Michigan Bankruptcy Attorney Jared Haddock's Financial Blog

May there be a spark of good news for the economy in the job sector?  Those who look only to national unemployment rates as an indicator may believe so: 

Jeannine Aversa, AP Economics Writer, On Wednesday February 9, 2011, 10:02 am reports (as posted on Yahoo Finance) WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke says the drop in unemployment over the last two months is encouraging but cautioned that it will take several years for hiring to return to normal.

What has the Chairman excited?  Well, the national unemployment figure dropped to 9% for last month, which represents the fastest two month drop in the figure in nearly six decades.  Sounds great, right?  We could certainly use some good news right now, after all. 

But wait a minute…even Chairman Bernanke is cautious in his optimism.  If we consider what it really means – and more to the point, what it doesn’t mean – the picture gets a lot more complex.

The problem isn’t the number, of course, but what it really means and doesn’t mean.  It means that people who have been seeking employment and willing to accept it are finally getting jobs.  It does not mean that they are getting the jobs back that they lost or even better jobs than they lost.  It does not mean that they are working in fields in which they are best qualified to work, (maximizing productivity by maximum resource utilization).  It does not mean that they are earning enough more than they were to compensate for inflation and the increased cost of goods since they were working before.  It does not even mean that they are earning as much as they were, at all.  It certainly does not mean that consumers are generally more confident and willing to spend their new hard-earned wages to keep the necessary cycle going.

These concerns are only a few of all those still being addressed are all being addressed, all of which they are much more complicated and difficult to answer.  It is, perhaps, a glimmer of hope in a very deep well of uncertainty. 

Should we be encouraged?  Sure!  Should we open the champagne? Not by a long shot!

In a recent article on Yahoo Finance, 24/7 Wall St. identified the eight states that are presently running out of homebuyers in which the recovery from the real estate “slump” (I prefer to call it a “crash”) is expected to be extremely slow – if recovery is possible, at all.  Not surprisingly to local residents, Michigan tops the list. 

This is not good news to Michigan homeowners and sellers, of course, and it comes at a time when the media is enthusiastically pointing out that things in the overall economy are apparently getting remarkably better.  Not that you would notice it much in Michigan, where unemployment is presently at reported at 12.4%, (though, if you include unemployed people who are ineligible to receive unemployment benefits, this number is much higher).  To those in Michigan, getting news like this when much of the country is celebrating it’s “recovery” is particularly disheartening. Michigan is still a heavily industrial (largely manufacturing) state, despite many valiant but failed attempts to drag it kicking and screaming into a service and commercially  based economy over the past few decades.  The truth is there are good, hard-working people here who do not want to change or adapt to a new way of doing things…but their numbers are quite literally getting fewer.  Those who are willing to adapt do so – and move on to regions with populations that recognize and facilitate the changes.

The situation may not be as dire as predicted, however.  Michigan’s residents have overcome adversities in the past to such an extent that many locals feel that basic survival and recovery against the odds is part of the Michigan heritage.  While that may be true, historically recoveries have been best realized with extreme adaptations (take the transition from an agricultural economy to an industrial one, for instance).  Moreover, it has traditionally been true that populations that pioneer the transition reap the most from it.  This is where Michigan may find it’s greatest struggle, as other regions have already spent decades in transition. 

The bottom line, and perhaps one of little comfort to Michigan homeowners at present, is that recovery is going to require changes in everything from our concepts of home ownership and daily spending habits, to our careers and industries.  This will require immense overhauls of our social policies in everything from education spending to energy production. While initial recovery efforts are going to require significant downscaling (smaller populations paying less for services must feasibly translate to less resources), it is going to also require massive expansion of our vision.  Now is the time to conserve our few remaining fiscal resources, to be sure…but it is also time to brainstorm and consider all of our options for long-term rebuilding.  This means new concepts and fresh dialogue.  We must embrace change.  Fighting change will not prevent it, it will only cost us more than we can imagine, as evidenced by the present conditions.

Well, here we are - three weeks into 2011.  How are your resolutions coming?  By now, many have already given up on the most popular ones, like strict diets and strenuous workouts.  However, the month of January is still happening, meaning that monthly budget changes you resolved to make are not yet fully realized.  That is great news!  It means that even if you have already slipped and overspent according to your new 2001 budget, there is still time, even in this first month of the year to reel yourself in and live within your monthly budget.

