INTRODUCTION

We are living in a time like no other that we know.  People are having problems surviving.  Homes and jobs are being lost on a daily basis and in increasing numbers.  Credit has tightened up to a point of being non-existent.  Most Americans have been left in a state of disbelief and ignorance about how we ended up in this situation.  Well, I have put this article together to share my view of how all of this has happened.

In order for us to understand our current economic environment, we must have some idea of the factors which contributed to this dire situation.  These factors include predatory lending practices, subprime lending, securitized mortgages, access to easy credit, and excessive consumer debt.

WHAT IS PREDATORY LENDING?

Predatory lending practices focus on who benefits most in a loan transaction.  If the borrower does not benefit, then such lack of benefit could turn a legal loan into a predatory one.

Of course, some would say that any loan is predatory as the borrower always seems to pay high interest rates and fees. However, credit, or being given money or something of value now and being allowed to pay later, can be and is of great benefit to those who understand how it works and use it wisely.

The types of loans and practices to which I refer as predatory are those types which include:
-    Fraudulent practices that conceal the facts of the borrower’s obligations and/or income
-    Steering a borrower to a high-cost loan when they could qualify for a lower-cost loan
-    Making a loan that the borrower cannot afford to repay
-    Making a loan to a borrower that provides no actual benefit for the borrower
-    Unfairly stripping a borrower’s real estate equity through excessive points and fees or imposing overpriced, unnecessary add-ons such as lump sum credit life insurance as a condition of a loan
-    Flipping loans by inducing repeated refinancing, without benefit to the borrower, in order to generate fees
-    Changing credit card payment due dates
-    Holding checks to charge late fees
-    Double cycle billing

As a general rule, credit is a great equalizer and tremendous aid to a capitalistic economy.  With the advent of the industrial revolution, when factories were used to mass produce goods, there was a large amount of goods, but only a few people who had money to buy them.  So, companies which produced, distributed, and/or sold goods began allowing purchases with installment credit.   This process created a circular flow of money.  Businesses had capital to produce goods, workers got paid for producing goods, consumers could buy the goods, and more goods could be produced.

The main problem with lending is when the lender or its agents become greedy and put their interests above the borrower.  When such happens, we usually see the above-referenced predatory practices.

WHAT OTHER FACTORS CONTRIBUTED TO TODAY’S ECONOMIC ENVIRONMENT?

In order to understand the impact that predatory lending practices had on our current economic condition, we must take a glimpse at what happened in our country from 2001 through the present concerning subprime lending, the securitization of mortgages, and easy access to credit.

Melinda Fulmer, a writer for the MSN Real Estate section, sheds some light on this topic in her December 9, 2009 article Boom to Doom: The Decade in Housing.  She stated:
“… perhaps what this decade will be remembered for most is its excess: lenders making far too many ill-conceived loans and then selling them off to investors inside and outside the United States, and consumers piling debt on top of debt  -  all resulting in a record-shattering tsunami of foreclosures….”

The convergence of predatory loans, subprime mortgages and loans, investments in mortgage-backed securities, and excessive consumer debt created the current economic environment in which we exist.

In order to appreciate how such happened, let us consider the past and current banking models.

Change of Banking Landscape

Banks are in the business of selling debt.  Historically, they take depositors’ money and then loan it to individuals and businesses at higher rates of interest than they give the depositors.  Most of their transactions were local or regional in nature.  Where they were located was the community they served.  The loans they gave for real estate and business were for the real estate and businesses in their neighborhood.  A borrower would make his or her payment to the local bank which gave the loans.  The profits banks made from these transactions were limited.

In the 1970’s, the landscape of banking started to change.  The introduction of credit cards proved to be a gold mine for banks and credit card companies.  They soon realized that they had a product for which they could charge high interest, which they could process efficiently, and with which they could reach a national market.
The most important lesson banks and credit card companies learned from introducing the credit card was that if you give someone credit they will probably use it.

In addition to credit cards, the 1970s brought a period of deregulation of the banking industry.  Because of the depression in the 1930s, there had been laws or regulations put in place to avoid further depressing the economy.  The 1970s was a time when those regulations started to get lifted.  So, banks and other financial institutions could figure out ways to increase their profits, i.e. higher fees on overdraft, non-bank ATMs, fees for limited number of transactions, etc.

