Jumping the gap from Wall Street bonuses to cornbread mix

August 17th, 2010 by Mike Hinshaw

That recovery we keep hearing so much about?

Seems to be going be well–if you work in the neighborhood where the Great Recession was engineered.

According to an Aug. 13 article in MarketWatch, “Bonuses in the financial services industry will increase slightly this year as the sector outpaces the recovery of the broader economy, according to a forecast published by Johnson Associates Inc. Thursday.”

Supposedly, it’s a big deal among legislators, too. Apparently some of them see problems with bonuses for those in the sector that caused the problems that nearly drove the economy off the cliff.

“The increase in bonuses would come at a time when rising compensation in the sector has become a hot issue for lawmakers in the wake of the financial crisis.”

Of course, bonuses were off the charts during the boom leading up to the crisis. Trouble is, nothing changed during

Cuomo’s report

“But when the financial crisis hit in 2008, compensation stayed at these levels even as bank earnings plummeted. According to an investigation by Attorney General Andrew Cuomo’s office, at Bank of America net income fell to $4 billion from $14 billion, but total payouts still remained at $18 billion. Citigroup and Merrill Lynch, now owned by Bank of America, lost $54 billion in 2008, but still paid out about $9 billion in bonuses. Read more about Cuomo’s [2009] report here. [" According to the 2009 article, "Attorney General Andrew Cuomo's office analyzed 2008 bonuses and earnings at the nine financial institutions that were the first to receive government money from the Troubled Asset Relief Program, or TARP."

Another bailout beneficiary, GM is doing pretty well, although fellow bailee Chrysler is still struggling. Ford, not a bailee, is doing OK, too. Other big corps are reeling in the dough, like say, Disney (riding blockbusters Toy Story 2; Alice in Wonderland; and Iron Man 2).

The 'new abnormal'

And people aren't just buying downsized cars and going to the movies. Describing a "bifurcated market," this July 29 BusinessWeek article says bewildered-and-bewildering consumers are scrimping on soap and other basics in order to blow money on luxuries.

"The new abnormal has given rise to a nation of schizophrenic consumers. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo. Companies such as Cupertino, California-based Apple, whose net income jumped 94 percent in its last quarter, and Starbucks Corp., which saw a 61 percent increase in operating income over the same time frame, are thriving.

"Mercedes-Benz is having a record sales year; deliveries of new vehicles in the U.S. rose 25 percent in the first six months of 2010. Lexus and BMW were also up. Though luxury-goods manufacturers such as Hermes International SCA and Burberry Group Plc are looking primarily to Asia for growth, their recent earnings reports suggest stabilization and even modest improvement in the U.S."

Well, who can blame the American consumer for being at least a little crazy?

As the Aug. 17 Detroit Free-Press says, "The U.S. lost nearly 3 million jobs in the second half of 2008.

A 'deep hole'

"The hole was so deep that even with the 620,000 private-sector jobs that the Economic Policy Institute reports were added over the last seven months, it doesn't feel like a recovery to many.

"Charles Ballard, a Michigan State University economist, agrees that the recovery is very slow, but not ending.

" 'We're coming out of the worst economic downturn in our lifetimes,' Ballard said. 'Given that a sledge hammer was taken to the economy when Lehman Brothers failed, we're lucky the damage hasn't been worse.' "

Earlier in the year, some encouraging reports were noted, hinting that unemployment, foreclosures and bankruptcies had bottomed out. More recent reports say no.

Foreclosures still raging

From an Aug. 13 ABC News report: "In July, banks repossessed the second highest monthly number of homes ever, according to the California-based foreclosure listing firm RealtyTrac, Inc. There were 92,858 properties taken over by banks in July, an increase of nine percent in the month and six percent for the year.

"A sagging job market is the likely culprit. The silver lining: Overall foreclosure activity in July did drop about 10 percent from a year ago. But it was the 17th straight month of foreclosure actions on more than 300,000 properties, according to RealtyTrac."

