Early this year, Moody’s released a study of the re-default rates on around 78,000 loans that were modified between January 2009 and July 2010 by most of the major mortgage servicers. Re-default means that once a mortgage has been modified and brought current, the homeowner then defaults (or stops making payments), once again.

The Data

Here are the re-default rates for the participating servicers:

- Wells Fargo – 29%
- Bank of America – 33%
- American Home Mortgage – 26%
- JPMorgan Chase – 22%
- Ocwen – 24%
- GMAC Mortgage – 23%
- Litton Loan Servicing – 20%
- CitiMortgage – 20%

What This Means

This means that around 25% of all mortgages that have been modified to make the payment more affordable for a homeowner, eventually go back into default. For the most part, this means that HAMP is a success in what it intends to do, make mortgage payments easier to make for homeowners. But it also says something about the state of the housing industry, and the economy in general. I would guess a large portion of the re-defaults are because homeowners realize that even if they can afford their mortgage, its still a losing investment, their property is still underwater. Also, I’d guess that some of these re-defaults are as a result of a further decrease in income, or even from homeowners losing their jobs (or experiencing other financial hardships) even after they have received a modification.

So until these underlying fundamental problems with the housing market and the economy are fixed, I’d expect re-default rates like this to continue into the foreseeable future.

Some HAMP Background

HAMP stands for Home Affordable Modification Program which is a government program that gives incentives to lenders to help make mortgages more affordable for homeowners. There is certain criteria that must be met before the process can be started but a large percentage of Americans qualify for this assistance. Simply put, Lenders use specific formulas with the goal of lowering a person’s mortgage to 31% of their gross monthly income. Once a homeowner has submitted all the necessary documentation to support their situation, the lender then puts a borrower on a “trial plan”. This is basically a period where the bank determines whether or not a homeowner can afford the new lower payments. At the end of this period the bank determines whether or not to make this trial permanent, barring changes in circumstances and other problems with paperwork.

What I’ve Seen

I can’t tell you how many times I’ve seen the banks take payments for the entire trial period, and then deny a final modification. In my experience, banks will look for whatever reason they can find to deny a final modification. That’s because, in my opinion, the banks get to collect these fees for as long as the homeowner is willing to make payments, and they can still foreclose on the house in the end. For the most part, a trial period is nothing more than an elaborate way to collect mortgage payments from a struggling homeowner. A debt collection method. I’ve seen banks collect for up to 9 months and still sell a person’s house in foreclosure!

What This Means

In the case mentioned above, this is exactly what happened to Lori Wigod. She was offered a trial period, made her payments and submitted all necessary paperwork, and was still denied her final modification. The Court stated that she did have the right to pursue a breach of contract claim (among others) under Illinois State Law. This is a big blow to banks who think that they can just take a borrowers money and throw them aside in the end. This has been happening to too many people and has been going on for far too long. This is very good news for homeowners, and hopefully banks will take this as a warning.

Full Text of New Illinois Foreclosure Law; 735 ILCS 5/15-1505

The bill has since been passed and here is the actual language:

Sec. 15-1505.6. Objection to jurisdiction over the person.

(a) In any residential foreclosure action, the deadline for
filing a motion to dismiss the entire proceeding or to quash
service of process that objects to the court’s jurisdiction
over the person, unless extended by the court for good cause
shown, is 60 days after the earlier of these events: (i) the
date that the moving party filed an appearance; or (ii) the
date that the moving party participated in a hearing without
filing an appearance.

(b) In any residential foreclosure action, if the objecting
party files a responsive pleading or a motion (other than a
motion for an extension of time to answer or otherwise appear)
prior to the filing of a motion in compliance with subsection
(a), that party waives all objections to the court’s
jurisdiction over the party’s person.

Section 99. Effective date. This Act takes effect upon
becoming law.

What This Means

For the most part, this further limits a homeowners ability to properly defend a foreclosure. This statute essentially says that even if you stand up in Court, without an attorney, to merely learn about your case, that you have started the clock on your ability to dismiss the case for lack of personal jurisdiction. This really affects people who are acting as their own attorneys in their foreclosure case, or pro se defendants. This is because if you just show up once to your case, and then later on retain an attorney to defend your foreclosure you have effectively limited the defenses available to yourself, which includes motion to quash service and motions to dismiss for lack of service, or at the very minimum given yourself less time to prepare your defense. The Legislature had frivolous litigation and the lengthy court docket in mind when enacting this law, but at what cost? The media has already raised issues concerning faulty foreclosure practices and I feel as though this is just another blow for homeowners in the tragic foreclosure saga.

