The significant part of the ruling was that an attorney cannot advise a client to incur further debt solely for the purposes of taking advantage of the Bankruptcy sec. 524 (a) (4) prohibits professionals from advising debtors to incur more debt in contemplation of filing. The Bankruptcy Code generally prohibits an abusive filing, and debtors cannot simply incur debt for the purpose of satisfying the means test requirements of the Bankruptcy Code. However, this does not necessarily limit giving advice or talking about incurring debt for legitimate purposes, for example, obtaining a new car loan for purpose of securing reliable transportation. In Footnote 6, the opinion states:

Thus, advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause. Advice to incur additional debt to buy groceries, pay medical bills, or make other purchases “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor,” §523(a)(2)(C)(ii)(II), is similarly permissible.

So the upshot of the opinion is that attorney’s still may engage in “robust discussion” with their clients if their advice is designed to achieve enhanced financial prospects, not just for qualfying for bankruptcy.

According to Postal Service Data, as of September, the number of dormant addresses in Sacramento, Yolo, Placer and El Dorado counties had jumped more than 50 percent during the recession.

On the bright side, if there is one, commercial rents have fallen sharply as supply exceeds demand. This may be a Golden opportunity for Entrepreneurs with cash can get a deal and jump-start a new business.  At the same time, its no secret that cautious and troubled banks aren’t granting many loans to launch enterprises. Many businesses and offices are stuck with rents they can’t afford, while relocation costs keep them from moving.

As consumers and companies have changed their spending patterns, the flow of money has trickled down to a standstill, especially in retail.

Statistics from the Bankruptcy Court indicate an overall 47% incease in Bankruptcy filings.

The projected number of defaults in 2010 on mortgages is estimate to be approximately 2.5 million, according to the Department of the Treasury.  And although nobody knows for sure where where the economy is going, lack of funding for small businesses is a major problem that needs  to be addressed in order to stop the downward spiral.  As the number of small businesses closes, unemployment will continue to be a problem, affecting everything from commercial to retail.  Without easing tight credit restrictions, the trend is likely to continue.

The opportunity to use “Produce the Note” as a defense arises from the practice of bundling, fractionalizing and securitizing debt as commodities,and then from selling the debt in the secondary money market.   As lenders sought to monetize their customers and reduce the risk, it was thought that bundling mortgages as securities would reduce risk for investors by spreading the risk. In fact, it was known that a large number of loans would go bad, but as an investment risk, it was thought not to be a significant problem, because the risk would be spread around more by fractionalizing and bundling the securities in a pool. To get a real understanding of the mortgage meltdown, I strongly recommend reading Thomas Sowell’s “The Housing Boom and Bust.” He gives some great insights on how Government programs like the Community Reinvestment Act, Fannie Mae and Freddie Mac actually encouraged questionable lending practices.

Here’s how it happened: In 2000, Congress repealed the Glass-Steagal act, which was passed during the depression. That Act prohibited brokerage firms from owning an interest in Banks. The repeal of Glass-Steagal opened the door for Wall Street to start pushing mortgage backed securities in clever new packages dreamt up by the financial whiz kids. From the years 2001-2008 most loans “originated” by so called Wall Street “lenders” were not made using their own funds, i.e., lending their own money, but using the funds of investors. These loans were packaged or bundled, securitized and sold on Wall Street Investment Banks such Lehman Brothers, Bear Stearns, and Merrill Lynch to investors such as pension funds, mutual funds, municipal funds, hedge funds, insurance companies and foreign investors.

Under pressure from Federal Regulators, when Wall Street ramped up their lending efforts}during these years, the underwriting standards for most, if not all originating “lenders” dropped significantly,as the originating “lender” was more incentivized to produce as many assignable loans (“products,” or better yet, “Security instruments”) as they could in order to feed the voracious Wall Street money-making machine as many as these loans as could be produced. What traditionally would have been a loan to an unqualified buyer was now acceptable under pressure to help everyone live “the American Dream.”

The “Originators” or original “lenders” rarely lent their own money. Instead, the usual practice was for the originating “lender” to have already contracted to resell the loan to a “loan aggregator” in a pool. Immediately on sale.  The investment bank or other entity and was to be paid off immediately for the full amount plus a premium,  typically a 2.5% return.

