank reps say they’re doing as well as can be expected. One spokesperson for Bank of America said it has  “7,400 ‘home-retention specialists’ [who] are taking about 80,000 calls a day. The bank has made more than 48,000 offers through the federal program and now has 18,000 people making payments in their trial modification period.

“Chase is moving through a backlog of 155,000 loans ‘as fast as we can, having hired nearly 3,000 people to help in the process, including 950 loan counselors,’ spokesman Thomas Kelly said. The bank, which took over failed subprime lender Washington Mutual, has approved 87,100 trial loan modifications under the federal plan, Kelly said, and an additional 50,900 under the bank’s own program.”

But the Mercury’s reporter, Pete Carey, apparently remains unconvinced: “Though the reasons are many,” he writes,  “the problem is simple: Banks aren’t renegotiating enough loans to stem the rising tide of foreclosures, either through the federal program or on their own.

‘If the banks wanted it to work, it would work,’ said Fred W. Schwinn of the Consumer Law Center in San Jose.”

Next in series: Health care, medical bills and bankruptcy: contradictory studies.

Online resources: intro to Chapter 7, click here; intro to Chapter 13, click here; refinancing and loan modification, click here.