Max Gardner’s Bankruptcy Boot Camp was featured during a front-page article in the June 6th edition of the New Jersey Law Journal, which is the city’s oldest and most prestigious legal publication.
Check out the article below:
In the past, we’ve detailed the disturbing issue of zombie debt, that is debt which is discharged during the bankruptcy process but still erroneously sought by debt collectors afterwards.
Over the Memorial Day Weekend, the Houston Chronicle was the latest media source to report on zombie debt.
Be sure to give the article a read; it’s another close-to-heart reminder of how some shady debt collectors will just not let some debt die and further validates the need for organizations like ours to enforce consumer protection before, during and after filing bankruptcy.
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Yesterday, I was made aware that this blog has been selected to be featured in LexisNexis Bankruptcy Law’s “Top Blogs” section. This recognition is an honor, and the site is a good resource for bankruptcy news.
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Bankruptcy Boot Camp: Basic training in bogus mortgage fees
Sunday, Feb 24, 2008 - 09:40 AM Updated: 09:58 AMWSPA Channel 7 News
Greenville, South Carolina
By Heather Sullivan
People across the country are losing their homes in the mortgage meltdown. A leading attorney based in
Western North Carolina says its often due to hidden and illegal fees on their mortgages. That’s why he holds a Bankruptcy Boot Camp to teach other attorneys how to spot bogus fees. He shows you how you can spot them on your own mortgage, too, in this Seven On Your Side Consumer Watch.
Inside a quiet house on a hill in Polkville, North Carolina, attorneys are in basic training. It’s called Bankruptcy Boot Camp. They’re learning how to save homes from foreclosure.The drill sergeant is attorney O. Max Gardner III. Gardner, who is the grandson of a former North Carolina Governor and Undersecretary of the United States Treasury, has been fighting mortgage services in court for years. “What we’re trying to do is educate bankruptcy attorneys about how they can identify and find unlawful, illegal and unreasonable fees and charges that have been charged to the loans of their clients.”
Gardner says the fees are not usually charged by mortgage companies, but by the companies you send your payments to, the mortgage servicing companies. Said Gardner, “It may be a fee for allegedly driving by your house once a month. … It could be a fee for some legal service you didn’t know about. It may be a late charge that is being added to your account when a late charge is not justified.”
Inside the room where Gardner holds Boot Camp is what he calls the Wall of Shame, a series of framed checks he’s won in cases against loan servicing companies. “We’ve got some checks up here for $300,000, $400,000, $50, 000, $60,000 and $75,000,” points Gardner. He says the checks are from just about every loan servicing company out there. The fees start out small, but add up fast. Twenty dollars here may turn out to two hundred dollars there and after a year or so you have two thousand dollars on bogus fees and charges.
Said Gardner, “It can actually put somebody in default. They’re mortgage obligation can go into foreclosure when they’re not really in default and the pressure is on for them to do it more.” Gardner contends that many mortgage servicers “create default” just to claim and charge the additional bogus fees.
Attorney John LaRue traveled all the way from Indiana for Boot Camp so he can help his clients. Said LaRue, “We’ll be able to help them in retaining their homes, rewriting loans, even securing money judgments for them.”That’s the kind of basic training Gardner says attorneys will need in the war against the mortgage crisis. Here are some fees and violations Gardner says to watch out for on your mortgage:
*failing to credit payments to your account on a timely basis;
*applying payments to suspense accounts;
*adding late charges to your loan when you didn’t pay late;
*imposing charges and fees for bogus services;
*charging for insurance you already have and don’t need,
*overcharging for legal fees, property inspections and valuations; and
*failing to notify you when your payments change.
To protect yourself, whether you are in or out of bankruptcy, and whether or not your loan is current or in default,
Gardner suggests asking for a written statement of your payments every six months. If you see a fee you don’t recognize, he recommends sending the loan servicing company a written dispute by certified mail. If the fee is not resolved, you may need to contact an attorney.
Gardner said he starts out in any case with the assumption that whatever the mortgage servicer is saying is wrong. You’ll find more information about Bankruptcy Boot Camp here: http://www.maxbankruptcybootcamp.com/
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Since Nightline featured O. Max Gardner’s Bankruptcy Boot Camp on Friday night, the reaction has been strong and positive. Comments on the Nightline story itself include reviews from attorneys who have shared the eye-opening experience of Max’s Bankruptcy Boot Camp, real estate agents, people simply saying “thank you” for bringing this story to light and–sadly–a number of consumers with similar stories to tell about losing their homes to predatory lending practices.