It is essential that you speak with a Chicago Foreclosure Attorney as early as possible in your case to avoid issues such as these. You can do so by calling Steven J. Grace, Esquire at 312-493-6912 or by filling out the form to your right.

The Means Test

First of all, you may not have a choice as to which chapter you file. The IRS sets median incomes for households for each county in the nation, and this can determine what chapter you must file. For example, in Cook County Illinois, the median income is somewhere around $45,000 for a household size of 1. In order to determine your income, the bankruptcy schedules require you to take the last 6 months of income and to multiply that number by 2. If that number, for a household size of 1, is larger than the IRS determined median income of around $45,000 then you have to finish applying what is called the means test. The remainder of that test uses a formula to determine if you have enough disposable income to repay to creditors. There are many deductions that can be used to lower this disposable income, and the test takes these into account. Some of the deduction categories that can help you pass the means test include: taxes, involuntary paycheck deductions, health care, life insurance, telecommunications, secured debt payments and childcare just to name a few. So, if your income is above the median for your household size, and you have excess disposable income after completing the means test, you do NOT qualify for Chapter 7 Bankruptcy. Thus, you may only file a Chapter 13. It is very important to make sure that your bankruptcy attorney completely fills out the means test, and applies all categories fully. If this isn’t done properly, it may be the difference between a Chapter 13 and a Chapter 7 bankruptcy.

Chapter 7 Bankruptcy

So you qualify for Chapter 7 based on your income, now what? Well, this type of bankruptcy is referred to as a liquidation bankruptcy. That means that all of your assets are administered by a Court appointed official called a Trustee. The Trustee determines if there are any assets of value that can be sold and distributed to creditors. So, your house, bank accounts, household belongings, business interests, vehicles and other items of value will be looked at by the Trustee. The law grants you certain exemptions that protect specific amounts of each property. In my experience a very small percentage of people actually lose property, and for the most part, if they do lose property this is because they choose to do so. After the trustee has determined whether or not you have any assets, which is usually done at a creditors meeting, you are then granted an Order of Discharge which completely relieves you of your personal liability on all debts.

Chapter 13 Bankruptcy

The reason I say that almost no one loses their property is because one of the major differences between a Chapter 7 and Chapter 13 bankruptcy is that you can’t lose any of your property in Chapter 13. Chapter 13 is sometimes referred to as a reorganization bankruptcy. That’s because in this type, you propose a repayment plan (that lasts from 3-5 years) to repay (sometimes as little as 10%) your debts. After each party is given proper notice, the Court holds a confirmation hearing, and if there are no objections, then the court confirms that repayment plan. Here, you make a monthly payment for the agreed amount and the Trustee divides up this money and distributes it to creditors based on what was laid out in the plan. So, not only do you need to be able to afford your Chapter 13 Plan Payment, but you also must have income. At the end of the plan period, the court will then enter an Order of Discharge excusing you from the remainder of your debts.

Choosing the Right Chapter of Bankruptcy

In closing, people file either Chapter 7 or Chapter 13 for many different reasons. Whether its to help catch up on missed mortgage payments, to walk away or “strategic default” on real estate, to prevent wage garnishment, repossession or for mere peace of mind, bankruptcy can solve all of these problems. The most important thing is to understand your goals fully and to learn how each chapter will help you attain these goals. Please call 312-493-6912 to speak with Steven J. Grace about your situation and to find out which chapter is right for you.

Lets start by looking at the pros and cons:

Advantages of Bankruptcy

- Enables you to get a handle on your financial situation by giving you a set payment amount (Chapter 13 payment plan) or by discharging your debts entirely.

- Gives you a “fresh start” which helps you move away from a poor credit history, by establishing new positive credit on your credit report.

Disadvantages of Bankruptcy

- Bankruptcy can stay on your credit report for up to ten years.

- It has been estimated that your credit score is lowered by up to 100 points for as long as it stays on the credit report.

