Los Angeles Bankruptcy Blog

I am always curious when people come to me and say they want to file bankruptcy and do a short sale for the upsidedown mortgage. In my analysis, these are different alternatives to solve the same problem. That is, either a shortsale or a bankruptcy would do the trick (get rid of the real estate property). So, why then, do both?

Let’s do a quick review.

There may be very good reasons to file a Chapter 7 bankruptcy or file Chapter 13 bankruptcy. These would include things like avoiding financial liability for those credit cards you got in over your head with. Or maybe to avoid having to repay the balance on a underwater mortgage or car loan for a house or car you gave back to the bank (or plan on giving back).

There also might be good reasons for doing a short sale (or a quick sale). For example, saving your credit from the hit of a bankruptcy for the home loan that’s under water.

But both? If you have already made the decision of filing bankruptcy, who benefits from your doing a short sale? Your credit? No. The bank? A real estate broker, who may or may not be able to arrange the transaction. But make no mistake: there’s a commission at stake, and in this market, real estate people gotta eat.

Also make no mistake: when you file bankruptcy, there is no transferring or selling of your property. Without taking additional measures, you cannot sell your property while in bankruptcy.

But why would you want to? Let the BK take care of the upside down mortgage when deciding between foreclosure or short sale.

It’s certainly a political issue, especially in an election year. But what do we want our politicians to do about it?

A bit of satire from Scott Ott, proving that there is a silver lining around every cloud.

Here is a riveting analysis about why the recent downturn in the housing market will get worse before it gets better.

Foreclosure Prevention Act making its way through Congress has some members divided whether judges should be able to trim the loans of homeowners who are underwater with mortgages:

The Senate is poised this week to approve the housing legislation, dubbed the Foreclosure Prevention Act. Heavy on tax breaks for homeowners as well as for businesses incurring losses, the legislation has earned the ire of unions, consumers groups and other advocates for troubled borrowers, who complain that it does not do enough to help people at risk of losing their homes. Their chief objection is the absence of the bankruptcy measure, which would allow judges to trim the mortgage debts on homeowners’ primary residences.

It’s still very early to try to assess all of this. A lot of horse-trading still to be done.

How will the mortgage and credit crisis play itself out? Today’s paper offers a clue:

Like many, I’ve wondered how our home mortgage finance system will rebuild itself, and how we will be able to contain problems in the financial system so they don’t infect corporate America, lower profits, and lead to massive layoffs. The answer to these questions became much clearer to me on a recent Sunday when I drove to downtown Los Angeles and joined approximately 2,000 others in the Convention Center. They had come to participate in an open auction of 120 foreclosed homes from Los Angeles, Orange and San Diego counties. What I saw there reinforced to me that the only resolution to the crisis is to let the free market repair itself.

A number of lenders had foreclosed on and taken possession of the houses, with the objective of selling them to people at prices they could afford. They hired a company, National Home Auction, to run the show. Buyers all had to bring certified checks for $5,000 in order to participate. If they were successful in the auction, they had to post another $5,000 immediately, and then go upstairs where they were qualified for a mortgage. Once they were, the buyers moved to another room where the closing process was begun with the title and escrow company. Final closing was scheduled for 21 days later. Seventy-five percent of the homes auctioned that day have closed; would-be buyers and lender-sellers are still negotiating the rest.

It’s not pretty, but every house has a value and a selling point. The sad part is that many people who are hoping for a sale or deed in lieu or quick sale vastly over-estimate what this price point is.

In today’s WSJ, they quote the Becker-Posner blog:

Hardly a day goes by during this housing crisis that the media does not report on families in foreclosure proceedings, or in arrears in repayment on mortgages that had close to zero down payment requirements and low “teaser “ interest rates. The many excuses offered by some home owners for their plight, and also eagerly by the authors of these human interest stories, is that the borrowers did not understand that these introductory interest rates might rise a lot after a few years, or that they would have negative equity in their homes if housing prices stopped rising and began to fall. An obvious alternative explanation for their behavior is that they gambled that the good times would continue indefinitely.

