Arizona home values have fallen so much that almost half the people with mortgages owe more than their homes are worth. Despite a state offer to reimburse banks up to $50,000 of a $100,000 principal loan reduction to help homeowners stay afloat, most banks balked, including the nation’s two largest home loan guarantors, which flat out said no to any debt relief offer.

In fact, Fannie Mae and Freddie Mac opted out of the state-sponsored mortgage debt relief program, saying that the agency’s policies forbid them from participating. As a result, only three Arizona homeowners have been approved for a principal debt reduction since the program began in Sept. 2010.

Although many, including sate attorneys general who are negotiating a multibillion-dollar settlement with big banks over fraudulent mortgage practices, believe that mortgage loan principal reduction has become an indispensable tool for fixing the housing problem, Fannie Mae and Freddie Mac disagree. The taxpayer-owned agencies say debt relief for homeowners is bad for business and, as a result, bad for taxpayers.

Critics claim the response is another example of how banks and investors have benefitted from the government bailout after the housing collapse while borrowers have been left to drown.

“It’s sinful, is the word I would use, that they won’t do this,” said John Taylor, president of the National Community Reinvestment Corporation. “And the only reason they won’t is they don’t want to realize the red ink that’s already on their books.” Taylor and others claim that Fannie Mae, Freddie Mac, and other lenders that have opted out of debt relief programs in Arizona and elsewhere are only delaying inevitable losses on loans that were shaky to begin with (“Freddie and Fannie Reject Debt Relief,” The New York Times, Oct. 5, 2011).

Large Lenders: Debt Relief Involving Principal Reduction Invites “Moral Hazard”

Lenders claim that if they were to offer debt relief to borrowers, it would create a “moral hazard” and encourage borrowers to take out risky loans in the future because there would be less dangerous consequences or to purposefully default on their mortgage loans to get principal reductions.

Proponents of principal reductions say any mortgage debt relief, such as a mortgage loan modification, that fails to reduce the principal of the loan isn’t helping the continuing housing problem. At least one financial company, PMI Group, which shares the credit risk in many Fannie Mae and Freddie Mac loans, thinks that debt forgiveness makes financial sense because it gets loans down to realistic numbers that encourages the normal buying and selling of homes and shortens the pain involved in delaying a hit from bad loans. The company has found a way around Fannie Mae and Freddie Mac’s policy to deny principal reductions by paying some underwater homeowners if they make on-time payments for several years, a practice that amounts to a de facto principal reduction.

Steve Bailey, chief servicing officer at PennyMac, said that the failure to offer debt relief by cutting principal creates a moral hazard, not the other way around.

“A loan that is modified and left at 200 percent loan-to-value invites the moral hazard,” Bailey said. “You’re telling a person that they need to live in this house that’s severely underwater, paying more for housing than they need to, and looking around their neighborhood at homes that have gone through foreclosure and are available for much less.”

Nationwide, about one in five homeowners with a mortgage is underwater, with total negative equity between $700 billion and $800 billion.

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The U.S. Federal Trade Commission (FTC) announced last week that two related mortgage debt relief operations that allegedly failed to provide financially troubled consumers with promised credit card debt relief services, mortgage loan modifications, and other mortgage relief assistance services have been shut down.

A U.S. district court agreed to the FTC’s request to halt the operations of Residential Relief Foundation LLC, Silver Lining Services LLC, Mitigation America LLC, and their principal owners for together allegedly scamming customers out of more than $11 million.

The Residential Relief Foundation and Silver Lining Services defendants allegedly charged clients a $1,495 advance fee for mortgage modifications that consumers could have applied for at no cost through the federal Home Affordable Modification Program (HAMP), which encourages loan servicers and investors to modify mortgages to lower the monthly payment of homeowners who are at risk of default.

The defendants, who used a logo similar to the Great Seal of the United States to market their purported debt relief services, allegedly claimed quick results and a high success rate, advised consumers to stop making mortgage payments, and falsely claimed that reports they created would ensure promised results. The defendants also allegedly marketed credit card debt relief services that falsely promised consumers they could eliminate 50 percent of the credit card debt owed and allow consumers to become debt free in 12 to 36 months. Additionally, the defendants allegedly disposed of client’s personal information in unsecured dumpsters, in violations of the defendants’ own privacy policies.