Securitization of Mortgages

Around the same time, modern securitization of mortgages began with the Government National Mortgage Association (Ginnie Mae) issuing the first publicly traded mortgage backed security in 1970.

A way of describing the securitization process is when a lender gives loans to homeowners and then sells groups or bundles of the loans to investors who then sell smaller interests to other investors through ownership of stocks or bonds.  In short, it dilutes your mortgage by spreading the right to collect your principal and interest payments among many investors, who own stocks or bonds related to many other mortgages.

A study in December 2008 by the Ohio State University Kirwan Institute quoted an observation made by Christ Peterson, a securization expert and legal scholar.  He noted that:
“…with these new pass-through investment vehicles, investors could hold a share of large (and diversified) numbers of mortgages insured by the government in the case of Ginnie Mae, or guaranteed by the large stable government sponsored enterprises (GSEs) in the case of Freddie Mac and Fannie Mae (who also began securitizing shortly thereafter).  Because the agencies now guaranteed the principal and interest income of their securities even when mortgagers defaulted, investors saw the securities as a low risk investment even without the assurances of a rating organization such as Standard and Poor’s or Moody’s.”

The study further noted that the private sector’s ability to securitize separately from GSEs grew after 1975, when rating organizations began rating securities.

In addition to the backdrop and glimpse of how predatory loans, investments in mortgage-backed securities, and the availability of consumer credit have evolved in the last few decades, we need to also consider subprime mortgages and loans to fully understand their combined impact on our economic environment.

Subprime Mortgages and Loans

Loans are made based on the creditworthiness of the borrower.  The creditor determines what risk of default there is in making a loan so that it can factor the price or cost of the loan into the interest rate and other terms.  If you have good credit, not late with your payments, and have a good income, then you could get a prime loan or one which is considered “A” paper.  If your credit is not perfect or good enough for an A paper loan, or your income is not high enough or stable, then you would probably qualify for a subprime loan.

Subprime loans are graded from A- to below.  Your grade is usually determined by your FICO (Fair Isaac and Company) score and income/employment.  The lower your score and less stable your income, the lower grade you would get.  The lower grade you have, the higher your interest rate and more burdensome your loan terms.

Since a person with a low credit grade is more likely to default or not pay the loan, that person will have a loan which requires upfront fees and higher interest rates so that the lender can offset the risk of lending to that person.  There were only certain creditors who would give subprime loans, as there was too much risk of loss associated with them.

Subprime loans were initially used for credit cards and automobile loans.  However, as things changed in our economy, subprime loans were offered more in housing.  In the 1980s, three laws were enacted which allowed lenders to change their practices.  The first was the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) in 1980.  It allowed banks to charge more than the interest rate limits imposed by states.  The second was the Alternative Mortgage Transaction Parity Act (AMTPA) which allowed the use of variable interest rates and balloon payments.  This law was passed in 1982.  Finally, and most importantly, the Tax Reform Act of 1986 (TRA) was passed into law.  It allowed the interest deduction on mortgages and prohibited the deduction of interest on consumer loans.  Consequently, this increased the demand for mortgage debt, as homeowners could deduct their mortgage interest.

Subprime lending did not take off, however, until the mid-1990s, when interest rates were raising and the number of prime loan originations dropped.  Banks and other financial institutions started to offer loans to the more risky borrowers based on subprime loan terms.

Though these changes increased the volume of loan originations in the 1990s, it was not until the new millennium that our economic conditions significantly changed and subprime lending began to play a more prominent role in our economy.

Changes in the New Millennium

In 2000, Chris Larsen lobbied the California Assembly and testified before Congress to require that consumers be able to obtain their credit scores from the credit reporting bureaus.  Borrowers were told that their credit scores were low and that such resulted in the denial of their loan application, and/or the terms which were being offered.  Borrowers were not told what their credit scores were or how that number was determined.  Mr. Larsen’s victorious movement enabled borrowers to obtain their score and to figure out how to improve them so that they could get the best terms possible.

The terrorist attacks on September 11, 2001 caused the stock market to collapse.  The lack of confidence of the American public in investing in the stock market was reflected in the low trading volume and stock prices.  However, housing prices had not been affected by the attacks, as housing prices remained stable and, in fact, were increasing.  Consequently, the housing market became a possible area for investors to focus their attention.