These “middlemen” in the securities transaction were all paid in full and had no interest in the loan and were not in reality “lenders” but rather a conduit in a single securities transaction. Thus, it is has been theorized that the “originating lender” was in reality doing nothing more than using borrower’s credit to issue unregulated negotiable securities (certificates of asset backed securities) on behalf of the Wall Street investors, who were the true “lenders” who funded the loan and who are entitled to any payment that might come due on the loan. To state it another way, the practice of the originating “lenders,” in creating the negotiable securities, along with the structure of the deal, was a single, multistage transaction that was literally designed to encourage funding of high risk subprime, predatory loans to be originated by the “straw man” or “stand-in” originating “lender.” This resulted in funding loans for literally anyone that could walk, talk, and most importantly, sign loan docs. At the same time, the more predatory the nature of the loan/security and the more the more profit potential, and the more attractive these products were to investors.

(These tactics included deceptive teaser rates, obscured negative amortization products, balloon payments, the YSP (Yield Spread Premium,) onerous pre-payment penalties, sloppy underwriting, bait and switch tactics at the signing table, false assertions of a right to refinance, appraisal fraud, unverified stated income loans, etc.)   So the financial incentive to make these loans was great, while the risk, for the investor, was thought to be minute. What this created was a system wherein literally anyone with a pulse and FICO score over 500, was able to obtain a mortgage loan in the form of a negotiable security that would be sold on Wall Street. Knowing that Wall Street would fund the loan through its investors, it encouraged the originating “lenders” to cut corners on proper underwriting and instead to produce as many assignable notes as possible without regard to the consequences.

The Securitization system was further designed so as to eliminate the risks caused by predatory lending, defaulting loans, and other risks by insuring and cross-collateralizing thousands of loans in a loan pool. In fact, if a loan defaulted and resulted in a foreclosure, and if foreclosure was pursued, the loan would be paid-off in full by insurance proceeds, money from various guarantors, by the investors, and/or by the federal government. If the loan was paid, there is no right to foreclose or threaten foreclosure.So even though these loans were by nature high risk, there was little risk to the investor because of insurance. Of course, this led to the bailout of Fannie Mae, Freddie Mac, and AIG. So the lenders were not taking any risk at all because the loans were guaranteed by the government or by you as the taxpayer. Put another way, the lenders and investors were using the taxpayer’s money to insure their financial gambling habits.

Now here’s where the legal problem arises. When the notes and deeds of trust were bundled and collateralized in a pool, the promissory notes and deeds of trust were separated, giving the investors with an interest in the deed of trust (i.e., the security) while the lenders retained the note or assigned the note for collection to another entity. This leads to a fundamental problem according to the long standing principles of real property law, because only the holder of the note is entitled to enforce the debt, making the security interest, the deed of trust unenforceable without possession of the actual note. Having a digital copy of the note is not enough to prove a security interest.  With the multiple assignments of security interests, and the collapse of many financial institutions, it is difficult to determine where the note is, if it is to be presently found at all.

An entity called MERS (Mortgage Electronic Registrations Systems) was used to track ownership of loan servicing rights and ownership rights and even pretends, at times, to be the beneficiary of many loans, even though they do not collect any loan payments, have no right to collect such, and have no other financial interest other than being paid its ordinary fees for the tracking and registration service.  MERS typically failed to record any assignments of the loans in the property County Recorder’s office. This was done to avoid the payment of fees, among other reasons.

In many cases, when it comes time to enforce a security interest on a predatory loan, the party attempting to foreclose cannot provide evidence of ownership and possession of the note which evidences the obligation.  As a result, their legal standing or right to collect payments, and, ultimately, to foreclose on the security interest is subject to challenge. If there is no note, and/or no properly recorded assignments of such, there can be no enforceable debt obligation.

This is not a novel but ancient defense which has come back to life as a result of the securitization practices of the Wall Street Lenders. Failure to provide validation of the debt or proof of ownership of the note/recorded assignments is now being used as a defense against enforcement of the security interest.