Mitigation America, the second operation halted, allegedly deceptively marketed debt relief services for Residential Relief Foundation and Sliver Lining Services. The company also allegedly discarded consumer’s personal information in unsecured dumpsters in violation of its privacy policy (“At FTC’s Request, Court Shuts Down Deceptive Mortgage and Debt Relief Operation,” FTC press release, Oct. 4, 2011).

Under the terms of the settlement agreements, Residential Relief Foundation, Silver Lining Services, and their owners are banned from participating in the mortgage assistance and debt relief industries. The defendants must pay a judgment of more than $10.5 million, the total amount taken from consumers in the scam. Another $1 million that the defendants still have from the scheme will be sought by a court-appointed receiver. A joint judgment against Mitigation America and its owner bans them from participating in the debt relief industry and includes a judgment of $509,306, the total amount taken from consumers in the scam.

Consumers who feel they have been the target of fraudulent, deceptive, and unfair business practices can file a complaint with the FTC in English or Spanish by calling (877) 382-4357 or by visiting the FTC’s online Complaint Assistant at www.ftccomplaintassistant.gov.

Further Reading

Stipulated Final Order for Permanent Injunction and Settlement of Claims: Federal Trade Commission v. Residential Relief Foundation, et al. Filed September 28, 2011.

Stipulated Final Order for Permanent Injunction and Settlement of Claims: Federal Trade Commission v. Mitigation America, et al. Filed September 28, 2011.

Complaint for Permanent Injunction and Other Equitable Relief: Federal Trade Commission v. Residential Relief Foundation, et al. Filed November 19, 2010.

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Homeowners facing foreclosure could gain a measure of debt relief from a proposal negotiated this week during ongoing settlement talks between banks and state attorneys general.

The proposal would allow banks to pay less in penalties for improper and sometime illegal business practices related to the financial crisis, including foreclosure and mortgage-related wrongdoing, in exchange for an agreement to cut the loan balances of mortgage holders.

The proposal comes as banks and a coalition of state attorneys general attempt to reach a settlement agreement as the result of investigations into widespread fraud and deception by mortgage lenders in the wake of last fall’s robo-signing and home foreclosure scandals. As a result of the scandals, banks were accused of falsely attesting in affidavits as to the nature and ownership of consumer debts and then using the fraudulent legal documents to improperly foreclose on borrower’s homes.

The proposed principal reduction plan would be joined by a second agreement that would require banks to provide funding to states to pay for their own foreclosure-rescue programs that would presumably to a better job of providing consumer with mortgage debt relief than the banks’ own programs, which have been severely criticized for failing to approve significant numbers of customers for permanent mortgage loan modifications.

However, the proposed settlement didn’t sit well with California Attorney General Kamala Harris, one of the eight state attorneys general representing the core team involved in negotiating the proposal. Harris said Friday that she was leaving the negotiating team because the proposal lets banks off the hook and doesn’t go far enough to punish lenders for their unethical and illegal business practices.

In a letter to Iowa Attorney General Tom Miller, who is leading the attorneys general group, Harris said that it “became clear to me that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated. In return for this broad release of claims, the relief contemplated would allow too few California homeowners to stay in their homes” (“Principal Reduction Plan for Struggling Homeowners Could Be Part of Settlement Between Lenders and States,” The Palm Beach Post, Oct. 4, 2011).

Washington Attorney General Rob McKenna, one of the members of the negotiating team, disagreed with Harris’ evaluation of the proposal. “Our settlement will provide huge benefits — estimated in the tens of billions of dollars — for borrowers,” McKenna said. “The deal we are negotiating will not give banks a get out of jail free card.”

Representatives of the attorneys general, banks, and federal agencies met this week in Washington, D.C., to continue settlement negotiations.

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The economy remains mired in consumer debt more than three years after the financial crisis first struck and could take years to improve. Unemployment remains high and many consumers, in over their heads with credit card debt and mortgage debt, have been forced to seek help from debt relief, debt management, and debt settlement companies. But some economists are calling for a different kind of debt relief program.

