December 21, 2024

Loan Modification Searches Go Parabolic – Making Home Affordable Guidelines

March 16, 2009 by 2 Comments

Loan Modification Enters Mainstream Vocabulary

If you had used the term “loan modification” six months ago, most people would have given you a blank stare.  With the passage of the Homeowner Affordability and Stability Plan, the term loan modification has now entered the mainstream vocabulary.  News coverage of the government plan to help homeowners with their mortgage problems via loan modification has generated  huge interest in this topic as can be seen by the increased Google searches on “loan modification”.

Loan Modification Assistance Programs

HUD’s website provides details on the modification program and also warns homeowners to beware of foreclosure rescue scams.

  • There is never a fee to get assistance or information about Making Home Affordable from your lender or a HUD-approved housing counselor.
  • Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!
  • Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
  • Never make your mortgage payments to anyone other than your mortgage company without their approval.

    • Need urgent help? Contact the Homeowner’s HOPE™ Hotline: (888) 995-HOPE

Making Home Affordable Refinance – General Features & Eligibility

Some of the features of the new loan modification program include reducing the interest rate to as low as 2%, increasing the mortgage term to 40 years and possibly reducing the principal balance of the mortgage loan.  Note that after 5 years, the interest rate could start to increase each year.

Some of the basic guideline qualifications are:

1.  applies only to a first mortgage on a principal residence,  2. income verification is required, 3. there must be a financial hardship, 4. the mortgage must be owned by Fannie Mae or Freddie Mac, and 5.  the current mortgage payment must exceed a specified percentage of monthly income.

HUD has an easy to use program on their website that allows a homeowner to determine program eligibility –  see Do I qualify for a Making Home Affordable refinance? Answer these questions:

Home Mods Get Complicated

In theory, a loan modification is a simple concept.  The reality of loan modification is that it has become ever more complicated, involving multiple parties and numerous financial, tax and legal issues.  The government has become deeply involved with loan mods and government programs tend to become complicated, confusing and bureaucratic.

At a minimum the following questions should be asked and the answers understood by every homeowner before deciding on a particular course of action.

1. Exactly what would be the terms of my proposed loan modification?

2. Are there tax issues involved?

3. Is the benefit of owning my home outweighed by the costs?  In other words, would I be better off renting after considering my income and all the numerous costs of home ownership?

4. What is the impact on my credit score?  It will be difficult to obtain any type of future loan with a low credit score.

5. If I decide home ownership is not the best option – do I let the home be foreclosed or attempt to negotiate a short sale with the bank?  What are the pros and cons of each option?

6. If I accept a loan modification but receive no principal forgiveness, does it make sense to stay in the home if the loan balance still exceeds the value of the home?  Any sale of the home under this condition would mean bringing money to closing that may not be available.

7. Is it cheaper to rent than to remain in the home after the loan is “modified”?

8. Will housing prices increase going forward?  Keep in mind that real estate prices in Japan are still far below the peak prices reached in 1990.  There is no divine rule which mandates an increase in housing values.

9. Are there legal issues involved with the loan modification that should be reviewed by my attorney?

Not much in life is simple.  Do your homework before you finalize any decision involving your home.


Filed Under: Housing, loan modification, Uncategorized Tagged With: , , ,

Debate On Loan Modification Continues: Free Enterprise Vs Free Government

January 1, 2009 by 2 Comments

The debate seems to intensify on a daily basis regarding the merits and legitimacy of for profit loan modification companies.  Officials of HUD, Hope and the banking industry continue their criticisms of the loan modification industry by noting that they offer for free the service that many borrowers are now paying for.

Consider some recent comments from both sides debating the merits of for profit loan modification.  Daily Herald

“You don’t need to go out and hire someone to help you,” said Michael Gross, managing director of mortgage servicing for Bank of America. “It is very, at times, frustrating to find a homeowner who has paid a for-profit company $3,000 to $5,000 in an upfront fee, when they could have gotten the same or better assistance free.”

“Nonprofits are not as efficient as the regular market,” said Moose Scheib, head of Michigan-based LoanMod.com, a loan modification firm that charges homeowners $1,500 to help renegotiate their mortgages. “I think the difference is probably more attention you get from us.”

