The pending legislation to permit courts to modify home mortgages is stirring up some controversies–even among its advocates. The key issues are operational and very important, I think, to the success of this legislation. Here's the first brewing controversy: How will consumers make the payments on these modified mortgages (directly to the mortgage servicers or through the chapter 13 trustee?)
The pending legislation contains language that would require the payments on mortgages modified in bankruptcy to be made "directly to the holder of the claim." In more than 2/3 of jurisdictions, chapter 13 trustees serve as conduits for at least many mortgage claims, meaning that the debtor pays the trustee the mortgage payment, along with their payment on their unsecured claims, and the trustee transmits the payment to the mortgage company. The legislation, apparently at the urging of some consumer advocates, would bar this practice. I think this is a bad approach for several reasons: Why change existing practices that are working well and add confusion? Some courts have local rules that require debtors to pay all claims through the trustee; the legislation would override such rules, which are growing in popularity becuase of problems with letting debtors make mortgage payments. Many debtors like the convenience of making only one payment–to the trustee–and letting the trustee disburse. It helps keep them on track financially and may improve completion of chapter 13 plans. Further, given the numerous and well-documented problems with mortgage servicers' ability to correctly apply payments in chapter 13 cases, why put the burden of sorting all those problems out on the debtor or debtor's counsel? If the trustee is the conduit for the payment, then the trustee can take steps to ensure the payments are applied properly and the debtor is being charged correctly. I suspect this stems from some concern that consumers shouldn't have to bear the added costs of paying a trustee. Many trustees, however, take only 5% commission instead of the usual 10% for the disbursement on mortgages, and if Congress is concerned about this, they could amend section 586 to provide for a lower trustee fee for mortgages. Also, consumers who pay the trustee are getting services; the trustee is the one who must wait on hold with the mortgage servicer, try to reconcile the accounting, deal with RESPA and escrow issues, etc. I think it is fair to pay trustees for that work. I think debtors should have the option of making payments on a modified mortgage either directly to the mortgage company or through the trustee, as is currently the practice.
Comments
19 responses to “Cramdown Controversy #1–Who Do I Pay?”
1. Chapter 13 Trustees that make conduit mortgage payments (payments of the current monthly mortgage payment) generally have lower percentage fees than trustees that don’t make conduit mortgage payments. The reason is that more money flows through the Chapter 13 Trustee’s office, and the U.S. Trustee limits the office’s expenses, and all the creditors (both secured and unsecured) benefit from the lower percentage fees. Chapter 13 Trustee fees for larger, conduit mortgage trusteeships are in the 3% range, some are even lower.
2. I don’t think many Chapter 13 trustees charge two tier fees – a lower fee for a conduit mortgage payment, and a higher fee for other distributions. It may happen, but I don’t think that is all that common. Requiring conduit payments and legislating a two tiered system for mortgages that were crammed down might be a good idea – I suggest that approach in a previous comment.
3. The concept of conduit mortgage payments has been dealt a blow by the 9th Circuit a couple of weeks ago. In re Lopez held that bankruptcy courts could not require conduit mortgage payments. If the debtors want to pay their mortgages directly, they are allowed to – at least in the 9th Circuit.
4. If an individual bankruptcy judge can’t require a debtor to make conduit mortgage payments, it is unlikely that an administrative order or a local rule can fix that lack of authority. See, In re Suggs, 377 B.R. 198, 205-206 (8th Cir. BAP 2007)(“A local rule “may only be upheld if (a) it is consistent with the Bankruptcy Code in that it does not ‘abridge, enlarge, or modify any substantive right,’ as required by 28 U.S.C. §2075 and (b) it is ‘a matter of procedure not inconsistent with’ the Bankruptcy Rules as required by Bankruptcy Rule 9029.”)
If debtors have a right to make their mortgage payments directly – as Lopez holds – then a local rule to the contrary would be invalid.
I prefer for my clients to use the chapter 13 trustee as a conduit for all payments. Why? I know who he is and I can get him on the phone. Also, he has to deal with me every day until one of us retires; there’s an incentive for the two of us to play nice.
In contrast, when I call lenders it takes forever, I’m never talking to the person with decision making authority. If I have to call back I never get the same person twice and the lender never has any record or my previous contacts with them.