Some experts, economics professors, and financial pundits are suggesting a radical “great haircut” that could jumpstart the economy. They’re envisioning a negotiated process in which banks provide homeowners with real mortgage debt relief, even if it means that banks must lose money and incur severe write-downs and bond investors must absorb losses — called haircuts — in some of the securities sold by the banks.

“We’ve put this off for too long,” said L. Randall Wray, a professor of economics at the University of Missouri-Kansas City. “We need debt relief and jobs and until we get these two things, I think recovery is impossible.”

Stephen Roach, a renowned economist who currently serves as the non-executive chairman of Morgan Stanley Asia, has argued that the great haircut should be taken a step further and has called on Wall Street to get behind what has been called a “Debt Jubilee.” Inspired by the biblical notion of Debt Jubilee in Israel, in which debts were forgiven every 50 years or so, Roach has called for the complete forgiveness of excess mortgage and credit card debt for troubled borrowers.

Even institutional investors like Ash Williams, who would suffer from debt reductions on their portfolios, are urging a creative solution to the debt morass. As the executive director of the Florida State Board of Administration, Ash oversees $145 billion in public investments and pension money. “If there is something constructive that can be done it should be,” Ash said. “You don’t want to reward bad behavior and you don’t want to reward people who were irresponsible. But if there is a way to do well by doing good, then let’s take a look at it” (“A ‘Great Haircut’ To Kick-Start Growth,” Reuters, Oct. 3, 2011).

If Banks Can Get Debt Relief, So Can Consumers

Although consumer debt levels have slowly come down since the financial crisis began, households are still carrying a staggering debt burden. The debt crisis has left many consumers besieged on one end by unscrupulous debt relief scams and on the other by unscrupulous banks. The debt relief scams falsely offer to settle debts for a fraction of what is owed — for the right price. The unscrupulous banks offer shady mortgage loan modification programs that rope homeowners into making lower monthly payments on a trial basis only to eventually — and some say intentionally — deny their program applications, charge them for being behind on their mortgage payments, and then foreclose on their homes.

Although officials for financial institutions say they have fiduciary obligations and can’t simply chose to absorb losses and depress the value of securities because it may be good social policy, some make it clear that financial institutions, which were saved by the taxpayer bailout, need to get pragmatic about the taxpayer’s debt crisis.

“They’d be bankrupt if not for the bailouts,” said Barry Ritholtz, director of research at Fusion IQ. “For their part, bondholders need to understand that we’re not earning our way out of this mess and should eat losses now before they get nothing.”

Other economists say that concern over consumer debt is overdone and that a Debt Jubilee would only make things worse. According to Mark Zandi, chief economist of Moody’s Analytics, said a forced write-down of debt “would only result in a much higher cost of capital going forward and result in much less credit to more risky investments.”

“Early in the financial crisis I was sympathetic to passing legislation to allow for first mortgage write-downs in a Chapter 7 bankruptcy,” Zandi said, “but the time for this idea has passed.”

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Shady debt relief, debt management, and debt collection companies are often targets of state attorneys general, U.S. attorneys general, and federal agencies for the scams they commit against consumers who owe significant or unpaid debts. But rarely are the companies in question accused of committing illegal acts against both consumers and the creditors that hire them.

However, according to a complaint by the U.S. Federal Trade Commission FTC, six individuals and three companies involved in a California-based debt collection operation did just that.

A U.S. District Court on Friday granted a request by the FTC to shut down a Van Nuys debt collection operation doing business as Rumson, Bolling & Associates, freeze its assets, and appoint a permanent receiver to run it while the FTC moves forward with charges that the company’s practices violated the Federal Trade Commission Act and the Federal Fair Debt Collection Practices Act.

The operation allegedly subjected consumers to abusive and illegal debt collection practices while at the same time deceiving the small business clients for whom it collected debts. According to the FTC’s complaint, the operation committed several offenses:

• Harassed and abused consumers by threatening physical harm and death to them and their pets, threatened to desecrate the bodies of deceased relatives, and used obscene and profane language;
• Improperly revealed consumers’ debts to third parties, such as the consumers’ employers, co-workers, neighbors, and family members;
• Falsely threatened consumers with lawsuits, arrest, seizure of their assets, or wage garnishment; and
• Falsely claimed that consumers would be liable for legal fees incurred in the collection of the debt (“At FTC’s Request, Court Orders Debt Collector to Stop Deceiving Clients and Abusing Consumers,” FTC press release, Sept. 30, 2011).