For more commentary from the blogosphere, check out posts on Max’s Nightline appearance at:
Kansas Bankruptcy Law, Hojin’s SW Orlando Perspective and The Home Equity Theft Reporter.
Dec. 14, 3007—
It’s been a six-year battle for Mike Dillon, who is trying to save his home from a foreclosure the courts say should never have happened.
It began in 2001, when the company servicing Dillon’s loan was sold. According to Dillon, he made a payment in 2001 to his servicer, but it had been sold to Fairbanks Capital, Dillon said. Fairbanks told him his payment was not received.
“The payment disappeared,” said Dillon of Manchester, N.H. “The check never came back to me, and the first notification that I ever got from Fairbanks was a default notice saying that you owe us $2,000 plus. From there it was all downhill.”
Dillon admits to paying late but said he always paid the late fees. He contends he landed in loan default and on the doorstep of foreclosure because of deception by Fairbanks Capital.
In 2005, a New Hampshire judge barred Fairbanks from foreclosing on Dillon’s home, saying that Fairbanks created a “predatory scheme of penalties that generated the default.” Dillon said that while the ruling helped keep his house safe for now, he ultimately didn’t consider it a victory.
“It didn’t make up for the years of illegal fees they charged me,” Dillon said. “It didn’t make up for the damage to the credit report, it didn’t make up for anything.”
Fairbanks disagreed with the court’s ruling, but said it complied. Still, the company said, Dillon has refused to pay into a mandated escrow account, leaving him behind on years of mortgage payments, taxes, and insurance. He remains locked in litigation with the company.
Fairbanks has been sued before. In one case in 2003, the company voluntarily agreed to a $40 million settlement with thousands of Massachusetts customers, after the Federal Trade Commission and the U.S. Department of Housing and Urban Development said the company “assessed and collected improper or unwarranted fees.”
The FTC charged the company with failing to post mortgage payments on time, then charging customers late fees; charging customers for homeowner’s insurance when the homeowners already had a policy in place; and misrepresenting the amounts customers owed.
Since the settlement, the company was sold, changed management, and changed its name to Select Portfolio Servicing, or SPS. It says it’s now a leader in responsible servicing.
But many homeowners continue to find themselves in the same situation with their servicers. Some of them file for Chapter 13 bankruptcy, which protects them from creditors while allowing time to restructure their debt.
Bankruptcy Boot Camp
Attorney Max Gardner said bankruptcy courts have become an unlikely ally in exposing loan-service abuse.
At his idyllic rural retreat set in the gently rolling hills of western North Carolina, lawyers from around the country come to Gardner’s estate northwest of Charlotte to learn how to dissect their client’s records — rooting out the hidden fees mortgage servicers charge. Those fees can add up to tens of thousands of dollars and according to Gardner, are not only unreasonable but sometimes illegal.
“The fees are unreasonable fees, they’re unnecessary fees, they’re improper fees, and I’m saying they’re illegal fees because they’re not approved by the bankruptcy courts,” said Gardner. “The problem with these fees is that, you know, they’re secret fees, they’re secret charges.”
He believes this is just the tip of the iceberg, and that some homeowners might be getting taken advantage of, paying the fees when they don’t have to.
“These guys are smart and they are playing the odds,” said Gardner. “And the odds are that 95 percent of the people will have no idea exactly what’s going on. That 95 percent will just go ahead and pay it.”
Gardner’s goal is ambitious. He’s training an army of lawyers to go out onto the complex battlefield of credit servicing, and hopes that they in turn will train fellow lawyers in the same thing, spreading the knowledge to thousands.
“There is no way I can train 10,000 lawyers,” Gardner acknowledged. “But maybe 200 can train 2,000 and they can train 2,000 more and then 4,000 more and keep going.”
Bringing in the ‘Forensic Accountants’
Sometimes the legion of lawyers is not enough to sort through mortgage-service fees. Gardner says some fees seem so innocuous that often he has to bring in a forensic accountant to uncover what is legitimate and what is not. According to Gardner, the accountant almost always uncovers “bogus” fees.