Do you agree or disagree? Post your comments.

I was particularly taken by this opinion piece that touched on the mortgage and housing crisis. A sample interesting quote was:

With liberalized credit rules, many people with limited income could access a mortgage and choose, for the first time, if they wanted to own a home. And most of those who chose to do so are hanging on to their mortgages. According to the national delinquency survey released yesterday, the vast majority of subprime, adjustable-rate mortgages are in good condition,their holders neither delinquent nor in default.

There’s no question, however, that delinquency and default rates are far too high. But some of this is due to bad investment decisions by real-estate speculators. These losses are not unlike the risks taken every day in the stock market.

What’s fascinating is when you learn the piece touching on the credit crisis was written by George McGovern.

In today’s housing market, many people are upside down with their mortgages. Not to mention, many homeowners have an adjustable rate mortgage (ARM) that has the payment skyrocketing. As a result, there are people who approach me with this basic of questions:

Should I do a short sale or let the house go in foreclosure?

The question is not easy to answer. In a short sale (also sometimes called a quick sale), you are agreeing to sell your house back to the bank at a reduced price. Now, banks are not crazy about owning homes; they’re in the making-money-from-interest-and-loans business. They don’t want to own homes. Especially if your entire neighborhood is faltering. Will they own your entire block? What about half your block? Is this really what Bank of America, Countrywide, HomEq and Chase Mortgage are in business for?

In addition, with a shortsale, you may have to pay taxes on the amount you were forgiven, the write-off. Talk to your CPA about the tax consequences of this. A 1099c for the cancelation of
debt might be sent to you, and then you have to pay taxes. (not to mention property taxes) Check with your tax advisor.

A foreclosure, on the other hand, is where the bank takes possession of the house again. In some ways, it’s like a car repossession. However, unlike a car repo, there are many statutory requirements about notice and such that the mortgage servicer has to abide by which are beyond the scope of this article.

The thing to get out of a foreclosure is that, unlike a quicksale, you won’t owe additional income taxes if a foreclosure happens on your residence, thanks to the Mortgage Forgiveness Act that President Bush signed into law last year.

Also unlike a short sale, there is no aggressive and extremely hungry real estate agent seeking a commission off your transaction. Are they looking out for you?

Summary

Short sale: Realtor gets commission, possible tax bill to IRS, no leftover debt, roller-coaster ride.
Foreclosure: No realtor, no tax assessment or 1099, credit hit, possible collection for unpaid mortgage

And it’s this last point where a bankruptcy could swoop in, remove any lingering debt owed to a mortgage company that didn’t have thier lien paid, eliminate the other debt you have, and get you a fresh start, tieing this all up in a neat little bow. (call to set up a consultation for more info)

No easy answers, both are imperfect solutions. As of today, no bankruptcy attorney or judge can change your mortgage payment or balance or payout. It is what it is. However, if you want a fresh start, no property tax debt, no Internal Revenue Service bill, and just to move on, a bankruptcy after a foreclosure might be the way to go.

The banks don’t want judges to re-write mortgages, saying it would raise mortgages for everyone.

The AP reports that more and more people are doing the “midnight move” and just walking away from their house as the mortgage payment increases and the equity decreases. And most surprisingly, it’s not just the “subprime” borrowers doing it: people with decent credit are also considering this more and more.

That has already led to surging defaults among risky subprime borrowers who could barely afford their mortgage payments even before they got hit with the double whammy of falling home values and rising adjustable-rate loans.

Seemingly creditworthy homeowners are bailing out now, too. They aren’t following the predictable script of the past, which meant stopping payment on credit card and other debt just to keep up their mortgage obligations.