It is important to note, however, that while it is symbolic of rejuventaion and new hopes, January is still just another month.  It is never a bad time of year to review your financial status and realign your financial goals with a feasible budget.  Start now – not because it is January, but because your financial health is vitally important to your long-term welfare.

Albert Einstein once said that, “We cannot solve our problems with the same thinking we used when we created them.”

Am I the only one that finds it disheartening that during the present recession, with the unemployment rate so high, home values so low, and public bailouts for banks that have no obligation to account for their use of the aid, that members of Congress have actually become more wealthy during our struggle?

A recent report on Yahoo Finance (contributed by CNBC) shows that, “Despite a long and deep recession, the collective personal wealth of congressional members increased by more than 16 percent between 2008 and 2009″, according to a study released Wednesday by the Center for Responsive Politics.

What would Einstein say about the prospects of a group elected to solve a problem who benefit from the problem?  Think I exaggerate?  The report goes on to include some insight into the investments making Congress members rich right now:

In another context, however, Beltway watchers might find it unsettling that some of the most widely-held stocks are those of companies at the center of the financial crisis in 2008-2009. 

“The most popular investment among congressional members reads as a who’s who list of the most powerful corporate political forces in Washington, D.C. — companies that each spend millions, if not tens of millions of dollars each year lobbying federal officials,” states the CRP report. 

In addition to Bank of America, Goldman Sachs (NYSE: gs) , Wells Fargo(NYSE: wfc) , JPMorgan Chase (NYSE:JPM – News) and Citigroup(NYSE: c) were popular holdings. All of them received funding under the TARP. Morgan Stanley, General Motors and AIG are not on the list.

 Another big sector is health care-drugs, which, like financial services, was the subject of major reform legislation in 2009.

Disturbing?  I think so.  To think that members of Congress approved a bailout of troubled banks of which they personally were shareholders is troubling enough.  That they recorded significant personal profits as a result of that bailout – at the expense of taxpayers who are struggling in a recession that they are looking to these members of Congress to solve is downright maddening.  In my profession as a lawyer (which a majority of Congress members are, by the way), that is akin to a conflict of interests.

How can we expect Congress to be objective in determining whether or not bailouts or reforms are needed, when they are significant shareholders and stakeholders in the outcome?  As investors, they have done quite well in this recession.  As leaders and representatives of a struggling populace, they are failing miserably.  The problem gets worse when there is a profit motive in failure.

Some disturbing realities reported by  the Detroit News today…apparently local food pantries in the Detroit region are struggling to meet the demands of an impoverished population.  It is one thing to admit that we are all feeling the effects of this recession, but I find this news to be downright disturbing.

The article explains that “Lingering double-digit unemployment is projected to fuel a hunger crisis in Metro Detroit over the next three years. By 2013, one out of four people in the region won’t know where two of their daily meals will come from, according to the United Way for Southeastern Michigan.”
From The Detroit News: http://detnews.com/article/20101118/METRO/11180414/Food-pantries-struggle-to-keep-up-with-growing-need#ixzz15fps3Pij

We have been told that the United States is the breadbasket of the world…that, in fact, we could produce enough food to quite literally feed the world.  To know that there are those struggling for food in your own backyard is hard enough to cope with, but that 25% of people in your own neighborhood don’t know if they will eat more than once today is unfathomable – certainly unacceptable.

I remember when I was a kid visiting Berkeley, California and the tradition back then when dining out was to always ask for a “to go” container for any leftovers.  It was considered adborent to let good food go to the trash.  Instead, it was customary to give your leftovers to the first homeless person you saw.  At the time, I remember thinking what a great idea that was.  I could not give them money – I had none to spare and didn’t know how they would spend it, anyway.  What I could do, (and it would not cost me a dime), was make sure that at least one other person would not go hungry.

This Thanksgiving, as we sit down to overeat our delicious meals with friends and family, rather than merely giving thanks for what we have, I urge everyone to do something to ensure that others can give similar thanks for whatever we can provide.  As Ghandi once said, “You must be the change you wish to see in the world.”