“I don’t know of a case that he’s looked at that he didn’t find fees that shouldn’t have been charged,” Gardner said of the accountant, adding that the fees can range from “about $500 after a case is first filed, up until $28,000 or $29,0000 in cases I have had.”
And he’s not alone. When Katherine Porter, a professor at the University of Iowa studied 1,700 bankruptcy cases, she found that questionable fees had been added to almost half the loans looked at, and that they were missing important pieces of documentation, making it difficult to know what the homeowner is being charged for.
“The problem is, without that documentation, it is very hard for the homeowner or his bankruptcy attorney or the bankruptcy court to make sure that the debtor is being charged the right amount,” said Porter. “The law requires that documentation for a reason, because without that documentation you can’t be sure that you are being charged fairly.”
Bankruptcy judges have begun to respond. Gardner has a wall covered with copies of checks from judgments he’s won against a variety of mortgage-servicing companies.
“We display these checks on the wall to sort of give my boot campers some encouragement,” Gardner said. “That even though it’s very difficult, there is some financial incentive for them to do it.”
And he cautions that it’s not just financially distressed homeowners who find themselves the victims of mortgage servicing fraud. He warns all mortgage holders to be cautious.
“If you have a home mortgage you need to do the same thing whether you are in bankruptcy or not,” Gardener warned. “Whether you are AAA credit or single D credit. And you need to write your servicer at least once every six months and ask for your transaction history.”
He says the fees often are very small — $25, $100, $200 — but if they happen to thousands of customers they add up to millions of dollars in revenue for servicing companies. And, critics warn, with less business coming in from new loans, mortgage servicers will be even hungrier for other ways to make money.
Copyright © 2007 ABC News Internet Ventures
Mortgage crisis expected to cost Bay Area $5.4 billion next year
Kelly Zito, Chronicle Staff Writer
Tuesday, November 27, 2007
The subprime mortgage fiasco stands to cost the Bay Area economy more than $5.4 billion next year, according to the latest report intending to put a dollar figure on the rising wave of real estate foreclosures.
The lending crisis will cost the national economy $166 billion and 524,000 potential jobs, said the report, to be released today in Detroit at a meeting of the U.S. Conference of Mayors. In addition, homeowners across the country will lose $1.2 trillion in property values in 2008.
“Not that long ago, economists said housing was the backbone of our economy,” Douglas Palmer, the mayor of Trenton, N.J., and president of the mayors’ group, said in a statement. “Today the foreclosure crisis has the potential to break the back of our economy, as well as the back of millions of American families.”
The study, titled “The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas” examined the gross metropolitan product (GMP) - the market value of all goods and services produced within a region - for 361 areas. The national subprime mortgage market began unraveling in earnest this year as home prices cooled and many borrowers who had squeaked into a home with an exotic mortgage found they could not make their payments.
As defaults and foreclosures rose, the market stumbled further. Investors pulled back from buying subprime mortgages - typically made to those with less-than-stellar credit scores - or any loans that smacked of risk, including “jumbo” loans, which are a key piece of the real estate market in the pricey Bay Area.
The mayors’ report did not forecast a recession, but it said 128 metropolitan areas - including the San Francisco-Oakland-Fremont metropolitan statistical area - would see GMP growth fall into the “sluggish” category of below 2 percent. Researchers said GMP in San Jose, Sunnyvale and Santa Clara would lose $1.8 billion, and GMP growth would slow to 2 percent, based on lower consumer spending, weak residential investment and falling income in the construction industries. Combined with estimated losses of $3.6 billion in the San Francisco area, the Bay Area stands to lose at least $5.4 billion, not including losses in close-by Northern California counties such as Napa and Solano.
By most estimates, the number of foreclosures could peak in 2008, when the next batch of mortgage interest rate resets is scheduled to occur. Many credit-impaired buyers, caught up in the homebuying frenzy of the past few years, took out exotic mortgages that carried extremely low teaser rates that reset far higher after the introductory period is over - usually two years.
Still, the Bay Area is faring far better than economically depressed regions such as Michigan, Indiana or areas with rampant over-building, such as Las Vegas or Florida. For example, the report forecast real GMP growth in Bay City, Mich., to slow 1.3 percent, or $83 million, due to the subprime fallout.