“Once a borrower pays an unscrupulous loss-mitigation consultant and time is wasted, the damage has been done,” said Sarah Bloom Raskin, Maryland’s commissioner of financial regulation. “While we may be able to recover fees, we can never recover the lost time — time that the borrower could have used to work out a bona fide loan modification.”

“We are extremely concerned about the huge proliferation of for-profit companies making a buck on these people,” said Laurie Maggiano, senior policy adviser at HUD’s Office of Housing.

Clayton Sampson, founder of U.S. Housing Assist of Nevada, which launched in July, said nonprofits provide a great service, but added, “We have a lot of clients that need us.”

Sampson said he spent five years at a mortgage brokerage and his contacts have enabled him to customize workout plans for a homeowner’s lender. His firm charges a minimum of $2,500, but he said he would return the money if he was unable to help the homeowner.

Some developments that I foresee in 2009 include the following:

As the number of mortgage delinquencies and foreclosures increase, the loan modification business will receive more scrutiny from state and federal regulators.  I would expect that many more states will introduce tough licensing and bonding requirements for any firm engaging in the loan mod business.

Companies involved in the loan mod business may be required by regulatory decree to provide full disclosure to a potential customer that loan mod services are offered for free by various agencies.

If the number of complaints about loan mod companies grows dramatically, strict federal regulations may be passed.  For example, it is possible that HUD would  require that banks and loan service providers deal only with third parties approved by HUD on any loan modification.

The loan mod companies that remain in business will have to give potential customers a compelling reason to deal with them, especially as consumers become aware of the free loan mod services available.

Filed Under: loan modification, Mortgages Tagged With: ,

Is A Loan Modification Worth The Cost?

December 29, 2008 by 2 Comments

With the large number of people in arrears on their mortgages, various governmental agencies have been attempting to provide solutions.   Loan modifications have been proposed as the answer for over a year now.  The FDIC has recently been pushing this as the solution to keeping people in their homes and  spearheaded the effort to formalize and streamline the mortgage modification procedure.

From a practical standpoint of the person who is behind on their mortgage, the most important questions to ask, assuming that you want to remain a homeowners, are as follows:

  1. Do I qualify to have my mortgage modified?
  2. Will a loan modification help me in the long run?
  3. Should I pay someone to get a loan modification?

1.  As far as qualification goes,  a good place to start is by reviewing the new SMP guidelines – see Streamlined Modification Program – Who is Eligible? If a review of the guidelines leads you to believe that you qualify for a loan modification, a good way to start is by calling your loan servicer directly, whose phone number is on your monthly statement.

Be advised, however, that nothing is simple when it comes to a loan modification.  The process is controlled by different parties with different interests.   If your mortgage is not owned by Fannie Mae or Freddie Mac, the SMP guidelines that they issued may not apply to you.  A large percentage of mortgages originated over the last five years were sold on a worldwide basis to many different investors.  Generally speaking, the loan servicer that you are dealing with is operating under the guidelines of the investors who own your mortgage.  Some of these investors are willing to do a loan mod and some are not.  The terms of a loan mod that each investor allows will differ depending on their guidelines.

2. Whether or not a loan modification will help in the long run is a complex topic and will be the subject of another post.  Each loan situation is unique but if we examine the data from the Comptroller of the Currency, Office of Thrift Supervision, the results of a loan mod after 6 months showed re-default rates of 50 to 60%.

Three Months After Modification (30+ Days Delinquent)

Six Months After Modification (30+ Days Delinquent)

On-book portfolio (loans held by servicers)

35.06%

50.86%

FHLMC (Freddie Mac)

39.09%

57.87%

FNMA (Fannie Mae)

38.34%

57.11%

Private Investors

42.28%

60.76%

3.  Assuming that questions number 1. and 2. were answered with a “yes”,  a potential loan mod applicant should assess whether or not it makes sense to pay someone to do the loan modification for him.  The loan mod business seems to growing larger every day with a large number of companies offering to provide  loan mod services.   Some factors to consider when deciding whether or not to engage a loan mod company to help you include the following.

