Author: Tara Twomey

  • Loan Modification Quality Matters

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    Tara Twomey

    Yesterday new foreclosure and loss mitigation data was released by HOPE NOW in its "Loss Mitigation National Data July 07 to November 08" and by the OCC/OTS in their "Mortgage Metrics Report."  Combined the reports show a steadily increasing number of loan modifications and a slight decrease in foreclosures.  That's the good news.  The bad news is a large number of loans that have been modified are redefaulting.  The OCC/OTS report shows 37% of loans were 60 or more days delinquent after six months.  Here's an example to put this in real numbers.  The HOPE NOW report shows nearly 870,000 loan modification in 2008.  Using the 37% redefault rate means that  just over 317,000 borrowers will enter the foreclosure pipeline again within 6 months.  

    The reasons that borrowers are falling back into default is the source of much debate.  Industry representatives claim that every modification is affordable when it is made and borrowers redefault because their circumstances change.  Consumer advocates argue that servicers are not creating long-term, affordable loan modifications.

    Whose side does the data support?

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  • BAPCPA Gag Rule Found Constitutional by Fifth Circuit

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    Tara Twomey

    Rarely do we get two important consumer bankruptcy decisions from the circuit courts in the same week, but it appears this is no ordinary week.  As noted previously, the Seventh Circuit this week decided an important means test issue, and yesterday, the Fifth Circuit Court of Appeals in In re Hersh, No. 07-10226 (5th Cir. Dec. 18, 2008) rendered a decision in a case challenging the constitutionality of sections 526(a)(4) and 527(b).  These two sections are part of the “debt relief agency” provisions added by BAPCPA.

    After finding that bankruptcy attorneys qualify as ‘debt relief agencies’ under 11 U.S.C. § 101(12A), the court affirmed the district court’s holding that § 527(b), which
    compels that certain information regarding bankruptcy proceedings be conveyed
    by the “debt relief agency” to “assisted persons,” does not violate the First
    Amendment. The court reversed the district court’s finding that § 526(a)(4), which prohibits an attorney from advising his or her client to incur debt in contemplation of filing for bankruptcy, is facially unconstitutional.

    In finding that § 526(a)(4) does not offend the First Amendment, the court applied the doctrine of constitutional avoidance to narrowly interpret the provision such that it would fall within constitutional parameters. Thus, the court construed the phrase “in contemplation of” to suggest that the prohibition is coupled with an implicit requirement that the speech only be prohibited when it constitutes an intent to abuse the bankruptcy system. Here, the court deviated from the Eighth Circuit majority opinion in Milavetz,Gallop & Milavetz, P.A., v. United States, 541 F.3d 785 (8th Cir. 2008), which held that the provision was facially unconstitutional.

  • Seventh Circuit Decides Hotly Debated Means Test Issue

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    Tara Twomey

    One of the more divisive post-BAPCPA consumer issues has been whether a debtor who has no monthly vehicle loan or lease expense can claim a vehicle ownership deduction when applying the means test. Until Wednesday, no circuit court of appeals had considered the issue. The four bankruptcy appellate panels that had rendered opinions were evenly split, as were the bankruptcy courts. Now the Seventh Circuit Court of Appeals has weighed in on the issue in In Ross-Tousey v. Neary, 2008 WL 5234070 (7th Cir. Dec. 17, 2008). The court reversed the district court and held that when conducting a means test analysis a debtor may claim a vehicle ownership expense even if the vehicle is not encumbered by a debt or lease payment. According to the court of appeals, this result was dictated by the plain language of the statute, the legislative history, and the underlying policies of the means test.
    The importance of the decision extends beyond the car ownership allowance.