Economic growth will be cut by one-third in 65 metropolitan areas and by more than one-quarter in 143 regions. Certain cities in the Central Valley that have been hit hard by foreclosures and widespread new home building would see the largest losses in real GMP growth, researchers found. GMP growth in Merced, Madera and Salinas would fall by between 1.3 percent and 1.7 percent.
“We already had (GMP growth) slowing in California because of the real estate contraction, but the question now is the further exacerbation of the subprime problem, defaults and the like,” said Jim Diffley, managing director of regional services at Global Insight, the East Coast firm that prepared the survey.
One expert on the Bay Area economy, however, said the study overstates the size of the impact. First, economist Ken Rosen said, the GMP is inherently an imprecise measure that involves cobbling together varying economic indicators on a local level. Second, Rosen said he believes investors in subprime mortgages - who may be far afield - will likely bear the economic brunt of the subprime meltdown, not local economies. “Most of the loss is not to the homeowner, but to the owner of the mortgage, and they’re not regionally concentrated in the Bay Area,” Rosen said. “We’ve exported maybe a quarter of this loss to the rest of the world.”
Several recent studies have attempted to quantify the ripple effect of the subprime debacle. Last month, the Association of Community Organizations for Reform Now found that nearly 4,800 subprime loans made to Bay Area borrowers in 2006 probably will fall into foreclosure in the next couple of years, costing homeowners, cities and lenders as much as $1.5 billion. A report by another advocacy group found that foreclosures in the Bay Area could depress neighboring home values by as much as $11.6 billion.
And finally, research by the U.S. Senate Joint Economic Committee found that California homeowners are at risk of losing $23.6 billion in housing wealth if real estate prices continue to decline and foreclosures soar.
Many of these reports have the same goal: to persuade mortgage holders and loan services to agree to new payment terms with borrowers in an effort to reduce foreclosures and keep families in their homes - particularly those victims of mortgage fraud.
Earlier this month in an announcement with Gov. Arnold Schwarzenegger, four major subprime lenders promised to help California homeowners who could not afford skyrocketing mortgage payments. The four lenders - Countrywide, GMAC, Litton and HomeEq - said they would maintain the initial lower interest rates for some subprime borrowers whose rates are set to soar. That said, there are many questions about the timeline for the rate freeze, as well as how the process would be monitored and reported.
“The government in California has done the right thing,” Rosen said. “Loan modifications is a key thing preventing this from becoming a more widespread problem - it could prevent a quarter to a half of these foreclosures. It’s a very important, good start.”
The Federal Statute of limitations for all statutes enacted after December 1, 2000, is four-years (4) from the accrual of the cause of action, provided that the Federal Statute does not otherwise provide. 28 USC 1658. Since Sections 362 and 524 of the Bankruptcy Code were amended as of October 17, 2005, and since neither has a limitation period, the four-year statute would apply to any violation of the automatic stay or the discharge injunction.
What does it mean that HSBC is moving their SIVs to their balance sheet? Let’s start with the structure of an SIV (Structured Investment Vehicle). First an SIV has investors - like hedge funds or wealthy individuals - who invest say $1 Billion in the SIV (the equity). Then the SIV issues commercial paper (CP) and medium-term notes (MTN) that pay slightly higher rates than similar duration paper. The typical SIV, according to Fitch, uses 14 times leverage, so in our example the SIV would sell CP and MTN for $14 Billion.Now the SIV invests this $15 Billion ($1 Billion equity and $14 Billion borrowed) in longer term notes. The idea is simple: borrow short, lend long, hedge the interest rate and credit risks - and the profits flow to the investors in the SIV.
So what does a bank like HSBC have to do with this? Usually the bank sets up the SIV, attracts the investors, manages the SIV for a fee - and there was always the appearance that the SIV CP was backed by the bank - perhaps allowing the CP and MTN to pay lower interest rates.
So what is the problem? Some SIVs invested in asset backed paper, backed by home mortgages. Even though the SIVs almost always invested in the highest tranches (with no losses to date), the market value of these assets has fallen recently (not a news flash). This means that the investors in the SIV (the equity) have taken paper losses on their $1 Billion investment.
UPDATE: Note the following NAVs are for the equity portion. A NAV of 71% means the $1 Billion equity in the example is now worth $710 million.