Here is a summary of some of the interesting cases on the subject:

In re Foreclosure Cases, (Dist Ct. Cent. D. Ohio 2007) On October 31, 2007, Judge Boyko of the United States District Court of Ohio, Northern District, dismissed a series of foreclosure complaints brought by Deutsche Bank. All complaints were dismissed for lack of standing to bring the complaint, where there was no evidence of ownership of the note at the time the complaints were filed. Judge Boyko issued an order requiring the Plaintiffs in a number of pending foreclosure cases to file a copy of the executed Assignment
demonstrating Plaintiff (Deutsche Bank) was the holder and owner of the Note and Mortgage as of the date the Complaint was filed, or the court would enter a dismissal. Deutsche Bank was unable to do so. The Court’s amended General Order No. 2006-16 required Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identified Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest. Deutsche bank submitted several affidavits that claimed that they were in fact the owner of the mortgage note, but none of those affidavits mentioned assignment or trust, that they were the successor interest. Thus, the Judge ruled that in every instance, the submissions create a “conflict” and they “‘[did] not satisfy” the burden of demonstrating at the time of filing the complaint, that Deutsche Bank was in fact the “legal” note holder.

In re Caporales, Case No. 09-09050, (Bk. Ct., ND CA 2009), debtors filed an adversary proceeding and a motion to enjoin a trustee’s sale, Debtor alleged, among things, that the lender was not the owner of the note at the time of filing the Notice of Default or the Notice of Trustee’s sale, and moved for a Temporary Restraining Order, which was granted. That case appears to be still unsettled and awaiting further disposition and briefing.

In White Plains v. PHH In a Chapter 13 case arising out of the Southern District of New York, a lender got a surprising ruling on Oct. 9, 2009 in federal bankruptcy court when Judge Robert Drain ruled that the bankrupt borrower could not be held to pay a note to the Lender, PHH Mortgage, because it hadn’t proved its claim to a delinquent borrower’s home in White Plains.

In doing so, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt vanished, via a court order. The borrower lived in a home with her daughter and son-in-law. The borrower bought the house in 2001 with a mortgage from Wells Fargo Bank; four and a half years later she refinanced with Mortgage World Bankers Inc. She fell behind in her payments, and her attorney, David B. Shaev, filed a Chapter 13 bankruptcy plan on her behalf in late February 2009 in an effort to save her home from
foreclosure.

Shaev had originally hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case. In response, the debtor received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action. Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder. Among the documents filed to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice-president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records.

Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed, obviously in violation of the automatic stay of Bankruptcy Code § 362 (a). PHH at the hearing was left in the uncomfortable position of having to explain why there was no documentation of an assignment to U.S. Bank. According to a transcript of the Sept. 29, 2009 hearing, Mr. DiCaro said: “In the secondary market, there are many cases where assignment of mortgages, assignment of notes, don’t happen at the time they should. It was standard operating procedure for many years.”

Judge Drain rejected that argument made by the lender that it was common practice for assignment of mortgages to not occur when they should, concluding that what had been presented to the court just did not add up. “I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person,” he said. “That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage.” This case leaves some unanswered questions; a house with no discernable debt, but a lien of record.

Debtor’s attorney is left to file an amended plan or sue to try to get clear title to the property via a declaratory relief and quiet title action. The ruling is being appealed.

The California Foreclosure Law

The California Foreclosure Law is found in Civil Code § 2923-2924 et seq.

Under prior law, and the amendments enacted, the standing of parties is always in question. The Civil Code incorporates the common law in the wording of the statute, and suggests that standing is an issue in every foreclosure case:

CC 2924 (a) requires the trustee, mortgagee, or beneficiary, or any of their authorized agents to contact the borrower prior to filing a notice of default.

Strict compliance with the foreclosure laws is generally required.  This leads to several conclusions.  First, no foreclosure should be permitted where the California Foreclosure statutes are not followed. Under California Law (California Civil Code Section 2923-2924 et seq. (The California Foreclosure Law) the “beneficiary or their authorized agent” is required to contact the borrower to assess their financial information and discuss modification options. This statutory section requires, it would seem, that only the true and actual beneficiary (i.e., the actual holder of the note) is authorized to make contact and certify such contacts with the homeowner/borrower prior to making the required declaration in the Notice of Default. Failure to have the true and actual beneficiary and or their authorized undertaking the foreclosure precludes and nullifies any attempted foreclosure.  As such, it makes the filing of the Notice of Default with the California County Recorder, void, if not fraudulent.  The Civil Code echoes the principal that only the holder of the note has standing to bring foreclosure proceedings.

No one other than the true and actual beneficiary of the note or their authorized agent should be able to assert proper standing and prove that it is a real party in interest in any legal proceeding, including responding to a temporary restraining order (TRO); preliminary injunction; bankruptcy; or eviction action.