-How difficult will it be to get my mortgage modified?  The best way to get a preliminary assessment of this is to call your loan servicer, whose number is on your mortgage statement.  Depending on your situation and who owns your loan, it may be relatively simple to provide the servicer with the documents that they are requesting.  Many servicers and investors consider getting your loan current again to be in their best interests so they should be willing to help you out.

-If for whatever reason you do not want to deal with the loan servicer directly a call to a non profit organization such as Hope Now cannot hurt.  I have heard some people say that they have helped, some say that they are a waste of time; either way, a free phone call is an easy way to find out.

-Keep in mind that if you do engage the services of a loan mod company, they do not have any special powers of persuasion over the the investor owning your mortgage.   The loan servicer is going to make the same modified payment offer regardless of who they deal with.

-The price of a loan mod varies depending on what company you engage to help you.  I have seen prices ranging from $700 to $3500.  The amount of fees charged upfront also varies as do the service guarantees.  Some companies want the entire fee upfront and sometimes the entire fee is nonrefundable.

-If a loan mod company has expertise in the mortgage modification business they should be able to give you an accurate idea of what they can accomplish for you.  For example, there are some servicers (due to restrictions by the investor) who essentially refuse to modify a mortgage.  Regardless of who owns your mortgage, the loan mod company should be able to tell you give you a good idea of how your mortgage will be modified and what your new monthly payment will be.

-A principal reduction is done by very few servicers so if the company you are speaking to guarantees that they can do this for you,  be very skeptical.

-Do not work with any loan mod company without first checking their references.  There are few state or federal licensing requirements or proof of expertise required to enter this business so it is “buyer beware”.     Do not pay more than a modest nonrefundable application fee ($300 to $400 is common).  I would also not recommend engaging a loan mod company whose fee is nonrefundable.   You are paying for their expertise and they should know if they can help you before they take your money

-If your mortgage is delinquent by 90 days, which is usually required before a loan can be modified, do you really have up to $3,500 to spend getting your loan modified, when the odds of re-defaulting are up to 60%?

Conclusion:

There are reputable loan mod companies willing and able to get your loan modified for you and save you the time and hassle of paperwork and phone calls.   Considering the cost that most loan mod companies charge, your best bet is to directly contact your loan servicer or a nonprofit help agency first.

Filed Under: Housing, loan modification, Mortgages Tagged With: ,

Streamlined Modification Program – Who Is Eligible?

December 22, 2008 by 2 Comments

On December 18, 2008 the Federal Housing Finance Agency, Fannie Mae, Freddie Mac and Hope announced their Streamline Modification Program (SMP) to assist troubled homeowners.  By implementing common standards and procedures for loan servicers to follow it is expected that the process will expedite the process of modifying a mortgage loan for a troubled homeowner.

Am I eligible for assistance under the new Streamlined Modification Program (SMP)?

If the answer to all of the following questions are YES, you may qualify for assistance under the new Streamlined Modification Program (SMP).

  1. Is your mortgage principal equal to or greater than 90% of your home’s market value?
  2. Is your home a single family residence or condo?
  3. Is the single family residence or condo your primary residence?
  4. Is your mortgage past due by 3 months or more?
  5. Is there a financial hardship that caused you to become late with your mortgage?
  6. Did you take out your mortgage before January 1, 2008?
  7. Can you verify your income?
  8. Is your current monthly mortgage payment (including taxes and insurance) greater than 38% of your gross monthly income?

If you answered yes to all of the above questions you probably qualify for assistance.  Even if you think you may not be qualified, you should still call your loan service provider, who will try to arrange an affordable monthly mortgage payment.  The Federal Housing Finance Agency states that “The key to success is the borrower’s ongoing cooperation and communication with the (loan) servicer”.

Other Considerations

The loan servicer’s phone number is usually listed on your mortgage statement.   In addition, the participating loan servicers in the SMP will attempt to contact delinquent borrowers by phone and mail.

