Bankruptcy Creates Many Problems in Mortgage Loss Mit

Behrooz Vida, a consumer bankruptcy attorney at the Dallas-based Vida Law Firm, believes facilitating loan modifications in the bankruptcy process is not working, and that lenders should be more willing to work with borrowers that are in the process of a bankruptcy. Vida was a panelist at a SourceMedia loss mitigation conference in Dallas Thursday. Another panelist at the conference, Patricia Hennessy, vice president of bankruptcy and probate for BBVA Compass (BBV) argued that since a bankruptcy filing limits creditors’ access to individual debtors, the borrower should contact the bank. Vida responded that banks should access court records of borrower assets and liabilities — made public record after a bankruptcy filing — to facilitate a loan modification. Total bankruptcy filings are projected to top 1.63m in 2010, and increase nearly 10% and nearly 9% in 2011 and 2012, respectively, according John Griggs, chief operating officer of Fort Worth-based Ascension Capital Group. Griggs said the rate of bankruptcy filings closely follows rates of foreclosure, unemployment and strategic default. Ascension projects unemployment will remain high through the end of 2010, then flatten out and reduce and hover around 8% by late 2011 or early 2012. In addition, the value of option adjustable-rate mortgages (ARMs) that will reset will peak at approximately $35bn by early 2011, with some borrowers seeing their monthly payments increase by as much as 80%, driving more bankruptcy filings. Jim Cruzan, corporate counsel for Ascension Capital Group, suggested that the courts take on the task of facilitating a loan modification, a notion Hennessy strongly objected to. “We can’t have judges deciding what a lender’s rights are or what a person should pay,” she said, adding there are concerns for the impact such a move would have on neighboring properties, as well as the lender’s business. Vida took the position that banks should add bankruptcy capabilities to their loss mitigation software systems, but Hennessy said that’s impossible since every bankruptcy judge interprets the federal code differently. Instead, Hennessy said lawyers should encourage their clients to obtain a loan modification before they file for bankruptcy. Then, after filing, the borrower can reaffirm the debt, pay the new lower payment and keep his or her home. Vida argued a lawyer opens themselves up to potential litigation if they encourage a client to take on a loan modification and then the borrower later can’t make the payments. In addition, Vida said banks do not move quickly enough to process a debt reaffirmation on a mortgage, modified or not, before the 60-day time period. “I’ve got to rely on the mortgage company to send the paperwork to me,” he said. In the case of BBVA Compass, Hennessy said there are approximately 7,400 borrowers with real estate loans that are currently in a bankruptcy. The bank is the 15th largest in the country, and larger institutions likely have even greater numbers. The problem is just too large for banks to make that much contact, she said. “In the communication process, we would look more to come from your side of the street,” Hennessy said. “We’re told to shut up and sit on our hands” once the bankruptcy is filed. The panel brought many opinions to the table, but the magnitude of the challenges in complex bankruptcy and mortgage loss mitigation created many questions. Write to Austin Kilgore. The author held no relevant investments.