In fact many of the SIV NAVs have fallen substantially. Moody’s says some SIV NAVs have fallen below 50%
Moody’s [on Nov 8th] stated that the average NAV across the SIV sector has fallen from 101% at the beginning of July to 71% at the beginning of November, and the shut-down of the CP market has led to realized losses in some cases.
However, the rating agency pointed out that there was significant variation between the NAVs of different SIVs, with some declining only to 90% and others falling below 50%.
Once the value of the equity falls enough (usually 50%) there is usually a trigger event forcing the SIV to liquidate the longer term investments. A forced liquidation might not only wipe out all the remaining SIV equity, but the holders of the CP and MTN might take some losses too.
This has made potential investors in CP and MTN (not to be confused with the investors in the equity of the SIV) to refuse to buy any more CP.
Since there is a duration mismatch - the investments are in longer term notes, CP is less than 9 months - the SIV is stuck with a liquidity problem when the CP comes due.
To solve this problem, a bank like HSBC could explicity guarantee the CP and MTN, and this would attract investors in CP and MTN again. But under accounting rules, this guarantee means the SIV belongs on the bank’s balance sheet. The structure stays the same - the SIV equity investors still take the losses - but there is no liquidation event. If the losses exceed the equity investment ($1 Billion in our example), then the bank would start taking losses.
From the HSBC article this morning:
[HSBC] insists earnings won’t be materially impacted, because existing investors will continue to bear all economic risk from actual losses.
Clearly HSBC think these is adequate equity in these SIVs to cushion the bank from any losses.
Finally, to the balance sheet!
The balance sheet lists the assets and liabilities of the company.
Moving the SIV to the balance sheet simply means adding the $15 Billion in assets (those longer term notes) to the Asset portion of the balance sheet, and moving the $15 Billion in CP, MTN and SIV equity to Liabilities. The new assets balance with the new liabilities, and there is no income or loss for the bank. Since the equity will take the losses first, any mark down in the $15 Billion in assets will be matched by a mark down in the liabilities - up to $1 Billion.
So what is the problem if there are no losses for the bank? There is an impact on the ratios of the bank - the reason the SIVs were off the balance sheet in the first place.
Follow this link for details on Citigroup’s own $41 billion SIV debate (”Should Citigroup Bring $41B On Its Balance Sheet?”), and how it differs from HSBC’s situation (”If HSBC Can Bail Out Their SIV, Why Can’t Citigroup?”): http://tinyurl.com/33srlj
Nov. 20 (Bloomberg) — They dubbed it “The Survivors’ Conference.” In early November, 2,000 people who handle asset- backed securities for a living crowded into a ballroom at the JW Marriott hotel in Orlando, Florida, just 3 miles from Disney World, to hear speaker after speaker explain why 2008 may be their worst year ever. The subprime crisis, which has claimed the jobs of three chief executive officers and prompted more than $45 billion in writedowns at the world’s biggest banks, may end up spilling into 2009.
“These events tend to become deeper and play out longer than most people initially expect,” says Michael Mayo, an analyst who covers securities firms at Deutsche Bank AG in New York. “This is one of the slowest-moving train wrecks we’ve seen.”
The tumbling U.S. housing market will continue to inflict the damage.
Mortgage-backed securities and collateralized debt obligations containing those securities are falling in price and won’t find their footing anytime soon. That’s because most of the subprime mortgages, which provide collateral for $800 billion in securities, have yet to go bad, says Christopher Whalen of Hawthorne, California-based Institutional Risk Analytics.
“The collateral is not yet problematic,” Whalen says. “That’s the next big shoe to drop.”
Housing Starts
Whalen says defaults will soar as the rates of low-interest “teaser”
mortgages held by borrowers with poor credit move up. At the end of August, about $46 billion in subprime loans, representing 225,000 homes, had defaulted, according to Credit Suisse Group. The number will more than triple to $143 billion by the middle of 2009, the bank forecasts.
Total subprime loan defaults will top out at about $270 billion, or 1.52 million homes, in 2010 or later.
Home builders are also facing headwinds. U.S. housing starts rose in October as an increase in condominium projects offset the weakest construction of single-family homes in 16 years. Builders broke ground on 1.229 million homes at an annual rate last month, up 3 percent from September, the Commerce Department said in Washington today. Building permits, a gauge of future construction, fell 6.6 percent to a 1.178 pace, the lowest since 1993.