As discussed above, without proof of ownership of the note and all required recorded assignments, any attempt to show up and defend any of the above actions by the “pseudo lender” without proof of possession of the note and/or their “agent” who cannot prove their standing to enforce the security interest may be subject to legal challenge.

It may also be a violation of the Fair Debt Collection Practice Act because, if no one other than the true and actual beneficiary or their duly authorized agent has a right to collect Loan payments (including principal and interest), late fees, attorney fees, etc., and may not legally demand or collect such. That’s because the mortgage follows the debt.

California Civil Code 2923 and 2924 provide in pertinent part:

CC § 2924.3. (a) Except as provided in subdivisions (b) and (c), a person who has undertaken as an agent of a mortgagee, beneficiary, or owner of a promissory note secured directly or collaterally by a mortgage or deed of trust on real property or an estate for years therein, to make collections of payments from an obligor under the note, shall mail the following notices, postage prepaid, to each mortgagee, beneficiary or owner for whom the agent has agreed to make collections from the obligor under the note:

…. (3) Notice of the time and place scheduled for the sale of the real property

2924f. (a) As used in this section and Sections 2924g and 2924h, “property” means real property or a leasehold estate therein,  and “calendar week” means Monday through Saturday, inclusive.

(b) (1) …before any sale of property can be made under the power of sale…notice of the sale thereof shall be given by posting a written notice of the time of sale … at least 20 days before the date of sale in one public place

…A copy of the notice of sale shall also be posted in a conspicuous place on the property to be sold at least 20 days before the date of sale,…where possible and where not restricted for any reason. If the property is a single-family residence the posting shall be on a door of the residence….

The question thus arises whether the statutory language requires a valid assignment of the note prior to Recording a Notice of Default, Posting and Mailing notice of Trustee’s Sale.

If the putative lender or their agent does not have possession of the note at the time the Notice of Default was recorded, or the Notice of Trustee’s sale is recorded and served, lack of standing seems to be a valid defense to any foreclosure action.

Under the California Loan Modification Law, there is also Language that the Lender is Required to offer a Loan Modification to the Borrower Based on the “Net Recovery” Exceeds Net Present Value Basis following foreclosure.

CC 2923.6. (a) The Legislature finds and declares that any duty servicers may have to maximize net present value under their pooling and servicing agreements is owed to all parties in a loan pool, not to any particular parties, and that a servicer acts in the best interests of all parties if it agrees to or implements a loan modification or workout plan for which both of the following apply:
(1) The loan is in payment default, or payment default is reasonably foreseeable.
(2) Anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure  on a net present value basis.

An unanswered question is whether this statute gives the borrower a private right of action(basis for a lawsuit) to sue for specific performance of a loan modification based on a net present value theory. One thing is for sure, with mortgage defaults expected to number 2.5 million in 2010, the confusing method of collaterization and assignment used in originating the loans, with current and new foreclosure statutes, makes this area fertile ground for litigation in the State and Federal Courts, providing further defenses and methods to attack foreclosures by distressed borrowers  in danger of losing their house.

Dale Kasler did a follow up in the Sacramento Bee about General Growth Properties, Inc. it’s Reorganization Plan, and the prospects for the Promenade in the near future. Elk Grove’s unfinished megamall will likely remain stalled even though its developer has taken a major step toward exiting bankruptcy protection. General Growth Properties Inc. said it has reached agreement with lenders to restructure billions of dollars in debt, as part of a reorganization plan that would leave the Chicago mall developer largely intact. The plan needs the approval of creditors.

But unfinished projects, including the Elk Grove Promenade, aren’t part of the reorganization plan. General Growth is still negotiating with lenders on those projects, company spokesman Jim Graham said Wednesday.

The Promenade’s future “remains to be seen,” Graham said. Construction on the on the 1.1 million-square-foot mall ground to a halt in October 2008, and lawsuits from contractors seeking payment began piling up. Last February the project, surrounded by chain-link fence and sprouting weeds, was officially put on hold indefinitely. Two months later, buried under billions of dollars in debt, General Growthfiled for Chapter 11 bankruptcy protection. The site is now a steel ghost town, an e1ery site that looks like the survivor of a nuclear winter or an outtake from the Omega Man.

