Blog Topic

DIG YOURSELF A HOLE
Posted by: Darrell Castle
December 30, 2009

You have good credit when you get yourself in debt on purpose and then make payments on time every time and then you do it over and over again. Should you fail to make payments on time every time, you will have bad credit. When you continue to pile debt on top of debt, whether your credit is good or bad, you are digging yourself a hole and eventually you will pull the dirt in on top of yourself because you will not be able to repay the debt on time. The first time something bad happens such as a lost job or unexpected illness you are at the bank begging for mercy. You seek mercy in the form of loan re-structuring or Obama mortgage mitigation but you find no mercy.

People dig holes for themselves when they become more concerned about good credit than getting out of debt. A fixation on good credit or repair of a bad credit score is an indication of future trouble. Credit trouble should serve as a warning to people that credit is not always a good thing. In today's economic environment where unemployment is rising and foreclosures are common, if you can't pay cash or at least pay within the month, you don't need it.

Extending credit to so called sub-prime borrowers and other poor credit risks was big business before the collapse in residential housing prices. The borrower could be charged a higher interest rate and when he defaulted the house could be quickly taken and sold for a profit. Now mortgage lenders seem to be in a panic but I suspect it is because foreclosures are not so profitable anymore and not out of a since of mercy for borrowers.

To survive in this economy, forget about credit reports and whether they are good or bad. Get out of debt as fast as possible and stay out of debt. Consider advice from an experienced professional such as those at Darrell Castle and Associates. There is no charge for the consultation.

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PAYDAY LOANS
Posted by: Darrell Castle
December 28, 2009

A payday loan is a small, usually $50 to $500 short term loan with a high rate of interest. There is a reason why the Federal Trade Commission calls payday loans "costly cash." According to a recent FTC consumer alert, if you borrow $100 for two weeks at a cost of $15, the actual annual percentage rate is 391 percent. If you keep rolling over the loan every time it is due at a cost of $15 each time, instead of paying it back, you will soon owe much more than the original debt despite having paid $15 every two weeks.

There are many reasons why someone would get a payday loan despite the obvious rate of interest? Many people do not understand how interest rates work and $15 seems like a small price to pay for an immediate $100 which may be desperately needed. Some people have such bad credit and have so many IOU's out to relatives that they don't have access to traditional credit. The loan is discreet and can even be hidden from a spouse. In short, it is a fast, easy, and discreet source of cash.

I, like most bankruptcy attorneys, have extensive experience with payday loans. It is quite common for bankruptcy clients to have a long list of payday loans outstanding, and sometimes those loans are the force behind the need for bankruptcy. If you are considering a payday loan or you have a payday loan outstanding, that is an indication that your financial life is seriously out of order. It means that you have no savings, that you live paycheck to paycheck, that you have no relatives or friends that you can borrow from, and that you have a need that at least occasionally requires you to spend more than you earn.

If the above description fits you, consider the services of an experienced professional such as the ones at Darrell Castle and Associates. There is no charge for a consultation to evaluation your financial condition.

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OPERATION STOLEN HOPE
Posted by: Darrell Castle
December 23, 2009

The Obama administration continues to put more and more pressure on mortgage lenders and servicers to influence them to modify residential mortgages. Meanwhile, federal and state regulatory agencies, through a program called Operation Stolen Hope, are going after companies that promise mortgage relief and then don't deliver it. Since the program began on November 24, 2009 the federal Trade Commission has brought several lawsuits against many different companies.

Some of the violations these companies are alleged to have committed include: promising to use proceeds from refinancing of a mortgage to pay off the original mortgage but then pocketing the money; charging fees for promises to remove legitimate bad credit marks from consumers credit reports; misrepresenting themselves as federal agencies; promising refunds for failure and not delivering them; making unsolicited telephone calls to consumers pretending to be a lending agencies; claiming an almost perfect success rate and then refusing to refund fees; and promising to stop foreclosures without having any ability to do so.

There are always fraudulent people who survive by victimizing others and quite often their victims are the weakest and most vulnerable of us. The wolf always looks for the weakest sheep first because it is less likely to escape his attack.

If you are having mortgage problems and you are afraid of foreclosure, consider the services of an experienced professional such as those at Darrell L. Castle and Associates.

