By Bill Kirk
bkirk@eagletribune.com
March 28, 2009 12:13 am Homeowners buried under mountains of debt are flocking to area bankruptcy attorneys, mirroring a nationwide trend that has caught the attention of President Barack Obama and members of Congress. Job losses, adjustable rate mortgages, and maxed-out credit cards are conspiring to send more people scrambling for protection from creditors. "We're going through another deluge," said Andover attorney Michael Feinman, whose bankruptcy caseload has recently increased from 40 percent to 80 percent of his practice. In late February, Obama proposed a bill that would allow bankruptcy judges to change the terms of a mortgage for distressed homeowners in their courts. So far, the bill has passed the House, but has less support in the Senate, which is due to take it up in late April. Bankruptcies are the highest they've been since the last major recession in the early 1990s, Feinman said. Nationwide, there were 1,074,225 consumer bankruptcy filings in 2008, up from 822,590 in 2007 — a 30 percent increase. In Massachusetts and New Hampshire, the caseload has risen by comparable amounts, topping out at 16,098 in Massachusetts and 3,538 in New Hampshire last year. Doug MacMillan, a Haverhill bankruptcy attorney, said his caseload is up 50 percent from last year. "In the past year or so, the number of people calling to inquire about bankruptcies at my practice has doubled," he said. The biggest problem he sees are people unable to afford their mortgages because they have adjustable rates that are now resetting. "Maybe they thought they'd sell before it adjusted, or they could lock into a fixed rate," he said. "But that never happened because the value of the house fell. So they no longer qualify for refinancing. The banks can't rewrite their mortgages when their loan-to-value ratio is negative." He said that's been compounded by many people who have lost either their primary or second jobs. In response to this growing problem, Obama put together a multi-pronged plan to stabilize the housing market, which included allowing bankruptcy judges to change the terms of a mortgage agreement. The Obama administration has argued that without such a law, people are being forced into foreclosure, even though they would be "potentially ... better off, and the bank would be better off, and the community would be better off, if they're at least making some payments, but they're not able to make all the payments necessary." U.S. Rep. Niki Tsongas, D-Lowell, who voted for the measure in the House, said it is an important part of Obama's overall economic stimulus package. "Bankruptcy judges can protect second homes and boats, but not primary homes," she said. "Given the huge number of bankruptcies and foreclosures we need this to help keep people from losing their homes." She said the proposed bill is very narrow, noting that it applies only to existing mortgages. Further, people have to show they've taken all the steps for loan modification outside of bankruptcy, and they have to let their lender know 30 days before they declare bankruptcy. "The hope is, with this tool of bankruptcy in place, banks and lending institutions will rewrite existing loans before the homeowner has to declare bankruptcy," she said. "This is one of the levers we had to make banks take seriously the need to rewrite existing mortgages and bring down the number of foreclosures." But some in the mortgage industry — and many on Wall Street — say that such a law, known as a "cram down" in bankruptcy lingo, would cause the mortgage market to seize up because investors would stop buying mortgage-backed securities out of fear a judge could unilaterally change the terms of the deal the securities were created around. Peter Garuccio of the American Bankers Association said that the change also would translate into higher prices for consumers. Material from MSNBC.com was used in this report. ÔÇæÔÇæÔÇæ Join the discussion. To comment on stories and see what others are saying, log on to eagletribune.com.
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