I must be missing something elementary but isn’t the proposed language of the new Section 1322(b)(11)(D) permissive not mandatory?: The plan MAY modify mortgage terms and MAY make payments on that modified mortgage directly to the mortgage holder/servicer–Senate Bill 61 does not say debtor SHALL make payments directly. Where does the bill go counter to what you urge at the end of your article: allowing the debtor to choose between paying the modified mortgage payment through the trustee or directly to the creditor?
Here are the pertinent subsections from the Congressional Record of 1/06/09, S66 (it’s not yet available through the Library of Congress’ THOMAS service):
(b) Subject to subsections (a) and (c) of this section, the plan may–
“(11) … with respect to a claim for a loan secured by
a security interest in the debtor’s principal
residence that is the subject of a notice that
a foreclosure may be commenced, modify the
rights of the holder of such claim—
“(D) by providing for payments of such
modified loan directly to the holder of the
claim;”
This is a small concern when compared to the massive failure rate of Ch 13 filings. Why isn’t this issue being discussed?
Chapter 13 cases fail primarily because “_ _it happens” in the 3-5 year term of the plan. Debtors live and die; they change jobs; they lose jobs; they move; they buy and sell homes; they get married; they get divorced; they have kids; they lose kids; they get sick; etc. — all of which impact their financial circumstances. The failure rate is not an inherent flaw in the Chapter 13 system but it is an innate aspect of people living and trying to get by under difficult circumstances.
Ask debtors of dismissed cases. At worst, it bought them some relief and gave them a last opportunity to try and save their home or their personal finances. At best, it helped them cure their mortgage, pay delinquent taxes, get current on domestic support payments, etc. Even if they did not receive a discharge, they received a substantial benefit. I assert that far and away the majority of debtors would not consider their Chapter 13 case a “failure.”
What failure rate are you talking about?
The failure rate of pro se Chapter 13 cases? That’d be about 95%, or higher, in most jurisdictions. Under BAPCPA, they don’t even get the filing requirements done well enough to survive to a first meeting.
Lots of Chapter 13s are filed just to stop a foreclosure – and the debtors never show up at the first meeting, and the case is dismissed. Sometimes cases are filed for purposes of delay a second time – with no intention of filing a Plan. That is going to be a difficult problem to cure without keeping out those debtors who didn’t meet all the BAPCPA paperwork requirements (with or without counsel) and try again with the intention of actually going forward with a Plan.
There is also a number of people in Chapter 13 Plans who run into problems – job loss, health issues, divorce. Three to five years is a long time for people to have steady income. Many of those debtors convert to a Chapter 7 – after having made payments for years to creditors that would have gotten nothing if the debtor went straight to Chapter 7.
But, if you look at the number of cases that get to confirmation – and you count as successful those Plans that are completed by second time filers who come back and make it work – I don’t think the failure rate is so “massive”.
And what else have we got?
Voluntary programs that count every action as a success for loss mitigation, and which don’t actual fix the complex financial problems that people face in the real world?
Government programs that have been so narrowly tailored that no one actually uses them?
Don’t let people fight to keep their homes because free markets always bring nothing but good – like the subprime mess?
Even assuming many of these Chapter 13 cases don’t “work” in the sense that they complete and the debtors receive a discharge – still, while they are pending, the mortgage companies should be receiving payments (or they’ll get relief). And the flood of houses onto an already glutted housing market will at least be slowed.
Maybe it would have been better if regulators had done their job, and the investment banks hadn’t set up all those little (now defunct) mortgage lenders, selling subprime mortgages with creative terms that couldn’t be defaulted on for 6 months so that under the terms of the private label MBSs the issuers had not skin in the game. But that multi-trillion dollar problem is a horse out of the barn.
Face it – the mortgage industry broke faith with the country. 7%+ unemployment is the just the beginning of the giant sucking sound brought to our country largely by ponzi mortgage vending.
Should there be some limit on the number of times a debtor can file a Chapter 13 and try to invoke the ability to restructure the mortgage? I’d say yes. But I presume that is a discussion for another blog entry.
A couple of statistics from the UST web site:
For 2007, Chapter 13 trustees disbursed a total of $5.15 billion while Chapter 7 trustees disbursed $3.07 billion.