The company tried to sell the mall earlier this year but pulled it off the market several months ago. Graham said the Promenade’s fate is “subject to market conditions that are unrelated to the bankruptcy.” Analysts agree, saying the Promenade190 is a troubled project regardless of what happens to General Growth.

Another point of view might be that the market conditions that caused the bankruptcy was the failure of the developer and planners to adequately prepare feasbility studies and understand demographic trends. Ambition and greed may have factored into a ill fated decision to go ahead and build before the time was ripe. That’s of course the dual problem of being a developer, being a visionary and being accurately able to predict future growth patterns.

The Sacramento research director at commercial real estate broker Colliers International, Garrick Brown, said the Promenade won’t open “for three years at best, more likely four years.” Brown said the retail market is starting to improve, but the Promenade was built too far out in front of Elk Grove’s housing development. The mall is about two miles from the nearest housing. “Nobody wants to touch it until there are homes there,” he said. The mall, first proposed in 1997, has been a symbol of Elk Grove’s ambitions and frustrations. It spurred Elk Grove’s push for cityhood in 2000. Macy’s and Barnes & Noble were among the earliest anchor tenants committing to the project.

With unemployment officially at 10.2% nationwide, the State in Deep Financial crisis, Bankrupticies at all an all time high, and Chairman of the Fed Ben Bernanke saying Monday that the employment picture isn’t going to get dramaticallly better in the near futre, until economic circumstances change, the Promenade is going to be a symbol of ambition gone awry and failed dreams. The Promenade might now be known as the “Ghostwalk,” a regional symbol of the times, where the dreams of visionaries haunt the landscape, waiting without hope of a certain future.

Paul R. Bartleson
Sacramento Bankruptcy Lawyer.

The company halted construction on the Promenade in October 2008; in February it said the project was on hold indefinitely. Contractor lawsuits and mechanics liens started piling up. The company tried selling the mall site to investors but pulled it off the market several months ago.

Market analysts believe the mall won’t get completed for several years, regardless of what happens to General Growth. There are obviously a variety of factors involved in this, included high unemployment and the State of California’s fiscal crisis.
Graham reportedly said the fate of Elk Grove mall is “subject to market conditions that are unrelated to the bankruptcy.”
General Growth filed for Chapter 11 Bankruptcy in April of 2009, staggered by billions in debts.

It’s uncertain what Mr. Graham meant by “market conditions that are unrelated to the bankruptcy,” but those might include problems in obtaining financing and investment capital. Another factor might be grossly overestimating the region’s ability to absorb growth based on demographics, rather than housing projections. Harry Dent, the same guy who wrote the Roaring 2000s, wrote an interesting book called the “Great Depression Ahead,” in which he predicted a stock market and real estate crash based upon sheer demographics, that the real estate market was bound to decline simply because the baby boomers were starting to retire, and the generation following up behind was smaller in number, and in addition, holds different values and buying habits. As the era of rampant consumerism and free wheeling credit winds down, it appears to be anybody’s guess when, if ever , the project will be completed.

The American Bankruptcy Institute, an industry research firm, said 388,485 bankruptcies were filed during the last quarter, compared to 292,291 filed during the same period in 2008, according to data released by the Administrative Office of the U.S. Courts.

Filings for the first nine months of the year climbed 35% to 1,100,035, compared to 841,496 filings during the same period in 2008. A total of 1,117,771 bankruptcies were filed last year.

“The spike in bankruptcy filings for both consumers and businesses reflect the continuing effects of today’s weak economy,” said ABI executive director Samuel Gerdano in a statement. “With unemployment surpassing 10% and credit to businesses remaining tight, consumers and businesses are increasingly turning to the financial relief of bankruptcy.”

Bankruptcies are at the highest level since 2005, when 2,078,415 were filed before Congress passed amendments to the Bankruptcy Code, said ABI.

In October 2005, Congress implemented legislation making it more difficult for filers to prove they should be allowed to clear their debts in a Chapter 7 bankruptcy, forcing more to file under Chapter 13. The law triggered more Americans to rush to file for bankruptcy in the months before the law went into affect.

The ABI report said business bankruptcy filings rose 32% in the third quarter of 2009 to 15,177, and filings for the first nine months of the year totaled 45,510, topping the total 43,546 business bankruptcies filed in 2008.