A homeowner’s mortgage may be in foreclosure but the borrower may not be in an active bankruptcy.  A mortgage that was modified previously is eligible.   The new SMP covers mortgages owned by Fannie Mae and Freddie Mac.  Mortgages with the FHA, VA and RHS are not eligible under this program.

The loan service provider is authorized to lower your interest rate to as low as 3%.   A struggling homeowner has nothing to lose by directly contacting their service provider to determine eligibility.

Filed Under: Interest Rates, loan modification Tagged With: ,

Details Of Streamlined Mortgage Modification Released

December 19, 2008 by 1 Comment

The Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac announced the details for streamlining the mortgage modification process for homeowners in default.  The new guidelines are an effort to standardize the eligibility requirements, thereby allowing the modification process to be completed more quickly.   Currently, the loan modification procedure is bogged down due to understaffed loss mitigation departments and varying rules which have turned the process into a two to four month ordeal for a homeowner already under financial stress.

Fannie Mae President Herb Allison stated that the new guidelines had been established by working with the Federal Housing Finance Agency (FHFA) and numerous lenders and service providers.  Mr Allison also noted that “These efforts are helping more than 10,000 delinquent borrowers every month get back on track”.

FHFA director Jim Lockhart noted that “I am pleased that our program is being rolled out right on schedule and that servicers are already working at modifying delinquent loans with the goal of keeping people in their homes”.

Loan Service Providers who administer the actual mortgage processing will attempt to notify eligible borrowers by mail of the details of the new Streamlined Modification Program (SMP).

The eligibility requirements for the SMP are as follows:

  • the borrower must own and occupy the home
  • the borrower is not eligible if he is presently in bankruptcy
  • the borrower must be delinquent at least three months
  • the borrower must have a loan to value of over 90%
  • the borrower’s income must be verified

The mortgage loan will be modified so that the borrower’s total monthly payment including escrows does not exceed 38% of his gross income.  To bring the ratio to 38% or lower, the term of the loan may be extended to 40 years and/or  part of the principal will be allowed an interest forbearance.   The interest rate on the modified loan may not be lower than 3%.  Any second mortgage on the property will be left outstanding.

There has been much controversy over whether or not the loan modification programs will ultimately work out well for the borrower since the loan principal is not being reduced.  As noted above, the servicer can make the borrower’s payment smaller by making a part of the principal interest free for a period of time (principal forbearance).   The homeowner, however, will in many cases still owe more on his home than it is worth and the reduced mortgage payment usually only lasts for 5 years.  It is therefore interesting to note that the new streamlined modification program does not allow for any type of principal forgiveness.

The loan modification process has generated a lot of controversy and criticism lately since the redefault rate was approximately 50% after 3 to 6 months.   Each party involved in the process has different interests to protect and were promoting different eligibility standards.   It will be very interesting to see if this new streamlined and standardized loan modification program will result in a smaller redefault rate going forward.

Filed Under: loan modification, Mortgages Tagged With: ,

HUD Loan Modification Program Called A Failure

December 18, 2008 by 12 Comments

None other than the Secretary of Housing and Urban Development has declared the HUD loan modification program, known as Hope for Homeowners, to be a failure.   Steve Preston, HUD Secretary , blamed Congress for the program’s failure.  “What people don’t understand is that this program was designed to the detail by Congress”.

The Hope program,originally expected to help almost half a million people, has had only around 300 applications since its launch.   The chairman of the House Financial Services Committee blamed the Bush administration for opposing features of the bill that would have made it acceptable to lenders and easy to use by homeowners in default on their mortgages.   There have been calls by others on Capital Hill to use a portion of the TARP funds to ease and expand the Hope program.

In theory, the Hope program would have been beneficial to both borrower and lender by turning a defaulted loan into a performing loan.  It was structured to refinance a homeowner into a 30 year fixed rate mortgage insured by the FHA.