For 2007, Chapter 13 trustees disbursed $389 million to debtors’ counsel while taking $256 million to cover trusteeship expenses.
$5 billion is annual disbursements is hardly a failure, and a 5% surcharge for trustee administration is hardly unreasonable.
Katie — I’m wondering how the trustee would disburse payments over 30 to 40 years. Would they want to? What sorts of risks does that long term arrangement have for both the debtor and the lender?
lmclark –
When the Chapter 13 ends – after 3 to 5 years – the debtor(s) would resume making direct payments to their lender. From what I have seen, I think most Chapter 13 trustees who do conduit mortgage payments do a motion to have the mortgage declared current at the end of the case. So, the debtor(s) leave the Chapter 13 with a mortgage that is current.
The amortization of the “new” loan may be up to 40 years – the Chapter 13 case won’t be any longer than normal.
At least that is the way things are currently done in the Chapter 13 trusteeships that do conduit mortgage payments.
AMC’s first comment, regarding the effect of making conduit payments on trustee comissions, seems to be correct. Most trustees who do make conduit payments have fees that are less than 5% for all disbursements, as AMC suggests in the first comment. A few other trustees noted that before they made mortgage payments their fees were the statutory maximum. In essence, paying the mortgage through the trustee is cost-neutral from the debtor’s perspective—the total commission to trustees is about the same. BUT the debtor gets the benefits of the chapter 13 trustee dealing with the mortgage company and filing that motion to declare the mortgage current at the end of the case.
The unstated premises of conduit payments are (1) that debtors simply are incapable of complying with their confirmed plans and they therefore much become wards of the state, and (2) that debtors’ counsel are unwilling (primarily, I suspect, because the courts restrict their allowed compensation) to provide adult supervision to their clients to ensure that chapter 13 plans will be performed according to their terms. However, using chapter 13 trustees (or, much more precisely, the trustee’s administrative staffs) as conduits presents its own set of performance problems. For example, who is liable for the late fees that inevitably will result from the late monthly maintenance payments made by the trustee as a conduit? Many trustees’ staffs hold on to individual debtors’ monthly payments sometimes for weeks (primarily to let the checks clear) and then send a single, bundled payment to the servicer of the loans of multiple debtors in his/her district on a monthly basis. Very often this results in individual maintenance payments being made late even though the checks may have been remitted by the debtors to the trustee before the due dates on the individual mortgage loans. Who is responsible for the payment of those late fees? The debtors or the trustee? Or, as I suspect the debtor advocates on this blog would prefer, no one. Let the big bad servicers eat the fees. I guess the Congress simply can nullify late fees in chapter 13 cases and make explicit what many servicers have adopted implicitly because they do not want to get sued for exercising their contractual rights to late fees. Another notch in the belt of the erosion of the freedom to contract has been effected sub rosa by the plaintiffs’ bar.
Another [related] issue:
Let’s say that the Debtors modify their mortgage beyond the length of the plan, extending the loan. Even if conduit payments are permitted, there won’t be any trustee payments after the 5th year.
What gets filed in the hall of records to make the extension binding after the 13 is closed at the end of three or five years?
Not the confirmation order, like you might in an 11, because the plan must be completed to make the modification effective going forward. The discharge, at the end of the plan, won’t give notice.
We are going to need something new. Or am I missing something.
Man these comments came fast:
I think modifying a Mortgage in Chapter 13 Bankruptcy would be best because it can do what no other lender can at the time of the re-write of the mortgage. “Decrease” over all debt significantly without adding to the overall debt load. That is the one of the most problematic issues when refinancing a Mortgage note. “Debt to Income Ratio”. You don’t have credit card, medical, finance cos. etc. eating away at monthly income. In the context of a 13, most of the “Plan” payment, if it is a “conduit” payment will go directly to the Mortgage co. thus releasing the all important “flow”.
On the issue of unsuccessful 13s:
Just because a debtor does not ultimately receive a discharge in a 13 or a 7, does not mean that the bankruptcy was unsuccessful. There are many, many ways to “win” without a discharge. That by no means is that the ultimate “goal” but “successful” is a relative term in consumer bankruptcies.