Companies can’t trim their inventories because sales of single-family homes are declining as fast as construction, suggesting the real-estate recession will linger into 2008.
“Until housing prices bottom out, the writedowns won’t stop,” says Peter Kovalski, who helps manage more than $12 billion at Purchase, New York-based Alpine Woods Investments. “The Street wants things right away, but it doesn’t work that way.”
Level 3 Writedowns
Banks’ writedowns include assets that they classify as level 3, an accounting category which indicates the holdings are so illiquid that they can only be priced using the firm’s own valuation models.
Goldman Sachs Group Inc.’s level 3 assets rose by 33 percent in the third quarter of 2007 from the prior period because it was stuck with loans when the leveraged buyout market froze. Level 3 assets accounted for 6.9 percent of the firm’s $1.05 trillion total at the end of August, according to a government filing. Citigroup Inc. classified 5.7 percent of its assets as level 3 on Sept. 30.
The total global loss from the subprime mess, Deutsche Bank’s Mayo said on Nov. 12, may reach $400 billion.
Rating companies, under fire from investors for applying their highest ratings to CDOs that included securities backed by subprime loans, are downgrading the debt. Late last month, Moody’s Investors Service cut ratings on CDOs tied to $33 billion of subprime mortgage securities.
Citigroup Plummets
The ratings firm also threatened to downgrade structured investment vehicles with CDOs managed by Citigroup and HSBC Holdings Plc after two SIVs defaulted in October. Moody’s says it assumes the SIVs are unwinding their assets, selling at distressed prices, to refinance their maturing commercial paper. The so-called Super SIV, a fund set up by banks at the urging of the U.S. Treasury to buy the highest-rated securities, will seek to prevent a meltdown of the 30 SIVs globally holding $320 billion as of Oct. 5.
Wall Street profits are also plunging in the fourth quarter. Citigroup, the second-largest CDO issuer in the first half of 2007, may post a loss in the final period, according to the average estimate of 23 analysts compiled by Bloomberg News. That’s after the bank reported a writedown of as much as $11 billion, which cost CEO Charles Prince his job.
Merrill Lynch & Co., which replaced CEO Stan O’Neal with New York Stock Exchange head John Thain on Nov. 14, may report that profit fell 49 percent in the fourth quarter. Bear Stearns Cos. also may have a loss.
24,000 Job Cuts
At the five biggest securities firms — Lehman Brothers Holdings Inc., Morgan Stanley, Bear Stearns, Goldman Sachs and Merrill Lynch — earnings are expected to fall 8.3 percent in 2007 from a record $30.6 billion in ‘06, according to analyst estimates.
Lower profits mean more firings. Bank of America Corp., JPMorgan Chase & Co., Bear Stearns, Citigroup, Lehman Brothers and Morgan Stanley announced more than 24,000 job cuts in the first 10 months of 2007.
Gustavo Dolfino, president of New York- based executive search firm Whiterock Group LLC, says he expects the firms to fire another 5,000-10,000 people in ‘07.
The subprime debacle may echo through the economy the way the popping of the Internet bubble did — hurting consumers and growth years later. The
39 percent drop in the Nasdaq Composite Index in 2000 eventually led people to yank money from their mutual funds, Mayo says. The U.S.
economy fell into recession in March ‘01.
Economic Slowdown
At the conference in Orlando, investors concerned about another recession were in no mood for the usual festivities. The party thrown by Bear Stearns — the first Wall Street bank to have a subprime blowup — was almost empty at 9 p.m., with 10 people commiserating over beer and calypso music.
Bose George, an analyst at Keefe, Bruyette & Woods Inc. attending the conference for the first time, has an equally glum outlook on the already slowing U.S. economy. He says a decline in home equity loans will curtail consumer spending.
“Credit is a huge driver of growth, and it’s hard to see how this isn’t going to have an impact on the economy,” George says. “Things are going to get worse.”
There’s one bright spot for George: He’ll have more time for research.
Six of the 15 companies he used to cover, including American Home Mortgage Investment Corp. and New Century Financial Corp., have gone out of business.
To contact the reporter on this story: Lisa Kassenaar in New York at lkassenaar@bloomberg.net
