David J. Babel's Bankruptcy Blog

       Treasury has announced new guidelines, protecting homeowners from foreclosure and additional rules to assist homeowners in financial distress with respect to their mortgage obligations (see http://www.financialstability.gov/latest/pr_03262010.html). I’m from Missouri (not literally). Show me. Somehow this just seems like old wine in new bottles. I can’t help but remember when I worked as a teenager many moons ago at a summer camp when the owner directed that all the Heinz ketchup containers be filled with the inferior brand Catsup to provide the appearance of a high quality ketchup to the visiting parents. Aren’t we just putting off the inevitable? Treasury is just trying every conceivable approach short of allowing judicial modifications in bankruptcy. Why not permit a bankruptcy judge to make a fair and equitable decision based on a loan modification consistent with current dealings for other secured creditors. Let the property be marked down to its current value with a current market rate interest recapitalized over 30 years or 40 years. Maybe, that is too sensible. I apologize for overreaching and pushing the envelope. If not now, when?

            The traditional Chapter 13 plan for one who is delinquent with mortgage payments and/or maintenance payments is a 100% cure of all arrears for all mortgage obligations, generally without interest, over a five (5) year period. What happens if you have more than one mortgage and your residential property is underwater (you owe more than its worth)? For now I am assuming I am dealing with a single family primary residence property with a current fair market value of $400,000 with an outstanding mortgage payoff of $425,000 and a second mortgage with an outstanding mortgage payoff of $50,000. Thus, in this scenario where the primary residence is underwater, you can knock out or strip off the totally unsecured junior lien of $50,000 in a Chapter 13 proceeding (This cannot be done in a Chapter 7 case). This is routinely permitted under current bankruptcy law. The net result of a strip off would be the resumption of the regular monthly mortgage payment (either fixed or current adjustable rate pursuant to the mortgage agreement) to the first mortgage lender on the first of the month subsequent to the Chapter 13 filing date (unless a different due date was in place). The second mortgage would be voided and the $50,000 in this scenario would be treated as an unsecured debt. It would be lumped into the pool of other unsecured creditors (credit cards, medical bills, etc.) and receive the same percentage payout (5%, 20%, 100%)). In most cases, the pro rata payment would probably be small. This will definitely be a big plus for many people who fit into this situation.

             A parallel effort at restructuring the mortgage debt is a request for a loan modification on the first mortgage. The two approaches are not mutually exclusive. This approach complements each other. If you can strip off the second mortgage you will have more money available in your budget to deal with your other debt. If you do get a loan modification in the bankruptcy, you may be on your way to a successful reorganization for the short-term and the long-term. Can this be done? Yes, it can. Our office has done it and is doing this kind of work as are other experienced law offices. Does it work for everyone? Not for everyone! Each case stands on its own merits. Make sure that if you are a homeowner in trouble or a professional trying to help a homeowner that you have explored all of the options, including the above possibilities. More to come on investment properties that include two family houses in which one of the units is a primary residence.

            Although the number of permanent loan modifications that have been granted by lenders in bankruptcy court within the Southern District of New York during this past year has been underwhelming, they can be obtained. It can get complex. I will try to simplify it. The following is not a true road map or recipe to resolve so many of the underwater mortgage scenarios. Only if judges in bankruptcy are given the authority and power to make judicial modifications may this lead the masses of bankruptcy debtors to a fresh start. Until the messiah comes, I offer the following for informational purposes. I cannot guarantee results, of course. But I can point you in the right direction.

