Debt Settlement Blog

Debt settlement plans, chapter 7 bankruptcies and loan modifications continue to implode as unemployment rates rise and home equity decreases.  Borrowers are modifying their second mortgages in high volumes as well.  Second mortgage lenders are typically quick to renegotiate terms, because bankruptcy and foreclosures yield huge losses.

A sudden, drastic drop in income last year had Bob and Roxanne Curry fearing they would become another foreclosure statistic.  He works at a brokerage firm and she runs a child care business out of their Queen Creek home. In mid-2008, her weekly income fell from $1,000 to $300 as fewer parents could afford day care.“I was robbing Peter to pay Paul to make ends meet,” Bob Curry said. “I started charging up credit cards and taking money from my 401(k), and then, in November, there was finally no more money to rob Peter from. That’s when we started to get behind on our mortgage.”  

The couple’s loan servicer wasn’t interested in working with them until they were at least two months behind on the home loan. Bob Curry then compiled a 39-page document requesting a loan modification, with advice from Jeff Underwood, vice president for the Central Chapter of the Arizona Association of Mortgage Brokers. Underwood is also with AmeriFirst Financial in Mesa.  “It took two months from the time that we first faxed in the paperwork for it to finally come to a close,” Curry said. “We did all that we could do. We didn’t get into a home we couldn’t afford.”  The couple was able to get their mortgage interest rate cut from 7.45% to 5%, and all late fees and charges were moved to the end of the loan.“Basically we saved about $700 a month,” Curry said. “The mortgage loan is fixed for five years, and so hopefully when that time comes we’ll be able to do what we need to do.”

The Currys are part of a growing trend of distressed homeowners reaching deals with their lenders to get back on track with their mortgage payments and remain in their homes. “We’re seeing more (mortgage) modifications and we’re also seeing for the first time … balance write-downs as part of a modification to avoid any sort of foreclosure,” said Andrew Loubert, vice chairman of the Arizona Foreclosure Prevention Task Force. “What didn’t work six months ago is working today. We are seeing the lenders more proactive in their understanding that the market has substantially dropped and as a result they need to be more flexible with how they handle balances and things like that.”

In April, 270,000 modified mortgages and repayment plans were completed nationally, according to Hope Now, a private sector alliance of mortgage servicers, nonprofit counselors and investors. It was the largest number in any month since Hope Now began compiling data in July 2007. It has not yet released any 2009 figures for Arizona.  In the Valley, President Barack Obama’s Homeowner Affordability and Stability Plan prompted some increase in mortgage loan modifications, Underwood said. “I do think that banks have opened up a little bit to the reality that if we don’t work with these folks, it’s most likely going to go to a foreclosure process and that’s not what the housing market obviously needs,” he said.

According to an article in the New York Times, in exchange for a hit to their credit score, borrowers may be able to negotiate significant discounts on their outstanding balances with increasingly desperate card companies: After helping to foster the explosive growth of consumer debt in recent years, credit card companies are realizing that some hard-pressed Americans will not be able to pay their bills as the economy deteriorates.

So lenders and their collectors are rushing to round up what money they can before things get worse, even if that means forgiving part of some borrowers’ debts.  Every major credit card lender is giving its collection agents more leeway to make adjustments for consumers in financial distress…

Debt collectors, who are typically paid based on the amount of money they recover, report that the number of troubled borrowers getting payment extensions has at least doubled in the last six months. In other cases, borrowers who appear to be pushed to the brink are being offered deals that forgive 20 to 70 % of credit card debt…

Just as mortgage lenders competed for years to be the first card to be taken out of the wallet, they are now competing to be the first ones paid back.  Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.

If you are presently delinquent on your credit card balances, now may be a good time to pay down that debt.  Card companies will offer loan modifications only to people who meet certain criteria. Most customers must be delinquent for 90 days or longer. Other considerations include the borrower’s income, existing bank relationships and a credit record that suggests missing a payment is an exception rather than the rule. Read complete debt article>

The Bush administration’s approach to today’s meltdown is to direct all its energies and largess to mortgage lending institutions. There is, as yet, no program to help distressed homeowners renegotiate the terms of their home mortgages with loan modifications or loan work-out plans. The president is opposed to further stimulus programs, even though private-sector investment in the United States has all but ceased.

It’s becoming increasingly clear, however, that while saving the banks may limit further calamities, it doesn’t really save anybody else. Even with government-guaranteed lines of credit, financial institutions are refusing to lend money.  Credit card debt continues to mount for Americans nationwide and affordability for housing has become a growing fear for many families in all types of neighborhoods. With the banks effectively on strike, an economic recovery, if there is to be one, must begin with the government injecting funds to those parts of the economy that need it most: infrastructure development, state and local governments, an alternative-energy sector. These are all programs to which Bush is firmly opposed.

In a sense, Bush’s inactivity is even less excusable than Hoover’s. Unlike Hoover, Bush could learn from the successes of New Deal and World War II-era programs to revive the economy. Keynes’s general theory of how to defeat depressions wasn’t around when Hoover was president, but it’s been with us now for seventy two years. What’s more, virtually every reputable conservative economist, from Martin Feldstein on down, now supports a government stimulus program. But Bush, drawing on no known body of economic thought, remains opposed. And with each passing day, the economic hole out of which we will have to climb grows deeper.   Read the complete article at Real Clear Politics.