The period of 2002 through 2007 brought a flurry of advertising and marketing campaigns along with investment strategies which all surrounded the housing market and easy access to credit.

Credit card companies and banks began their balance transfer, 0% or low Annual Percentage Rate (APR) and no annual fee campaigns.  Mortgage companies encouraged consumers to roll their credit card and other consumer debt into their mortgages, so that they could get the mortgage interest tax deduction.  Most homeowners either refinanced their mortgages or took out home equity lines of credit (HELOC).  Though fixed interest rate loans were usually the type of loan homeowners would get, the new millennium introduced loan products which were seldom used.  These products included, but were not limited to, adjustable rate mortgages (ARM), negative amortization loans (also known as Option ARMs), and interest only mortgages.  Along with these loans came the vehicles to entice people to apply for them, such as low introductory interest rates, stated income loans, and no documentation loans.

For investors, a best of both worlds scenario presented itself.  They could participate in the housing market’s high times by investing in stocks and bonds which had bundled the loans from the banks giving them.  In many instances, banks and originating lenders were paid the full amount of the principal of the loan when they sold it to investors and also received additional forms of compensation for selling loans.  On the other hand, investors were purchasing an investment which brought guaranteed income from the principal and interest payments to which they were entitled as owners of the stocks or bonds.  Also, the mortgage-backed securities were also guaranteed by the government (Ginny Mae) and/or a government-sponsored agency (Freddie Mac or Fannie Mae).

As the selling of mortgages to investors proved to be profitable, more and more money from private investment houses or firms, such as Lehman Brothers, started to pour into the market.  Greater incentives were offered to banks and loan originators.  With the greater incentives came a relaxing of or elimination of underwriting standards for the loans.  As subprime loans increased in volume, the risk of these loans defaulting was insured by AIG, one of the world’s largest insurance companies.  Banks and loan originators were giving mortgage brokers who brought borrowers to them premiums on top of their commissions.

How the Combined Affect of these Factors Created Our Economic Environment

The stage is now set for what was to come.  Lenders had investors who would buy all of the loans they could generate.  Brokers and loan officers were assured high commissions if they had borrowers.  Investors had an investment product which provided a guaranteed return.  The more loans which were given, the more money everyone made.

The greed of many of the lenders got the best of them.  This led to giving loans which should not have been given.  Marketing and advertising campaigns had most Americans believing that they could afford to own a home and that they could qualify for the loans to get them.  Loan officers and mortgage brokers convinced potential borrowers that they qualified for the loans by qualifying them with the initial or teaser low introductory interest rates, and telling them that by the time the adjustable rate mortgages increased that they would be able to refinance the loan and get a lower rate or a fixed loan.  Of course, this made sense since the housing prices were continuing to go up.  If the borrower could not qualify for the loan based on the initial interest rate, then the broker only needed to increase the borrower’s income on the mortgage application to make the numbers right.  Lenders had stated income loans, so that all the borrower needed to do was to state his/her income without proving such.  Most of these loans had subprime features.  This created an environment in which just about anyone could get a loan.

The problems started when the adjustable rate mortgages began to adjust.  Those borrowers who qualified based on the initial, low teaser interest rate now needed to make payments in a much larger amount.  When they could not, a wave of mortgage defaults began to occur.   The initial wave of defaults in 2006 related to subprime mortgages and those loans which had the interest rates adjust.  These were the 2002 -2003 loans which had 3 year adjustment periods.

As more and more loans defaulted, investors in the mortgage-backed stocks and bonds began to lose confidence.  Investments slowed to a stop.  Investors looked to the government agencies for payment under the guarantee and to AIG for the insurance against defaults.  Lehman Brothers was over-invested in the subprime market and had no one to purchase the loans it bought.  It was not bailed out by the government and eventually closed its doors.  AIG and the government agencies were bailed out by the government.  The Obama Administration created the Troubled Assets Recovery Program (TARP) to help certain financial institutions.

If the loans were allowed to default on the scale which the early numbers were indicating, then such would lead to ruining the American economy.  Instead of paying under the guarantee, the government insisted that lenders allow homeowners to modify their loans.

