No end in sight for home foreclosures
This article first appeared in the St. Louis Beacon, May 29, 2009 - No matter their age, sex or occupation, the size of their home or model of their car, on Thursday morning in U.S. Bankruptcy Court, Eastern District of Missouri, they shared a bottom line -- as debtors.
For more than two hours, a parade of attorneys took turns standing next to a court-appointed trustee on case after case of Chapter 13 bankruptcies -- 62 pages of them -- before a federal judge. The proceedings were orderly, at times congenial, in a stately paneled courtroom on the seventh floor of the Thomas F. Eagleton Courthouse. No matter how messy the debtors' lives, they clean up nicely when presented by an attorney in a business suit.
The majority of the debtors, as they are known in legal proceedings, didn't appear in person as Judge Kathy Surratt-States ruled on their court-supervised payment plans or requests for continuances. The exception: those asking for mercy because they had fallen behind on their payments. They risked having their bankruptcies dismissed and becoming fair game once more with creditors.
"I can pay $800 now and $800 tomorrow," one man told Surratt-States, as he reached into his pocket. He explained that he is now working more hours and promised to get current on his payments.
The judge granted a continuance until the end of June to see how he's doing -- and suggested that his attorney escort him to a bank. The court doesn't take cash.
"We don't want debtors to lose time from work, to take a chance of losing money or their job to show up for all of these hearings," explained attorney Rochelle Stanton of Frontenac, who specializes in Chapter 7 and Chapter 13 bankruptcies. "It's in the debtor's best interest to go to work because we can handle all the simple stuff. If it's a really bad problem, I'll tell the debtor to appear because it's hard for the judge to put a face with a name and then tell them that they're out of luck."
Chapter 7 bankruptcies work like liquidations, offering a clean slate for debtors who have little or no assets. Chapter 13s work to reorganize debt, a preferable option for debtors trying to hold onto assets, such as their homes. Debtors must prove that they have a dependable source of income and enter into three- to five-year debt payment plans, overseen by a court trustee.
Foreclosures keep coming
* According to the Mortgage Bankers Association, 12 percent of U.S. mortgages were in trouble -- either in foreclosure or delinquent by at least one payment -- in the first quarter of 2009, the highest level ever recorded. Nearly 29 percent of foreclosure proceedings involved fixed-rate prime mortgages -- not the sub-prime mortgages that started the foreclosure ball rolling.
* In April, foreclosure filings were reported on 342,038 U.S. properties, about the same level as March but an increase of 32 percent from April 2008, according to RealtyTrac, which tracks foreclosure data. Foreclosure filings include default notices, auction sale notices or bank repossessions.
* Missouri had 2,698 filings in April - about the same as March but a 21 percent decrease from April 2008. But all is not well: During the first quarter of 2009, one in every 153 housing units in St. Louis city received a foreclosure filing -- the highest rate in the state and about 2.4 times the state average, according to RealtyTrac. St. Louis County ranked second with one in every 202 housing units and Jackson County was third with one in every 214.
* Illinois saw an 11 percent drop in foreclosures in April, but the state's 13,647 filings were up 54 percent from 2008 and ranked fifth highest in the nation. Madison County ranked ninth in the state with 198 new filings and St. Clair County was 10th with 176.
Fresh from her court stint on Chapter 13s, Stanton wasn't surprised by the day's gloomy report from the Mortgage Bankers Association that U.S. foreclosures had reached a record high during the first quarter of 2009. Nor was she surprised that a growing number of homeowners in fixed-rate conventional mortgages are now in trouble.
"Down in the trenches we see it all the time -- and we see the worst of it,'' Stanton said.
She said that rising unemployment is compounding her clients' woes -- a fact also cited by the bankers association.
"Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve,'' said Jay Brinkmann, the group's chief economist in a statement.
But Stanton adds that even several years into the foreclosure crisis, many of the lenders she deals with are still not willing to modify mortgages to make them really affordable, and that they continue to tack on late fees and penalties that drive homeowners further into the hole.
"I'm thinking that some of those people would not be risking foreclosure if it weren't for the fact that the banks don't deal with them fairly,'' she said. "I don't think that people should miss their mortgage payments. I know that they're supposed to make their payments religiously. But if someone falls behind a month or two, you don't set it up to take their house. At two months, most of my clients get a 30-day letter from the attorneys saying it's already been turned over because the debtor is two months behind and is foreclosing.''
During the first quarter of 2009, new filings for Chapter 7 bankruptcies in Missouri's Eastern District rose to 2,467, up from 1,595 new filings during the same period in 2008. New filings for Chapter 13s actually declined slightly -- to 929 from 1,010 in 2008.
Stanton isn't surprised by those numbers, either. She said she is seeing fewer clients willing to put up a fight for their homes by filing Chapter 13.
"They do Chapters 7s now,'' she said. "They're resigned to give up their houses. They say, 'When the economy gets better, I guess I'll try again.' ''
Last resort: Tell it to a judge
In recent weeks, Legal Services of Eastern Missouri has hired a bankruptcy attorney to represent low-income clients facing foreclosure, said Dan Claggett, managing attorney for the agency's consumer unit. The staff expansion comes courtesy of a three-year, $250,000 grant from the Institute for Foreclosure Legal Assistance, a project of the nonprofit Center for Responsible Lending.