Apple cakes and cornbread

That report also describes a consumer pushback of sorts, as people sick and tired of waiting for help are increasingly taking matters into their own hands--even if their plans are, let's say, fanciful. Efforts range from representing themselves in court--as more judges are  getting savvy to lender tricks--to having large-scale "bake sales."

One woman who lost her house after losing her job has been inspired by "Teaneck, N.J., homeowner Angela Logan [who] sold enough of her $40 apple cakes to qualify for a loan modification that allowed her to save her home. She dubbed her venture Mortgage Apple Cakes.”

Fueled by visions of Logan’s success, Beverly Davis decided to sell her grandmother’s cornbread recipe (10 bucks for the dry mix or the mix plus a cast-iron skillet for $40; see cornbreadmillionaire.com)–in hopes of raising  80 grand in order to buy her house back. On August 13, the ABC report said she had 21 days left. A quick check at her site shows an Aug. 4 post indicating that the bank told her the house will not be auctioned but instead will go on the market with a “firm price”–but (of course!) they can’t reveal to her any advance info…

No, that would make too much sense–to give out information to the most motivated buyer for the house, somebody who already thinks of it as home.

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The bankruptcy reform act of 2005 increased the complexity of the law, but 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, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

Texas sues ‘debt-relief’ firm; investors claim victory over Countrywide; housing signals mixed; credit card regs kick in

August 22nd, 2009 by Mike Hinshaw

What a week: we may not be witnessing a sea change or even a “perfect storm”–but the cross currents are fierce, interconnected and powerfully intriguing.

In Texas, Attorney General Greg Abbott is w-a-a-y up in the middle of the locked-down Debt Relief USA, in a Chapter 7-related filing that matters a great deal to more than 2,500 former customers who have been left hanging on the line. In a seemingly unrelated but possibly pivotal case, a federal judge in Manhattan has bounced back to state court an investors’ suit against subprime-lending giant Countrywide Financial, which is being closely followed not only by pension funds and insurance big wigs but also by–well, practically the entire lending industry.

Meanwhile, the first changes of Team Obama’s credit-card reforms have taken effect, within days of recognition that the foreclosure debacle has extended its tentacles from the subprime plebes into the prime-rate neighborhoods. In other quarters, sales of existing homes priced less than $100,000 are leading something of a housing rally, even as owners of luxury homes are turning to auctioneers for help in shedding their properties.

Debt Relief USA is the Addision, Texas-based outfit that promised its customers an alternative to bankruptcy protection and then turned around and stiffed them by closing down–and filing for bankruptcy protection for itself. Since our preceding discussion of Debt Relief USA (also known as No Debt USA), the company, according to its Web page, had its Chapter 7 status conference July 29. At least part of the meeting included “the best way to handle claims of consumers and other creditors involving the case.” However, because “the questions about how to handle the property fo [sic] the estate and what notice to give to consumers are still up in the air, the Chapter 7 Trustee decided to adjourn the meeting and re-convene it on August 26, 2009 at 1:00 p.m.”

About three weeks after the meeting, on August 18, Attorney General Abbot filed suit “to recover $4.6 million from Debt Relief USA to pay restitution to former clients who claim they were financially hurt by the Addison-based company’s debt negotiation practices.

“Abbott’s office contends Debt Relief USA, which filed for Chapter 11 bankruptcy relief in June, took money from consumers who were in debt and promised to negotiate better terms with their creditors. As a result, more than 2,500 financially distressed consumers did not received the debt relief promised, Abbott said.”

That account is from the Dallas Business Journal, which goes on to say that “Abbott’s office said it successfully had the company’s bankruptcy case changed from Chapter 11 to Chapter 7 status, which allows the liquidation of assets for the purpose of paying off creditors’ claims.”

What one can infer from that is that Abbott sees no value in Debt Relief USA’s continuing as an ongoing concern. Although Chapter 7 can offer an individual a splendid shot at a second chance, that’s not so for a business that wants to keep doing business. One also presumes the AG has verified the company has enough assets to make liquidation worthwhile. And from reading the petition filed with the court, one can quickly see what the AG’s office thinks about not only this company in particular but maybe also the industry in general. It’s worth reading, especially if you’re considering hiring such a company. Let’s hope the AG can recover at least some of the money for the people who put their faith in this company.

