On July 29, 2010, the Federal Trade Commission (FTC) announced new regulations  on debt settlement companies.  The rules will not take affect until the fall.  They will prohibit companies from charging a fee before the settle or reduce the customer's debt.  They also require that the companies set up dedicated or trust accounts for debt relief payments and disclose to their customers how long the debt-reduction efforts will take, what they will cost, and the potentially negative consequences that could occur.

Yep.  We have the best congress that money can buy.  The following is from the American Bankruptcy Institute.

I found the following article from Drew Broaddus interesting.

Did Bankruptcy Reform Trigger the Housing Crisis?

Posted by Drew Broaddus on 4/16/10 • Categorized as Bankruptcy News, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, History of Bankruptcy

As discussed in John Colwell’s recent contribution here, housing – which seems to be at the center of the current economic downturn – is a long way from a rebound, and foreclosures may actually increase in the coming months.  After reading Mr. Colwell’s article, I decided to learn a little more about the subject and came across this articlewhich was published in BusinessWeek on October 29, 2007, near the beginning of the housing crisis. In this article, the author contends that the 2005 amendments to the Bankruptcy Code (also known as the Bankruptcy Abuse Prevention and Consumer Protection Act  or BAPCPA) caused more people to walk away from their mortgages.  The author explained:  “foreclosures are soaring, while bankruptcies, though clearly on the upswing, are running roughly at half the 2001-2003 pace. The reason: [the BAPCPA] … makes it much harder for households to get out from under their consumer debt … [m]ore people [are] being forced to walk away from their homes, leaving lenders holding the bag.”

According to the 2007 Businessweek article, the old bankruptcy law was considered extremely housing-friendly. In practice, most Chapter 7 filers got to keep their homes, while the rest of their property and assets were sold off to pay a portion of unsecured debts such as credit-card and medical bills. When the assets ran out, the remaining loans were cancelled (with the exception of non-dischargeable debts like student loans, alimony and child support) and future paychecks could go to mortgage payments. Under the BAPCPA, however, more debtors are forced into Chapter 13 due to the means test, so they are still trying to make payments on car, credit card, medical, and other bills (which used to be discharged in Chapter 7) pursuant to their Chapter 13 plan. That makes meeting the mortgage more onerous.

I am surprised by how little attention this idea has received in the last few years.  However, I did find this more recent working paper which tackled the issue and concluded that “personal bankruptcy law … played an important role” in the financial crisis of 2008.  More specifically, these authors “estimate that the reform caused about 800,000 additional mortgage defaults and 250,000 additional foreclosures to occur in each of the past several years.”  These authors suggest that “the 2005 bankruptcy reform should be at least partially reversed” because “lowering the cost of filing for bankruptcy will encourage more homeowners to file and therefore reduce foreclosures.”

-Drew Broaddus

Home Affordable Modification Program ("HAMP") just may provide some relief for struggling homeowners.  The following information is taken from the Making Home Affordable website - www.hampadmin.com:

The Home Affordable Modification Program is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Borrower eligibility is based on meeting specific criteria including: 

1) borrower is delinquent on their mortgage or faces imminent risk of default 

2) property is occupied as borrower's primary residence 

3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

After determining a borrower's eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower's total pretax monthly income:

Well, it looks as if we're going to bail out Wall Street — again.  And, again it will be at the expense of the every day working stiffs.  Also, Congress is treating the symptoms, not the problems.    The problem is (we have been told) that there are alot of  bad mortgages out there.  That's probably true, I represent some of them.  The Banks want to get the loans off their books and on the government's books.  Essentially that means on your books.  However, if the loans are bad, they are still bad.  It seems that a better way would be to be able to rework the loans so that they are performing loans that can and probably will be paid.

There had been a provision in the bill that would allow Bankruptcy Judges to adjust the mortgages on the debtor's principal residence.  Currently that is prohibited although almost all other debts can be readjusted.  The argument from the banking industry (the folks that got us to this problem) is that such a "drastic" change would decrease the availability of mortgages and drive up interest rates on them.  Hmmmmm.  Remember Economics 101?  Price is a function of Supply and Demand.  When money is pleantiful, interest rates are down.  That's been the problem.  Maybe fewer "goofy" mortgages would not be such a bad thing.

As I understand it, the current proposed bill "encourages" the lenders to renegotiate the debts of the "troubled" loans.  It ain't gonna happen folks.  Under the current structure, the mortgage servicer does not own the mortgage.  The mortgage is owned by something else or a group of "something elses."  The mortgage servicer is under a duty to collect the debt.  It risks being sued by the "something else"  if it is wrong in readjusting the mortgage.

That's why it is in everybody's interest to permit the Bankruptcy Judges to readjust mortgages.  Then everyone can blame the Bankruptcy Judge.  In the time honored tradition of passing the buck, everyone can say, it's not my fault —  "The Judge made me do it."

Thanks for reading.  I'm through ranting for now.

The Senate killed for now, a proposal to allow Bankruptcy Judges to refine unjust mortgages.  I've heard that it's not dead but could be brought up later.  Problem is that it has been "bought" up.  Remember,  we have the best government that money can buy.