“If you go into a new home purchase with no skin in the game, with just your credit score but no money down, then you really don’t have much to lose from walking away,” said Alex Stenback, a mortgage banker in Minneapolis who writes the blog “Behind the Mortgage.”

There’s even a website to educate people to the process of bailing on their house: www.YouWalkAway.com. Seems like a trend in the making.

Over ten percent (10%) of all mortgages are underwater, according to a new study by Moody’s. This means one in ten houses is worth less than the loans.

Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.
As a result, millions of U.S. homeowners have the incentive to abandon their properties.

What’s best? A short sale for these underwater mortgages? There’s no easy answer.

Is this really a good idea?

Your mortgage was a bad proposition from Day One. You didn’t read the fine print, and Mr. Sleazeball Lender told you this was a good loan. Nine easy payments of only $800 a month, and then things adjust. What exactly does that mean? Well, you found out, didn’t you? Three months at $2000 a month, and then now it’s at $3600 monthly. When will the mortgage payment go up again, and what will it be then?

Well, of course, you don’t want to move. You can’t refi… it’s too soon, and you have no more equity anyway. And you have some available credit on the credit cards. Just take cash out of the credit card stash and apply that to the mortgages that you can no longer afford. The writing is on the wall, but you don’t want to face reality.

You cannot afford that house.

Only the grace of Countrywide’s HOPE department will let you do a loan modification so that you can afford your dream house turned mansion of nightmares. Sure, they don’t want to own your home and have to sell it some poor shlub for less than it’s worth, but really, do you want to gamble your future on your mortgage servicer being nice to you? Reality is, you’re stuck with a horrible loan, and borrowing from friends, family and even Capital One is just putting off the inevitable.

Robbing Peter to pay Paul is not really fair to Peter. You’re not really going to repay that credit card that’s making the next month’s mortgage while you buy some time. Desperate times calls for desperate measures.

And finally, the credit cards are maxed out. Then what?

You do what you should have done six months ago. It’s time to get ready to move.

But what of the debt?

Just file bankruptcy.

But there may be problems. Can we all agree that if you put a lot of debt on the credit cards and then file bankruptcy that the credit card companies might have a problem with that? Sure they will. They’re not giving out free money. Taking out $3000 and then telling them to pound sand probably will set off some alarms. It’s not Chase or Bank of America’s fault that some shyster lender lied to you about your house’s monthly payment. You borrowed money and they kind of expect it back. Filing bankruptcy will only create new problems, potentially.

In our world, these are called 707(b) and 707(c) motions from the United States Trustee. Words like fraud, bad faith and totality of the circumstances puts your case in the hands of a judge who may or may not see things your way.

We’re very sympathetic to your situation; many people come to our office and we need to help them face difficult truths. But using credit cards to pay mortgages when you know you can afford neither is just not a good idea. And despite the rumors you hear, no bankruptcy attorney, not even this Los Angeles bankruptcy lawyer, can change your mortgage loan. (we can help you catch up on arrearages, however).

It’s a sad situation, and one that breaks my heart. Constant re-finanacing, the downturn in housing prices, being lied to about your loan, losing a job after getting the loans, it all leads to a payment that’s unaffordable. But the good news is: at least I can help you turn the page and start your life over.

Simplify.

In today’s news, another lender closes mortgage business in the United States.

From the Wall Street Journal:

TOKYO — Nomura Holdings Inc., Japan’s largest investment bank by market capitalization, said Monday it would close its New York-based residential mortgage-backed securities business, marking the latest fallout from the meltdown of subprime mortgages in the U.S.

Nomura said it would take a loss of $621 million on write-downs of residential mortgages and an additional charge of about $85 million for restructuring the business. That will swing Nomura to a pretax loss of as much as $510 million in the quarter ended Sept. 30, 2007. In the same quarter a year earlier, Nomura posted a net profit of about $2.1 billion.

As California foreclosures and mortgage defaults continue to climb, we’ll sadly be seeing more of this.

More layoffs to come.