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Does the recent increase in foreclosures signal the long-anticipated surge in defaults of Option ARMs (adjustable-rate mortgages) that were scheduled to reset their interest rates right about now?
That’s a question that came to mind when I noticed the recent uptick in new home foreclosures.
Option ARMs gave borrowers a choice of paying principal and interest, interest-only, or else lower payments covering only a part of the interest and none of the principal. Most people paid on the low end, which increased their principal balances every month. Plus many of them had low “teaser” interest rates. These rates would reset after 5 years, or sooner if the principal balance reached a certain threshold, say 120% of the original amount. People could get more house for less money, but with a greater gamble that house values would continue to rise.
Since $600 billion worth of Option ARMs were made from 2005 through 2007, we are now right in the thick of when they were scheduled to reset. A similar flood of resets among subprime mortgages in 2006 and 2007 likely was a major cause of the “subprime mortgage crisis” which ignited the Great Recession. Around that time lots of smart folks were warning about this huge second wave of mortgage defaults and foreclosures that was to hit now.
But it’s not happening, or at least not nearly with the intensity anticipated. Why not?
1. Because many of these mortgages never got as far as their reset dates. They fell into default as the economy got worse and property values declined. They’ve just been part of the mix of mortgages in the foreclosure pipeline through these last two-three years.
2. Something like 20% of the Option ARMs have been modified by mortgage lenders and servicers, many into fixed-rate mortgages. Although mortgage modification efforts overall have been roundly criticized for their ineffectiveness, the lenders recognized their self-interest in avoiding the anticipated Option ARM defaults and so they were proactive with this category of mortgages.
3. Because the economy has been so slow in its rebound, interest rates have stayed extremely low for much longer than most anticipated. As a result the interest rate resets have increased mortgage payments much less than expected. In fact, in some cases mortgage payments have actually gone down.
4. Unlike subprime loans which mostly went to homeowners with shaky credit scores, Option ARMs went to borrowers with average or better credit. Those that have not already defaulted, and who are getting relatively modest payment increases at reset time, tend to be borrowers who can better afford to make the payments.
However, there still are millions of Option ARMs, most of which ARE requiring payment increases when they reset. A large percentage of ARMs are at least 30 days late. So although the reset impact is not nearly as bad as many anticipated, with the very shaky economy many homeowners with these mortgages, even if they had decent credit a few years ago, are very vulnerable now.
If you have an Option ARM, or any other kind of mortgage, and need advice about your options, please come in to see me.
In August, mortgage lenders started so many home foreclosures that the month-to-month increase was the biggest since August of 2007. For nearly a year the number of foreclosures has been relatively low as lenders have reacted to an explosion of challenges to the legality of their mortgage and foreclosure practices. But this new surge in foreclosure starts may reflect that the lenders think they have worked through these problems.
According to RealtyTrac, mortgage default notices–the first step in the foreclosure process—increased by 33% from July to August.
That increase has to take into consideration that July’s numbers had been relatively low. Not only had the number of foreclosure filings come down modestly—by 4%–from the prior month. They were also down significantly—by 18%–from a year earlier. In fact, July 2011 had the lowest foreclosure activity in 44 months.
Now with this 33% increase in August, the tide seems to be turning. But is it going to turn into a new wave of foreclosures?
That’s impossible to tell. Not only are there countless factors at play here, they shift all the time, reacting to the constantly changing environment.
Just take a look at one of the factors affecting how many foreclosures are filed: the ongoing legal challenges to foreclosures. These challenges are making their way through the court appeals systems. For example, just a couple days ago the Supreme Court of Alabama ruled that the embattled MERS (Mortgage Electronic Registration Systems) has standing to foreclose. That ruling will presumably open the foreclosure spigots in Alabama, because some lenders undoubtedly had held off on foreclosing while awaiting that ruling. Similar dynamics are at play in just about every state.
This means is that foreclosure trends can be very much a local and dynamic affair. This means you need local advice. Day in and day out I constantly deal with mortgage lenders, and help local homeowners make good decisions about their homes. Give me a call so that I can help you, too.
Don’t take for granted the extraordinariness of bankruptcy’s automatic stay. That’s the federal law that stops creditors from pursuing you, your money, and your other possessions the moment your bankruptcy case is filed.
In my last two blogs, I told you about the relatively rare situations in which the automatic stay does not apply—situations in which certain special creditors, or sometimes even all creditors, can continue collecting their debts. But let me emphasize again–the vast majority of the time, as soon as your bankruptcy case is filed, all creditor efforts against you and your property come to an immediate stop.
The automatic stay is so powerful because it is 1) fast and 2) very broad in what it covers.
