Homeowners = Losers and Lenders = Winners

Many bankruptcy attorneys that we prepare petitions for are normally apprehensive regarding cram downs and strips downs of mortgages.  Although I have written many articles about these topics, one angle I have not covered before is the angle of NOT proposing cram downs or strip downs at all. This is great news for those bankruptcy attorney practicing in states where they encounter problems with the courts when they try to propose cram downs and strip downs to help their debtors.

So if you do not propose a cram down or a strip down what can you do to still save the debtor money on their mortgage?  In order to sufficiently answer that question we need to take a few minutes and understand this issue from the lenders perspective.  In doing so, the apprehension will be eliminated and you will be better able to find the proper procedure to fit your particular debtor.

How the Lenders Are Winners

If you could loan me $150,000 at a 300% interest rate and have full assurance that you would get your money back (either from me or an insurance company) you would say that was a good, no-risk investment, right?  Many wealthy people think the same way.  This is why PMI (private mortgage insurance) was developed (which solely benefits the lender but the homeowner pays the premium.)

According to The Money Alert.Com:
Ref:
http://www.themoneyalert.com/mortgageinsurance.html

“Early forms of mortgage insurance arose in the private sector around the turn of the century and developed until the onset of the Depression. The private mortgage insurance industry then collapsed, and its function was assumed by the federal government, which was the only source of mortgage insurance from the mid-1930s through the late 1950s. Today, mortgages backed by government insurance continue to play a significant role in the home finance market, but mortgage insurance offered by the private mortgage insurance industry is also widely used by homebuyers and those refinancing their existing mortgages. Private mortgage insurance backed nearly 1.2 million single-family home loans extended in 1993, representing about 45 percent of all the insured mortgages granted that year.”

However, there is a another issue to consider.  The country is in a mortgage crisis.  When a national crisis occurs, insurance companies can be forced to pay back more than the value of the asset. For example, Larry Silverstein, a wealthy investor who held the lease on the World Trade Center in New York, sued his insurance company and got double the policy limits when the twin towers were bombed because there were two different planes and two different acts of terrorism.

Video Ref: http://www.youtube.com/watch?v=EZ9BofDUXv0

Now, let us suppose that you grew tired of waiting on me to pay you back the $150,000 I borrowed. Suppose you did not want to be paid steady payments over a period of 30 years.  Instead, you wanted all your cash right now.  What would you do?

One option would be to collect the $150,000 (oops, $450,000 plus fees, interest, etc.) owed to you in one lump sum through payment by an insurance company.  But in order to collect your money you would need to foreclose on my property; which is easy to do if I fall behind in payments.  In fact, we have all heard the rules and regulations of lenders not being willing to negotiate with homeowners unless they show a hardship and are facing foreclosure from non-payment.  Do you think this regulation was made for the homeowners benefit? You tell me.

But as you know, private mortgage insurance (PMI) kicks in so that the lender loses absolutely nothing.  In fact, some lenders benefit more from foreclosures and repossessions than they do if they permit a debt workout.  Remember that lenders have no care for the homeowner.  They may tell you they are loving and kind in their brochures and the employees working in the lobby may have a heart for the homeowner, but these are not the people making the final decisions.  The final decisions are made by wealthy investors who have achieved power simply because of the amount of money they control in this world.

How Can This Information Be Used to Help The Debtor?

I am working on a bankruptcy case right now that is a typical example of how a cram down and strip down will not help the homeowners, but the homeowners may still be able to save $200,000 or more.

The debtors own a home that was appraised for $150,000; they owe $200,000 and are in default five (5) months.  The lender started foreclosure procedures and filed a claim with their private mortgage insurance company for the loss.  The lender also added on an inflated amount in late fees (and many hidden fees) so that the lender could force the homeowners into even more debt.

Before deciding to file bankruptcy the lender contacted the debtors and scheduled a meeting to negotiate the past due amount.  Keep in mind that the debtors are five months behind ($1,600 x 5 = $8,000); however, the lender was willing to negotiate a reinstatement if they agreed to pay $11,000 in cash.  Wow.  I wish I could make an extra $3,000 in five months while still getting paid all the late fees, finder fees, thinking fees (or any other fee the mortgage company can find to charge.)  Of course, the debtors will need to borrow in order to come up with this kind of money and most mortgage companies know that; which is why many homeowners are filing bankruptcy today.

As you can see, the debt negotiation meeting was not set up to benefit the homeowner (although the brochure looks nice.)  Like I said before, lenders do not care about homeowners.  This is just another good investment strategy for the lender because not only do they get an extra $3,000 from the negotiation (if the debtors take the bait) they also receive an average of 300% of their initial investment.  (Loan $150,000, receive $455,000 over the life of a 30 year home loan.)  And they get this money either from the homeowner or the insurance company.  Besides, investors do not care who signs the check as long as they get their money.

The debtors naturally were very upset after the meeting with their lender. They did not have $11,000 to reinstate their loan and they finally faced the reality that they may actually lose their house and have to move.  This is devastating for people who have bought into the whole “American Dream” ideology.  But logically, it is not rational thinking to destroy your future simply because of a physical structure like a house.  You can live anywhere and still survive just fine.  Therefore, the attorney advised the debtors that it was in their best interest to walk away from the mortgage, file a Chapter 7 (which is what the Means Test qualified them for) and become debt free.  In this manner, all their debt was eliminated and they truly used the bankruptcy laws to obtain a fresh start – which was the intention of the law in the first place.

Summary

This story ends well.  The debtors had been paying $1,500 a month as a mortgage payment but they found a smaller house for rent in the same area for only $650.  This more than sliced their mortgage payment in half plus the bankruptcy saved them paying the $11,000 to reinstate their mortgage. The debtors have also found that by renting, they actually have more money in their pocket because their landlord absorbs all the cost of repairs and maintenance.  Plus, they are totally debt free and only pay rent and utilities.  In fact, they actually reduced their average expenses from $2,500 a month to only $1,000 and they have much more disposable income than they have had in years.

Now this solution is certainly not going to fit every single scenario; but it is one idea to help bankruptcy attorneys start looking at different solutions to help their debtors if a cram down and strip down is not feasible or permitted in your bankruptcy court.  Using the Means Test as your guide, if the debtors qualify for a Chapter 7, forcing them to file a Chapter 13 to keep their home may be worthless and cost your debtor many years of hardship and heartache.  Whereby, filing the Chapter 7 and becoming debt free may be the best solution for many debtors who are in the same situation as our previous couple.

Assistance for Bankruptcy Attorneys

If you are a bankruptcy attorney and would like to discuss a case strategy regarding your clients, call Victoria Ring at 719-659-0743 or email your contact information to victoriaring1958@gmail.com

Our Websites

http://www.victoria-ring.com
http://www.coloradobankruptcytraining.com
http://www.mybankruptcyschool.com

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