Whether you donate a few cans of food to a local food drive, volunteer your time at a local food bank, or just hand someone less fortunate your leftovers, be part of the solution – however small.  It might only make a tiny and insignificant difference in the overall epidemic, but it can mean the world to an individual in need.

There is not much that one can do to solve this problem, but if all do one thing, much can be done.

The news from AP, as reported on Yahoo! Finance today indicates that foreclosures may been decreasing – slightly:

“The Mortgage Bankers Association says about 9.1 percent of homeowners had missed at least one mortgage payment in the July-September quarter. That figure, which is adjusted for seasonal factors, fell from 9.9 percent in the April-June quarter and from a record high of more than 10 percent in the January-March quarter.

“The percentage of homes in the foreclosure process fell slightly to 4.4 percent from 4.6 percent.

“Still, delinquencies and foreclosures remain elevated. They are expected to stay that way as long as unemployment remains high and home values continue to drop.”

Of course, this is only somewhat telling.  With so many distressed borrowers seeking loan modifications and the mortgage companies taking longer to process foreclosures in light of their efforts to prevent flooding the market with available properties, it is hard to say why these numbers are significant.  Is it because people are actually doing better now than they were at the start of the year, or does it indicate that the mortgage companies are actually doing more than simply reporting defaults and foreclosing right away?

The report indicates that unemployment rates and a slump in the market may stall recovery in the short term, but then what is recovery and how will we know when it starts?  In the sense that borrowers are catching up with the mortgage arrearages is good news, it nevertheless does not indicate that such efforts to stay current are producing any equity.  In other words, a decrease in note defaults is good, but it does not mean that values will rise any time soon.  In the aggregate, that could ultimately occur as fewer abandoned homes appear in neighborhoods, but to say that this will increase the demands of buyers still seems to be quite a stretch.

In Michigan, where unemployment rates are still well into the double digits, the prospect of fewer foreclosed homes on the market would be good, but it does not mean that buyers are suddenly looking to buy homes.  No matter how optimistic a buyer is, without a stable source of income necessary to fund their purchase, demand for the homes will likely still be less than the supply of available homes for purchase.  What does this mean for existing homeowners?  They will still have less equity in their homes until the overall market improves significantly.

Foreclosure fraud class action suits are now on the rise in various states, even while all 50 state Attorneys General offices continue to investigate the actions of several mortgage companies in regard to their foreclosure procedures.

Bank of America, Wells Fargo, HSBC, JPMorgan Chase, and Ally Financial (formerly known as GMAC Mortgage) have all been named in lawsuits regarding their foreclosure practices.

Meanwhile, many of the mortgage companies, including Bank of America, that had earlier announced a hold on foreclosures pending a review of their internal procedures have indicated their own confidence in their processes and have begun foreclosing again.

It is difficult to determine at this point what impact this will ultimately have on the real estate market, but it seems to indicate that, at the very least, this slump in the market is far from over.

For many homeowners this means that even if they are current on their mortgage payments, their mortgage debt leaves them upside down relative to the market value – and will likely stay that way for a relatively long time.  Many people in this situation are questioning why they are not being helped in light of all the efforts currently underway to resolve this crisis.

The truth is that all investments carry some degree of risk, even real estate.  Some investments take a loss – that is just a reality.  I believe that part of the problem stems from the fact that most homeowners never considered their home an investment with risk.  Historically, a home was viewed as a “sure thing” – a way of saving money for a place to live while building equity over the long term.

Now that people are coming to the realization that real estate is like any other investment with risks, the next question becomes what should one do when an investment takes a loss and the prospects for recovering the loss are questionable?  With most investments, the answer would be simple…dump the investment, take the loss before it gets worse, and re-evaluate.  However, this becomes more complicated when the investment is not just an investment, but also one’s home.

According to recent reports, the foreclosure freeze by Bank of America, J.P. Morgan Chase, Ally (GMAC), PNC, and Litton Loan Servicing could actually stall an already sluggish “recovery” of the economy.