Very few legal procedures work as quickly and efficiently as the automatic stay. To get anything done in just about any court usually takes weeks, months or even years. A complaint or motion of some sort needs to be filed, the other side usually has the opportunity to respond, then often there is a hearing of some sort, and finally a judge makes a decision.
But not with the automatic stay. It operates as a one-sided and immediate court order, made effective by the very act of filing the bankruptcy case. A judge isn’t even involved. The creditors have no immediate say about it. There IS a procedure for creditors to object and ask the judge for “relief from the automatic stay,” in other words, for permission to continue or start pursuing you or your money or property, but that’s after the fact. The automatic stay gives you an immediate breathing spell, whether your creditors like it or not.
This breathing spell protects you in just about every possible way from your creditors. It stops all phone calls and letters—“any act to collect, assess, or recover” a debt. The automatic stay stops all court and administrative proceedings against you from starting or continuing. Doesn’t matter if your bankruptcy is filed two minutes before the start of a civil lawsuit trial or the foreclosure of your house, the trial or foreclosure does not happen. If a judgment was entered against you in the past and the creditor is about to garnish your wages or checking account, these garnishments are stopped. If you’ve fallen a couple months behind on your vehicle loan payment and the repo man is looking for your car in the employee parking lot, the automatic stay sends him away empty-handed. If the IRS is about to record a lien against your home and vehicle to collect an income tax debt, the automatic stay stops the tax lien. Or if you already have a recorded tax lien and the IRS is about to grab your vehicle to pay the debt, your bankruptcy filing stops this enforcement of the tax lien.
This IS powerful medicine.
As with other strong medicine, it should be administered with the right guidance, and with help for dealing with any potential side effects. Stopping your creditors with a bankruptcy would essentially be the end of the story for many of them. But for other creditors—those with rights against your home or vehicles, or with special kinds of debts such as taxes and student loans—the breathing space gives us the opportunity to address each of these special creditors.
Contact me to get the immediate protection you need, along with the long-term financial solution for dealing with all of your creditors.
In VERY RARE circumstances, ALL of your creditors can pursue you even if you file bankruptcy. Here’s how to avoid those rare but dangerous circumstances.
In my last blog I listed three special classes of debts for which you can still be pursued in spite of filing bankruptcy. They are exceptions to the automatic stay, the broad protection from creditors that you get immediately when your bankruptcy case is filed. But in this blog today I’m talking about a circumstance in which the automatic stay does not apply to your case AT ALL, regarding ANY of your creditors. And about another circumstance that you can lose the protection of the automatic stay 30 days after your case is filed.
Because of the huge importance of the automatic stay, you absolutely want to avoid these circumstances, as rare as they might be.
For anybody who is thinking about filing a bankruptcy and has NOT had a previous bankruptcy case filed in their name in the last year, and then dismissed, you can stop worrying about this. Or if you have already filed a bankruptcy case recently and I’m getting you worried here, stop worrying if you did NOT have a previous bankruptcy case filed in your name, and then dismissed, in the year before your present case was filed.
But, IF you filed TWO OR MORE prior bankruptcies in the year before your new one, AND they were dismissed, the automatic stay does NOT go into effect with the filing of the new case. The automatic stay CAN go into effect AFTER the case is filed if certain conditions are met.
Or, IF you filed ONE prior bankruptcy in the year before your new one, the automatic stay EXPIRES 30 days after the filing date, unless certain conditions are met before then.
The details of the conditions for imposing or preserving the automatic stay are beyond the scope of this blog. What IS of immediate and absolute importance is that you must tell your attorney—AT the BEGINNING of your INITIAL CONSULTATION—if you have filed ANY prior bankruptcy cases, and especially any recent ones.
Now if you’re wondering who goes around filing multiple bankruptcy cases in one year?—it happens more often than you might think. It tends to come up two ways: 1) A person files a bankruptcy without an attorney, gets overwhelmed by the process and doesn’t follow through, so the case gets dismissed. 2) Or a person hires an attorney, signs some papers, and the case gets filed, maybe without the person even realizing it, and then gets dismissed because he or she (or the attorney, for shame) doesn’t follow through. In either case, eleven months later they’ve forgotten all about it. Or don’t think it’s important.
The point of these anti-automatic stay rules is to stop “serial bankruptcy filers,” the very, very small minority of folks who filed multiple bankruptcy cases, arguably abusing the bankruptcy process, usually to repeatedly delay a foreclosure or some other creditor action. But these rules can also seriously penalize innocent people in situations like the ones I just mentioned.
Avoid this happening to you by 1) thinking carefully about whether there is ANY possibility that you filed a prior bankruptcy case within the last year, and 2) then telling your attorney if there’s ANY chance that you did. If so, there’s a good chance the bankruptcy court can be persuaded to impose or retain the automatic stay, but only if your attorney knows about the issue in advance and determines whether your case so qualifies.
