Bankruptcy Article of the Week
Mortgage Crisis Could Worsen.For Lenders
Mortgage lenders who are busy lobbying against the provisions in the 2008 Helping Families Avoid Foreclosure bill that would allow bankruptcy courts to modify mortgage terms might have bigger things to worry about. A pending case in the 7th Circuit Court of Appeals could open the door for class action lawsuits that would cancel mortgages en masse.
The case before the appellate court involves a Wisconsin couple who won a judgment last year against Chevy Chase Bank. Like many home buyers in recent years, Bryan and Susan Andrews believed that they were getting something other than the loan they closed on. The Andrews expected a fixed rate of 1.95% for the first five years, but ended up with a loan that began adjusting after just one payment, and quickly climbed to more than 8% interest. The court found that the Andrews were entitled to rescission of their loan, and that other homeowners could join their suit.
Many homeowners who are facing foreclosure—or who have already lost their homes—currently can't afford the legal representation necessary to pursue such claims. Lenders are banking on that obstacle, but class action lawsuits could ease the burden and open the door to mass litigation.
The defendant, Chevy Chase, is no stranger to the impact of class action litigation. In 2006, the bank agreed to pay $16.1 million and remove negative information from consumer credit reports in order to settle a class action suit brought by credit card holders over excessive fees.
When the ruling first came down last year, bank officials were dismissive, but the Washington Post is reporting that Chevy Chase and other banks are worried now. As foreclosures continue to climb and banks rack up losses, the risk is greater than ever—and the 7th Circuit ruling is said to be just around the corner.
Unfortunately, the door isn't likely to open immediately, even if the 7th Circuit rules favorably. The lower court ruling contradicted a 1st Circuit Court of Appeals ruling from last year. That decision stated categorically that class action was never an option for litigating rescission claims under the Truth in Lending Act (TILA). Though various district courts have certified such claims, federal appellate court has not yet sanctioned such certification.
If the 7th Circuit rules in favor of class certification, the districts will be split on the issue, and attorneys on both sides of the debate have indicated an expectation that the U.S. Supreme Court will ultimately have to decide the issue. Perhaps, in the interim, Chevy Chase and other banks will see the writing on the wall and finally find some incentive to work honestly with homeowners to find workable solutions to their mortgage problems.
The Numbers Game -
Bankruptcy Filings Reach Highest Post-BAPCPA Levels in February
There were more than 76,000 personal bankruptcy filings in February, according to data collected by the National Bankruptcy Research Center and published by the American Bankruptcy Institute.
According to the Associated Press, those numbers represented the highest monthly bankruptcy filing totals since the inception of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) on October 17, 2005. In comparison, there were nearly 620,000 personal bankruptcy filings in October 2005.
The ABI reported that February 2008 totals were up 15.2 percent as compared to January 2008, when more than 66,000 people filed for bankruptcy.
The ABI also detailed that there were more than 55,000 personal bankruptcy filings in February 2007.
For more insight into these numbers, check out what University of Illinois Law Professor Bob Lawless has to say at The Credit Slips Blog.
Credit Difficulties Already Affecting Student Loans
In the last issue of The Next Chapter, we examined how aspiring college students may find it more difficult or costly to obtain student loans as many lenders stay away from asset-based securities in the midst of the credit crunch.
With this in mind, the Pennsylvania Higher Education Assistance Agency announced on February 27 that it would suspend making federal-guaranteed loans beginning in early March, as reported by The New York Times.
Unfortunately, this is not the first instance of a lender halting its loan programs as a result of recently tightened credit markets. The New York Times also reports that:
- the Missouri Higher Education Loan Authority has temporarily stopped offering private loans not guaranteed by the government;
- the College Loan Corporation recently left the federal loan program; and
- Sallie Mae, the largest student lender, has recently tightened its lending standards.
Examine this issue in more detail in the following article:
From Subprime to Prime Loan Delinquencies
As for home loans, IndyMac Bancorp recently reported that the delinquency rate on prime loans rose to 6.85 percent from 3.83 percent in last year's first quarter, as detailed in Reuters.
According to the story, IndyMac also indicated that the percentage of loans that were 30 days past due rose from 7.50 percent at the end of December to 7.79 percent in January.
While we've heard about the subprime mess, it has become more and more common to hear about prime loans defaulting:
When you combine these defaults with the credit crunch, the sputtering of high-yield debt sales and a lack of investor appetite for student loans and other assets, it's no wonder why some are saying that bankruptcy lawyers should "sharpen their pencils" this year.
Kevin's Corner
Practice Management Tip:
Email Communications
"Email has revolutionized business communications, mostly for the better. Email can be particularly useful for those of us practicing consumer law because it allows for quick and easy updates to clients.
"While email can be much easier to control than a phone call or face-to-face meeting, the very ease of dashing off an email can be a pitfall as well. Email seems casual, temporary—more of a post-it note or a message slip than a formal letter—but in fact electronic storage is ample and inexpensive and most email programs include a handy search feature that makes revisiting your words next week (or next year) a quick and easy task.
"Ellen Freedman, in her excellent summary of the pitfalls and considerations surrounding the use of email in business communications, highlights a piece of conventional wisdom that's often forgotten in the moment: don't put it in an email if you wouldn't put it in a letter on firm letterhead.
"But that maxim alone doesn't cover all of the risks; there are confidentiality issues to consider as well. While most firms have email policies, include disclaimers and confidentiality notices, and may take additional precautions such as sending confidential information as an attachment rather than in the body of the email, there's another risk to the security of email contents you may not have considered: your clients.
"One of the greatest pitfalls of email—whether in the business world or in personal communications—is the ease of forwarding. It's become commonplace to simply send along an email to friends, family and colleagues for comment, review, or just as an update…and that simple act of clicking 'forward' can destroy privilege.
"In addition to taking care with our own email communications and protecting confidential information, it's essential that we educate our clients in the appropriate use of email in legal correspondence."
- Kevin Chern
President, Start Fresh Today
Trump's Financial Advice Falls Short for Homeowners
Donald Trump offered some advice for homeowners facing foreclosure last week, but in our opinion it appears that Trump's financial wizardry is limited to the upper echelons. His suggestion that banks don't want to own houses and borrowers should simply talk to their lenders sounds familiar, but clients in our offices, mortgage counseling agencies and foreclosure statistics simply don't bear out the idea that lenders are willing to work with borrowers.
Here's why we think homeowners need more: Donald Trump Knows How to Save Your House...Or Not
The Numbers Game, Part II -
January Foreclosures Up 57 Percent from Year Before
The number of homes facing foreclosure was up 57 percent in January 2008 as compared to the year before, according to an AP story on recent RealtyTrac findings.
The story detailed a RealtyTrac finding that some 233,001 homes received at least one notice about an overdue mortgage payment this past January.
In comparison, 148,425 homes received such notices in January 2007.
Need More Client Inserts?
Utilize our new order form to request more copies of our credit counseling and debtor education inserts for your client intake folders.
Simply indicate whether you are or are not a SFT customer, fill in the required fields as noted by a red * and click "Submit" for our SFT team to receive your request.
As always, we will ship out your new inserts free of charge as soon as possible. If you have any questions, simply call 1-800-435-9138 or email info@startfreshtoday.com.