R.C. Lim, Attorney and Counselor at Law

Obama’s Mortgage Relief Plan

The Basics:

LA Times

NY Times

* The details are still skimpy, but it looks like the new plan just announced by the White House will affect a much larger group of borrowers than previously covered. New additions to the plan would include coverage for individuals who have not yet fallen behind on their mortgages. This removes the weird logic before in which some borrowers who were so far current were better off falling behind so that they were in a better position to renegotiate their loans. Still the $275 billion is still not a lot of money given the scope of the problem, and the vast majority of those who can do so will most likely be forced to

Housing Secy Leans on Banks

Bank of America Agrees to Extend Foreclosure Moratorium

UBS Violates Bank Secrecy

Today’s news that UBS will reveal the names of several prominent families who have covertly banked in Switzerland confirmed what many have already suspected for some time: the trust between client and banker would disappear once the bank was faced with this choice between continuing its overseas operations or maintaining the principle of client secrecy that traces to the Middle Ages. You might say that bank secrecy has become a victim of its successful US Wealth Management division.

This follows the story of the German taxing authorities successful uncovering of tax cheats this past summer. Now would-be hiders of assets should beware that there are a multitude of ways to get caught in the act of tax evasion.

1. From your own actions of money entering or leaving the tax haven.

2. From a rogue bank employee.

3. From the bank itself.

As all honest asset protection planners will advise, the purpose of our work is NOT to cheat the tax man. Rather the purpose is generally to provide to individuals many of the same protections that commonly exist and utilized by corporate “persons.” This activity has been recognized as legitimate reason to send money to overseas locales by the US taxing authorities. However, the price of this activity is that one MUST report on one’s overseas assets.

The American System

The American way when a corporation files for bankruptcy is to keep the management that drove the corporation into that mess in charge. The rationale is that no other more competent management could be found. This is the case despite the fact that there are a host of executives in the US who specialize in turnarounds. Never has the error of such reasoning been more on display than recently where we’ve seen chief executives land in private planes to hold their hands out before Congress and recipients of TARP funds use the new cash infusions on wasteful office renovations in the midst of a crisis.

The American system stinks. Notably, the Europeans don’t follow such a broken logic. If your company ends up in bankruptcy, you go. The PR war that occurred in the 80s and which culminated in favor of entrenching management instead of permitting “corporate raiders” to break up companies, enshrined the poison pill and has left American managment more corrupt, lazy, and incompetent than ever. So it is true that Obama’s $500,000 cap on management pay will encourage managers to head to bankruptcy before taking TARP funds, which would then trigger salary limits. In fact, it is often the case that Chapter 11 leads to a round of salary increases! The argument the inept management uses is that as debtor in possession uses is that they need their senior management in bankruptcy more than ever. Never mind that it’s usually simply the senior managment rewarding themselves for the error of their ways. One of the only good provisions in BAPCPA is that at least now the salary raises have to be cleared through the Office of the U.S. Trustee.

Folks who enter my office these days are typically consumers filing for bankruptcy. Consumer bankruptcies spiked some 40% in 2008, and I think we may just be getting started. For them, it is a momentous and difficult step to take. Most feel guilt. I attempt to encourage them to take a different view. To explain to them that this too shall pass and that many others have filed to only later to find great success. Perhaps I should have them turn their dial to Donald Trump’s The Apprentice. Trump hasn’t lost a bit of his self-satisfaction despite the fact that he is on the verge of filing for his fifth bankruptcy.  But I suppose that would be to suggest that bankruptcy means the same thing for the regular people and the very rich, which it clearly does not. How much of a raise do you think Trump intends to give himself when he heads into bankruptcy this time?

Estate Planning for These Crazy Times

On December 16th, 2008, the FOMC set the Fed Funds rate at 0-0.25. For anyone who still has a taxable estate left this leaves two salient features that favor estate planning right now. First, asset prices have collapsed. Hence gifting now occurs at greatly depressed level. Second, interest rates, which are used and which determine the size of the tax avoidance value of some strategies, can be locked in at what will clearly be the floor. Specifically, planning that involves grantor retained annuity trusts (GRATs), charitable lead trusts (CLTs), and sales to intentionally defector grantor trusts (IDGTs) are particularly effective in this economic environment.

No one feels flush in these time. But if your estate is likely to exceed tax-free amount on your death, you might consider taking advantage of the financial zaniness of the moment.

Hiltzik’s Argument for Bankruptcy Judge Loan Modification

Michael Hiltzik had an interested suggestion in the LA Times.  Maybe the Country should rely on bankruptcy judges to rewrite mortgages.  It’s an interesting idea and might work, but that would require that someone figure out exactly how much forgiveness the mortgages should receive. The obvious solution and the that Hiltzik assumes would occur if bankruptcy judges were given this responsibility is that loans would be crammed-down to their present value.  So if the homeowner owed $400,000 on a $300,000 house, the loan would be rewritten to value the home at $300,000. The chief argument against allowing bankruptcy courts to do this is that going forward it might forever make mortgages more expensive. I think that there is probably another factor that he did not consider.

Banks are tasked with self-reporting their losses under the mark-to-market accounting rules. I think that it’s a fairly safe bet that there are a whole lot of banks that have not yet taken their medicine. And there is no agency that is charged with scrutinizing each and every loan. Each and every piece of real estate is different so maybe those comparables aren’t accurate, the banks would reply if ever asked why they haven’t been writing down their assets enough. One definition of troubled assets are the ones that people are still bothering to buy and sell. If the bankruptcy courts were to jump in this way, it would quickly reveal the full extent of the problem, which has been hitherto carefully hidden from view. That is, there would be a tidal wave of bank failures that would take most experts by surprise. (How do I know this? Leverage + 25% erosion of home values = a really, really ugly negative feedback loop.)

Despite what a lot of crooks might want you to believe, the conditions that lead to a loan modification are quite specific. Banks have NOT been taking losses on these modifications and instead have simply forgiven interest and fees from late payments. Moreover, most banks are not even willing to work with people unless they have some compelling story that excludes nearly everyone: sick and just returning to work, laid off but just found a new job that pays the same money. In short, the story needs to (1) provide an understandable reason for the debtor falling behind, and (2) give adequate assurance that the debtor will be able to pay back the loan. Another category are those that fall within the settlements for RESPA and TILA violations. If you don’t fall within these categories, then it’s your tough luck.