In order to obtain a HAMP loan modification, there are a number of waterfalls that must be analyzed. The first thing to establish is borrrower’s gross income (income before taxes). This may include  spouse’s income and rental income (assuming there is rental income and other income, if documented). For example, if the borrower has combined gross household income of $7,000 per month, you take 31% of that amount and arrive at a figure of $2,170. This is the target monthly mortgage payment. This $2,170 subsumes the PITI. This includes principal, interest, taxes, and insurance (oh, what a pity). If the income yields a figure that is currently greater than your current PITI,  the HAMP loan modification will likely be rejected. One may be eligible for a different loan mod but this is not the time to explore that option. The next step is to use a mortgage calculator. I usually go to www.bankrate.com . If you work your way to the mortgage calculator portion of the web site, you can by trial and error see if the borrower can qualify for a proposed mortgage loan modification. The next level of the waterfall is to see if a 30 year mortgage as low as 2% will provide a figure when added to the escrow sums of taxes and insurance of $2,170 or lower. For argument’s sake, let’s say that the payoff on this hypothetical mortgage is $400,000. A 2% mortgage over 30 years will cost $1,478.48. If the escrow monies totals $691.52 or less, the borrower may qualify for the loan modification. If there is still money left over, the interest will be higher. If there isn’t enough money to pay for the escrows, then you go to 2% for 40 years to see if the borrower qualifies. If the borrower does not qualify under the PITI analysis for a 2% loan at either 30 years or 40 years, you go to the next waterfall analysis and try to figure out how much of the principal needs to be lopped off the top (my words) to make this formula work. That amount of reduced mortgage would be deemed a non-interest bearing balloon payable at the conclusion of the mortgage loan. The final waterfall requires a Net Present Value (NPV) analysis. Thus, the discounted value in a mortgage foreclosure sale (how much the lender actually would get in a distressed sale) for this property would need to be less than the amount of monies the proposed mortgage modification would bring in over the life of the loan. “Are you kidding? All this needs to be figured out. You need to be a mortgage broker to figure this out.” I didn’t say it was easy but it can be done.  I shall try to give more examples in future blogs. For the record our most recent loan modification for one of our clients looked like this. This was a very happy client indeed!

  New principal balance of $412,290.02

Years 1-5 interest rate of 2.25%

Year 6 interest rate of 3.25%

Year 7 interest rate of 4.25%

Year 8 through maturity of 4.75%

   (Please note that the mortgage payment does increase over time but it does get locked in at the Fannie Mae rate that was in effect at the time of the loan modification request).  

            A very interesting article by Richard Wilner appeared in last weeks Sunday’s New York Post (February 14, 2010- see the attached link immediately below). www.nypost.com/p/news/business/left_at_the_alter_7dq194jGLw9iWuciR7Qg8O

This was the anti-Valentine’s Day financial message for those in debt and for those who are in a Chapter 13 bankruptcy in the Southern District of New York. Permanent loan modifications are just not happening. According to the article there have been less than ten permanent loan modifications offered by banks out of the total of 452 homeowners who were accepted into the program that covers Chapter 13s in the following counties: New York, Bronx, Westchester, Rockland, Dutchess, Putnam, Sullivan, and Orange. My office can modestly or not so modestly be proud of the fact that we have three (3) of those permanent loan modifications and right after this article went to print we were informed that two other clients were offered permanent loan modifications. What are we doing that others may not be? That is a good question. My next blog will break down the HAMP loan modification program of the Treasury Department of the Obama Administration and the specific waterfalls or varying levels of analysis to qualify for a loan modification. Stay tuned.   

             Did you know that if you have a primary residence in New York where the fair market value of the property has sunk below the amount of your first mortgage your house is deemed under water in real estate vernacular. For bankruptcy purposes, this means that if you are in a Chapter 13 and you find yourself in this type of situation, you may be able to void the second or third mortgages. The result of knocking out these mortgage(s) is to convert the lender’s secured claim to one that is a general unsecured claim. That claim would then be treated as if it were treated like a credit card debt for purposes of any distribution of monies from the Trustee. There are a great deal of ins and outs and nuances of doing this in bankruptcy and it is important to find an attorney who is experienced with this sort of motion in a bankruptcy court. This shall not be construed as legal advice but information to point one in the right direction of seeking competent legal counsel. Clearly, I am refer to my experience in New York and this point and any other point made refers to New York law though it may have applicability in other states as well. Our office has been successful with knocking out junior mortgages in sums in some cases of greater than $100,000 and we are not the only ones doing it. In my last blog I spoke about NACBA’S efforts to lobby Congress to pass a law that would enable Chapter 13 bankruptcy judges to modify 1^st mortgages for owners of their primary residences. This is not permissible now. However, there may be some relief if you own a two-family hose where you reside in one and rent out the other. Similarly, it may also may be possible to reduce the principal balance of an investment property where there is a 1^st mortgage to the fair market value of the property where the property is underwater. I shall pick this up in my future blogs as I discuss the strip and maintain option for the mixed use house (owner-occupied in one unit and an investment rental in the other unit) and the traditional investment properties.                             