The problem with loan modifications is that the government has not taken into consideration the interests of all of those who must agree to a modification.  The primary component is the investor who now owns the mortgage.  It is not just one investor, but in many instances hundreds of them who have an interest in the mortgage.  The investors must agree to take less than they original agreed upon when they purchased the investment.  If they agree to a modification, then they must pay someone to do it.  These glitches have caused loan modifications to move at a snail’s pace.

A chain reaction occurred once the defaults started.  The borrowers who had defaulted with their mortgages were also defaulting with their consumer credit.  With the slowing of mortgage loan activity, there was no need for the large number of mortgage brokers, loan processors, and others involved with generating loans.  No money was being borrowed to payoff credit card debt or to remodel one’s home.  Accordingly, those who worked in the construction industry started to get laid off and businesses related to home improvement began to close.  With increasing unemployment and business closures, there were more defaults with mortgages and consumer credit.  As a result, banks stopped loaning money, began decreasing credit limits to what current balances were, and started exercising their right to have the consumers pay at default rates, if they were late with or missed a payment.

CONCLUSION

The predatory lending practices of lenders, the securitization of mortgages, subprime lending, and excessive consumer debt have all contributed to the described chain reaction which has lead to the current economic environment in which we exist.

We live in a time when we have reached record numbers of debt as a nation; unemployment is reported to be near 10% of employable adults; there are over 1.7million foreclosures so far in 2009; there is astronomical credit card debt reported by credit card companies; more than 50% of credit card holders are in default of the terms of their agreements; and unprecedented numbers of bankruptcies are being filed daily. At least one of these statistics is affecting each of our lives. We are either addressing the issues which have arisen or we are ignoring them. We all know that we should be responsible and address the issues having a negative impact on our lives, but we are human and tend to believe that if we ignore them they will go away. Well, I’m here to tell you that they will not go away. You must face them or they will get worse. The first step to facing your problems/issues is to understand them. This blog will give you one view of how to understand what has been going on in recent years and what some individuals and businesses have been doing to deal with the very same type of issues.

My name is Michael L. Sloan. I am an attorney licensed to practice law in the State of California. I am also a real estate broker licensed by California. In the last two (2) years, I have seen a drastic change in the types of issues my clients have had. In speaking with colleagues, they have made the same observations. In the early part of this decade, the new millennium, we saw real estate values/prices escalate to record heights, the stock market soared to new highs, and mortgage loans and credit was given to anyone who asked, money was abound. Instead of people engaging in transactions to purchase businesses, real estate, and goods and services, they are drowning in a flood of litigation/lawsuits, collection activity, and stress related illnesses.

In this blog, I will share with you some of the types of lawsuits that I and other attorneys have had to handle for some of our clients, what the specific area of the law involves, the procedure/legal process, and ways that our clients have been able to save money going through the process. I will also discuss the general problems some clients have had with mortgage and credit accounts, and how such problems have been dealt with by them. I will specifically give an overview of the various debt resolution options available to those with mortgages and credit card holders, including loan modifications, refinances, short sales, principal reductions, debt consolidation, and debt settlement, just to name a few. Additionally, I will share information about a debtor’s rights and responsibilities, and general rules applicable to collection agencies/companies.

Regarding lawsuits, I will limit my discussion to the civil area, but briefly comment on the criminal area. Civil law is that area which involves something other than criminal, and specifically whatever concerns money or a person’s rights, such as personal injuries, breach of contracts, employment and business disputes, real estate matters, etc. Criminal laws relate to robbery, theft, fraud, violence against others, malicious destruction of property, etc. The civil type of cases we will cover will include real estate/mortgage related lawsuits such as foreclosures, unlawful detainers, and fraud. Additionally, we will look at the effect of closing a business and what happens to the office and machine leases which remain in effect after the closure of the business as well as when a business is underinsured to handle a loss. Finally, we will examine employment lawsuits and what are the rights and responsibilities of employers and employees, including the standard for that type of litigation.

Clearly many have written books on these various topics. Nonetheless, this blog and my efforts are meant to provide a big picture view of these areas so that others might gain insight and information to become empowered to deal with similar situations and circumstances without fear.