In reality, features of the Hope program seemed to have been designed to make it unattractive to both borrower and lender.  Specific provisions that created problems and made the program basically unworkable for all parties were as follows:

  • there was no obligation on the part of lenders to participate
  • the FHA would only insure  a new loan for up to 90% of the homes value.  Cash strapped borrowers had no way of coming up with the cash for the shortfall on what was owed.  For example, a homeowner owing $150k on a house now appraised at $100k could get a new low rate mortgage of $90,000 but only if he could come up with the $60k balance due on the original loan.   Someone with $60,000 available would probably not be in default on the mortgage.   The only other option to bringing $60,000 cash to closing was to request that the lender write down the loan balance to $90,000, which most lenders politely declined to do.
  • in order to qualify for the Hope loan, borrowers had to sign a statement testifying to the fact that all of the information they provided on their original loan application was accurate.  With the large number of stated income loans done in the past, many borrowers could not sign such a statement.
  • fees were to be assessed on any homeowner refinancing under the Hope program, monies that many homeowners did not have.
  • there were also limitations on the allowable debt to income ratio on the new loan in order to qualify.  Many would not have qualified even under the reduced loan amount and lower payment.
  • since the government was sharing with the original lender a portion of the losses on the refinance and loan write down, a portion of any future price appreciation upon sale by the homeowner would be due to the government

The amount of the new loan allowed under the Hope program and insured by the FHA has now been raised to 96.5% in an effort to make a refinance more appealing to the original mortgage lender.

Additional change to the Hope program are expected after the new administration takes over in January.

Filed Under: Bailout, Housing, loan modification Tagged With: ,

Loan Modification Efforts Continue

December 16, 2008 by Leave a Comment

Despite the recent news that many of the mortgage loans modified have gone back into default, the loan modification effort continues.  Until a better solution is found loan modification efforts will continue, especially given the full backing by the FDIC and other government leaders.  It is likely, however, that the approach and methods will change to ensure that future loan mod efforts are more successful.

Bank United Announces New Loan Mod Efforts

Bank United announced today that it will intensify its efforts to save troubled homeowners  by outsourcing much of the work involved in a loan modification.   To anyone familiar with the delays and inconsistent procedures being employed by many banks in their loan mod efforts, this new approach is a welcomed fresh approach.  Many loss mitigation departments are overwhelmed with work, causing many months of delays before the homeowner receives any type of loan mod offer.   In many cases, the rules as to which loan is modified and under what terms also seems to be inconsistently applied.

Many of the $1 billion in delinquent loans at Bank United apparently are due to the large number of pay option arm loans that were originated.   Given the large drop in property values and the negative amortization features of the pay option arms, many borrowers in this category  have a large negative equity position.   The most probable course of action that Bank United will take for this category of borrower is to reduce the principal balance.   Without principal reduction, the borrower would still be in a negative equity position which frequently leads to default.  Unless the homeowner is wildly bullish about housing prices, very few people will continue to make payments on a $400,000 mortgage when the house is valued at $200,000.

With Bank United stock selling at 33 cents and almost 10% of their loans in default, they would apparently have little to lose by offering to put their borrowers in a stronger position through principal reduction.  As previously discussed, long term housing stability is based on strong borrowers.

Ocwen Shows High Success Rate With Loan Mods

Ocwen Financial reported that results with their loan modification efforts far exceed the industry results.   Ocwen is experiencing less than a 25% delinquency rate 60 days after the loan mod, compared to the industry average of over 50%.

CEO William Erbey stated that “The salient issue is not the efficacy of loan modification as a loss mitigation tool, but whether mods are being properly designed.   Our loan approach achieves the twin objectives of keeping homeowners in their homes and maximizing the net present value of the mortgages to the investors who own the loans.”

Mr Erbey further stated that “the re-default problem lies with how some servicers are doing modifications, not with concept of modification. It’s possible to do modifications right. It’s challenging, but we’re doing it — and doing it in a way that’s scalable.”

Ocwen’s good results seem to reflect it’s use of high technology applied on an individual basis.  Rather than having a loan mod decision made by an individual, the characteristics of the loan and the borrower are assessed using artificial intelligence technology.

To date, Ocwen appears to be an industry example of the right way to do loan modifications.  This year alone, Ocwen has kept over 60,000 borrowers in their homes with the mortgages now being paid on time.

