The growth for our economy since the 80s has resulted from increasing reliance on the service sector of the economy. The increase in the service sector has primarily rested upon consumer spending. The consumer spending has been fueled by credit - mortgages, home equity loans, long term car loans and, of course, credit cards. Everyone has been encouraged to not only spend what they earned but to use credit to mortgage their future earnings to provide an immediate impact on the economy. It is good while it lasts. 

Now that we have mortgaged our future earnings to the breaking point what can we do. The world is in a panic because it now realizes that the debt service on past spending will continue to grow and mean not only will the consumers not be able to spend more than what they earn but even the consumer's earnings will not be available for spending since an increasing portion will be needed for debt service.

The only way to resolve the problem is reigning in the debt and more specifically the cost of that debt to every person who finds themselves owing more on a house than what it is worth, a car payment that is out of line with their income and credit card balances that will take 34-52 years to pay off if minimum monthly payments are made. The only answer is that the debt must be reduced and the cost of repaying the debt must be reduced as well.

In the 2005 debate over so called Bankruptcy Reform, an amendment was offered to limit interest rates to no more than 30% - it failed. (The reasons it failed were astonishing but that is for another time). Consumer bankruptcy comes down to a fight over who gets the consumer's earnings. With a negative savings rate, the consumer will spend everything he or she earns so the question is who will get that consumer's money - the prior creditor who advanced credit or the future creditor who wants to make a sale to the consumer. That is the central issue here.

Will the country make some decisions which will limit the amount claimed by the existing creditors by placing a limit on the amount of interest that can be charged for interest (I have seen default rates on credit cards in excess of 45%), over limit fees and various other charges? My belief is that the unregulated charges that have been permitted have caused the "crash" to occur sooner and be more severe than if there had been reasonable limits. It does not matter in determining the solution given where we are now. What does matter is where do we go from here. 

The only way this crisis will be resolved will be by limiting what the existing creditors can get from consumers. This will include a need to reduce mortgages to house values to stop the tidal wave of foreclosures causing housing prices to continue a downward spiral. Credit cards will need to pare down debt and by all means have to be regulated to limit interest rates and fees. Without these changes, and allowing past creditors to pursue their claims against consumer's earnings with unregulated, unlimited fees and costs, we will see a downturn in the economy that will be devastating.   

Tonight's speech failed to address any of the reasons that the current crisis exists. Interestingly, the off the record comments that Wall St was "drunk" did not make the speech.  This would have required identifying the bartender - the regulators. So much for personal responsibility.

According to press reports, the government is preparing to throw more multi billion dollar sandbags to stop the flood from the mortgage crisis. There is a talk of a Resolution Trust II, if not in name, in spirit. For those who may not remember, the government created the Resolution Trust Corp to bail out the faltering Savings & Loans. The S & Ls found themselves drowning in bad debt as a result of careless lending that was nevertheless financially rewarding for the people running the S & Ls - sound familiar? The Resolution Trust Corp took the bad debts off the hands of the S & Ls to relieve the S & Ls of their self inflicted problems. The end result of the process was that many who worked the system grew rich, the persons responsible for the crisis as a whole survived and retained their fortunes. (I understand the pain and agony in this crisis has already begun - the former CFO of Freddie Mac is apparently facing tough times - he has to sell his $5,000,000 vacation home). The problem was then, as it is now and apparently will be forever, that the government bail out does not extend to individuals. So much for the end of welfare - corporate welfare appears to remain strong and firmly entrenched. "We the people" has transformed to "We the politically connected Corporations". With this safety net for the corporate ranks, do you think that we will see Resolution Trust III - bet on it. The situation was allowed to progress so far that the bailout cannot be avoided. 

Real Estate prices began a wild ride beginning in 2001 until this year. Many thought it wasbecause of supply and demand. I disagree. The prices went wild because mortgagebrokers and Wall St.found a way to increase the buying power of a monthly payment through increasingly exotic (another way of saying crazy)  and nonsensical loans. The below chart explains themonthly cost for a $100,000 loan based on four different types of loans: fixedrate, ARM (adjustable rate mortgage); interest only and, my favorite. the payoption arm. (A pay option arm begins at a low initial interest rate – 1.5% -which is effective for less than 2 months. Thereafter, the interest rate on the loan fluctuates but usually increases to a variable interest rate of 7% or higher. The catch is that your payment stays the same as if the interest on the loan is still 1.5% but it is not. Since you are being charged 7.% interest but you are only paying interest at the rate of 1.5% each month the interest not paid by you is added to the principal balance of the loan. This is commonly known as negative amortization. These loans cap the negative amortization at no more than 15%-25% of the original principal loan amount.)    

 

 

	Fixed	ARM	Interest Only	Pay Option
Interest Rate	6.00	4.5	4.5	1.50- Teaser Rate
Term	30 year	30 year	30 year	30 year
Monthly Payment *	$600	$600	$600	$600
Loan Amount	$100,000	$118,000	$159,000	$480,000

 

The effect of each new loan twist was to increase the principal amount for the same payment amount.