You can’t count that filing a bankruptcy will instantaneously stop every act against you by every one of your creditors. Or can you?
Isn’t one of the most important benefits of filing bankruptcy the fact that it puts a screeching halt to all collection efforts of your creditors against you and your property? Yes, and in fact in many cases it does exactly that. This benefit of filing bankruptcy is called the “automatic stay,” because at the moment of the filing of your case a legal injunction automatically goes into effect “staying,” or stopping, most actions by creditors against you. But exactly because the automatic stay is something we count on so much, we better know its exceptions.
Today I’m just going to list some of the most important exceptions. Then in the next couple blogs I will explain in practical terms these and other important aspects of the automatic stay.
So creditors CAN do the following in spite of your bankruptcy filing:
1) A district attorney or other governmental authority can begin or continue a criminal case against you, such as an indictment, a criminal trial, or a sentencing hearing. This includes not just felonies and misdemeanors, but also lesser matters like traffic infractions that you might not think of as “criminal.”
2) Your ex-spouse, or about-to-be ex-spouse, or somebody on his or her behalf, can start or continue a variety of divorce and family court proceedings. These include legal procedures to establish paternity of a child, determine or change the amount of child or spousal support to be paid, settle child custody or visitation issues, address domestic violence disputes, and even dissolve the marriage. (Although a marriage dissolution usually cannot include a determination about how assets or debts would be divided between the spouses.)
3) Specifically about child or spousal support, the person owed ongoing support can continue collecting it. If there is back support owed, then in spite of a Chapter 7 filing, the person who is owed the support can in most cases start or continue collecting it. This includes not only collection through wage withholdings and garnishment of bank accounts, but also through seizure of a tax refund and suspension of a driver’s license, an occupational or professional license, or even a hunting or other recreational license. In contrast, a Chapter 13 filing can stop these aggressive methods of collecting back support.
4) Taxing authorities can start or finish a tax audit, can send you a notice that you owe taxes, can demand you to file your tax returns, can assess your taxes and demand you to pay them, and in some situations can even file tax liens against you and your property.
Notice that each of these exceptions involves a special kind of creditor. As I said, the automatic stay stops actions against you by most creditors. But if you are involved in a court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse, be especially aware of these exceptions.
According to the S&P/Case-Shiller Home Price Indices, home prices are going up all over the country. Do these increases signal that we’ve reached bottom and are heading into a period of sustained price increases?
In my last blog I said that S&P/Case-Shiller 20-metro composite index had risen for the last three reported months in row (that’s April, May & June, because of their reporting lag). I remembered that in the last couple of years we had seen another time or two when the long downhill slide hit a price-rise bump, only to turn back down, and more than lose whatever had been gained.
So I thought it would help to compare this time to the recent prior upturns to see if we can get a clue whether this time will be different.
Let’s put the current increase in perspective. From March to June of this year the 20-metro composite index has gone up from 137.63 to 141.30, an increase of 3.67 points. (Remember that these numbers measure home prices at a point in time compared to the price pegged at a value of 100 in January 2000.) This 3-month period of increases feels minor compared to the initial 33 consecutive months of decrease in home prices during the initial sustained slide in prices from the July 2006 peak. During that slide the index fell from a high of 206.52 to 139.26, a loss of 67.26 points. That makes our recent 3.67 point uptick seem minor indeed.
Notice that initial slide ended at 139.26, in April 2009, and we’ve just passed through that same price territory this spring, two years later. What’s happened in the meantime?
Two years of comparatively shallow rises and falls in prices leaving us close to where we started at the bottom of that first slide. Two periods of consecutive months of price increases occurred but were not sustained. Six months of increases totaling 6.51 points, turned into 5 months of price decreases, then 4 months of increases totaling 5.55 points, were followed by a tumbling of prices down to 137.63 this last March, lower than the initial low point nearly two years earlier.
Just from looking at this recent history, our three-month, 3.67 point string of consecutive increases does not look very impressive. At 141.30 points in June, we haven’t gotten close even to where the index had climbed to even just last July, 148.98 points.
One positive sign is the geographic breadth of the current upturn. With the sole exception of Las Vegas, home prices in every other one of the 20 metropolitan areas have increased during this current 3-month March –to-June run. Of these 19 areas, 14 of them had increases in every single month, indicating some consistency within each market as well as across the whole country.
But this was all before the debt-ceiling fiasco, the Standard & Poor’s U.S. credit rating downgrade, and steep dives in both the stock market and in consumer confidence. Sorry to say, the recent signs are not promising for a steady and consistent increase in home prices.
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