Below is a Press Release put out today by the National Association of Consumer Bankruptcy Attorneys (NACBA). I am State Chairman (So. District Texas) for them. They are saying that the voluntary loan modifications being done by mortgage companies are not enough, and that bankruptcy courts should be allowed to modify or change the terms of mortgages, to make them more affordable, so that fewer people will lose their homes.
NACBA has some very compelling arguments, not the least of which is that this law change would cost the taxpayers (you and me) absolutely nothing; we already have the Bankruptcy Courts and Judges that we need for this to work. Read their information yourself. If you think it's the right thing to do, after the holidays we would appreciate your calls, emails or letters to your U.S. Representative or Senator, supporting this proposed new law.

Near Half of Homeowners in "Loan Modification" Programs Face  Higher Monthly Payments; Failure of Voluntary Industry Efforts Hikes Pressure  on Incoming Obama Administration, New Congress to Clear Way for Court-Supervised  Modifications. WASHINGTON, D.C.//December  19, 2008//Much  hyped "foreclosure prevention programs" relying on voluntary loan modifications  are failing to reach a significant number of troubled homeowners and are often  backfiring when they do so, according to newly updated research released today  by the National Association of Consumer Bankruptcy Attorneys (NACBA).

The across-the-board failure of these much  ballyhooed "fixes" for the foreclosure crisis are expected to result in the new  President and Congress facing considerable new pressure to clear the way for  court-supervised loan modifications that will prove more beneficial for homeowners. The  findings released today by NACBA come on the heels of a dire new projection  from Credit Suisse that "over 8 million foreclosures (are now) expected" over  the next four years in the U.S. That astounding level accounts for 16 percent  of all mortgages -- including 59 percent of all subprime mortgages and more  than 11 percent of all other mortgages, including Alt-A, options ARMS and even those  in the prime category. This new forecast  from Credit Suisse is up sharply from the two to six million foreclosure range cited in previous  estimates from industry sources. The  new data presented today from Professor Alan White, Valparaiso University  School of Law, Valparaiso, IN, is updated through November 2008 and shows that:

  • Less than 10 percent of the time do the voluntary programs result  in a reduced principal loan balance with  more than half of modifications capitalizing unpaid interest and fees into  larger and more drawn out debt on the back end of the mortgage; and
  • Only  about a third (35 percent) of voluntary mortgage modifications reduce monthly  payment burdens for homeowners, with nearly half (45 percent) actually saddling  distressed homeowners with increased payments under the  modifications.

Just how badly are the voluntary modification programs flopping? To answer that  question NACBA reviewed the publicly available data about the reach to date of  the much-hyped programs. In one  prominent case - the Hope for Homeowners Act FHA refinancing program passed by  Congress with much fanfare earlier this year on the strength of forecasts that  400,000 homeowners would be aided - there have been only 312 applications to  date -- and no mortgage modifications whatsoever have taken place.

This is consistent with the most recent  estimates from the National Association of Attorneys General that "nearly 8 out of 10 seriously delinquent homeowners  are not on track for any loss mitigation outcome ... up from 7 in 10 in  previous reports. Henry  Sommer, president, National Association of Consumer Bankruptcy Attorneys, Philadelphia PA.,  said: "Court-supervised loan modification is urgently needed to deal with  this problem. We call on the incoming Obama administration and the new Congress to adopt this solution without delay.  The American home mortgage foreclosure  crisis has gone from the danger zone to the full-blown crisis stage. The number of foreclosures is growing  rapidly and is reaching well beyond the subprime world to the American middle  class. Despite a proliferation of voluntary  programs, we are not seeing evidence of a meaningful number of sustainable loan  modifications." Professor  Alan White, Valparaiso University School of Law, Valparaiso, IN, said: "American  homeowners are carrying 10.5 trillion dollars in mortgage debt, a number that  has risen by 250 percent in the past decade.  While banks have written down more than half a trillion in mortgages and  mortgage-related securities, homeowners have gotten little or no relief. A broad range of economists from Nouriel Roubini  to Ben Bernanke to Martin Feldstein have recognized the need to deleverage the  American homeowner. The excess mortgage  debt is depressing home prices and consumer spending, and acting as a drag on  the broader economy. Empirical evidence  from mortgage servicer reports to investors shows that for the most part, the  necessary deleveraging of homeowners is not happening."