 

The use of the exotic loans also assured that anyone who obtained one would be back shortly to refinance because when the loan adjusted, the homeowner could not afford the new payment. In selling these loans, there was no requirement that the homeowner be shown to be able to afford the increased payment that would inevitably flow from these types of loans. The mortgage brokers could come back every two years and sell the homeowner a new loan, and make fees all over again, to save the homeowner from the true cost of the loan the homeowner was previously sold.

 

* rounded up to $600 for illustration purposes. For instance the actual amount due for a $100,000 loan at 6% is $599.55.  

 

I previously wrote about the anatomy of the mortgage business that was allowed to soar without pesky regulations in the first decade of this new century. The securitization system expanded with ever increasing exotic mortgages but it was also used for car financing and credit card financing. The "ripple effects" of the downfall of the securitization system are more accurately described as a slow flood that is affecting all who participated. The flood is moving slowly but is relentless. The government announced it will loan 85 billion to save AIG because it is unsure how its downfall may affect the world financial system. If the government does not know but its fears are correct, then the question is how long will the government be able to place 85 billion sandbags to hold back the flood?

On April 3, 2008, Governor O'Malley signed three new laws as emergency legislation. As emergency legislation, the bills take effect immediately. The bills were HB 360, 361 and 365. Highlights of the bills are:

FORECLOSURES

For the first time in nearly 200 years the foreclosure laws have been changed to provide greater protections for homeowners.

    Personal service is now required. Under the old law the lender only had to show they mailed notice - not that the     homeowner actually received notice.

    The timing of foreclosures which previously could be done in as little as 15 days has now been expanded to a
    minimum of 45 days after notice to the homeowner and then only if the loan is in default at least 90 days.

FORECLOSURE RESCUE FRAUD

    When first enacted in 2005, this law provided exemptions for various licensed people. The new law now
    removes the exemptions previously available for title insurers, title companies and lenders. These exemptions
    were being used to evade and avoid the law. The changes is very good news for those who are victims of these
    crimes.

MORTGAGE TERMS

    This law prohibits prepayment penalties for certain loans

 

The new year has started off right for consumers. The firm was successful in obtaining a stay of a foreclosure proceeding pending the home of a homeowner who lost the title to their home through a foreclosure scam. The stay was granted by the Circuit Court for Prince George's County, Maryland.

For those who don't know how a foreclosure scam works, it works in one of two ways. Both ways start the same way - a con man contacts the homeowner in distress offering to either help the homeowner pay off the default on their mortgage or arranging a refinancing for the homeowner. The con usually includes a story that they work with someone who likes to help people.

If they are going to catch up the payments, the con man explains that they will catch up the past due amounts and all they expect is that the homeowner will continue to make the payments along with an extra amount each month to pay back the con man for the money paid out to catch up the homeowner's mortgage.  In exchange for helping out the homeowner, the con man asks the homeowner to sign various papers. Buried among the papers is a deed to the homeowner's home.  Once the con man takes the deed they normally try to evict the homeowner shortly after the transaction through a landlord tenant case.

If they are going to arrange a refinancing, the con man arranges for a person, who agrees to act as purchaser,  to obtain a new loan or loans against the homeowner's property. This person is commonly referred to as a "straw purchaser". The straw purchaser most likely has no ability to actually pay any loan back but the straw purchaser does it because he or she is promised a fee of between $5,000 to $10,000. 

The homeowner is told that they need to sign various papers to complete the refinancing. If the homeowner notices a deed in the documents, the con man explains that the transfer is only temporary to allow the homeowner time to clean up their credit. Normally the amount of loans taken out against the home far exceeds what the homeowner owed. The extra money is paid out to the con man and his or her boss. The homeowner is left with a house in the name of a straw buyer and mortgages that exceed the value of the property. The straw purchaser then defaults on the mortgages and the homeowner's home is once again headed for a foreclosure proceeding.


 

An amended complaint has been filed in this case. The complaint adds some new defendants. It also deletes Sussex Title, which has filed for bankruptcy.

Additionally, a motion for class certification has also been filed.

The Maryland Senate held hearing this past Tuesday, February 5, 2008 on a new law that will change the foreclosure process for the better. I was allowed to testify in favor of the bill.

The new foreclosure bill will prevent any lender from attempting to foreclose until a loan is at least 90 days late and then the lender will have to provide a minimum 45 day Notice of Intent to Foreclose to the homeowner before any sale could proceed.  Under current  law,  there is no minimum default time and a sale may be held in as little as 15 days.

Further, the new law will require personal service of a foreclosure proceeding. The current system does not require any service - only that notices are mailed - it does not matter whether the person actually gets the notice.

The improvements are considerable and will provide homeowners both notice and time to address a foreclosure.

It is my belief that the foreclosure rescue scam crisis has been created by the deficiencies of the existing foreclosure system.

I urge everyone to contact their State Senator and tell the to vote in favor of Senate Bills 216, 217 and 218!

At the same time a new bill was introduced in the Maryland House of Delegates - the Richard Atta Poku Right to Appeal Bill. This bill may not help my client Mr. Atta Poku but may help homeowners in the future. Sue Hecht from Frederick is a co-sponsor of the bill.

Read this editorial at the Washington Post:

http://www.washingtonpost.com/wp-dyn/content/article/2007/09/30/AR2007093001215.html