Filed Under: Banking Industry, Housing, loan modification, Mortgages Tagged With:

Loan Mods Just A Warmup For The Real Thing-A Mortgage Holiday

December 3, 2008 by 1 Comment

It has become increasingly obvious that the central banks of the world will engage in whatever desperate actions are necessary in order to sustain and increase our already unsustainable levels of debt.  The ridiculous idea of providing more credit to a financial system already imploding from oceans of debt seems to be the only solution that makes sense to our policy makers.

The alternative to keeping the credit engine going is to accept the economic pain necessary to restore sound finances.  Since the short term financial pain  would include very high unemployment, lower stock prices, frugal living standards, more credit write downs and  more asset destruction, it is a certainty which path the political and monetary authorities will chose.  Quantitative easing, bailouts and government borrowings are all certain to see immense increases.  The risk of inflation and debasement of the currency brought on by these techniques is apparently viewed as preferable to the pain of deleveraging.

The false prosperity of the past 25 years has come from a parabolic increase in the national debt.  One credit bubble after another in various asset classes have now burst leaving us with destroyed asset values and mountains of debt that can never be repaid.

Real national income has been stagnant for the last decade; attempting to address this problem by borrowing money to maintain living standards does not work long term since the interest costs eventually overwhelm a static income level as shown on the chart below.  With interests rate essentially at zero the Federal Reserve is now forced to employ the unconventional methods that Fed Chairman Bernanke has spoken about in the past.  The deflation we are now facing makes debt payments ever more onerous to the borrower.  Debts too large to be repaid by definition will not be repaid – the only two options are to default or attempt to reduce the debt through inflation of the currency.  The Fed has obviously chosen the later option.


Since the consumer represents roughly 80% of the economy,  there will be massive efforts to put cash into the American consumer’s pocket.   Additional income will not come from wage increases with the present high level of unemployment.   Additional cash  will not come from borrowing  since the banks have thus far largely refused to lend to poor credit risk consumers.   Additional cash will not come from lower rates since the Fed is out of bullets on rate decreases.   Those who are financially responsible do not want to borrow or spend since they are trying to save to make up for the huge wealth destruction they have sustained over the past two years.

What is the solution on how to put more money in the pockets of those consumers most likely to spend whatever cash they receive?  The proposed stimulus rebate program is presently the government’s only and preferred “solution” to over leverage and static incomes.   The next move beyond this point will be to simply provide a way for the consumer to simply stop paying his bills without technically defaulting on the debt.

Since the largest monthly payment most consumers have is the mortgage payment, it is increasing likely that as the economy continues its downward spiral, the government will allow a mortgage holiday, as I have previously predicted. This once unthinkable action was actually proposed today by Gordon Brown in Britain, where consumers have distinguished themselves by becoming the most indebted citizens of the world.

As reported by the Financial Times, “Gordon Brown on Wednesday granted homeowners in financial difficulty the right to demand a two-year mortgage holiday, guaranteed by taxpayers, in a dramatic bid to underpin the housing market.”    You can be certain that this program will eventually be applied to all mortgage holders in many countries.

According to the Federal Reserve, total home mortgage debt as of the second quarter of 2008 was $10.6 trillion, roughly equivalent to 80% of the GDP.    Assuming an average interest rate of 6.5% on this mortgage debt, the cost to the government (who would pick up the tab) would only be $700 billion per year, oddly enough the same size of the presently proposed rebate program.  Since we have already partly institutionalized the repudiation of debt through loan modification programs, this step is only a natural progression but applied to a wider number of people.

This program would no doubt be eagerly embraced and wildly popular with cash poor consumers. It would put cash into the pockets of those most likely to spend it, thereby helping the economy.  The minority of those without mortgages may be upset until they accept the wisdom of “wealth redistribution” now being preached as a method of helping those in need.

My view is that we will all end up equally poor.

Filed Under: Bailout, Economy, loan modification, Mortgage Holiday, Mortgages Tagged With:

Debt Collection M&A Is Booming As Collections Collapse

November 24, 2008 by Leave a Comment

Business Week reports that amid a general collapse in the mergers and acquisitions (M&A) field, one area that is still booming is in acquisitions of companies that buy and collect on defaulted consumer debt.  Acquisitions of $1.8 billion this year already exceed last years total of $1.65 billion.