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SHADOW INVENTORY
Posted by: Darrell Castle
December 21, 2009

Bloomberg reports that unemployment claims went up again last week and the "shadow inventory" of houses went up as well. The "shadow inventory" contains houses that would be for sale if owners thought they could find a buyer at a decent price but since they can't they don't even put the house on the market. Bill Bonner in Daily Reckoning adds that houses owned by people about to make "strategic defaults" on their mortgages should be added to the list. Growing numbers of people, especially in states where real estate prices have been hit hardest, are making a strategic decision to default on their mortgages. This default is not out of necessity, but is simply because they think it is in their financial best interest to do so. About 5.5 million people have houses that are 20% or more under water.

The problem is too much debt and this is one way of solving it. Instead of pay it off, we write it off. A home owner can improve his balance sheet tremendously by doing nothing but walking away from his debt. For example, if a home owner owns a home on which he has a $250,000 mortgage, and that home is actually worth $180,000, he can improve his balance sheet by $70,000 by just abandoning the debt. If the lender is able to pursue the home owner for the balance, he seeks protection in bankruptcy court. Either way the house is taken by the lender and is removed from the "shadow inventory" and placed in the real inventory where it will add to the further decline in real estate prices.

The scenario that I just mentioned reflects a shift in attitude by the American public. The values of Americans are shifting before our eyes and that shift is killing the runaway consumerism that drove the American economy for many years. Many factors are contributing to this shift including: the rising cost and scarcity of energy to make consumer goods, Americans have run out of money and jobs to buy stuff, and most importantly the economic model of stimulating growth by inducing consumers to buy on credit no longer works.

Sooner or later all this debt that has built up in the American economy over the last 50 to 60 years will have to be de-leaveraged. That means it will have to be reduced through payment, forgiveness, or default. There is still time for individuals to get out of debt, but it should be done quickly.

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DEATH PLEDGE
Posted by: Darrell Castle
December 18, 2009

Most people in America who own a home have a mortgage on that home with a bank or other lending institution. Knowing the origin of the word mortgage might be instructive and helpful for us today. Mortgage is a French word derived by joining two Latin words "mort" (which means death) and "gage" (which means pledge). The literal meaning of the word then is death pledge.

The Wikipedia definition is "the transfer of an interest in property to a lender as a security for a debt-usually a loan of money." This pledge of money or loan allows a borrower, the mortgagor, to borrow from the lender, the mortgagee, enough money to purchase property he would not otherwise have been able to afford. The mortgage contract enables people to buy a home without having the entire purchase price up front. The property is pledged to the lender in the event the borrower fails to repay the loan as the contract dictates.

The term death pledge means that the mortgage dies when it is paid in full or when the property is taken in foreclosure by the lender. It also means that the mortgage survives the borrower's death and is binding on his heirs. Not even death will allow a mortgagor to escape the payment of the agreed price of the mortgage.

Congress has seen fit to protect mortgage lenders in bankruptcy. The terms of mortgages cannot be altered through chapter 7 or chapter 13 bankruptcy but defaults can be cured. For example if a borrower is behind in his payments to the mortgage holder and full payment is demanded and foreclosure is threatened, the borrower can pay the amount he is behind over a five year period and stay in his house. Perhaps this economic trouble that we are in will inspire Congress to show mercy to those losing their homes and give bankruptcy judges the authority to write down mortgages to current or real value and re-amortize the payments to an affordable amount. Time will tell but in the mean time get out of debt bondage as quickly as possible.

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THE UNEMPLOYED
Posted by: Darrell Castle
December 15, 2009

The New York Times recently conducted a poll of unemployed people and published the results in the Tuesday, December 15^th 2009 edition. The results of the poll "help to lay bare the depth of trauma experienced by millions across the country who are out of work."

More than half of unemployed workers have borrowed money from friends or relatives since losing their jobs . More than half have cut back on doctor visits or medical treatments because they are out of work. Almost half have suffered from depression or anxiety and 4 in 10 parents have noticed behavioral changes in their children that they attribute to their difficulty in finding work.

Half of respondents described the recession as a hardship that has caused fundamental changes in their lives. The longer the respondents were without work the worse the effects. I have mentioned many times that unemployment drives foreclosures and one quarter of those polled said they had either lost their home or been threatened with foreclosure or eviction because of missed payments. Difficulty paying bills was not the only problem experienced by the unemployed. Almost half said that unemployment had led to more conflicts or arguments with family members and 55% have suffered from insomnia. Nearly half admitted to feeling embarrassed or ashamed most of the time or sometimes as a result of being out of work. Men were significantly more likely than women to report feeling ashamed.