             On January 27, 2010 as part of a group of attorneys affiliated with the National Association of Consumer Bankruptcy Attorneys, I lobbied the office two Congressmen Eliot Engel and Peter King, both from New York) with respect to the passage of a bill that will be proposed during this congressional session that aims to raise the floor for a bankruptcy homestead exemption to $150,000. This would apply to the over 55 years of age crowd. As a result of the recession, there is class of individuals in the mid-fifties who have house equity but no other substantial assets to speak of. This proposed bill would recognize the difficulty of those individuals who get laid off in their fifties and have the hardest time finding replacement work. They will need a greater house exemption if indeed they are forced to file bankruptcy. I spoke with the legislative directors for both Congressman and they both seemed to be open to the idea. This is part of a continuing effort of NACBA to educate Congress and the general public as to the economic difficulties so many people are facing and the need to enhance the bankruptcy law provisions where necessary. Clearly this is one area that seems to fit the bill. It is also hopeful that in the near future The President and Congress will revisit the issue of providing the appropriate authority to bankruptcy judges for judicial modification of primary resident mortgage loans. This would enable a bankruptcy judge to fix an appropriate interest rate and strip down a mortgage to the fair market value of the property, a situation that the current law provides for an investment property. So many properties are underwater but the legislators don’t appear ready. What additional suffering for homeowners will be necessary because Congress doesn’t see the light? We all need to stay tuned.

        On Monday, January 25, 2010 as part of a delegation of attorneys from the National Association of Consumer Bankruptcy Attorneys (25 strong), I was admitted to practice in the Supreme Court, the highest court in the land. It was quite moving and remarkable in a number of ways. Our organization was joined by a group of New York State Worker’ Compensation Board Attorneys as well as a substantial group of JAG Attorney Officers from the military. Seven Supreme Court Justices were present. Chief Justice Roberts read a summary of a decision wherein he wrote the opinion for the majority. It was a New York City case against an online cigarette retailer for purposes of collecting taxes. New York City did not win. What topped off the experience was the presence of Justice Ruth Bader Ginsburg at the post-ceremony gathering in the Supreme Court. She was so humble, transparent, and nonchalant. She asked if anyone had any questions. She addressed the issue of cameras in the courtroom and felt that attorneys would play for the camera and this would change the character of the debate. She was also concerned about attorneys and the media playing fore the sound bite, resulting in a distortion of the issues. It was unanimous amongst the attorneys and guests that this was a most powerful experience regardless of one’s political views of the Court. The Supreme Court has been a party to some of the greatest events in the history of the United States.  This was a day to remember.

There was a very interesting article by Peter S. Goodman in yesterday’s Business Day section of the New York Times. He reports that the United States Department of Treasury is about to announce new efforts and guidelines with respect to expanding the number of homeowners eligible for permanent modifications. Negotiations are still underway with the representatives of Treasury and the mortgage servicing industry. The net results, hopefully to be announced this upcoming week, would ease the income documentation production burden that currently exists. As of December 2009 only 31,000 homeowners have received permanent loan modifications. This is a paltry number. For anyone who is involved in the loan modification process as an applicant or assisting an applicant, the level of bureaucratic bungling of paperwork has raised the bar or lowered the bar (depending how you want to look at it) for incompetence. Documents lost or misplaced for each and every client my office has been involved with gives new definition to unprofessionalism. Apparently, Treasury is going to cut through some of that by eliminating the use of tax documents in favor of pay stubs for verification of income. We shall see. Seeing is believing. I’m from Missouri as they say. Show me! I forgot for a moment. I’m from New York. (go NY Jets). I will be in Washington D.C. this weekend lobbying for a proposed judicial mortgage modification bill after being admitted to the Bar of the Supreme Court; both of these activities and efforts have been organized by NACBA. I shall have a great deal to report next week.