On the issue of filing notices to declare mortgage current:
I can’t think of a “trustee” motion/notice that I have seen or read that has been more helpful than that one. It works.
To rcerone: Truth is that currently, servicers/mortgage companies CAN recoup those late fees and in fact, that “Notice to declare mortgage current” gives the servicer time to make the claim. In our district the Trustee gives them 60 days to make the additional claim. It’s just not “hidden” thing and has to be open for review and objection. OMG! Detailing fees and expenses in Bankruptcy! What is this world coming to?
To Patches: Declaratory judgments require an AP. BR 7001(9). But that is beside the point and sidesteps the issue I intended to make: Recoup from whom? The trustees who were responsible for the late payments? Yeah, right. The only group more immune from accountability in the system than chapter 13 debtors are the chapter 13 trustees. The favorite “whipping boys” du jour are the servicing companies. However, the root of the problem is the paternalistic nature of the “reforms” being proposed and implemented hodge-podge by individual judges and courts around the country. The “wards” of the system, i.e., the debtors, are viewed by the “keepers” of the system to be too immature or too incapable to comply with the terms of their own chapter 13 plans. Therefore, big brother government must step in to save them from themselves and those evil capitalists who loaned them the money to buy their houses.
So you have to open up an Adversary, big whoop, if it was contested and you win, you still get the house and expenses. And the debtor will get to pay you out (most of the time). And the debtors will be able to afford it, especially post discharge. Couple hundred bucks filing fees, a little rule rate+. When it really doesn’t have to be that complicated. Not here anyway. Locally, Servicers are getting those fees and I have been seeing some success stories on the “Discharge” front, their just a little harder to see when you have people to help.
Some Trustees are better than others granted (some bank in town…. OTHERS Don’t!) but its a (bleep) big job. I can’t imagine what it’s like in a “hot spot”.
Your right, your right Servicers make an easy target, heck, it’s almost hip. Truth is, do we really want to know how much further we can slide? It doesn’t have to be forever and the banks are getting those same homeowners tax dollar. (yes, even if they are losing their home, unless on welfare they most likely are making money for someone) Servicers were set up to handle “performing” loans to a lesser extent the “default”, their sole purpose in life is to make those “MBOs” perform. They have huge computers to calculate every word of that contract. They are good at that. (THERE I SAID IT!)
With the advent of new space age technologies, “Bill Pay”, people will have their payments in on time. NO MORE SNAIL MAIL, to make Mortgage payments! And if your paying by phone ITS LATE! But hey, it’s tough when you’re at the bottom. A few bumps and your banking “privilege” get suspended.
Maybe we need a little “parental” guidance in a time like this and it looks like there maybe a limit worked in. I think there should be limit. FDR got us out that way, “Paternalistically” that is. (My new word for the week). These cycles are a bitch, but with a little intervention by a Democrat and poof, we have FDIC, Social Security etc…………… Strange how FDR and our president elect are similar, the situation I mean, the political climate, war, the Depression, how he got everyone moving in the right direction. I mean everyone. And when the dust settled it was the poor, working and living that got us out. Hey, if you’re going to bet big with deregulation, you got to be able to pay up afterwards. That’s what we are doing BTW, “Paying”.
“Primarily this is because rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence….The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit” FDR March 1933
Spooky right?
via wikipedia http://en.wikipedia.org/wiki/FDR
Just my 2 cents worth on success of chapter 13’s. Here is Boston, almost all chapter 13’s are filed to stop foreclosure and save the house. Debtors don’t generally care about discharge when their house is on the line.
As noted by some of the other entries, a chapter 13 can be successful without a discharge, e.g. if you refinance outside the BK, or sell and gain a lot of equity, etc.
I once did an informal survey of all the chapter 13’s filed in Eastern Mass in 2001 to see if they were successful- which I defined as whether the debtor, 5 years post filing of case, still owned the house, refinanced, was able to sell to 3rd party (not the bank) or transferred to a family member. With those as indicia of “success” in a 13, I found about a 70% success rate. It would be different now, given all that has transpired in the past year and our general economic malaise, but chapter 13’s are not always doomed to failure. It just depends on how you define success.
Roger: I will give $1.50 for those 2 cents. Great examples bro.