Wednesday, January 28, 2009

Seven Big Reasons for the Nation’s Financial Mess

1. The failure of the Federal Reserve Board, the FDIC, the OTS and the DOJ to regulate the subprime mortgage originators and to impose more detailed and informative disclosure statements on the ARMS and Option ARMS. If many of these exotic loans had been classified as consumer products, they would have been banned by the Consumer Products Safety Commission. The failure of the SEC to adequately investigate any of the regulated enterprises under its jurisdiction was also a substantial factor with the Bernard Madoff case being Exhibit Number One.

2. The failure to increase and enhance financial market regulations after LTCM. Long-Term Capital Management was a hedge fund that blew up in 1998 after losing $4 billion investing in complex derivatives, necessitating a federal bailout. A movement quickly began to regulate derivatives like mortgage-backed securities through the Commodity Futures Trading Commission, but then-Fed Chairman Alan Greenspan, then-Treasury Secretary Robert Rubin and others blocked those efforts, which helped set the stage for the 2008 meltdown. And, Greenspan was also a strong advocate for the ARMS and Option ARMS mortgage products.

3. The repeal of the Glass-Steagall Act. In 1999, Congress repealed the Glass-Steagall Act of 1933 after the financial services industry gave more than $80 million in campaign contributions to members of Congress on both sides of the aisle. Former Senator Phil Gramm of Texas led the supporters of the repeal efforts. The repeal eliminated the separation of commercial and investment banking mandated after the Great Depression. This allowed big banks to get even bigger and subjected depositors to the risk of a whole new array of speculative investments, such as MBS and other derivatives.

4. The failure to create any type of regulatory structure to deal with the credit-default swaps and other forms of derivates that created trillions of dollars of contingent liabilities.

5. The failure to rein in Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac were private companies backed (and now owned) by the federal government that buy and then securitize home mortgages from lenders who originate them, thus providing liquidity to the U.S. mortgage market. These companies also created, sold and invested in billions of dollars of MBS and, more than any other player, fueled the MBS market. In 2005, after an accounting scandal at the companies, Congress sought to more closely regulate Fannie Mae and Freddie Mac and prohibit them from owning MBS. The bill failed to pass. Fannie Mae and Freddie Mac then increased their costly participation in the MBS market, which eventually led to their takeover by the federal government.

6. The SEC let banks pile up new debt. In 2004, the five largest Wall Street investment banks convinced the SEC to exempt their brokerage units from an old regulation (the "net capital rule") that limited the amount of debt they could take on. This unleashed the Wall Street firms to borrow billions of dollars to invest in MBS, credit default swaps and other risky, exotic securities. Bear Stearns, for example, was leveraged 33 to 1 when it melted down — for every $1 in capital it had $33 in debt. Lehman Brothers' $613 billion in debt made its bankruptcy the largest in U.S. history —10 times larger than Enron.

7. The abuses of the Community Reinvestment Act. Congress passed the Community Reinvestment Act in 1977, and revised it in 1995, to encourage banks to make home loans to lower-income customers, in part to expand home ownership. The intentions were good, but abuses led to unsafe lending practices, which led to many defaults and contributed to the 2008 credit market meltdown. Many of the subprime originators used the Act as cover to make hundreds of thousands of loans that they knew the consumers could not pay once the first reset date occurred.

About the Author: O. Max Gardner III has been a licensed attorney in North Carolina 1974 and is a member of of the National Association of Consumer Bankruptcy Attorneys. Mr. Gardner is AV Rated with Martindale Hubbell and is frequently a featured speaker on Consumer Bankruptcy Law at numerous National and Local Bankruptcy Seminars and Conferences.

Saturday, January 17, 2009

Circuit City Bankruptcy Could Cause Problems for Bargain Hunters

On November 10, 2008, Circuit City filed for reorganization under Chapter 11 of the United States Bankruptcy Code. However, Circuit City was unable to find a buyer or obtain a refinancing deal. Instead, Circuit City will convert to a Chapter 7 liquidation. This will result in the closure of its remaining 567 stores and more than 30,000 employees will lose their jobs.

As Circuit City liquidates the remainder of its inventory, consumers will undoubtedly be looking for bargains. However, those bargains will come with a risk. Circuit City will most likely adopt an "all sales are final" policy, so returns and exchanges of damaged or defective merchandise may be difficult.

The risk is particularly great when purchasing a big-ticket time such as a flat-screen TV, which may be difficult or extremely inconvenient to replace or repair. In some cases, the manufacturer's warranty may be sufficient to protect the consumer. In other cases, the buyers may be protected by extended warranties provided and administered by third parties that may be obligated despite the Circuit City bankruptcy.

With enough care and research, consumers will be able to find fantastic bargains due to the misfortune of Circuit City. The following tips may provide some additional protection to buyers:
  1. Make your Circuit City purchases on a credit card. Even with a "no return" policy, you might be able to dispute credit card charges in case you have a problem with the merchandise. Federal law gives consumers broad protections when it comes to credit card purchases.

  2. Investigate the terms of the warranty before you buy. Some manufacturers like HP require you to send in an item to be repaired rather than offering an exchange or replacement. Other manufacturers are more generous with their replacement/repair policies and will promptly send replacements for defective merchandise.