Today is a great day to start a blog. It is my 21^st anniversary practicing consumer bankruptcy law in New York, for the most part in the Bronx and Westchester.  I was admitted to the bar on January 18, 1989. It seems like the other day. It also seems like a good time to share my thoughts, hopes, experiences, and general strategies with both the professional legal community and the lay public. The aim is to share information and create a dialogue. In other words, if you are in the field of practicing bankruptcy law whether as an attorney or as a paralegal or whether you are in the field of seeking information about filing a consumer bankruptcy, this may be a relevant stop on your journey. There is no intent to provide legal advice nor is there any intent to enter into an attorney-client relationship as a result of writing or responding to this blog. One would really need to consult a competent attorney who would field any questions that relate to the specific circumstances that you are encountering. With that being said, let’s get it going. What interests me most today is the issue of loan modifications. This is the program that almost all mortgage service providers have agreed to offer to borrowers. It is known as the Home Affordable Modification Program (HAMP). This is not to be confused with the pending legislation seeking judicial loan modification where a bankruptcy judge would ultimately determine the terms and conditions of a requested modified mortgage. I will have a lot more to say about this especially after lobbying Congress on January 27, 2010 as part of the National Association of Consumer  Bankruptcy Attorney (NACBA) team and its efforts to lobby for a rational change in the loan modification program. (NACBA is a group of nearly 4,000 strong, made of attorneys, ancillary legal professionals, and other supporters of the rights of debtors).  Rarely do I encounter a person who is in trouble with his or her mortgage who is not seeking a loan modification, involved in a trial period, involved in a forbearance arrangement and for the few, granted a permanent loan modification that will actually work. During the past six months, my office has requested loan modifications under the auspices of the newly created program in the Southern District of New York that provides a forum for such modifications. Whether you are just filing for bankruptcy or have a confirmed Chapter 13 plan, the Court affords a debtor the opportunity to request a loan modification under the umbrella of the Court. If a request has been made to the lender and the lender fails to object to the request, the mortgage is on a loan modification track. What that means at least for a mortgage modification request at the inception of the bankruptcy where the lender does not interpose an objection is a freeze on the traditional rules for curing mortgage arrears after filing. In a traditional Chapter 13 mortgage arrears case, the debtor must resume monthly mortgage payments on the due date on the month subsequent to the filing. Thus, if you file your bankruptcy on January 18^th you need to resume your regular monthly mortgage payment on February 1^st. The mortgage arrears and other pre-petition debts will be handled by the payments to the Trustee. In a loan modification scenario, you are not required to resume your regular monthly mortgage payments until a final determination of your loan modification has been made. For some people this may be a great idea, enabling breathing room for a couple of months; this allows one to get the household finances in order. However, for several reasons, I do not think that generally it is the way to go. If you are serious about a loan modification, get out your trusted mortgage interest book or go to bankrate.com, go to mortgage calculation, and plug in the proposed numbers. We have generally started with a 2% mortgage over a new 30 year term by taking a true payoff and paying that over that time period. That payment is the payment we propose in the Chapter 13 plan and schedules. All other things being equal and they are generally not, if the debtor can make that payment it is a good faith effort to show the lender that this payment is feasible from the inception; it provides the debtor with the financial discipline also from the outset to understand what it takes to make the Chapter 13 work. If the debtor cannot make the projected payment now it is unlikely he will be able to make that payment in the future.

Our office has been successful in the last three Chapter 13 loan modification attempts. They were all new Chapter 13 cases. Ocwen and GMAC were the lenders. Thus, these are some encouraging signs; unfortunately, it has worked for too few.  Details of these successful modifications will follow.