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  • Poor Servicing Paves the Path for Predators

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    Tara Twomey

    Thanks to Credit Slips for having me back. I wanted to start the week talking about how poor mortgage servicing is paving the path for a new breed of predators and how little is being done to address the situation.
    Homeowners facing foreclosure have always been vulnerable to scammers, con-artists, and thieves. As soon as an impending foreclosure becomes public information, homeowners are bombarded with post cards, telephone calls and even door-to-door solicitations from would be saviors.
    When property values were appreciating rapidly, foreclosure rescue scams primarily focused on obtaining title to the home and robbing homeowners of their equity. Today
    with property prices depreciating and many homes already “underwater,” equity
    is no longer the game. Instead, rescuers have become high-volume, “loan modification specialists.” A recent editorial in the New York Times (here) and an article from BusinessWeek (here)
    describe this business that is now booming across the country. The gist of the business model is that for a fee, which can reach several thousand dollars, these specialists will attempt to obtain a loan modification for the borrower.
    But why are homeowners giving their precious dollars to loan modification specialists when they should be able to obtain the same results for no charge?

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  • Hobson’s Choice

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    Tara Twomey

    In my last post this week I wanted to thank everyone at Credit Slips for giving me the opportunity to “speak my mind.” It has been a full week when it comes to bankruptcy and foreclosure. The Senate Banking Committee held its hearing to examine the crisis in the subprime mortgage market, Judge Steen in Texas heard hours of testimony in the hearing to determine the appropriate sanctions for Countrywide’s counsel Barrett Burke, and the Bankruptcy Appellate Panel for the Eighth Circuit decided the case of In re Zahn, 2007 WL 817510 (B.A.P 8th Cir. Mar. 20, 2007). The Zahn case, while little noticed, shines a spotlight on the way chapter 13 debtors fighting to save their homes, must often battle the “system” first.

    You see when creditors or trustees object to confirmation of a chapter 13 plan and lose, they may appeal immediately as of right. By contrast, when debtors lose and a plan is rejected, the order in most circuits is considered interlocutory. Debtors must request leave to appeal the interlocutory order and, at least in the Eighth Circuit, leave is rarely if ever granted. As a result debtors are left with two choices: 1) file an amended plan that contains provisions the debtor does not believe are required by the Code, or 2) elect not to file an amended plan and have the case dismissed. The dismissal results in a final appealable order, but also terminates the automatic stay. In addition, under BAPCPA dismissal now has significant consequences if the debtor must later refile.

    Not wanting to suffer the consequences of dismissal, the debtor in Zahn tried a different approach—she filed an amended plan and objected to it. This procedure was referred to favorably in dicta from other Eighth Circuit cases. Unfortunately for the debtor, the BAP held that she had no standing to appeal confirmation of her own plan. According to the court, the debtor was not an “aggrieved party.” Despite the court’s conclusion, the debtor was effectively left without a way to challenge the original denial of confirmation. With so many chapter 13 issues under BAPCPA unresolved many more debtors are likely to find themselves in this same situation.

    Until the Courts of Appeals reconsider their position on this issue (as suggested by Judge Mahoney in concurrence) debtors will have to choose between submitting less favorable plans or having their cases dismissed. Sometimes a choice is no choice at all.

  • The Case of the Upside-Down Trade-In

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    Tara Twomey

    The more times I read section 1325(a), the more I am convinced that not even Leroy “Encyclopedia” Brown, the wonder boy detective, could solve the mysteries of the “hanging paragraph.” The latest chapter, in what is sure to be a very long series, involves the case of the upside-down trade-in.

    An upside-down car is one in which in which the value of the car is less than the amount owed on it. It is not unusual for owners with longer-term loans, low or no down payments, and/or cars that are depreciating rapidly to be “upside-down.” According to J.D. Power and Associates, more than one-third of U.S. car buyers who traded in for a new car in 2005 were upside-down. When an owner of an upside-down car goes to buy a new car, not only must he pay the purchase price of the new car, he must also payoff the negative equity on the old car. Is a loan that includes refinancing of negative equity a purchase money loan, in whole or in part? Does the “hanging paragraph” cover claims in which only a portion of the debt is purchase money? These were the puzzlers faced by the court in the recent case of In re Price, 2007 WL 664534 (Bankr. E.D.N.C. Mar. 6, 2007).

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  • One-Way ARMs: Stacking the Deck.

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    Tara Twomey

    The Senate Banking Committee has invited representatives from the top five subprime lending companies to “explain their lending practices in the subprime mortgage market” at a hearing scheduled for tomorrow, March 22. With all the recent focus on teaser rates and no document loans, the one-way adjustable rate mortgage (ARM) probably won’t get much attention. An analysis of the actual terms of recent ARM loans, however, shows that one-way ARMs are yet another example of how subprime lenders stack the deck against borrowers.