  3. Avoid extended warranties. This informative article includes a list of 5 important reasons to avoid extended warranties or service contracts. If Circuit City is out of business or fails to transmit the money for the warranty to the third party administrator, the extended warranty or service contract may be worthless. Circuit City also offers an in-home repair service, but it can be difficult to schedule an appointment.

With care and proper investigation, the unfortunate demise of Circuit City may allow consumers to find excellent bargains on electronics. However, care should be taken before making a purchase.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Tuesday, January 13, 2009

Bankruptcy and Loan Modifications: Hype or Help?

You may have heard commercials from attorneys and loan modification gurus offering loan modification services through bankruptcy. They are probably referring to proposed legislation called the Helping Families Save Their Homes in Bankruptcy Act. Beware of the hype, because this has not become law and may change significantly before it becomes law, assuming it becomes law at all.

How Current Bankruptcy Laws Impact Mortgages

Under current bankruptcy laws, debtors who qualify can file a Chapter 13 repayment plan bankruptcy proposing to strip unsecured liens, other than a first mortgage, from their home. Lien stripping is available if a second mortgage is completely unsecured (i.e. the fair market value of the home is less than the balance on the first mortgage). The following example may illustrate the point better:

Example: In 2000, husband and wife purchase a home for $500,000 with 100% financing, including a $400,000 balance on their first mortgage (30-year fixed rate at 6%) and $100,000 on a second mortgage (adjustable rate mortgage). in 2008, the home value has dropped to $350,000 and the formerly happy homeowners now have $50,000 in credit card debt because their mortgage payments are now beyond their ability to pay. In a Chapter 13 bankruptcy, the debtors have the capability of completely removing the second mortgage and treating it as unsecured. However, current bankruptcy laws do not allow any type of modification to the first mortgage.

What Will The Proposed Legislation Do?

A common frustration that I hear from potential clients is that they cannot get their lender to modify their mortgages to a more reasonable payment or interest rate. With falling home values and spiraling mortgage payments, adjustable rate mortgages are a common cause of home foreclosures. The Helping Families Save Their Homes in Bankruptcy Act makes the following proposals:

  • Eliminating a provision of the bankruptcy law that prohibits modifications of first mortgages;
  • Changing the Chapter 13 debt limitations to allow more debtors to qualify for a Chapter 13 repayment and lien stripping plan;
  • Permitting bankruptcy judges to modify variable interest rates with a new interest rate that will keep the mortgage affordable while allowing creditors to get a fair return on their investment;
  • Make filing bankruptcy easier by waiving the pre-bankruptcy credit counseling requirement for families facing imminent foreclosure; and
  • Requiring lenders to give proper notice when assessing fees and allowing judges to waive prepayment penalties.
When Will These Proposals Become Law?

It is too early to tell if the proposals will even become law, let alone what the final law may look like. Supporters and lobbyists are lining up on both sides to have their say and there are 2 different versions pending, one before the Senate and one before House of Representatives. For now, the best advice is to ignore the hype and remain watchful. In the meant time, contact a qualified bankruptcy attorney if you are facing foreclosure or need other debt relief assistance.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Sunday, January 04, 2009

Gift Cards and Bankruptcy: Now What?

Now that the holiday season is over, shoppers are flocking to stores to use their new gift cards. But what happens if the retailer that issued the gift card files for bankruptcy? Unfortunately, a gift card may be worth little or nothing if this occurs.

Consumers in California might have an extra measure of protection. California Civil Code § Section 1749.6(b) requires a retailer to honor gift certificates issued before the bankruptcy filing. However, this law may conflict with federal bankruptcy law and no court has ruled on the effectiveness of this law.

Retailers that file for reorganization under Chapter 11 of the Bankruptcy Code generally intend to stay in business. They will usually ask permission from the bankruptcy court to honor gift certificates in order to maintain good customer relations. However, there is no guarantee that the court will grant permission to accept gift certificates.

If the court will not allow the retailer to honor the gift certificates or if the retailer is going out of business and files for Chapter 7 liquidation, the card holder becomes a creditor of the bankruptcy estate. Gift certificates are considered unsecured debt and would have 7th priority among unsecured creditors. Many other types of creditors would have higher priority, including secured creditors and employees with unpaid wage claims. In fact, the holder of a gift card willlprobably receive only a percentage of the value of the gift card assuming the bankruptcy estate even has enough assets to pay creditor claims.

In the end, the best thing to do with a gift card is to spend it as soon as possible. There is never a guarantee that the business will survive for the recipient to use it.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Friday, January 02, 2009

What Does the New "No Texting" Law in California Really Include?

Under a new California law effective January 1, 2009. it is now illegal write, send, or read a "text-based communication" while driving. While most media outlets only make reference to the common practice of sending and receiving text messages from a cell phone, the new law also applies to any type of electronic communications such as testing, instant messaging and email.

First time violators will be fined $20 and then $50 for each violation after that. The law does not apply to situations where the driver is using a phone to look up a number to place a phone call. The law does not apply to "emergency service professionals" such as police officers when the electronic communications occur in the scope of their duties and while in an authorized emergency vehicle.

California drivers were previously banned from using their cell phones while driving unless they used a headset or a speaker. Passed in 2006, that law did not cover texting or emails.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.