The Broader Picture

These factors must be viewed objectively from a broad viewpoint. For example, many people are deterred by the detrimental effects a bankruptcy can have on your credit report, but did you know one late payment can remain on a credit report for up to 7 years? Also, it has been suggested that just one missed mortgage payment can lower your credit report by up to 100 points upon the first missed payment. So before you jump to conclusions about your credit being ruined you should look at the entire picture. As a matter of fact, I would say that at least 85% of all credit scores actually increase after bankruptcy. That’s because a major component of a FICO score is the total amount of debt, which is used in the calculation of your ability to repay. Thus, once you have removed your debt from your credit report through bankruptcy, it will actually increase your ability to repay, and as you build a positive credit history, your score will in turn increase. As strange as it may sound, many of my Clients receive credit card and auto loan offers in the mail before they have actually completed their bankruptcy!

Some of the other benefits bankruptcy can offer besides helping with debt:

- It stops all foreclosure actions, including sales and can even help you catch up on missed mortgage payments (in Chapter 13).

- It can help you recover a vehicle that has been repossessed and to repay the past amounts (in Chapter 13).

- It can discharge some government debts, and even past due IRS taxes.

Is Debt Settlement Worth It?

After all of this the question then becomes is whether I can settle a credit card debt for less than what is owed. Many credit card companies send settlement letters where they offer to cancel all remaining debt in exchange for a lump sum payment, many times around 50% of the amount owed. In many cases, this sounds like an appealing alternative to bankruptcy, but there’s a catch. After you have settled your remaining debt, the bank will send you and the IRS a 1099 for the amount of “cancelled debt”. The IRS considers this income, and they expect you to pay taxes on it. As absurd as this sounds, you may be digging yourself a bigger hole than you bargained. Not only are you dropping a lump sum, (many times in the thousands of dollars) you also expose yourself to tax liability, where if you don’t pay this taxes on this income you are raising red flags with the IRS and possibly risking audit.

And finally, and I can’t stress this enough, do NOT fall victim to so called debt settlement programs. They will not settle your debts. What they do is put you on a payment plan, where your money is put into an escrow and these funds are used to pay off the debts once the company has reached a “settlement” with the lender. More than likely this settlement will never happen, your money will never be sent to the bank, and you will get sued, leaving you worse off than you were before. Where you could have just filed bankruptcy and had peace of mind. But these debt settlement companies prey on those who are afraid to file bankruptcy, and in my opinion these people pay a very grave price. If you have any doubt about debt settlement companies, just look into some of the lawsuits that have been filed by the attorney generals of various states against them.

I hope this information has helped you in your decision regarding bankruptcy, and if you have any questions at all you can schedule a consultation by filling out the form to the right or by calling 312-493-6912.

A Little History

These mortgage issues can be blamed on:

M.E.R.S.- Mortgage Electronic Registration System

During the real estate boom, the mortgage companies created this company to facilitate the assignment of mortgages. MERS is basically a conduit or third party agent that enabled mortgage companies to buy and sell mortgage without having to actually go down to the Register of Deeds and file the proper paperwork. So instead, when Bank of America sells a persons mortgage to Chase, they could make this trade almost simultaneously, and that’s because MERS would be the only company that would keep record of the transaction. MERS would simply update the owner of the note and the mortgage. So the only mortgagor that would be listed at the Register of Deeds would be MERS “As third party agent”. This is why many local government have filed lawsuits against MERS, because by using this system they were effectively able to evade payment of real estate transfer taxes on thousands if not millions of transactions. It was a creative scheme.

The Securitization of Mortgages

The second cause of the lack of proper documentation in foreclosures is the trading that took place on Wall Street of mortgages and notes. There was such heavy volume of trading in mortgages at the height of the real estate boom that in many instances there’s no way to tell who owns what. Mortgages were bundled into trusts, bundles and REITS in order to make them look more attractive to investors. But, because of this sometimes there is a lack of chain of title as to who actually owns the right to foreclose. It can be quite complicated, but to put it simply a bank has to be able to prove it holds the mortgage in order to foreclose. Which can be quite the burden.

Going Forward

Nevada had just passed the Foreclosure Fraud Reform Act (A.B.284) which is effective October 1, 2011. This is a very interesting law that should prevent faulty foreclosures for many reasons. First of all, it essentially codifies the due diligence that must be done to establish the right to foreclose. The bank are now required to file the documents used to support a foreclosure to be filed in the county where the property is located. In addition, they must also file an Affidavit of Authority to foreclose. These affidavits are at the center of the “Robo-Signing” scandal. These affidavit essentially states, under notary, that the person has made the proper research to determine if the lender foreclosing in fact holds the mortgage. During the Robo Signing scandal many of these affiants that actually signed these documents admitted either in depositions or in the media that they in fact did NOT personally inspect the records. Thus, there is a strong likelihood that there have been banks that have foreclosed on properties they do not even own. This is a dangerous situation because renegade “lenders” could lie and claim to hold mortgages on overdue properties, falsify the documents, and hold a foreclosure sale. Essentially stealing the property free and clear.