    In its simplest form an adjustable rate mortgage is one in which the interest rate for the loan is pegged to an “index” and for which the interest rate is adjusted at set intervals (e.g., 6 months, 1 year, etc.). If the index increases, the borrower’s interest rate increases, if the index declines, the borrower’s interest rate goes down. The floating rate structure of the ARM allows lenders and borrowers to share the interest rate risk. In exchange for assuming some of this risk, borrowers generally receive lower initial interest rates. This economic reward for risk-sharing is the justification for ARM loans–at least in theory.

    In practice, the one-way ARM, which is ubiquitous in the subprime market, only adjusts upwards from the initial rate. By the terms of the note the interest rate can never drop below the initial rate even if the index goes down. As a result, borrowers, not Wall Street, bear the brunt of any interest rate volatility.

    Preliminary data from an empirical project (funded by the National Conference of Bankruptcy Judge’s Endowment for Education) that I am currently working on with Professor Katie Porter confirms the widespread use of one-way ARMs among homeowners in bankrutpcy. As part of the project, which looks at the intersection of bankruptcy and homeownership, we coded information about debtors’ notes and mortgages when such loan information was available. Among ARM loans in the sample-to-date, more than 85% of these loans put no risk of interest rate change on the lender because the initial interest rate and the floor interest rate (the lowest rate permitted by the note) were identicial.

    Some have likened ARMs to a gamble: the borrower wins if interest rates go down and loses if the interest rates go up. The realities of recent subprime lending practices show that Wall Street is like every winning gambling house—it is has effectively stacked the deck so that the house always wins. With one-way ARMs, consumers don’t get a fair deal, no matter how you cut the deck.

  • Subprime Servicing Getting Worse?

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    Tara Twomey

    Wall Street is watching closely to see what, if any, “ripple effect” the problems in the subprime market will have on other credit markets. It is also watching to see what effect the market meltdown will have on subprime servicing. Financial troubles, staff layoffs and potentially higher servicing costs on defaulting loans have led to concerns that servicing quality may decline.

    SUBPRIME SERVICING QUALITY MAY DECLINE!! This is really bad news for homeowners in bankruptcy where mortgage loan servicing is already abysmal. Of course, according to servicers and their attorneys it’s not really their fault. It’s those darn pesky computers that keep giving them incorrect information.

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  • Super Trustees?

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    Tara Twomey

    Faster than speeding bullets, more powerful than locomotives and able to liquidate fully exempt property with a single motion—they’re super trustees! Taking their cue from a Superman comic book, trustees around the country are attempting to exert their self-proclaimed super trustee powers by filing motions to liquidate exempt property, particularly homesteads, to pay domestic support obligations. According to these trustees their superpowers derive, not from some Kryptonian heritage, but rather BAPCPA’s amendment to section 507(a)(1)(A).

    In 2005, Congress made several changes to the bankruptcy code to benefit payees of domestic support obligations. Significantly absent from these extensive amendments was any mention of the power to liquidate exempt property. Despite the lack of express authorization for such power, trustees have argued that the amended language in section 507 gives them “implied authority” to liquidate all of the debtor’s assets, whether exempt or not, to pay domestic support obligations. The amended language of section 507(a)(1)(C) states that: “If a trustee is appointed…the administrative expenses of the trustee…shall be paid before payments of [DSO claims], to the extent that the trustee administers assets that are otherwise available for the payment of [DSO claims].” The trustees argue that Congress, in adding the trustee compensation provision and using the term “assets” instead of “property of the estate,” impliedly bestowed upon them this superpower. Given the additional fees that the trustees would generate for themselves by liquidating exempt assets (admittedly a less than altruistic motive), no one can blame them for wanting these superpowers, but here’s why this one won’t fly.

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  • Introduction

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    Tara Twomey

    Thanks to Credit Slips for having me “on” this week. Between BAPCPA and foreclosures there is certainly no shortage of things to talk about. This week I will share some thoughts on both and hopefully in the process highlight some lesser known, but important issues. I welcome and look forward to your comments.