Alys  Cohen, staff attorney, National Consumer Law Center (NCLC), Washington, DC,  said: "Sadly, the magnitude of the foreclosure crisis dwarfs the response to  date from the financial services industry, regulators and lawmakers. The  lack of aggressive and meaningful solutions from federal policymakers is  baffling, particularly given that most economists, including the Chairman of  the Federal Reserve Board and the Chair of the FDIC, have recognized that the  financial crisis can be resolved by only by dealing with its root cause - the  escalating millions of mortgage foreclosures ... The foreclosure crisis will not  be resolved through voluntary efforts on the part of the financial services  industry alone.

Despite widespread efforts to encourage voluntary loan  modifications, it is clear that the financial services industry has failed to  implement a loan modification strategy on a scale that matches the urgent  crisis we are facing. Bankruptcy courts must be empowered to implement  economically rational loan modifications where the parties are unwilling or  unable to do so on their own. Loan  modifications through the bankruptcy courts can help accomplish this on a  sufficient scale and timeframe to have a meaningful impact. Congress  should lift the ban on judicial modification of primary residence mortgages, as  part of the solution to stemming the tide of avoidable foreclosures and stabilizing  the housing market and the broader economy. The need is urgent. The time for action is now."

When  NACBA, NCLC, Consumer Federation of America (CFA) and the Center for Responsible  Lending (CRL) called on Congress in April 2007 to move aggressively to stem the  growing flood of home foreclosures, it was estimated that some 2 million  homeowners were at risk of foreclosure.  And, at the time, the financial services industry accused the  organizations of being overly pessimistic about the likely toll of foreclosures. However, it turns out we were low-balling quite  significantly the number of foreclosures.

As  of September 2008, a full 1.2 million homeowners with subprime loans already  had lost their homes to foreclosure.  Another 1.7 million families with subprime loans are seriously  delinquent and at risk of losing their homes in the very near future. Credit  Suisse ("Foreclosure Update: Over 8 million foreclosures expected, December  2008) now estimates that 8.1 million mortgages will be in foreclosure over the  next four years, representing 16 percent of all mortgages. Disturbingly, Credit Suisse finds that the  problem has spread from subprime loans to Alt-A, option ARMs, and even prime  loans.

