As I wrote previously about credit card debt, there is a consumer debt crisis in America. In this blog I will write about the home loan crisis and the companies that prey on those looking for a solution.
The Home Mortgage Foreclosure Crisis Never Seems to End.
Which word to choose? Chaos. Debacle. Scandal. Perhaps even, crisis. Over the past three years the real estate industry in the United States has nearly collapsed. House prices have been reduced by 25% nationwide due to the bursting of real estate bubble. The only vibrant part of the real estate market in the present economic recovery is the millions of foreclosed homes being sold to bargain hunters. Around 7 million Americans are now either not paying their mortgages at all, or are seriously behind in their monthly payments – about one in seven of all residential mortgage borrowers – but that is not the surprising issue. This remains largely in line with the predictions that were made at the onset of the credit crisis, when it became clear lenders had been putting indigent borrowers into unsuitable loans for years.
When the foreclosures come to an end the U.S. market will have to work through a massive inventory of unsold homes! There are over 20 million empty homes in the U.S. right now. These “assets" sit on the balance sheets of U.S. banks at valuations far above what they will ever receive. Millions of these homes will simply have to be bulldozed, because there will never be enough buyers for all of them. After the U.S. housing collapse stops accelerating downward, sometime after 2011, the collapse will gradually slow down (over a period of several additional years). At that point, after the U.S. economy has lost over $30 trillion and at least 30 MILLION jobs, the U.S. housing market will almost certainly remain depressed for several additional years.
Bankruptcies on the Rise!
Many people have turned to bankruptcy as an alternative to foreclosure. Congress overhauled the Bankruptcy Code in 2005 to reduce the number of consumers and businesses filing for bankruptcy. However, Bankruptcies have increased each fiscal year since 2005. While a "mere" 617,660 bankruptcy petitions were filed in 2006, an upsurge in filings has resumed - if not accelerated - over the past few years. Annual filings increased over thirty-five percent between 2008 and 2010, from 967,831 to 1,596,355.
This upsurge is attributable in part to the worst economic crisis the United States has suffered since the Great Depression. The economic downturn has led to many sources of financial distress, including the rise in unemployment, increase in the number of uninsured people, mortgage and foreclosure crises, and tightening of consumer credit. Debtors facing these difficult situations may have no other option but to turn to the last resort of filing for bankruptcy to obtain a "fresh start."
A majority of respondents (74 percent) in a recent American Bankruptcy Institute (ABI) Quick Poll predicted that bankruptcy filings will increase in fiscal year 2011. Fifty-three percent of respondents “strongly agreed" that filings would increase, while 21 percent “somewhat agreed" that filings would increase.
Experts agree that the end is not in sight. According to the Federal Reserve, household debt is at a record high relative to disposable income. Some analysts are concerned that this unprecedented level of debt poses another risk to the financial health of American households: A high level of indebtedness together with a low savings rate among households could lead to increased household delinquencies and bankruptcies, which could threaten the health of lenders if loan losses are greater than anticipated.
Reflecting this pessimistic outlook, consumer bankruptcies in February 2011 increased 11 percent nationwide from January 2011, according to the ABI, relying on data from the National Bankruptcy Research Center (NBKRC). The data showed that the overall consumer filing total for February reached 102,686, up from the 92,669 consumer filings recorded in January 2011.
“Though consumers are striving to reduce their debt burden, high unemployment and a still-poor housing sector continue to fuel new bankruptcies," said ABI Executive Director Samuel J. Gerdano. “We expect these factors to lead to over 1.5 million consumer filings this year."
Who is being hit the hardest? The most common demographics for bankruptcy filing describe an individual who was: 40 years old, Female, White, had graduated high school, was employed and made less than $30,000 a year. Since the recession began, all of us have been affected in some way or another. But which demographic has been the most affected by the rough economic times? More than half of the filers had jobs, (with only 13% being unemployed). Close to 75% of filers were Caucasian and most filers were women, (around 53 %). The most common age group for bankruptcy filing was between the ages of 35 and 54, which made up about 55% of total American bankruptcy filings.
Once again, there are companies waiting to “help" you modify your home loans. While some of these companies provide a legitimate service, many do not. If you have paid a company to modify your home loan and yet find yourself in default and facing a trustee sale it is quite possible that you have been ripped off. There are things that can be done to obtain some justice. Civil enforcement can see the return of the money you paid to the loan modification company, see them put out of business, and possibly obtain compensation for the other losses you suffered as a direct result of their fraudulent or incompetent services.
What Recourse Do You Have Against Companies That Prey On Your Hard Times?
The Washington State Department of Financial Institutions (DFI) advises homeowners who are delinquent on their mortgage to be cautious about using the services of someone offering to help them work with their lender to modify the terms of their home loan. DFI has received a number of inquiries regarding the legality of providing this service in Washington. DFI states that “while there is nothing inherently illegal about this business, those providing this service in the State of Washington must be licensed as loan originators, mortgage brokers, or consumer loan companies. . . Be careful when dealing with companies in other states. If you do business with a company outside Washington, and they do not perform as promised, your only ability to seek damages may be a private lawsuit against them." In other words, there is little or nothing the State of Washington will help you do to get your money back or place you in the position you were in before you used the scam company’s services. However, private enforcement is a proven solution.
There are statutes that provide potent ammunition against a scam company. The Washington Debt Adjusters Act, the Federal Trade Commission’s MARS rule are the primary tools you can use. There are also the old fashioned common law remedies of breach of contract and fraud. Further, malpractice claims can be made.
Litigation is usually not practical to see the return of your money. If the money involved is under $5,000 then it is generally not worth taking someone to superior court over. Attorney fees and costs would it a risky venture. You could take the company to small claims court, but as they are generally a corporate entity, they could be represented by an attorney while you would not be. Also, as many of these companies are from out of state, any judgment you obtained would have to be entered and enforced in the home state of the company.
Our experience is that most companies are willing to settle the claim if contacted by an attorney. If the services involved an attorney or other licensed individual then there is considerable leverage in forcing a settlement. Complaints to licensing bodies, particularly bar associations that also have client reimbursement funds, can be very effective and the licensed person knows this. They are often willing to pay rather than deal with a complaint. Further, companies that are not about to go under and disappear are often willing to settle: they are still making money and are willing to accept a settlement as the cost of doing business. However, I always try to get the money out of them quickly, as you never know when the “pyramid scheme" will collapse.
Complaints to regulatory agencies about unlicensed individuals or companies are less successful. The attorney general’s office has a consumer complaint mechanism as does the Department of Financial Institutions. Neither has proven very successful at pursuing out of state companies in particular.
In conclusion, retaining an attorney who is experienced in this type of recovery and who will work on a contingency basis will likely garner the best outcome. An attorney generates more respect from the scam companies and crooked lawyers as they know that the matter will likely be effectively pursued. Seth Rosenberg of Smith & Rosenberg is currently the only attorney in Washington State who handles this practice area. He provides a free consultation to review your claims.