NEWS AND ANALYSIS
STOCKTON EXPERIENCED YEARS OF UNRAVELING PRIOR TO BANKRUPTCY
Stockton, Calif., recently became the largest city in the country to declare bankruptcy, but evidence of its unraveling has been mounting for years, the New York Times reported today. Housing prices shot up in the early 2000s, when commuters from the San Francisco Bay area bought and built homes in Stockton. After the bubble burst, the median home price plummeted by more than 60 percent in the last five years. In the first half of this year, the city had the highest foreclosure rate of any in the country, according to RealtyTrac. The unemployment rate has hovered around 17 percent for the last few years, nearly double the national average. While Stockton’s bankruptcy troubles can be traced in part to the collapse of the housing market and the subsequent erosion of the city's tax base, for years city leaders also mismanaged and overspent funds, pushing the city into financial peril, analysts and current city officials say. Stockton cannot afford the $417 million it owes for retiree health benefits, city officials say, and this year a bank repossessed city-owned parking garages and a $40 million building the city had bought intended to house an upgraded City Hall. Since 2009, the city has cut 25 percent of its police officers, 30 percent of its Fire Department and over 40 percent of all other city employees. Read more.
CALIFORNIA'S "CHARTER" CITIES ARE UNDER THE MICROSCOPE
The last three large California cities to seek bankruptcy protection are all "charter cities," and now another charter city, Compton, says that it may have to file for bankruptcy by September, the Wall Street Journal reported today. Of California's 482 cities, 121 have their own constitutions, or charters. That gives them more leeway in governing their own affairs, including the freedom to set their own rules about elections, salaries and contracts. But that autonomy may be at the root of some of their fiscal problems, some experts say. Charter cities are exempt from state laws that mandate salary limits for elected officials. These cities also were free during good times to include generous worker pay and staffing agreements in their charters that can be difficult to alter quickly during financial duress. Read more. (Subscription required.)
FORECLOSURE CRISIS HITTING OLDER AMERICANS
A new AARP report says that more than 1.5 million older Americans have already lost their homes, with millions more at risk as the national housing crisis takes its toll on those who are among the worst positioned to weather the storm, the Associated Press reported today. According to AARP:
• Nearly 600,000 people who are 50 years or older are in foreclosure.
• About 625,000 in the same age group are at least three months behind on their mortgages.
• Nearly 3.5 million — 16 percent of older homeowners — are underwater, meaning their home values have gone down and they now owe more than their homes are worth.
AARP said that over the past five years, the proportion of loans held by older Americans that are seriously delinquent jumped by more than 450 percent. Homeowners who are younger than 50 have a higher rate of serious delinquency than their older counterparts. But the rate is increasing at a faster pace for older Americans than for younger ones, according to AARP’s analysis of more than 17 million mortgages. Read more.
Click here to read AARP's press release on the report.
COMMENTARY: THE CFPB’S NEW MORTGAGE DISCLOSURES ARE A BUST
The Consumer Financial Protection Bureau's (CFPB) "Mortgage Disclosure Team" just came out with two proposed forms that are supposed to make things easier for borrowers, but lenders, including nonprofit Habitat for Humanity, are concerned that the new forms will impede their ability to enable low-income families to become homeowners, according to a commentary in today's Wall Street Journal. The CFPB is proposing to replace the old mortgage disclosure forms with a new Loan Estimate Form and Closing Disclosure Form. However, any lender, including organizations such as Habitat, is at legal risk if they try to help low-income borrowers who lack the ability to repay their loans. The new rules would also forbid many borrowers from making smaller payments every month, followed by a single, one-time balloon payment to retire the principal at the end, according to the commentary. Read more. (Registration required.).
STUDENT DEBT HITS THE MIDDLE-AGED
Student debt is rising sharply among all age groups, but middle-aged Americans appear to be struggling the most with payments, according to new data released on Tuesday by the Federal Reserve Bank of New York, the Wall Street Journal reported yesterday. The delinquency rate—or the percentage of debt on which no payment has been made for 90 days—was 11.9 percent for debt held by borrowers aged 40 to 49 as of March. That compares with a rate of 8.7 percent for borrowers of all ages. Two-thirds of the nation's $900 billion in student debt is held by Americans under 40, the Fed estimates. But borrowers over 40 are having a particularly tough time with student debt for several reasons, consumer and higher-education experts say. Many debtors over 40 are still paying balances incurred years ago from college, while their home values and savings have declined sharply in recent years. An Education Department program that provides loans to parents to fund their kids' education is also among the fastest-growing of the government's education loan programs. Read more. (Subscription required.)
