Negative equity drastically increases foreclosure risk. This Christian Science Monitor article notes that the current focus of existing home mortgage modification programs–reductions in monthly payments and interest rates–is misplaced, because the real culprit may be the fact that so many people simply owe far more than their houses are worth.
While lenders may be willing to shave down monthly payments and interest, should they also be willing to shave off tens of thousands of dollars of principal on loans? Does the cost of foreclosure outweigh a discount on the debt?
The above article reminds me of the Tennessean’s 2009 article that the “Making Home Affordable” Modification Program wasn’t helping the foreclosure crisis as expected.
So far, the federal programs look to cure certain symptoms, but can’t seem to reach all of the problem, sort of like plugging a hole and then having another leak spring up.
When talking about big corporate bankruptcy reorganizations, things like “running leaner operations” and “payment in full” (with interest!) to creditors are generally really good things. (Extraordinary things, actually, in Bankruptcy Court.)
But, for the 2,500 employees who are part of the “trimmed” operations of Utah’s Flying J gas stations, the remarkable success of the Bankruptcy is of little comfort. Tennessee based Pilot Travel Centers bought out the assets of Flying J…let’s hope they’re on the market for some people to run the stores.
The Nashville Business Journal reports today that the foreclosure rates have dropped in the middle Tennessee area for May 2010. Regardless of what happened in May, I expect the foreclosure numbers to spike in June, and then virtually disappear in July and August, 2010.
Here’s why: On April 27, 2010, Governor Bredesen signed House Bill 3588, adding Tennessee Code Annotated 35-5-117, which imposes new notice requirements prior to foreclosure on an owner-occupied residence. This law takes effect on July 1, 2010 and applies to any such foreclosure that is published on or after September 1, 2010.
Long story short, this new law effectively requires that a new pre-foreclosure notice, called a “Notice of Right to Foreclose,” be sent to delinquent borrowers at least 60 days prior to the first foreclosure publication date. This law is designed to allow the borrowers to explore refinancing or mortgage modification options. This notice requirement applies, regardless of whether any notice is required under the loan documents.
Knowing that the law had changed, many lenders may have rushed to foreclose prior to the new requirements, which would explain any increase in the June numbers. But, for any remaining residential foreclosures, those would be completely stayed in July and August, while the lender waits for the 60 day notice to run.
If your newspaper seems a little lighter over the next two months, this is why.
It only takes one lawsuit from a Bankruptcy Trustee to prove that, despite all the talk about fairness and equality, an avoidable preference lawsuit is one of the most unfair creations of the Bankruptcy Code. For those lucky few without first-hand experience, here’s the summary: A bankruptcy trustee may be able to sue creditors to recover payments received within the 90 days preceding the bankruptcy case filing. Lenders who have no collateral for their loans are particularly at risk for such actions.
Faced with account payments from customers who may be on the verge of bankruptcy, make sure to document all payments received during that 90-day period and how they were applied. These payment records will be critical to an “ordinary course of business” defense if you are sued. For material suppliers, be sure to advance new funds or sell goods after payment (thus triggering the “new value” defense) or upon cash terms (triggering the “contemporaneous exchange” defense).