Part of the problem is that the housing market is, at least historically, a major contributing factor of overall economic recovery from recession.  While the real estate market has been harder hit in this recession than in previous ones, the hope was that it would soon turn around (at least that is what some economists have predicted) and again prove instrumental in the economy’s recovery this time around.  If foreclosures are stalled pending lengthy investigations, this means that the real estate market cannot fully recover until the issues are resolved.  Meanwhile, sales and short sales are in a state of limbo.

In the end, while struggling homeowners may have more time than money to reslove their own financial problems, this does nothing to improve the value of their home relative to the debt owed for the home.  Those who are “upside down” on their homes will remain so…probably for an even longer period than anticipated.

Many people in financial hardship are desperate for a way out.  They will consider just about any legal way to get out of debt.  Before the real estate market bottomed out, almost every radio commercial break had at least one or two mortgage lenders offering to “reduce your debt with money you already have in your home” (those in Detroit, Michigan and surounding communities will remember Andy Jacob telling them they were sitting on a virtual goldmine just waiting to be tapped into).

Borrowing money to reduce debt is like adding weights to disperse the water of a sinkng boat.  Yes it will get rid of some water…and it will also sink the boat.  Of particular concern to Bankruptcy attorneys like myself at the time these offers were being pedaled was that these “equity loans” essentially turned unsecured debt into secured debt.  Yes the interest rates were lower, but only because the new creditor was secured by your home and, thereby, reduced their risks of you not paying them back.  Nonetheless, it made sense for people to take these options at the time.  Sometimes a reduction in monthly expenses just made sense to do, but the soundness of such decisions was predicated on the assumption that home market values would continue to rise – indefinitely.  This was an assumption, as we all now know, that never should have been taken for granted in the first place.

If real estate really was investment, as we were all lead to believe, then why couldn;t we at least foresee some risk of loss?  Isn’t some level of risk generally applicable to any investment?  Stocks, after all, were never sold with a guaranty that they would forever appreciate in value, right?  Why, then, would any other investment come with such assurances.

It does make sense to reduce the cost of one’s debt in many cases.  That is, all other things being equal, one should reasonably prefer a lower interest rate for borrowed money over a higher one.  The problem lies not in the math, but in the need to take such measures in the first place.  As a bankruptcy attorney dealing with a particularly hardhit segment of the population in Michigan, I meet with many clients who would simply be far better off eliminating the debt than borrowing to reduce it.  This was an option that most of the radio advertisements I hear fail to mention.

Before taking out a loan to payoff higher interest debts, consider all of your options.  There might be more to the equation than you realize.  Oh, by the way, I said the same thing to many clients long before the mortgage lending industry even admitted they overestimated the real estate market’s ability to sustain values.  It was true then, and it is even more apparent now.

Remember the mob movies, in which mobster loansharks would lend money at astronimical interest rates and collect under the threat of a baseball bat?  Well, they are still around.  The only differences are they are not mobsters – they are legal companies.  They now have storefronts all over depressed communities.  And they don’t use physical violence to collect, anymore – they don’t have to.  They have the power of suing to collect.

This is not some dark secret underworld aynore.  In fact, payday laons have become a $28 billion a year industry.  According to responsiblelending.org, “Twelve million Americans are trapped every year in a cycle of 400% interest payday loans.”

Believe it or not, post-judgment statutory interest rates would be a blessing for many otherwise strapped with a 400% interest rate.  The truly despicable part of this is, of course, the very nautre of payday loans.  They are targeted for people who are already struggling from one paycheck to the next in order to make ends meet.  In my experience as a bankruptcy attorney, the people who have payday loans to pay back are typically the same ones already living under the poverty line to begin with.  They are desperate.  The lenders know this – in fact, they rely on it.  If one cannot earn enough money to feed themselves or their family, they will likely commit to any interest rate necessary to put food on the table or a roof over their children’s heads.  If you offer someone like this a short-term loan at 400% interest, ask yourself who is really stealing.  Such lenders are not solving the problem so much as they are creating it.

Payday loans are generally dischargeable in Chapter 7 Bankruptcy, but will doing so solve the problem?  Only if the individual has addressed their cashflow.  In order to negate having to borrow to “make ends meet” in the future, it is essential that one have a positive monthly cashflow, however meager it may be.