We were at the cusp of a new era in finance when the old system nearly collapsed last year.    Then the government bailed out the old system and it could go on its merry way having been rescued by us taxpayers.  There is still no meaningful reform and the bankers are paying themselves just as exorbitantly as ever, although they are not lending to us with the money we gave them from our taxes (or more likely our childrens’ and grandchildrens’ taxes).

Nothing about these recent  major financial events however seems to impact my clients’ feeling of guilt, remorse and shame when they need a bailout. They don’t see the connect between themselves and GM and the banks and how its all part of the same financial system.  I’m not saying there is a domino effect necessarily, I’m just saying the same imbalances can occur regardless of scale and the type of financial entity.  Our system encourages leveraging your finances and few are the individuals and companies that can resist the temptation, or keep the leveraging within sustainable boundaries.  Those enabling the leveraging (the finance companies and counter parties to leveraged transactions on the secondary markets for debt) are only recently looking at what those boundaries should be.   The pendulum has swung from promiscuous lending to eschewing any risk at all.  Risk, however, is why lenders are paid interest.  The happy medium of prudent risk taking by lenders is still a way off.

Banks don’t have bankruptcy.  They get put in receivership or get bailed out by the government if they are “too big to fail.”  We people do get bankruptcy when we we’re financially stuck.   Most of my clients became over-leveraged when lending was indiscriminate.  However, they were not necessarily being irresponsible themselves, as they often assumed  the lender had done their due diligence on their ability to repay it.

So this is a time of de-leveraging and could you find a better place than LeverLaw to de-leverage?  Ok, bad pun that puts a serious point at risk.  Everyone is de-leveraging now.  What goes up must come down applies to finance too.  If bankruptcy is part of a fiscally prudent plan,  just like it was for GM, there should be no shame in it for your household or small business.

This is from a recent New York Times article, that I am excerpting in part as it details the incredible scope of our foreclosure epidemic:

“The economy and the stock market may be recovering from their swoon, but more homeowners than ever are having trouble making their monthly mortgage payments, according to figures released Thursday.
Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.
The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.
Unless foreclosure modification efforts begin succeeding on a permanent basis – which many analysts say they think is unlikely – millions more foreclosed homes will come to market.
“I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down,” said the housing consultant Ivy Zelman.
The overall third-quarter delinquency rate is the highest since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008.
The combined percentage of those in foreclosure as well as delinquent homeowners is 14.41 percent, or about one in seven mortgage holders. Mortgages with problems are concentrated in four states: California, Florida, Arizona and Nevada. One in four people with mortgages in Florida is behind in payments.”

In my practice I am seeing foreclosures and attempted loan modifications on a scale that is unbelievable.  I don’t attempt loan modifications as part of my practice because I do not believe that an attorney is a necessary component to that process and brings excessive cost to the mix.  Some of my clients have accomplished it on their own, and what they achieve is what the mortgage companies will agree to, and my position as an attorney would not improve that.  I have real power working within the court system, and even outside the court system where the real risk of court action compels compromise.  However, here the mortgage companies hold all the cards and it is only enlightened self interest that makes loan modifications possible, and usually on their terms.  I have yet to see a single case of a loan having its principal reduced. Usually it is just a temporary interest rate deduction and putting the arrears of the loan back into the principal amount to deem the loan current.

It is unfortunate that Congress did not make principal reduction on undersecured loans possible when it considered it last year and this year.   I strip off completely unsecured mortgages that in second or third position regularly.    However, at least some portion of the remaining mortgage is unsecured, meaning the homeowner is still to some degree “underwater.”

The foreclosure epidemic is not just a problem for those undergoing foreclosure or even just mortgage delinquency.  It is a problem for anyone who owns a home because our property values are under downward pressure.  However, as in all economic situations there are winners as well.   That would be home buyers who can take advantage of lower prices and low interest rates at the same time.  For those who have cash for a down payment, a job to fund the loan, and time to shop carefully, this is a great time to get into owning their residence, or even to buy rental property.  As usual, those who invest in downturns are the ultimate winners.

Practicing law is like carrying on a constantly evolving conversation.   In my area of the law, it is a conversation centered around one problem: Insolvency.  My conversations are multifaceted and multi-level.  I most directly am rewarded for the conversation I have with my clients as they pay the bills of LeverLaw.  However, I am also engaged in a conversation with all the prospects I meet daily, who may or may not need to file bankruptcy.

I am also engaged daily in a conversation with my fellow practitioners through the CDCBAA list serve.  I have a special inbox in my Outlook email program that discussed whatever problems practitioners here in the Central District of California are having in their cases, as well as practice updates through our liason with the courts.  Dozens of emails are exchanged daily, and I often participate in the subjects, or as we call them “threads.”   Of course, I don’t have time to participate in every thread, but ones that especially interest me, or I start, I follow avidly. Other threads I just follow.

One recent thread has a very arcane and practical impact on a particular transaction for one of my clients.  I learned that credit unions will use their cross-collateralization clauses to withhold the pink slip on cars where clients owed more than one debt besides the car loan, even when the client reaffirms the car loan with the credit union.  So I negotiated a waiver of the cross-collateralization clause and a release of the car lien in advance with the credit union  I know those last 2 sentences are a little jargon filled, but even if you don’t understand it, it will give you a feel for some of the technicalities of bankruptcy law and what our conversations are about.

In this respect LeverLaw is a platform for these conversations.  If you become a client of LeverLaw, you have decided to join the conversation, at least as it pertains to your particular case.  I will have the conversation with the judges and the trustees and the other officials of the system on your behalf so you do not have to do so.

This blog is also part of the conversation, and fits well into the network of conversations that is the LeverLaw platform.   Our economy has always been about relationships and conversations, but they have historically been relatively simple, even crude, compared to what the internet now makes possible.  Using the internet to develop, intensify and bring erudition to the conversation is a positive step.  Bankruptcy is a topic that is blanketed by ignorance and fear, and efforts to bring light on the topic to rid it of these distortions is a worthwhile effort.  I hope you’ll follow this blog as much as I hope to make it worth your reading.