Rumson, Bolling & Associates allegedly used the slogan “no recovery, no fee” when selling their services to creditors, promising potential clients that they would collect debts on contingency and not charge a recovery fee unless they successfully collected a debt. However, the FTC alleged, in many cases the company kept either more of the recovered debts than they were entitled to or all of it, without sharing accurate information on debt collection results with clients. In other cases, the company allegedly charged clients additional fees to file “lawsuits” that would “guarantee” the successful collection of debts but never actually filed any legal paperwork or provided any service in exchange for the fees.

Further Reading

Complaint for Preliminary and Permanent Injunction and Other Equitable Relief: Federal Trade Commission v. Forensic Case Management Services Inc., et al. Filed September 12, 2011.

Preliminary Injunction and Order Continuing Asset Freeze and Other Provisions: Federal Trade Commission v. Forensic Case Management Services Inc., et al. Filed September 27, 2011.

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A Michigan couple that paid of $92,000 in credit card debt in 5-1/2 years has been honored with an award by a national debt relief organization.

Jerry and Sue Bailey, from Jackson, were awarded Clients of the Year this week by the National Foundation for Credit Counseling (NFCC), a nonprofit association of credit counseling agencies that help consumers manage their finances so they can get out of debt.

Between 1992 and 2005, the Bailey’s racked up $92,000 in debt across 17 credit cards paying for things like weddings for their daughters, car repairs, and home repairs. Everything they paid for went on a credit card. “We got caught up with ‘More is better’ and ‘How much is enough’,” Jerry Bailey said (“Michigan Couple Honored for Paying off $92,000 Credit Card Debt,” Fox Business, Sept. 28, 2011).

When they were faced with putting the cost of their daughter’s wedding reception on a credit card, they realized how much debt they had.

And then came the mail and phone calls from creditors.

When the couple sought help from their local credit union in 2005, they were eventually referred to GreenPath Debt Solutions, a nonprofit credit counseling service and NFCC member based in Farmington Hills.

Credit counseling agencies provide clients with debt relief by enrolling financially troubles consumers in debt management plans. In debt management plans, the agencies typically negotiate affordable monthly payments with creditors. Clients then make monthly payments to the agency, which in turn distributes the money to creditors each month until the debts are paid off.

The Baileys’ debt relief program, combined with stubborn budgeting, sacrificing, and taking on extra work to earn more income, allowed the couple to finish paying off their staggering debt in October 2010. When Jerry Bailey got the call from his credit counselor that they had completed the program, he couldn’t believe it. “I had her repeat it because I wasn’t sure,” he said.

The couple offers simple advice for those who may be in the same position they were six years ago: save a little bit from each paycheck and get rid of all but one credit card and pay it off each month.

Sue Bailey also recommends that people think hard before buying something. “If you don’t have money to buy something,” she said, “then you have to ask, do I need it or do I want it and can it wait until later.”

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The U.S. Federal Trade Commission (FTC) has filed a lawsuit in against the owner of several websites that fraudulently offer debt relief, mortgage relief, and tax debt relief services while purporting to be federal consumer agencies or associated with such agencies.

According to the federal complaint, websites operated by Christopher Mallett of San Antonio, Texas illegally claim a connection to the U.S. government and purposefully mislead consumers into thinking they are visiting federal debt relief websites. Mallet allegedly does business as the official-sounding but nonexistent Department of Consumer Services Protection Commission. He also does business as U.S. Debt Care, World Law Debt, and U.S. Mortgage Relief Counsel, and his websites include gov-usdebtreform.net, worldlawdebt.org, usdebtcare.net, and FHA-HomeLoan.info.

When consumers signed up for the services — under false promises of that their debts could be settled by official government programs for 16 percent to 40 percent less than what was owed — their information was simply passed on to various private-sector debt relief companies that contracted with Mallett for the sales leads.