Filing bankruptcy can sometimes be a tool of last resort for homeowners trying to stave off the rapid pace of foreclosure in a non-judicial state, such as Missouri, where judges usually are not involved in the process, Claggett said.
"For clients who are behind on their payments and have some income coming in, Chapter 13 is oftentimes a useful tool for stopping foreclosure and getting them back on their feet,'' he said.
By filing for bankruptcy, debtors can address out-of-whack interest rates on car loans or credit cards that sap their budgets, pay arrears on mortgages and get second mortgages "crammed down" when property values have fallen below the principal owed, Claggett said.
Claggett praised the Obama administration's Making Homes Affordable plan that offers lenders incentives to modify loans to 31 percent of a homeowner's gross income. But he said the failure of bankruptcy reform legislation in April was disappointing because it would have allowed bankruptcy judges to go even further -- to step in and modify home loans to fair market terms.
The legislation, sponsored by Sen. Dick Durbin D-Ill., was voted down by the Senate on April 30. Advocates had argued that the sheer threat of empowering bankruptcy judges would have motivated mortgage servicers to restructure mortgages voluntarily.
"If the bank bill had passed, it would have given us extra leverage to modify a lot of these loans that should be modified," Claggett said. "Bankruptcy does hurt your credit score, and it remains on your credit report for years, so to that extent it's not helpful. But on the other hand, foreclosure also dings your credit, and I'm not sure a lot of clients who come to us have great credit to begin with, so saving their house through Chapter 13 may be the only viable tool to do that."
A growing sense of frustration with lenders convinced Karen Wallensak, director of the St. Louis Catholic Charities Housing Resource Center, to support the failed bankruptcy reform.
"I initially opposed the thought of letting judges cram down mortgages because I really did agree with lenders that eventually it is going to cost everybody," Wallensak said. "But in the end, during this last go-round with the legislation I endorsed it because I came to believe it was the only incentive for the lenders to actually modify loans. That threat hanging above their heads would be the only reason they would -- because they have shown no willingness otherwise."
Wallensak said her nonprofit agency, which provides free housing counseling, continues to be overwhelmed by troubled homeowners - from every zip code in the St. Louis area. Only about one home in four can be saved.
"I think we are still on the way down in terms of unemployment and foreclosures,'' she said. "I'm not sure the bottom is far off, and I do believe it will turn, but in the meantime more people in our area are going to lose their homes. I don't know how we can stop it at this point. We're doing what we can do, but when people have no income, there is not a lot that we can do. That is very sad, but that is the reality. You need money to make your mortgage payments."
Wallensak likened the work of nonprofit housing counselors to an episode of the TV series "M*A*S*H."
"I feel like right now, we're in this long episode where they were just triaging people -- setting them aside to die because they knew they couldn't save them. That's where we are now. We're just triaging in this war. And in those cases, we just have to advise them and help them as best we can to exit their homes. Because there's no hope of saving them."
Tomorrow is another day
St. Louis bankruptcy attorney Wendell Sherk says he has worked with clients who believe they have worked out loan modifications, only to be told months later that there was no deal.
To some extent, Sherk and area housing counselors say that such miscommunication can be attributed to the fact that the modification departments of lenders are overwhelmed by the number of foreclosure cases they are handling. But at the same time, they point out, the issues resulting from the complex pooling of mortgages have never been solved -- and lenders are still not willing to write down actual debt, even when homes have lost value.
Sherk suspects that in some cases, the mortgage servicers are offering temporary modifications that simply amount to stalling for time.
"A lot of the deals coming through seem to be designed to push the problem off a few years when hopefully the consumer will be making more and able to pay more," Sherk said. "There is no effort by the lenders to cut principal, the only way to ultimately save some of these homes. They're slowing down the foreclosure disaster. Instead of having another spike this year, it seems like their goal is to have a steady drumbeat of them."
Like Stanton, Sherk said that he, too, is seeing more people who are simply not willing to put up a fight to keep their homes out of foreclosure.
"They've already come to the realization that they can't do this. They don't want to get trapped in any modification that may put them into limbo for three or five years more. They'd rather just take their medicine and get it over with."
The attorneys say that debtors are finding that tightened credit has taken away the option to refinance, in many cases, and unemployment or fear of it has forced many to adopt a new attitude toward bankruptcy and foreclosure. Consumers are finally accepting that they have been carrying way too much debt and need to change their lifestyles.
"They've been paying so much to maintain that lifestyle -- and they often find that the sacrifices are not as painful as they feared -- they now get to sleep at night," Sherk said. "They might be living with less, in a smaller house that they are renting rather than buying. Or in an apartment. But they didn't like their neighbors anyway or they didn't like doing yard work. But getting their checkbook to balance every month or even thinking about putting away money for retirement is a nice consolation. It's a new level of frugality that we are seeing -- and that's wonderful. But it's a horrible way to get there."