Supreme Court Sinks More Homeowners into Permanent Debt

dead_economy-300x199New Orleans    In a startling unanimous decision, the US Supreme Court overturned an 11th Circuit Court of Appeals decision finding in favor of Bank of America that even bankruptcy protection does not allow underwater homeowners the ability to escape the obligations of second mortgages.  The impact of the decision allows zombie banks to continue operating on the basis of balance sheets reflecting virtually lifeless real estate holdings and makes these beleaguered homeowners into walking dead debtors with virtually no hope of a second chance.The Supreme Court once again reminds Americans that the Constitution is fundamentally about property rights and that the sanctity of a contract trumps all vestiges of common sense.

Generally speaking, a home is commonly classified as “underwater” if the value of the outstanding mortgage is 25% higher than the current market value of the home.  Remember the mortgage we are talking about here is the first mortgage.  The second mortgage is satisfied after the first is fulfilled.  Many of these second mortgages are home improvement loans.  Others arose from the need to finance children’s education or medical emergencies by attaching what has historically been the primary asset creating citizen wealth for the vast majority of low and moderate income families in the country.   Bank of America in their court filings estimated that there were 2.1 million underwater homeowners with second mortgages at the end of 2014.   Others like Zillow estimated that there are still 8 million homeowners who are underwater and most real estate experts estimate that it is likely that half of them have some kind of “second” on their homes.  This is not an insignificant problem in either the economic recovery or the hope for narrowing the equity gap.

Of course not all of these families had declared bankruptcy, partially because banks and others have done an amazing job over recent years with Congress in making bankruptcy both harder to achieve for desperate families and less valuable as a chance for a clean slate and a second chance.  Filing for bankruptcy does not allow someone to wipe out a mortgage debt or a student loan debt for example.  The mortgage obligation is what forces an underwater homeowner into foreclosure.  The best hope for the debtor is that surrendering what used to be an asset to the bank, calls quits to that debt.  In 2007 and 2008 when ACORN was negotiating with big banks and mortgage loan servicers as the implosion began, I was at some of those meetings.Executives then believed that they would just have to wipe out their second mortgage portfolios as worthless.

The Supreme Court’s decisions says, “no way, you’re stuck.”Hey, some day in the by and by, real estate values may go back up, allowing the loan to be collected.  Some of these properties are so far underwater that it won’t be a year but a generation for that to happen.  For the banks paying a dollar on that loan every 90 days allows them to still call it a performing loan, helping their zombie balance sheets, and leaving the debtor, desperate for a clean start, carrying even more weight. The Justices say, “dude, it’s a contract, didn’t you get that?”  The debtors, like millions of others, were on the merry-go-round being pushed by these same bankers and promoters in the real estate bubble into these sucker bets.  These weren’t contracts as much as cons.

Only death relieves some of these debts.It’s already legal for 25% of someone’s social security to be attached.  Now the Supreme Court has just locked another ball and chain onto untold numbers of families with little hope for the future but dragging the weight behind them, sentenced to a life as walking dead, not in debtors’ prison, but in a permanent debtors’ probation of sorts with little or no chance of escape.

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Johnny Cash – Folsom Prison Blues (Live)

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How Can We Get the “Rip Us Off Now” Sign Off Our Back?

student_debtNew Orleans    I just have to wonder why when we are in a period of historic wealth and income concentration at the top, there are so many outfits trying to rip off low-and-moderate income families at the bottom? The hustles keep rolling down on our people like an avalanche.

The Student Debt Project issued a report saying that the average graduate is now leaving school with $29400 worth of debt. Ok, maybe colleges and universities are not rip-off artists, but the evidence is piling up that even if so many of our folks signed the loans willingly, the institutions were predatory, waving a dream with one hand, while pulling out the rug of reality with the other.

Everyone is finally discovering how predatory payday lending is on low-and-moderate income families, as if it were news. Some hope the relatively new, Elizabeth Warren promoted, Consumer Finance Protection Board may zero in on these companies. Their reports are devastating and worth repeating:

 

…of about 12 million payday loans issued across more than 30 states only 15 percent of borrowers could raise the money to repay the entire debt without borrowing again within 14 days. Twenty percent of these borrowers eventually defaulted. Nearly two thirds renewed a loan and were on the hook for fees that could put them on the road to financial ruin; three out of five payday loans were made to people whose loan fees exceeded the amount borrowed.

 

Yes, like student loans, there is no benchmark of affordability being used here.

And, how about auto loans.

Capital One is leading the pack with Wells Fargo right behind in pushing these loans out the door, and, low-and-moderate families are gobbling them up. We made it through the recession on repairs and now in 2014 the old buckets of bolts are just past repair, and people have to have the wheels under them to get to work, school, and wherever. Flooded with money, since banks were not making loans, we have the home financing bubble and securitization schemes coming back along with no interest teasers and high interest balloons creating a new subprime market in auto loans.

 

Wells Fargo, for example, made $7.8 billion in auto loans in the second quarter, up 9 percent from a year earlier with $52.6 billion in outstanding car loans. 17 percent of the total auto loans went to borrowers with credit scores of 600 or less.

 

And, yes, like student loans and payday loans, there is no benchmark of affordability, meaning ability to pay back the loans, being used here.

What does it take to get some real action by the government at the local, state, and federal level to take the “Rip Us Off Now” sign of the back of working families?

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