What I am about to tell you is not the cure all for our economic woes. It is not the quick fix we all wish we could find to stop our internal suffering. What I will tell you is:

1. That we are all feeling the same way;
2. That we have all contributed to the messes we find ourselves;
3. That there are possible, workable solutions to each of our circumstances;
4. That the key is to understand our individual financial positions and to learn which possible options/solutions might work better for us; and
5. How to start the process of understanding our financial position and determining our options and solutions.

As I said, we are all feeling the same way about our financial circumstances. Of course, as with everything, our circumstances are relatively different from each other. Some of us have more or less than others. The fact is that for most of us, the number of zeros after the first digit of our bank balances is decreasing. We have less income, but the cost of living continues to increase. The cost of money, or credit as we understand such, continues to climb. With credit card companies being allowed to increase interest rates regardless of your payment history or creditworthiness, we are seeing a constant diversion of our resources to credit card companies, less available cash for our families’ survival, and an increase in our internal conflict over how we maintain our integrity of being responsible to ourselves, our families, and to our creditor. Most people with whom I speak and who are seeking legal advice concerning their financial circumstances usually state that they use to have money and had not found themselves in this type of situation before. There is usually some event which they will share which they perceive as the reason they are where they are. Everyone is so willing to accept responsibility for how life has turned and to feel ashamed for that decision or event which they perceive as pivotal. We have failed to remember that our country is founded on a system of checks and balances, and that if we are all having the same problem that it is not an individual’s failure, but rather a failure of the system which has occurred.

As a small business owner, I hear the voices too. The voices which cause me to question my skills, abilities and decision making. The voices which make me want to run and hide; dodge situations and conversations concerning my personal finances; and avoid contact with creditors. One Friday evening, as I reflected on various conversations I had with different individuals over the preceding days, I became extremely paranoid and began thinking that “they” were going to come and get me for the financial situation I found myself. I spent a good part of the weekend trying to contact people to see how they were doing. I was unable to make contact, so I begun to think that “they” got them. This excited, anxious state started the course of insomnia I am on now. When I finally made contact with those I had been trying to reach, I related my experience and was surprised to find out that they too had similar experiences and also have sleepless nights wondering and worrying about what is or could happen in light of their situation. It was at that point that I realized that people needed to understand the consequences of their financial positions and what they could do to get rid of the anxiety, guilt, and internalized shame.
Each of us have contributed to where we are financially and the consequences we are experiencing. We have been encouraged by our government to spend and by financial institutions to borrow money to do such. We did as we were encouraged. We borrowed money we could not afford to pay back, and banks and financial institutions lent us money which they should not have. To some extent, many of us have acted irresponsibly. Others have become caught up in the backlash of such irresponsibility. The bottom line is that we are all experiencing negative consequences of the combined actions of our society. We must realize that such is the case and not personalize where we find ourselves financially. We must understand that there are numerous solutions to our predicament, but that there is no one solution fits all remedy. We have to give thought to our individual circumstances and find specific remedies to them.

The possible, workable solutions are finite and include, but are not limited to, the following:

1. Pay your debts, if you have the income;
2. Renegotiate more beneficial terms with creditors and mortgage companies to reduce your debt servicing burden;
3. Obtain a debt consolidation loan;
4. Negotiate a settlement of your consumer /credit card debt;
5. Allow your credit accounts to go into a non-payment status and defend the non-payment in a lawsuit;
6. Refinance your home;
7. Obtain a loan modification for your mortgage;
8. Offer your deed in lieu of a foreclosure to your mortgage holder;
9. Get authorization for a short sale from your mortgage holder;
10. Request a principal reduction of your mortgage;
11. If your mortgage goes into default for non-payment, and then foreclosure, you will need to avoid being forcibly removed from the property; and
12. Filing for protection under the bankruptcy laws.

The key is to increase our financial awareness and financial responsibility. Our gaining more knowledge about economics and how to manage our financial resources is the first step towards healing the trauma to our financial psyche. Our acknowledging our current financial position, implementing a plan to maturely handle past financial deficiencies, and pledging to only enter into future financial arrangement if you are financially capable and sincerely intend to maintain them will complete the healing process.

The only way to get over feeling that you are a bad person because of your past financial deficiencies is to view such deficiencies as something which has happened without applying your interpretation to them. Allow yourself to judge your personal and financial integrity on your future actions. You cannot change your past, but you can learn from your mistakes and live a life which demonstrates that the lesson was truly learned. We must understand that both awareness and responsibility are necessary. You cannot look to the future without addressing the past. You cannot address the past without acknowledging that the basics of personal finance were misapplied or not applied at all. The only way you can be financially responsibility in the future is to truly understand and apply the basics of personal finances to your life now.

