I was watching election results, and saw a segment on Pennsylvania.  The gist of the segment is the reporter’s belief that Pennsylvania would have gone heavily for John McCain last spring, but the decline in the economy caused the shift to favor Obama today.  With our without Pennsylvania, the economy has certainly had a significant impact on the election.

That made me think of an article I read in USA Today this morning that Bankruptcy filings nationwide are up 40% for October, 2008 over October 2007.  That made me wonder what has happened with Oklahoma bankruptcy filings.  So, I checked.  I love Pacer.

In October, 2007 in the Western District of Oklahoma there were a total of 461 Bankruptcy cases filed.  In October, 2008 there were a total of 573 cases filed.  That is an increase of 24%.  I have done entries comparing national filing rates with ours before, and we are following an upward trend but not at nearly the same rate as nationally.  So, we are staying fairly consistent.  That is also consistent with our oil and gas economy which does tend to be somewhat counter-cyclical.

I also looked at our Chapter 13 filing rate.  As I have mentioned more than once, Chapter 13 filing rates really should not be heavily influenced by the Means Test which is the centerpiece of the Bankruptcy Reform Act of 2005 —  regardless of what you read in the press.  What should be the major influence on Chapter 13 filings is foreclosure rates. If you are in foreclosure, trying to save your house, and the mortgage company isn’t being helpful; a Chapter 13 can be the best thing that ever happened to you.

Although, I have seen some disturbing things in the local foreclosure statistics; I have not seen a big spike in numbers over last year.  So, I would expect our Chapter 13 numbers to have stayed pretty close to last year’s.  No surprise, there.  In October, 2007 we filed 131 Chapter 13 cases  or 28%  of the total filings.  In October, 2008 we filed 157 Chapter 13 cases or 27% of the total filings.  So, no great change there.

Well, I don’t know if anyone else found this interesting; but I did.

Elaine

Hedge funds are warning mortgage companies against modifying mortgages. Well, no kidding. Gee, and to think, the New York Times thought this was NEWS. Hello?

According to the New York Times (link above if you want to read the original), at least two hedge funds are sending letters to banks warning them of the banks’ contractual obligations to the investors (i.e., the hedge funds) who own the bonds and related securities collateralized by pooled mortgages. These letters supposedly warn the banks that the hedge funds might “take action” (I assume that is a polite euphemism for sue) if the banks participate in government backed plans to renegotiate delinquent mortgage loans. The hedge funds are concerned about protecting their investments. They bought bonds backed by mortgages with variable (read high) interest rates. Their cash flow, and ultimately total investment value, will be reduced if the interest rates on those mortgages is reduced — or the principal balance — or the monthly payment.

According to the New York Times this “saber-rattling highlights the conflicting interests of various players in the mortgage arena. . . . ” Well, yes.

Let’s go back to basics:

• Mortgage pools are governed by Master Pooling and Servicing Agreements, these agreements set out each parties rights, liabilities and options;
• Most Pooling and Servicing agreements include some provisions for modifying mortgage loans; one of the problems traditionally with getting mortgages modified (even FHA loans that have regulations requiring certain kinds of modifications) has been actual or perceived restrictions in the Pooling and Servicing agreements;
• The servicer is the player who calls the shots, but the Servicer’s interest is for the Servicer to make money — which isn’t necessarily the same thing as for the investors to make money;
• When the initial bailout provision was being negotiated in Congress, there was a provision to allow modification of mortgages in chapter 13 Bankruptcy included in an early draft, the banks screamed bloody murder; they made it pretty clear that they would just about not have a bailout than have that.

Now, the funny part of the article is at the end:

Officials at Braddock, a hedge fund based in Denver, said they were not against loan modifications per se but that they wanted to make sure renegotiations conformed to the contracts governing mortgages securities, which are backed by thousands of home loans. The most restrictive servicing contracts limit how many and what kinds of modifications mortgage firms can pursue. Other contracts allow the firms to pursue modification more freely if doing so will minimize overall losses. (Punctuation errors in the original.)

Ok, so before a bank — or even better the Treasury as part of its asset buyback plan — can modify a mortgage, an employee will have to identify the pool the mortgage is pooled into, obtain a copy of the Master Servicing and Pooling Agreement (a huge, densely written, pile of legalease in most cases), read it, understand it and stay within its terms. Uh huh, and these people are being paid how much?

Kind of what I thought.

Let’s stop kidding around. If we are going to start modifying mortgages to address the foreclosure rate, we have to have the authority to go outside the scope of the Pooling and Servicing Contracts. The only way that I know of to do that is by modifying Section 1322(b) of the United States Bankruptcy Code.

Elaine

Every time I hear on the news how concerned Congress is with helping homeowners save their homes in foreclosure, I have to change the channel. The only thing worse is when I hear how eager mortgage companies are to modify loans to help homeowners.

Ok, so I am a bleeding-heart, liberal bankruptcy lawyer. I’m supposed to react this way.

Bloomberg.com, however, is supposed to be conservative, fiscally-sensitive, pro-establishment and utterly Republican. So, what happened there this morning? Ann Woolner wrote a nice, little op-ed piece for Bloomberg.com called, Buy a Beach House for Shelter When Going Bankrupt. This Editorial is about the disparate treatment that owner-occupied real estate gets in the Bankruptcy Code over other Real Estate. For my purposes the primary Statute Section is 1322(b)(2).

The basic idea is that in most of the Bankruptcy Code you can effectively strip a secured claim down to the value of the underlying asset. You then only have to pay the asset’s value (with interest, of course) in order to keep the property. Traditionally, this was used to great effect by consumers with cars on which they were seriously underwater. That has pretty well stopped as a result of some changes to the Code in 2005. However, real estate can still be crammed down if you owe more on it than it is worth — but only if it is not the Debtor’s primary residence. If the debt is secured solely by an interest in real estate that is the Debtor’s primary residence, the loan terms cannot be modified in anyway. Residential mortgages are the ultimate sacred cow in the Bankruptcy Court.

To quote Ms. Woolner:

A speculator with slum properties all over the city, who owns a place in Manhattan and a house at the Hamptons, gets better treatment under bankruptcy law than a salaried worker’s family with only one, modest bungalow.

Now, there are a lot of parts of the Bankruptcy Code that don’t seem to make a lot of sense. Some of them are downright contradictory, and some of them are just of questionable policy. What makes this particular provision so gut-wrenchingly awful is that when the original bailout bill was being negotiated (you know, the one where the Treasury was going to buy toxic waste bonds, the one before the equity positions in banks bailout) some of the more sensible members of Congress wanted to change Section 1322 and let homeowners use the Bankruptcy Courts to reduce the principal value of their mortgages down to the value of the property. Basically, the bank and mortgage lobby told Congress they would pretty much rather not have a bailout than have that.

Oh, well. I guess I’m just not sophisticated enough to understand. After all, I never invested in completley unregulated insurance contracts insuring the lower tranches of multi-layer bonds secured by mortgages based on completely falsified loan files. So, what do I know about finance.

Elaine

As the law stands now a claim secured only by a security interest in real property that is the Debtor’s principal residence may not be modified in a Chapter 13 Bankruptcy.  Debtors’ attorneys have argued since the foreclosure crisis began that allowing debtors to modify their mortgages in a Chapter 13 would go a long way to resolve the problem.

A Chapter 13 Bankruptcy format gives the ability to reduce the principal balance down to the value of the property and reduce the payment accordingly.  At the mere mention of this proposal banks scream bloody murder.  So, when faced with a $700 Billion bailout; you would think that this idea would make more sense.  After all, this would write the mortgages down to the value of the collateral (which is a lesson in valuation we supposedly learned in the S & L mess) and turn a non-performing asset into a performing asset and an income stream to boot!

So, it shouldn’t come as any great surprise that this issue has raised its head again on Capital Hill this week.  The banks are still screaming bloody murder.  It really gives me pause (well, frankly, several things about this bailout give me pause, this is just one of them) when banks scream this loudly about a solution that seems to make this much sense.  Oh, wait a minute, free money is always better.

Sorry.  Not when I am paying the bill.

Write your Congressmen.  This bailout needs accountability, it needs limits, it needs oversight, it needs to be limited to certain kinds of collateralized debt (as of this morning the Treasury wanted to be able to include debt secured by credit cards, car loans and student loans as well — sorry, $700 Bn isn’t even a good start at that point).  It also needs a modicum of sense.  Using the existing Chapter 13 structure to create performing assets is a good start.

Elaine