As recession hangs on, lack of homeowner-loan workouts may bring bankruptcy reform back to a more willing Congress

September 11th, 2009 by Mike Hinshaw

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.

Bankruptcy questions

Bankruptcy principles

Bankruptcy Act of 2005

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Bankruptcy laws in your state