Legg Law Firm, LLC. Consumer Blog

Where we are and how do we get out of it

2008-10-12T11:43:01Z

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.

Who could have anticipated that telling regulators not to regulate could lead to disaster? Anyone and Everyone

2008-09-24T21:36:41Z

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.

Corporate Welfare Alive and well - The Government is planning to throw multibillion sandbags to stop the credit crisis flood

2008-09-19T07:56:18Z

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.

How "high finance" from Wall St. lead to the run up in real estate prices

2008-09-19T07:17:20Z

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.

The Credit Crisis Continues

2008-09-16T22:48:14Z

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?

New Maryland Laws affecting foreclosures, foreclosure frauds, mortgage fraud and prohibiting terms

2008-04-04T08:24:33Z

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

Saving Families' Homes who have been victims of Foreclosure Scams

2008-02-08T00:56:24Z

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.

Status of Metro Money Store case February 6, 2008

2008-02-06T23:05:14Z

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.

New Forelcosure Laws on the way for Marylanders

2008-02-08T00:31:29Z

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.

More on Metro Money from Editorial Page at the Washington Post

2007-10-01T19:00:12Z

Read this editorial at the Washington Post:

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

Mortgage Crisis

2007-09-02T19:02:41Z

THE MORTGAGE CRISIS

The current mortgage meltdown that everyone is reading about in the news media is a classic situation where form has dictated substance. In the 1990s a new mechanism in the field of financing became popular. The mechanism is “securitization”. The idea behind securitization is that you can generate loans and fund them by selling finance contracts into a trust. The trust raises funds from the public, including institutional investor such as pension funds by offering asset backed securities (“ABS”) or mortgage backed securities (“MBS”). The securitization theory provides that the risk associated with default is widely dispersed over a large pool of loans and therefore, the failure of some loans can be safely and easily absorbed by the performing assets of the trust. In theory it works great, however, the impact of the concept on the players involved in the process was not adequately considered. [ The use of securitization is not limited to home mortgages. It is used in every finance sector from car loans to credit cards. Ever wonder how a small Maryland bank (“MBNA”) became a powerhouse in the credit card world. MBNA jumped on the securitization bandwagon early to allow it to extend credit well in excess of its capital as a small bank.]

Traditionally, a mortgage loan made by an institution must be carefully underwritten because if that loan goes bad, it will affect that institution negatively. But what if that same institution will immediately sell the loan to a trust and therefore, if the loan fails it will not be the institution’s problem but the trust’s problem. The institution makes money by selling the contract and its success is not dependent on the long term viability of the loan. The focus is no longer long term but short term and simple - what fees can be obtained at the time of the origination.

Add a public who is generally financially illiterate. First, the consumer, since he lacks the financial spohistication to determine his eligibility, employs the rule of thumb on the basic premise that since the institution will hold the loan, the institution would not make the loan unless they thought the consumer could afford it. The basic premise does not hold true in a securitization environment. Second, the consumer does not question high fees because they are rolled into the loans. Based on these two factors, you have a path to riches for those originating the loans. Now add in an insatiable appetite for the loans as “products” for Wall St. firms to package and sell to trusts in return for commissions and fees. Again, like the institution, the Wall St. firms’ profits do not depend on the long term performance of the finance contract. Everyone is making money at the origination stage of these loans. The key to success for institutions and Wall St. firms is originating loans and before long the market adopts an anything goes standard. Take Lehman Bros’ decision to participate with a now defunct entity known as Fist Alliance as described by Mike Hudson in article appearing in the Wall St. Journal on June 27, 2007:

Twelve years ago, Lehman Brothers Holdings Inc. sent a vice president to California to check out First Alliance Mortgage Co. Lehman was thinking about tapping into First Alliance's lucrative business of making "subprime" home loans to consumers with sketchy credit.

The vice president, Eric Hibbert, wrote a memo describing First Alliance as a financial "sweat shop" specializing in "high pressure sales for people who are in a weak state." At First Alliance, he said, employees leave their "ethics at the door."

