Consider the following points when considering whether we are witnessing the next residential real estate bubble:
- The U.S. Census Bureau released median income statistics on September 21, 2009. Do your buyers' have income above or below the Median Income (see, http://www.census.gov/hhes/www/income/statemedfaminc.html)?
- The IRS released updated expense standards effective November 1, 2009. Are your buyers' actual household expenses above the IRS National Standards (see, http://www.irs.gov/businesses/small/article/0,,id=104627,00.html)? Will their actual household and utility expenses exceed the local standard for their state (see, each state's local standard at http://www.irs.gov/businesses/small/article/0,,id=104696,00.html)?
- If their average monthly income (gross income before taxes) is less than the median income in their state, can they afford the home they are trying to buy?
- If their household expenses exceed the IRS standards and their average monthly income is less than the local median income, can they afford that home? Can they still afford that home even if their average monthly income exceeds the median?
- If your buyers did not qualify for the home buyer's credit, would they still be able to purchase that home?
- If that loan they are applying for is not a fully amortized loan, given the above, if it were fully amortized, could they afford the payments?
- If a new home buyer should have 6 months of actual household expenses, including mortgage payments, saved in the event of job loss or other catastrophe (a real possibility today), do your buyers have sufficient reserves?
- If the banks/lenders/servicers in your area were to release their inventories into your marketplace, what would befall the valuations in your marketplace?
- If foreclosures were to return to their natural progression and cycle, rather than being slowed by trial loan modifications and other market manipulations, what would happen to the price of homes being purchased by first time home buyers?
If any of this analysis sounds familiar, it is! From October 2001 through April 2007, home prices accelerated based upon an artificial manipulation of affordability by the credit industry, as supported by willing and uninformed consumers. The above concerns were tossed aside in favor of unreasonable anticipations of ever more home price increases.
Shouldn't today's buyers be asked the hard questions of affordability? In balancing the risk of losing sales against the risk of yet another and even greater catastrophic housing bubble, isn't it the duty of each of us who touch their lives, the buyer's agent, the attorney, the mortgage broker, to ask the hard questions?
In our office, when asked to do so for a potential buyer, we run each client through the Bankruptcy Means Test that challenges the concept of affordability; applying the above government statistics and standards through an accepted formula.
if banks/lenders/servicers were to release housing stock into the market place based upon affordability, rather than accounting manipulations to avoid marking the value of their inventory to market, what would happen to home values?
It will do none of us any good to go through yet another housing bubble. But, that is exactly where we are headed if actual affordability is not brought back to (and kept in) the market.
A recent email to a client follows, and should be a fair warning to have clients consult with bankruptcy counsel before execution of short sale purchase and sale documents:
- As a result of the short sale of your home before you file bankruptcy you will no longer have the contractually due amount owing to your first and second.
- As a result, when we calculate your eligibility for Chapter 7 relief (rather than Chapter 13 relief) we will not be able to deduct from your Annualized Monthly Income those monthly payments.
- As a further result, if your Annualized Monthly Income (calculated from the prior 6 months of payment advices) exceeds the Median Income for your 4 member household (currently $79,971) you will not "pass" the Means Test, meaning that you will be forced into a 5 year Chapter 13 repayment plan; and to add insult to injury you will only be repaying your debts without the benefit of saving your home.
- Rent does not reduce your Annualized Monthly Income for purposes of calculating the Means Test.
- Remember that the short sale does not monetarily benefit you (you will still have liability for the deficiency owing on the second), and yet the inability to claim the contractually due amounts (even if not being paid) will cause you greater harm because you cannot gain a Chapter 7 discharge, but must wait out a Chapter 13 discharge.
- The short sale, although delayed, can happen any time after you receive your Chapter 7 discharge. This would be a win-win for you and the Realtor.
Louis J. Esbin, Esq.
Law Offices of Louis J. Esbin
27201 Tourney Road, Suite 122, Valencia, CA 91355-1857
Tel: 661-254-5050 | Fax: 661-254-5252 | Web: www.LouisEsbin.com
Certified Bankruptcy Specialist - State Bar of California Board of Legal Specialization.
Although the House of Representatives passed legislation earlier in 2009 to allow Bankruptcy Judges to modify loans secured only by a debtor's principal residence, 50 Democrats reversed themselves and rejected similar legislation recently introduced into the House. When questioned, some stated with passage of sweeping banking reform earlier in the day they could not vote against the banking industry twice in one day.