REPORT: PENSION UNDERFUNDING ON THE RISE
The amount by which pensions at S&P 500 companies are underfunded grew from $245 billion to $355 billion between 2010 and 2011, according to a new report from Standard & Poor's, CongressDaily reported today. Additionally the transportation bill Congress passed at the end of June included a pension provision that broadened the timeline used to calculate how much companies should stow away to cover pension obligations. The longer timeline reduces the short-term impact of the recession, freeing up cash for companies to spend (and the government to tax). But the benefits are fleeting: "It appears that Congress was willing to permit future payments to obtain tax receipts now, even though the expected net return would turn negative after five years," according to the report. Read more.
COMMENTARY: KEEPING CREDIT BUREAUS IN CHECK
The Consumer Financial Protection Bureau (CFPB) on Sept. 30 will start supervising credit reporting agencies, including the big three: Equifax, TransUnion and Experian, according to a commentary in yesterday's Washington Post. For years, consumer advocates have complained that the information collected often includes errors. Under the Fair Credit Reporting Act, the bureaus and any businesses supplying them with data must correct inaccurate information. The bureaus, in turn, are required to put systems in place that allow consumers to dispute information. However, surveys have shown that getting erroneous information removed from credit files can be an exasperating experience. The credit bureau industry claims that most reports are accurate, but one problem with the system, according to the commentary, is that the bureaus rely on information provided to them by companies seeking to collect debts. The CFPB will supervise credit reporting agencies that have more than $7 million in annual receipts. This means that the agency's authority will cover about 30 companies that account for about 94 percent of the market. The three major credit bureaus issue more than 3 billion consumer reports a year and maintain files on more than 200 million Americans, the CFPB said. Read more.
“SUBJECTING BUSINESS PROJECTIONS TO SCRUTINY IN VALUATION DISPUTES” WEBINAR TO BE HELD ON JULY 30!
Reassembling the speakers from the highest-rated panel at the New York City Bankruptcy Conference this year, ABI will be holding a live webinar on July 30 at 11 a.m. ET titled, "Subjecting Business Projections to Scrutiny in Valuation Disputes." Panelists include:
- Moderator David Pauker of Goldin Associates, LLC (New York)
- Martin J. Bienenstock of Proskauer (New York)
- David M. Hillman of Schulte Roth & Zabel LLP (New York)
- Bankruptcy Judge Robert E. Gerber (S.D.N.Y.)
The panel will address:
- How much deference should management projections be accorded?
- How do you determine whether projections are unrealistically optimistic or pessimistic?
- What is the relevance of "market consensus?"
- How do management’s incentives impact projections?
The webinar is available to ABI members for $75 and is approved for 1.0 CLE hours in Calif., Ga., Hawaii, Ill., N.Y. (approved jurisdiction policy) S.C. and Texas. CLE approval is pending in Del., Fla., Pa. and Tenn. To register, please click here.
LATEST CASE SUMMARY ON VOLO: STUDENSKY V. MORGAN (IN RE MORGAN; 5TH CIR.)
Summarized by Aaron Kaufman of Cox Smith Matthews Inc.
The Fifth Circuit reversed the judgment of the district court and held that where a debtor does not claim a homestead exemption and then sells the homestead post-petition, the debtor has the burden of claiming the exemption in the proceeds within the six months allowed under applicable state law. In this case, because the debtor failed to claim an exemption in his homestead and failed to claim an exemption in the proceeds during the six months following the sale (i.e., while the proceeds were exempt under state law), the debtor lost his right to claim an exemption in the sale proceeds. The trustee's objection should have been sustained. The lower courts' decisions were reversed and remanded.
More than 570 appellate opinions are summarized on Volo typically within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI’s Volo website.
NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: LIBOR SCANDAL UNDERMINES BANKERS' CLAIMS OF OVERREGULATION
The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent post examines the issues surrounding the Libor scandal and how it is undermining the push by bankers for looser regulations.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
ABI Quick Poll
The anti-modification rule for home mortgages in chapter 13 should be repealed, subjecting mortgage debts to bifurcation like any other secured claim.
Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.
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