Reading this blog is the beginning of your financial healing process. Maintain your financial health, enduring financial suffering, and undergoing financial healing are all personal experiences. As with all things, knowing what you need to do and doing it are two different things. I hope that this blog will provide you with the knowledge to enhance your awareness of personal finances and empower you to improve your financial and mental health.

In an economic climate in which no one has money and everyone is dealing with debt issues, the question is: what should one do with his/her particular debt circumstances?

Many are turning to companies which do loan modifications for real estate mortgages. Others are turning to debt settlement negotiators to assist with writing down their debt. Several are filing for bankruptcy protection. Some are ignoring the problem and hoping it will go away. The simple fact is that the problem or our debt must be dealt with some way, somehow.

I have been practicing law for over 20 years. In the last few years, my practice has evolved into one primarily dealing with financial issues. Clients have come to me with claims against people who have defrauded them; people to whom they have lent money and cannot get it repaid; owing money to others and not having the ability to pay it; wanting to be proactive in resolving credit and mortgage debt issues; having their home lost to foreclosure and getting evicted; and a whole host of other similar problems.

At one point in time, it was easy to recommend that a person renegotiate their existing debt, get a consolidation loan, refinance or modify their mortgage, have someone write-down their debt, or file for bankruptcy. However, these are unique times, none like any of us have experienced in our lifetime. Because of this fact, we must use a different approach in assessing our situation and making an informed decision on a course of action.

Some refer to these times as a recession, a period when there is a temporary slowing of economic activity. To me, we are clearly in a depression, or a period during which business, employment, and stock-market values decline severely and remain at a very low level of activity. (These are my loose definitions of these terms). In deciding which course of action to take regarding one’s finances during a recession, when you expect things to turn around in the near future, is totally different than making such plans when not knowing for how long the severe decline in business, employment and stock market values will last. It is this key distinction that I wish to discuss with you. Your understanding this distinction could make the difference in your being able to maintain a financial position which allows you to have money in your pocket and a roof over your head.

Over the last six (6) months, I have attempted to assist clients with negotiating with credit card companies to lower interest rates, settle or write down principal balances so that payments are more manageable, or defending collection lawsuits. Most of my clients are honorable and want to pay their debts. However, as time went on, all of them had circumstances of not being able to pay enough or anything because of the continuing downward spiral of our economy. As my clients could not pay their debts, including my bills, I noticed a generalized anxiety and desperation setting in amongst us all. I also noticed that my clients were approaching their problems in a disjointed and piecemeal manner, which was worsening their situation, not helping it.

Many were going to one company for a loan modification and another company to assist with credit card or other debt issues. Often, these companies did not know of the other’s existence and engaged in action which was counter-productive to the client’s position. It is not the client’s fault for placing themselves in such situations, as they rightfully rely on professionals to advise them on what they should do. Understandably, but regrettably, most professionals in this economic climate will take whatever business they can get. This leaves the client with an unconnected set of circumstances and advice which is not in their best interests.

Because of these observations, I have decided to write this blog and share some of these situatons with the general public. We, as a society dealing with severe debt issues, must have a comprehensive approach to assessing our financial position and determining a plan of action which is most beneficial to ourselves and families. In speaking with clients and others regarding our general state of affairs, I began to notice similarities in the nature and mood of my conversations.

The conversations start like any other with “hellos” and “how are you?” and a brief discussion of general topics of interests. At some point, they turn to the economy and how it has affected others and is affecting them. America’s financial position is hurting, but we as individuals are suffering from obvious, but unacknowledged injuries to our psyche. There appears to be a pervasive sense that we as individuals have done something wrong; that we have allowed ourselves to make terrible decisions to put us and our families in precarious positions; and that we are failures and our internalized feelings of shame, hopelessness, and guilt are justified. The conversations end with the understanding that we are not solely responsible for the circumstances we find ourselves, and that if we learn more about our individual financial positions in the context of the action our creditors are taking against us and apply a strategy to such, then we will start a healing process which will leave us with hope.