There was a feeling that the American dream had been upended. Many reported feeling that they were in danger of falling out of their social class, and many felt vulnerable and at risk. Nearly half said they did not have health insurance and the majority of those cited job loss as the reason. Over 40% moved to another part of the state or country to find work, and 44% reported job retraining or some other educational opportunities.

A general sense of optimism still exists because 39% anticipate improvement in their future, 36% expect it to stay the same while 22% believe it will get worse.

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THE LURE OF STORE CREDIT CARDS
Posted by: Darrell Castle
December 14, 2009

This post comes from an article in the New York Times of Saturday, 12-12-09 reported by Tara Bernard. The point of Ms. Bernard's article is to remind readers that there may be unwanted and unforeseen consequences to accepting the store clerk's offer to save 10% to 15% on your initial purchase if you apply for the store's credit card. She points out that before you accept the card there are some things you need to know.

1. If you carry a balance on the store card or if you miss a payment on the no interest portion of the purchase, you can wipe out all the initial savings and then some. Your credit score can also be hurt by it.

2. When the initial discounts and interest free time periods are gone many of these store cards are the same products often marketed to subprime borrowers who are willing to accept an unnecessarily high interest rate to get the credit.

3. During holiday shopping retailers may count on shoppers to concentrate on initial discounts and not see the future problems that can occur.

4. People who have weaker credit scores can be harmed more by a store card than a general purpose card. Credit limits are typically lower, than general purpose cards. Even small purchases can then make the store card to "maxed out" whereas a general purpose card would not be.

5. Sometimes borrowers are penalized with increased charges if they do not make all payments within the no interest period and these penalties wipe out all savings on the initial purchase and then some.

My advice is only use credit if you absolutely have to. If you do not have the money to pay for it you can't afford it and probably don't need it. Debt is the reason people can't make it through hard times. Paying the debt service often consumes the entire fruits of our labor. This is a foolish misconception sold to us by media marketing. Get off the debt treadmill right now.

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RECORD NUMBERS ON FOOD STAMPS
Posted by: Darrell Castle
December 11, 2009

Bloomberg.com reporting on a report posted Thursday, December 9, 2009 on the web site of the U.S. Department of Agriculture, states that a record 37.2 million people, or about one out of every eight Americans, received food stamps in September. The numbers were up 18% from a year ago and participation has set records for 10 straight months.

Nevada had the biggest increase in food stamp participation rates from a year earlier at 54% followed by Utah at 46.5%. Texas had the most recipients at 3.1 million followed by California with 2.9 million and New York with 2.6 million. Every state had an increase except Louisiana and that was because of the end of Katrina relief programs.

The federal government's food stamp program entitled Supplemental Nutrition Assistance Program (SNAP) expects about 35 million people to receive SNAP assistance each month for fiscal year 2010. Deputy Agriculture Secretary Kathleen Merrigan was quoted as saying "in this economic time, SNAP has been essential."

Yes, with unemployment rolls soaring and home foreclosures soaring and misery and suffering and poverty spreading across the nation, I suppose that food assistance is necessary. This should all be a terrible embarrassment to the nation as a whole but especially to the federal government. Government policies are so misplaced that one out of eight people need food assistance to live. There are many things that could be done and things that we could refrain from doing that would help restore manufacturing jobs in the U.S. It is the lack of good paying jobs that is driving the rise in poverty. The decision to end manufacturing has been a coldly calculated economic decision and that is a shameful thing.

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NO CREDIT; NO ECONOMY
Posted by: Darrell Castle
December 10, 2009

Today's report comes from an article in "The Daily Reckoning" by Douglas French entitled, "The Credit Crunch Continues." For the better part of 35 years but particularly in the last decade, banks have been shifting their lending from commercial and industrial (C&I) to consumers. This action has had the effect of shifting the nation's economic focus from production to consumption and "consuming more than one produces must eventually end in tears either for the spender or the lender or both." The shift to consumption leads banks to tighten their lending belts even more when consumers either voluntarily or through force start to exercise thrift. Consumer credit drives a large part of consumer spending which as we know is currently the American economy; therefore, no credit, no economy.