The big Wall Street investment bank decided First Alliance wasn't breaking any laws. Lehman went on to lend….

It is difficult, if not impossible, to motivate the originators to be concerned about long term performance when they will make money now and have no liability if the loan fails.

Of course, to keep the process moving, another necessary element is creating investor interest in the Trust’s Mortgage Backed Securities. Immediately after the dot.com bust in the stock market, investors were looking for the next great investment. They thought they found it in a booming real estate market. How do you create a booming real estate market? Create more potential buyers and give them ways to finance sums greater than they can afford. Since free flowing loans are the fuel for the boom market, underwriting of the loans becomes perfunctory and there is a need for new loan products that stretch buying capacity to allow the prices of real estate to rise rapidly.

The 2 year arm is perhaps a perfect example of the new products. It sets an artificial low rate that gets the person in the house. As an added bonus, since the buyer cannot afford the loan once it adjusts in 2 years, it builds in an automatic repeat client who will need to refinance before the end of the 2 year below market rate.[ A 2 year arm can only lead to a need to refinance. Most loans adjust at least 2 points after the two year rate ends. A 2 point increase can increase the monthly payment by 20-40%. Given the average wage increase is less than 5% there is no way that person can handle the increased payments. Interestingly, many lenders have now been announcing that they will discontinue sales of the 2 year arm product. See e.g., the report on Wells Fargo’s decision to stop selling 2 year arms at www.iht.com/articles/ap/2007/07/24/business/NA-FIN-US-Wells-Fargo-Subprime.php]

It appears endless until it ends. With all mass delusions, the time comes when people suddenly realize that the emperor has no clothes. [ This is nothing new. See Extraordinary Popular Delusions and the Madness of Crowds written by Charles Mackay in 1841.]

Once the bubble bursts, the tumble begins. Many of the 2 year ARMS are now coming due and homeowners have no way to pay the new payments. It is predicated that a large number of the 2 year ARMS are due to adjust later this year and into early 2008. It must also be kept in mind that the market was not limited to 2 year arms but there are also 3-4-5 year arms. With the credit market drying up and the real estate market falling, the likelihood of extensive foreclosures is not unrealistic. For Marylanders, this will be harrowing under the current Rules applied to foreclosure proceedings. There is movement by the Governor and others in his administration to make changes to the foreclosure process and various task forces and working groups have been organized by the Governor and for lending issues overall by the State Attorney General.[ I am a member of the task force committees as well as the working group assembled by the State Attorney General. ]

Michael K. Lewis

2007-09-01T10:04:05Z

Here is a story about Defendants in a case filed by the Legg Law Firm, LLC. Click here.

DC Attorney Attorney general files lawsuit against Metro Money

2007-09-01T10:04:42Z

The DC Attorney General has filed an action against Metropolitan Money Store and the people who ran it. Click here to read it.

Washington Post Article on Joy Jackson and Kurt Fordham - Metropolitan Money Stores

2007-09-01T10:05:04Z

The Washington Post did a story on the extravagant wedding of the people, Joy Jackson and Kurt Fordham, who operated the Metropolitan Money Store - click here

Foreclosure Case to be heard by Court of Appeals

2007-09-01T09:51:43Z

The Court of Appeals of Maryland has granted the Petition for Certiorari filed by Legg Law Firm, LLC. for its client, Kwaku Atta Poku. Mr. Atta Poku refinanced his home with the same lender, Washington Mutual in 2001. In 2005, Washington Mutual filed a foreclosure action claiming that the mortgage that was refinanced by it was never paid off. The case has been covered in the Baltimore Sun through a series of articles. Two recent articles can be found in the August 25 edition and the August 29 edition. Search for Atta Poku.

Foreclosure Rescue Frauds

2007-09-01T09:52:37Z

Legg Law Firm, LLC. is lead counsel in a class action filed against the Metropolitan Money Store which was operated by several individuals including Joy Jackson, Kurt Fordham and Jennifer McCall. More information about the case is available at www.metromoneystore.com