Mallett, who is a “lead generator,” allegedly used the names of his businesses and his websites to imply and promote a connection to the federal government. The websites “depicted the FTC’s official seal, copied language about the fictitious agency’s supposed consumer protection mission almost verbatim from the FTC’s site, and claimed that the fictitious agency ‘monitors and researches’ member companies that provide financial assistance to American consumers” (“FTC Asks Court To Halt Defendant from Impersonating Federal Agencies,” FTC press release, Sept. 22, 2011).

The website FHA-HomeLoan.info, representing the fictitious government agency Mallett called the U.S. Mortgage Relief Counsel, “included a picture of the U.S. Capitol building and promised that the ‘Counsel’ would direct consumers to ‘officials licensed with the National Mortgage Licensing Service (NMLS), persuant [sic] to the SAFE act of 2008.’ ”

According the FTC, neither Mallett nor any of his businesses or websites has ever had a connection to the FTC or any other government agency or program.

The FTC has asked the U.S. District Court for the District of Columbia to permanently shut down Mallett’s operation.

Curiously, the FTC vote to file the complaint wasn’t unanimous. FTC Commissioner J. Thomas Rosch voted no, making the final vote 4–1 in favor of filing the complaint.

Further Reading

Complaint for Permanent Injunction and Other Equitable Relief: Federal Trade Commission v. Christopher Mallett. Filed September 14, 2011.

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A Maryland District Court judge on Wednesday provided yet another round of debt relief for beleaguered Maryland consumers under attack from debt collection companies operating improperly in the state.

Chief Judge Ben C. Clyburn, who has already dismissed thousands of debt collection lawsuits, dismissed another 314 lawsuits filed by a debt collection company that was not licensed to collect debts in Maryland.

Clyburn dismissed the cases under the terms of a settlement agreement reached last week between Cantonsville-based Sunshine Financial Group and the Maryland State Collection Agency Licensing Board. The lawsuits, which sought to collect consumer debts, can be re-filed in the future after the company receives a Maryland debt collection license.

As part of the settlement, hundreds of other Sunshine Financial lawsuits were also resolved. Clyburn ordered that attorney fees be indicated as satisfied on 323 other cases that had already gone to judgment. On 19 other cases that had already gone to judgment, Clyburn ordered that attorney fees and pre- and post-judgment interest be indicated as satisfied (“Judge Dismisses Hundreds of Maryland Debt Cases,” The Baltimore Sun, Sept. 21, 2011).

Under terms of the settlement agreement, Sunshine Financial agreed to drop hundreds of debt collection lawsuits and repay or forfeit $665,000 in attorney fees and compound interest that the company improperly sought.

Tis week’s settlement agreement with Sunshine Financial is just the latest in a series of judgments that Clyburn has handed down against debt collectors. Last year, the judge dismissed more than 27,000 debt collection lawsuits against Maryland residents after the dissolution of the Mann Bracken LLP law firm. In March, he dismissed 10,000 debt collection cases under the terms of a settlement agreement in a class-action lawsuit against embattled debt collector Midland Funding.

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For over 50 years, Wisconsin residents have been able to take full advantage of a unique debt relief option that allows them to select debts an amortize them with creditors. But a Milwaukee County judge put an end this month to a wildly popular maneuver that let residents avoid power disconnections, or even get re-connections, despite owing utilities thousands of dollars.

Unlike Chapter 7 or Chapter 13, Chapter 128 is not bankruptcy and it offers no federal protections. However, it does offer residents debt relief by allowing them to consolidate their debts and pay them off over a three year period. Examples of debts that are eligible for Chapter 128 include credit card debt, medical debt, rent, and utility payments.

But, according to We Energies, a Milwaukee-based utility, some residents have been using the debt relief protection as a way to skirt their responsibilities and prevent power disconnections while avoiding making payments on their utility bills.

We Energies for years treated Chapter 128 like federal bankruptcy and wouldn’t disconnect power to delinquent customers. In some cases, the company would even restore power when they received a Chapter 128 petition. But the dramatic increase in Chapter 128 filings of the past several years led the company to question the practice and seek clarification from the courts as to whether the stature required that they refrain from turning off a petitioner’s power.