The apparent lure of the hot money M&A crowd is that with a collapsing economy, there is an ocean of debt that is defaulting giving the debt collectors an opportunity to cash in on chasing delinquent customers.  Every company in the country from small businesses to the S&P 500 list are finding out to their surprise that when you extend credit to already heavily leveraged and/or poor credit risks, it doesn’t take much before your customer is unable to pay.

My forecast is that the buyers of debt collection firms that the hot money deal makers are selling will not be sailing on their yachts next summer.

Borrowers of all credit levels suddenly have a new mentality:

-there is no job security and layoffs in the thousands are announced daily; even if I have the money, it is better to keep it in my pocket than to pay off overdue bills.  The choice between being able to buy groceries or pay off a delinquent bill is an easy one.

-the massive bailout of of the banking industry has caused much resentment among working people who justifiably perceive this to be a handout to those who caused the problem to begin with and in addition, made multi millions of dollars in the process.

-the idea that debts really don’t have to be paid back is being encouraged by the government’s bailout mania, especially with the institution of mortgage modifications for delinquent borrowers.  If I don’t have to pay my mortgage back, I am certainly not going to worry much about defaulted credit card debt.  The repudiation of debts is being encouraged by the very actions that the government is taking to contain the economic crisis.

-lending to many consumers, especially the weaker credits, has been drastically curtailed.  If I won’t be able to get new credit, why would I worry about the credit implications of not paying off old debts?

-I know many people who are not using bank accounts anymore, but cashing their paychecks and paying their bills in cash to forestall the seizure of their money by creditors who have judgments against them.

-the change of power in Washington along with the current job losses and declining economy will lead to a revision of the bankruptcy laws, essentially reversing the changes made in the recent past which made it much harder to file a Chapter 7 liquidation bankruptcy.  The debt collectors who think they can obtain a judgement and wage garnishment may soon find that their claims are now worthless.

-the most obvious reason that debts will not be collected easily or at all is the fact that the American consumer simply does not have the money; squeeze as hard as you want to – there is nothing left so nothing will be paid.   As reported in The Wall Street Journal,

“This should be the best of times for America’s debt collectors, since never has a society been so in hock. But ironically, much of the debt-collection industry is struggling because there’s little cash left to squeeze from strapped consumers.

Encore Capital Group Inc., a San Diego debt buyer, said third-quarter profit fell 30% to $3.8 million after its impairment provision for debt — an accounting term for debt it doesn’t think it can collect — rose to $7.3 million from $2.4 million. And Debt Resolve Inc. of White Plains, N.Y., said big losses at its debt-collection unit led to a second-quarter loss of $4.2 million.

“More and more accounts are going out to debt collectors, but it’s harder than ever to collect,” said John Nemo, a spokesman for ACA International, a Minneapolis-based trade group that includes 3,500 of the country’s estimated 4,500 collection agencies.

“There may be no other industry that has such immediate knowledge of consumer liquidity,” said Paul Legrady of Kaulkin Ginsberg Co., a Rockville, Md., consulting firm that advises collectors and others who manage accounts-receivable. The company publishes the Kaulkin Ginsberg Index of indicators such as corporate charge-offs of unpaid debt. “There’s been a clear downward trend for the past year,” Mr. Legrady said.

The slump also hurts businesses that supply equipment and services to debt collectors. Soundbite Communications Inc., a Bedford, Mass., company that makes automated robo-callers for debt collectors, told investors recently that it expects sales to agencies to decline in the second half of this year.

“Their ability to actually collect payment is significantly reduced because more and more debtors are simply unable to pay,” said Soundbite’s chief executive, Peter Shields. he said. As a result, debt-collection agencies are “becoming more selective in their spending.”

Good luck to the new owners of the debt collection agencies – I would say that the other side of this trade got the better deal.

Filed Under: Bailout, Economy, loan modification Tagged With: