Loan Modification Quality Matters

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?

BAPCPA Gag Rule Found Constitutional by Fifth Circuit

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 (8^th Cir. 2008), which held that the provision was facially unconstitutional.

Seventh Circuit Decides Hotly Debated Means Test Issue

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 (7^th 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.

Poor Servicing Paves the Path for Predators

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?