FAILURE OF "FORECLOSURE PREVENTION PROGRAMS" Bowing  to the demands of the financial services industry that created the foreclosure  crisis in the first place, every program put in place to prevent foreclosures  has relied on the voluntary cooperation of mortgage servicers who handle the  mortgages that, in most cases, are owned by securitized trusts that have issued  bonds to investors. It is painfully obvious that these voluntary programs have  failed to stem the tide of foreclosures. The few successful attempts at  mortgage modification, such as the FDIC efforts with IndyMac, have largely  dealt with those rare mortgages that are still owned by a single lender, rather  than securitized loans. Voluntary  programs are failing for a variety of reasons that cannot be changed without  action by the Obama Administration and new Congress:
  • Multiple owners make voluntary modification impossible. Many borrowers and  even their servicers simply cannot locate the holders of the mortgage to  negotiate with, or there are multiple owners all of whom would have to agree to  modification; the loans have been sliced and diced so many times that all of  the owners cannot be found and brought into the process.
  • Fear of investor lawsuits blocks voluntary modifications. The servicer has  obligations to the investors who have purchased the mortgage-backed securities  through pooling and servicing contracts, and the interests of these investors  conflict. Servicers are hesitant to modify the loans because they are concerned  that it will impact different tranches of the security differently, and thereby  raise the risk of investor lawsuits when one or more tranche loses potential  income. At least one servicer has already been sued. Under the current system, the legally safest  course for the servicer clearly is foreclosure.
  • Piggyback seconds block voluntary modifications. Perhaps the most  intractable problem is the fact that a third to a half of all 2006 subprime  borrowers took out piggyback second mortgages on their homes at the same  time they took out their first mortgages.  In these cases, the holders of the first mortgages have no incentive to provide modifications that would free up borrower resources to make payments on the  second mortgages. At the same time, the holders of the second mortgages have no  incentive to support effective modifications by waiving their rights, which  would likely cause them to face a 100 percent loss. The holders of the second  mortgages are better off waiting to see if a borrower can make a few payments  before foreclosure.
  • Overwhelmed servicers are not set up to negotiate modifications. Hundreds of  thousands of borrowers are asking for relief from organizations that  traditionally have had a "collections? mentality of trying to foreclose as  quickly as possible. They know how to foreclose, and the foreclosure process  has been increasingly automated to maximize the fees the servicers receive.  Many receive no extra compensation for working on modifications. These  servicers are not disposed to postponing foreclosure or equipped to handle  case-by-case negotiations. Many also have monetary incentives to foreclose  rather than modify.
In  practice, these roadblocks - all of which were warned of months ago by NACBA  and other groups - have resulted in gridlock in the voluntary modification  programs. Consider these examples:
  • Hope for Homeowners  Act -- This law, passed with much fanfare last spring, provides an FHA refinancing if  the servicer agrees to accept slightly less than the value of the home in  satisfaction of the debt. The thought was that servicers would agree to accept  less than 100% payment if that payment was guaranteed by the government. It was expected that the program would help  400,000 homeowners but since it opened in October, fewer than 312 people have  applied for the program and no loans have been modified. The result" As Credit Suisse notes in its December 2008  report: "While loan modifications and  similar interventions (such as the Hope for Homeowners FHA refinancing program)  could help to reduce the march of foreclosures, the proliferation of generally  timid loan mod programs with confusing loan features raises significant doubt  as to whether the current loan mod momentum is sufficient to reduce  foreclosures materially ... modified loans remain a small percentage of  delinquent loans and loans in foreclosure, even though servicers have ramped up  their efforts in recent months."
  • Hope Now -- This voluntary effort by the industry,  promoted by the Administration, has produced more public relations than real  results. Homeowners have great  difficulties getting answers because the services do not have adequate staff to  deal with requests. When some accommodation is reached, servicers virtually  never reduce loan principal and often enter into repayment agreements that do  not even reduce loan payments. Studies have shown that most of the workouts  negotiated through Hope Now provide at best temporary short-term relief from  foreclosure, and in a large percentage of cases, the homeowner cannot keep up  with payments because the agreement does not adequately modify the loan. As of September  2008, Hope Now worked out loan modifications resulting in lower monthly  payments for 266,087 homeowners; loan modifications with the same or HIGHER monthly payments for 226,667  families; and 780,000 short term repayment plans.
  • FDIC/IndyMac - This effort covers  65,000 borrowers who are more than two months delinquent on their mortgage, but  doesn't reduce the outstanding debt in any meaningful way and therefore has not  attracted much interest. So far, 7,200 homeowners have modified their loans under this program.  And, after a two-month moratorium on foreclosures pending the  modification program, IndyMac foreclosures in November skyrocketed 242 percent  from October, according to Mark Hanson of the Field Check Group.

Most  recently, FDIC Chairwoman Bair has proposed a program that would, like Hope for  Homeowners, provide government guarantees as a carrot to entice servicers to  make modifications of interest rates and defer principal payments under a  formula based on the debtor's ability to pay. If the payments are modified by at least 10  percent, (but only for five years) the government would guarantee 50 percent of  the loan losses.

The Treasury Department  noted that this program could actually give servicers an incentive to make  minimal modifications and then foreclose to collect the guarantees. While  NACBA applauds FDIC Chair Bair's commitment to homeowners, it fears that, other  than in cases where a planned foreclosure would be more lucrative for the  servicer, this program also would have few takers. It is likely that, for all the same reasons  plaguing existing programs, servicers would be unwilling to make meaningful  modifications of most loans voluntarily.  Moreover, the program does nothing to deal with the problem of piggyback  second mortgages, often the riskiest loans given by the most irresponsible  lenders.

Holders of second mortgages can  block the modification of the first mortgage, even though the second mortgage  typically would be wiped out in a foreclosure sale. Absent reductions in principal, the program  will neither sufficiently reduce payments nor prevent later foreclosures when  homeowners need to move or cannot refinance to resolve a financial problem. As  even Federal Reserve Board Chairman Bernanke has noted, "With low or negative  equity ... a stressed borrower has less ability (because there is no home equity  to tap) and less financial incentive to try to remain in the home.? At best, the Bair proposal would help only a  small number of homeowners and, in most cases, only postpone the foreclosure  problem - at considerable expense to taxpayers. ABOUT NACBA The  National Association of Consumer Bankruptcy Attorneys ( is  the only national organization dedicated to serving the needs of consumer  bankruptcy attorneys and protecting the rights of consumer debtors in  bankruptcy. Formed in 1992, NACBA now has more than 3200 members located  in all 50 states and Puerto Rico.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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