A day after Abbott filed suit against Debt Relief USA, The New York Times posted that a group of holders of mortgage-based securities had won a battle in its fight against Countrywide Financial, which last year had settled with 11 states’ attorneys general over its predatory lending practices.

Shortly before the settlement, described by The Times here as “the largest program ever to modify home loans,” Countrywide was acquired by Bank of America, which is now defending the suit against the investor group. We first described the possibility of such litigation in this post in March when we discussed a paper by Adam J. Levitin, entitled “Resolving the Foreclosure Crisis: Modification of Mortgages in Bankruptcy.”

As Levitin explains, “. . . under the Trust Indenture Act of 1939, to alter the [homeowner's] contract requires at least a majority of the MBS [mortgage backed security] holders, and if the alteration affects the MBS investors’ cashflow, 100% consent is needed.”

In other words, U.S. trust law holds that these “securitized mortgages” can’t be modified via a new agreement between the loan servicer and the homeowner. Sounds crazy that someone–or several–can enter a business deal downstream of the homeowner and somehow cause the homeowner to be unable to renegotiate, but that’s exactly what the investor group is suing about. Their argument is that Countrywide’s original contract with them includes provisions that Countrywide would buy back any loans it subsequently modified.

As The Times explains it: “The lawsuit was filed in December after Bank of America struck a predatory lending settlement with attorneys general in 11 states. In that deal, the bank agreed to modify thousands of mortgages written by Countrywide, providing $8.4 billion in loan aid to an estimated 400,000 Countrywide borrowers.

“Under the terms of the settlement, Countrywide said it would cut principal balances on some loans and reduce interest rates on others. Rates could decline to 2.5 percent, depending upon a borrower’s ability to pay, and remain at that level for five years.

“But it turned out that Bank of America owned only a small portion of the mortgages it had agreed to modify. Investors who owned the largest share of the loans had not agreed to the settlement and would bear the brunt of the reduced payments.”

So Bank of America, on the hot seat after acquiring Countrywide, argued back “that the matter belonged in federal court and that any contractual obligations to repurchase modified loans were trumped by the Helping Families Save Their Homes Act of 2009. Under that law, servicing companies that agree to modify loans receive some protection from liability arising from the loan changes.”

But Judge Richard J. Holwell of Federal District Court in New York disagreed with the bank over jurisdiction and remanded the case back to state court. The Times and one of the plaintiffs called Holwell’s decision a victory for the investor group: ““ ‘I view this as an opening salvo and a demonstration that investors do have contractual rights, even when it is politically unpopular,’ said William A. Frey, one of the investors who brought the lawsuit. ‘This is ultimately going to be one of many legal battles over who should pay the hundreds of billions of dollars in losses on mortgages.’ ”

However, among the many interested–and invested–observers following the case are some who believe this was not a victory for the investors because the judge did not rule on the merits of the case, but simply told both parties they’ll have to prove up in state court. An August 20 press release from the Center for Responsible Lending says, “Nothing in the court’s decision casts any doubt on mortgage servicers’ legal ability to modify distressed loans. Instead, Judge Holwell’s decision merely determines that this pending case should be decided by a New York state court, not in federal court as Countrywide had requested. Judge Holwell made this decision without ruling on any of Countrywide’s defenses to the lawsuit.

“Loan modifications are essential to turning around the current financial crisis, and the number of modifications continues to be dwarfed by the number of foreclosures. We hope that servicers, who are already using ‘investor refusal’ as a scapegoat for denying modifications, will not use the purely procedural decision in this case as a further excuse to refuse to modify loans.”

Next in “The week that was, Part 2“: debt-relief details from Texas lawsuit; changes concerning credit cards; Part 3: housing sales versus housing starts and auctions; obsolete regulation of credit derivatives.

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Related resources for personal bankruptcy:
Chapter 7
Chapter 13