This vote was taken notwithstanding Congressional reports that evidence the banking industry is not modifying loans to preserve home ownership. And, when there is closer scrutiny of loans modified, research points to the inevitable default on such modifications. Further, most loan modifications, not being a modification of principal balances, results in a balloon due upon sale or refinancing. Are we a society of homeowners or home renters? And, one of my family law colleagues reports a brisk business of new clients, each of which coincidentally is also a bankruptcy client.
The real estate industry needs to come around to better understand that bankruptcy reform to allow judges to modify home loans will preserve home ownership and therefore home sales, while bank controlled modifications will do nothing more than create indentured servitude and a society of home renters; never being able to pay off their home loans.
Lou Esbin
Law Offices of Louis J. Esbin
Certified Bankruptcy Specialist - State Bar of California.
Commencing a Chapter 13 Case
–A Chapter 13 bankruptcy case begins with the filing of the bankruptcy petition.
–Upon the filing of the petition an automatic stay arises that prohibits creditors from taking any further action to collect a debt or enforce a judgment.
–A Notice of Commencement of Case is electronically served on all creditors who have subscribed to the national database or by mail to all others.
–This Notice provides each recipient with the date, time and place of the meeting of creditors and confirmation hearing, as well as the last date to file for a determination of whether debt should not be discharged.
–At the time of filing of the petition or within 15 days Schedules of personal and real property, exemptions, priority debt (taxes, domestic support obligations, etc.), secured debt, unsecured debt, income and expenses must be filed.
Chapter 13 Trustee and Creditors
–Unlike Chapter 7 trustees, Chapter 13 trustees are not empowered to liquidate assets, but rather will evaluate asset values alongside income and expenses to determine if the plan payment is the debtor’s best efforts.
–The Statement of Financial Affairs filed by the debtor is reviewed by the Chapter 13 trustee for complete disclosures in response to a series of questions, income over the last 3 years, transfers, repossessions, and seizures made within 2 years (most trustees will ask about over the last 4 years), and interests in any corporate or business entities.
–Creditors have the right to object to the Chapter 13, but have no voting rights, as they would have under a Chapter 11 plan.
–Mortgage holders and auto finance companies require continue payments for the debtor to retain property rights. Auto financing entered into within 910 days of the filing of the case cannot have the value of their collateral reduced to the current value (cram down).
Who May Be a Debtor and Debtor’s Duties
–Chapter 13 is intended to provide a vehicle through which people facing financial difficulty attempt to keep their property while using their Chapter 13 plan to cure payment defaults, typically only to their mortgage lender.
–General unsecured debt that is liquidated, matured and not contingent cannot exceed $336,900, and secured debt cannot exceed $1,010,000. The determination of what is secured and unsecured can be subject to objection and litigation in a Chapter 13 case.
–Debtors are required to complete a credit counseling course prior to filing and must complete a financial management course within 45 days of confirmation of a Chapter 13 plan.
–Beginning each month after commencement of the Chapter 13, debtors must begin making the regular monthly mortgage payment to the first and the second (until the second may be deemed wholly undersecured), and regularly monthly mortgage payments may now include an escrow for taxes and insurance (thereby increasing monthly payments).
The Chapter 13 Plan
–Also at the time or within 15 days of the petition there must be filed a Chapter 13 repayment plan that will set forth how mortgage default payments will be cured over a 36 to 60 month period of time, as well as treatment of other debt repayment, if any. Depending upon the jurisdiction, plans may be proposed for as little as 0% being paid to general unsecured creditors.
–Under BAPCPA the period during which debtors must commit to a Chapter 13 plan will be dictated by whether their annualized monthly income is more or less than the median income in their Metropolitan Statistical Area as compiled by the Census Bureau.
–Other requirements as a condition to court approval (confirmation) of a Chapter 13 plan include: submitting tax returns, proof of income and proof of monthly expenses to the Chapter 13 trustee, as well as plan payments calculated from disposable income or the curing of default payments. r all plan payments are made during the term of the plan and the total amount required, the Chapter 13 trustee will file a final report upon which the debtors receive a discharge. In the event the second mortgage is deemed wholly undersecured, it may be avoided from title as prescribed by order of the court.
Advantages of Chapter 13
–Chapter 13 affords debtors the opportunity to retain their homes, as long as they make regular monthly payments and plan payments.
–Wholly undersecured junior mortgages may be removed from title upon entry of Chapter 13 discharge.
–Judicial liens may be removed.
–Auto loans that were made more than 910 days may be subject to being reduced to the value of the motor vehicle with payments made through Chapter 13 plan.
–Foreclosures, seizures, garnishments, levies, and collection efforts are stayed during the course of a Chapter 13 and are permanently enjoined upon entry of the discharge.
–Taxes are generally nondischargeable, but may be paid with post petition interested abated upon full payment and entry of the Chapter 13 discharge.