In a lot of ways, Illinois already has a very similar process, and we’re very fortunate for this. There are many of these requirements already included in 735 ILCS 5/15-1101. Thus, because borrowers already have substantial legal rights, it is very important to have an attorney that understands what must be proven for a foreclosure sale to take place. Even if the bank has filed the necessary paperwork its important to make sure that they’ve proven their case by a preponderance of the evidence. To set up a consultation with an experienced foreclosure defense attorney, please fill out the form to the right or call (312) 493-6912.

Either indirectly or directly a persons credit situation will always come into play throughout a relationship. If you’ve always dreamed of having the house with the white picket fence, or the red sports car, your significant other’s financial situation could affect multiple aspects of the transaction including: the interest rate offered, the terms of the loan and the amount of collateral required. BUT, this is only in situations where you need a second co-signer for a loan. If your credit score is impeccable, and your income is sufficient to support the amount borrowed, you will be able to get qualified for the loan regardless. So, especially for small lines of credit (credit cards, car loans), if your credit is sufficient it’s likely your significant other’s credit woes will not come into play.

Can their debts get me into trouble?

The answer to that question is for the most part, no. Assuming that all of the debts are pre-marriage and that you haven’t personally co-signed on any of the debt personally, there is very little a creditor can do to collect a debt from you personally (i.e. sue you, or garnish your wages). That is, unless you get married and choose to title your assets jointly. Some common examples of jointly titled debts would be: joint bank accounts, joint real estate deeds and automobile titles. It is very important that you speak with an experienced attorney regarding these intricate issues because they are very complex and can lead to a great amount of headache further down the road. And no, if your fiance is going through bankruptcy personally, the bankruptcy will never be on your record, even if you marry.

What happens if we divorce?

These questions ultimately evolve into hypothetical future scenarios, “What happens if they die, or if we divorce?” Well, Illinois is an Equitable Distribution state for divorce purposes. This means that property incurred during the marriage (and this means debt too) is distributed equitably, and not necessarily equally upon divorce. So, for all intensive purposes, if your partner has a large debt load before they marry, it will not be your burden upon divorce. Debts incurred during marriage are joint debts typically, and will be distributed upon divorce (or will even survive death, assuming they are co-signed by both partners).

Is there anything we can do?

A marriage is a very fragile thing, especially in the beginning. Many factors can add stress to a new marriage, and finances are definitely one of them. A bankruptcy would give your partner a fresh financial start, before starting marriage. It’s much cleaner this way. You want to give your marriage the greatest chance of success. Please contact me by filling out the form to the right to discuss your options.

Should I Stop Paying My Mortgage?

Well, this isn’t as simple as it sounds. There are a wide range of consequences that come with this topic, many of which are sometimes unforeseeable to the average person. You should always consult an experienced attorney before you make this decision, as it can definitely backfire, and I’ve seen it happen. One of the most important things to realize is that default, although it sounds harmless is actually a breach of contract. Yes, you can be sued. There are factors that go into the lender’s analysis as to whether or not this is likely, and it’s important to understand these fully. You must weigh the risk versus the reward, before you make a decision of this magnitude.

Is it a smart decision?

A property is deemed to be “Underwater” if the borrower owes more than it’s worth. This debt includes all liens and encumbrances that are recorded against a property, including second mortgages, tax liens, lawsuit judgments, etc. It has been estimated that almost 1/4 of all American homeowners are underwater on their mortgages which totals an astounding 11.2 million properties nationwide. In Chicago alone, its been estimated that up to 38% of all mortgages are underwater. The question then becomes whether or not it’s a smart decision to hold a property that may never have any value. You must look at the entire picture before you make such a drastic decision. Some factors to consider include: how far a house is underwater, safety of the neighborhood, comparable rental prices and desires to relocate. There are many moving parts when analyzing these situations and a good lawyer will be able to guide you by pointing out all the potential pitfalls and rewards.