In order for an economy to grow in a healthy manner Commercial and Industrial lending must play a large part. When C&I lending is growing, businesses are expanding, profitable, and hiring. When C&I lending is falling, business are contracting, losing money, and laying off workers. The combined total of C&I as well as consumer loans outstanding contracted by nearly $300 billion during the first nine months of this year. In fact, business lending has contracted at a much faster pace than consumer lending. This is as a result the contracting economy but according to Douglas French it is also because banks have been deemphasizing business lending for many years. This shift from productive lending to nonproductive or consumption lending creates structural weakness in the American economy.

This information may seem nebulous but what it means for you and me is that wealth-producing jobs have stagnated and the existing workforce, ever shrinking, is working for enterprises that promote malinvestment such as construction and jobs dependent on consumer spending. Unfortunately this trend shows no sign of ending.

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A NEW PLAN FOR MORTGAGES
Posted by: Darrell Castle
December 07, 2009

The New York Times Sunday, December 6, 2009 in its business section as reported by Gretchen Morgenson entitled "Why Treasury Needs a Plan B for Mortgages" announced that "the Treasury Department conceded last week that the Home Affordable Modification Program its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10 month old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet. Ms. Morgenson goes on to report several reasons why this program has failed but she doesn't say much about what to do about it.

I have a different plan which I suggest after 30 years as a bankruptcy attorney and after numerous contacts with bankruptcy judges and other attorneys. Home mortgages which are in default could be saved in almost all cases, if the home owner truly wants to save the home, by giving bankruptcy judges the power to save homes by altering mortgage values. This is a standard bankruptcy procedure for secured property such as automobiles, and furniture, etc. although the cram down power of the courts was weakened by the Bankruptcy Reform Act of 2005. Once a home owner is in mortgage default and seeks bankruptcy protection the bankruptcy judge should have the power to write down or adjust the mortgage to its actual value and then re-amortize it. For example: if a home owner had a $150,000 mortgage on a home now appraised at $100,000 and he was in default for several payments, that home owner could file for bankruptcy protection and if he otherwise qualified the bankruptcy judge could lower his mortgage to the actual value and re-amortize the payments based on the new value and time remaining on the mortgage and at a more affordable interest rate

The opportunity for the home owner to save his home would be binding on the mortgage company and the home owner would have the force of law behind it. No expenditure of taxpayer funds would be necessary because normal bankruptcy procedure would prevail. When a company loans money to a person who falls on hard times and ends up in bankruptcy court, that company should suffer the consequences not the American taxpayers. Let me add that it is no picnic for the bankrupt debtor either. This is the way to solve our current mortgage crises, protect home owners, protect the equity of homes, re-equify existing home owners, and de-leverage the home market. It is such a simple system it has almost no chance of being enacted.

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BORROWERS UNDER WATER
Posted by: Darrell Castle
December 01, 2009

From an article in the wall Street Journal from Tuesday, November 24, 2009 we learn that one in four U.S. homeowners are under water meaning they owe more on their mortgages than their homes are worth. Nearly 10.7 million households had negative home equity in the 3^rd quarter of 2009. Negative equity mortgages pose a severe threat to a future housing recovery because they are much more likely to fall into foreclosure thus fueling the market of available homes and putting downward pressure on home prices. When the number of available homes continually rises, the number of new housing starts continually falls. This all means that fewer and fewer new homes are being built because there is no need for them since potential buyers have a ready supply of existing homes at relatively low prices. The fall in new housing starts ripples through the economy affecting many areas besides the building trades. Businesses such as furniture, heating and air conditioning, appliances, carpeting, glass, and many others are affected when new housing starts slow down.

Negative equity increases home owner risk because it makes it more difficult to sell the home. When a home owner loses his job and can't afford his mortgage, he can sell his home and find one cheaper or even rent but with negative equity he can't sell unless he pays money at closing. This series of events tends to force home owners into bankruptcy or other forms of default. Home owners who can't sell their homes find it difficult to take new jobs which require a move to a new city. Study after study shows that when home owner equity becomes negative home owners are much more likely to stop making payments whether they can afford them or not because they no longer see their homes as a store of value.

Some states are harder hit by all this than others. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgages than their homes are worth. Arizona, Florida, and California are the other states where home owners tend to be deeply under water. Bankruptcy relief is an option for many people because it can keep them in their homes even if they are behind on their payments. It can also take away other debt such as credit card debt and medical debt so that more money can be devoted to mortgage payments.

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