Circuit Judge William Pocan ruled that it does not.

According to Todd Nelson, the attorney representing We Energies, most of the Chapter 128 filings in Milwaukee County last year included the utility as on of the creditors and hundreds listed only the utility.

“It’s one thing to file and actually make payments,” Nelson said. “It’s another to file with sole intention to avoid disconnection and (no intention) to make a payment, or even have any means to make payment” (“Milwaukee Judge Takes Away Popular Debt Maneuver,” The Milwaukee Journal Sentinel, Sept. 9, 2011).

Lawyers Criticized for Turing Debt Relief Statute Into Huge Money-Maker

Chapter 128 has provided debt relief for Wisconsin residents since the 1930s, but has only recently become popular. Although the statue first provided protections for small businesses, residents have had personal debt relief protections under the statute for more than five decades. Chapter 128 was rediscovered about 10 years ago and filings exploded when the recession hit in 2007. Filings doubled from 2008 to 2009 and tripled from 2009 to 2010. Filings are on pace to double again this year.

Some attorneys in the state have been criticized for using the renewed popularity of Chapter 128 as a cash cow, since consumers typically pay lawyers hefty fees in such cases. One attorney reportedly took her first Chapter 128 case in 1994 and now her and her staff of three keep an active caseload of about 500, with fees averaging more than $500,000 a year (“Chapter 128 Filings on the Rise in Wisconsin,” The Milwaukee Journal Sentinel, July 5, 2010).

Other attorneys remain wary of Chapter 128. They point out that it doesn’t offer the same protections as Chapter 7 or Chapter 13 federal bankruptcies and, because Chapter 128 is unique to the state, it can still end up on credit reports as a bankruptcy.

“You can’t cram down or strip down the debt,” said Richard Check, a Milwaukee-based bankruptcy attorney. “In Chapter 13, you might pay pennies on the dollar. In Chapter 7, maybe nothing.”

Check said that many who file for Chapter 128 could probably do better by turning to a nonprofit credit counseling service, which can negotiate lower interest rates and a five-year repayment plan while providing debtors education about credit, budgeting, and personal finances.

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A federal class-action lawsuit against a debt collection company and several co-defendants accused of altering their true identities in collection letters was allowed to continue Wednesday after a U.S. District Court judge denied the defendants’ joint motion to dismiss.

U.S. District Judge P. Kevin Castel refused to dismiss a class-action lawsuit against Cohen & Slamowitz LLP — a New York–based firm that provides legal representation for debt collectors — and co-defendants Encore Capital Group, MRC Receivables Corporation, and Midland Credit Management Inc., ruling that the co-defendants could be held vicariously liable for alleged violations of the federal Fair Debt Collection Practices Act (FDCPA) committed by Cohen & Slamowitz (“Class Action Lawsuit Filed Against Cohen & Slamowitz Continues,” Weisberg & Meyers LLC press release, Sept. 14, 2011).

According to the original complaint against Cohen & Slamowitz, filed in Nov. 2010, the company allegedly mailed thousands of debt collection letters from “The Law Offices of Cohen & Slamowitz” that contained multiple FDCPA violations, including altering the identities of the parties involved in collecting the debts and offering a “special discount” to settle the debts in full.

Although plaintiffs’ debts were originally purchased from Citibank by Encore Capital Group, the letters allegedly falsely represented the creditor as “Midland Credit” rather than “MRC Receivables.” Additionally, Cohen & Slamowitz allegedly altered its legal name in the letters by adding the prefixes of “The Law Offices of” and “Law Firm Of.”

The debt collection letters mailed by Cohen & Slamowitz also allegedly contianed a “Tax Season Special Discount” offer to settle plaintiffs’ debts for 50 percent off the amount owed.

Cohen & Slamowitz is one of 75 debt collection law firms that comprise an outsourced legal collections channel used by Encore Capital Group’s network of complex operational channels, which include MRC Receivables and Midland Credit Management. According to the lawsuit, the interconnected relationship makes Encore Capital Group, MRC Receivables, and Midland Credit Management liable for FDCPA violations committed by Cohen & Slamowitz.

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