Personal bankruptcies increased 33% to 373,308 during the last quarter, led by a 42% hike in Chapter 7 filings, which totaled 265,721. The number of consumers filing Chapter 13 bankruptcies rose 15% to 107,142 filings in the third quarter, according to ABI.

During a twelve-month period ending Sept. 30 2009, the report said total filings increased more than 34% to 1,402,816, compared to 1,042,993 in the same period of 2008.

Nevada had the highest rate per capita filings in the country, with 10.49 residents per thousand filing for bankruptcy in the year ended Sept. 30. The state also had the highest rate of filings for chapter 7 bankruptcies at 7.53.

Tennessee had the highest rate of filings for Chapter 13 bankruptcies in the 12-month period with 4.36 people per thousand.

In the Eastern District of California, filings were up 51.% over the same period from the year before:  According to the clerk’s office, here are the statistics

UNITED STATES BANKRUPTCY COURT
Eastern District of California

STATISTICAL REPORT
YEAR TO DATE COMPARISON

Total filings were up 49.3%, as indicated.  Significantly, Chapter 11 filings were up 78.9%, and total filings were 23,853.  These statistics of course do not reflect those ineligible for Chapter 7 because of the means test, or those who were bankruptcy candidates but unable to confirm a plan because of the means test and therefore did not file.

I also got an interesting email from Mike Dillard with a Technicolor view of the recession by county

The Decline: The Geography of a Recession

Things don’t look too much better, either statistically or in color.

After being owned for short periods by a parade of different investment groups or private equity firms, which try to buy undervalued companies, mostly with borrowed money, and as part of the investment “strategy”, liquidate the company, at the expense of creditors and investors.

For many of the company’s investors, the sale will be disastrous. Its bondholders alone stand to lose more than $575 million. Not only will the demise of the company affect bondholders,  the company’s downfall has also devastated employees who will have been or will be laid off.

But Thomas H. Lee Partners of Boston, its present owner, it has not only escaped unscathed, it has made a profit. The investment firm bought Simmons in 2003 and has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars in “speical dividends” from the company. The New York Times also reported that it also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

At the same time as the Wall Street investment banks were cashing in, collecting millions for helping to arrange the takeovers and for selling the bonds that made those deals possible, making around $750 million in profits from Simmons over the years, the company was driven into insolvency by putting Simmons deeper into debt. The financial dealings resulted in Simmons borrowing d more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

An otherwise healthy company, Simmons was weightened down and today owes $1.3 billion, compared with just $164 million in 1991.

The strategy of private equity firms did at Simmons, and scores of other companies like it, eerily reflected the boom and bust of subprime mortgage meltdown. Fueled by easy money from not only from banks but also endowments and pension funds, buyout kings like THL upended the old order on Wall Street. It was, they said, the Golden Age of private equity — nothing less than a new era of capitalism.

These private investors were able to buy companies like Simmons with borrowed money and put down relatively little of their own cash. Then, not long after, they often borrowed even more money, leveraging the company’s assets as collateral — For the financiers, the rewards were enormous.  For the company the effects were devastating.

Just as with the housing market, the good times ended when the economy fell into recession and the credit markets froze, and the investors were no longer able to refinance or leverage the assets of the company.  With the recession, Simmons is now groaning under a huge amount of debt at a time when its sales are slowing. And the game of refinancing and leveraging is over.

Simmons, however, is unfortunately not a unique phenomenon.  According to Standard & Poors, more than 220 companies that have defaulted on their debt in some form this year were either owned at one time or are still controlled by private equity firms. Among them are household names like Harrahs Entertainment and Six Flags, the theme/amusement park operator.

This brings up the question of what is the liability, if any, of the investment companies to shareholders when a company is systematically drained of equity.  Perhaps the bankruptcy code should be amended to consider profits like these to insiders as a preference, recoverable by the Bankruptcy Trustee.

In a Chapter 7, the debtor may not be able to keep the property and make  the payments unless the lender consents to a modification, because the lien survives the discharge.  In a Chapter 7 case, there is no provision in the Bankruptcy Code for modifying a mortgage loan.  Your case lasts about 3-1/2 to four months and so you need to reinstate the loan before the discharge is entered and the cases close.  You either need to bring the loan current or work something out with the lender in between.   There is no provision or program to cure the default over time, and once the discharge is entered, the automatic stay is lifted.  That means that if any arrearages on the loan have not been cured by that time, the lender can proceed to foreclose on the property.  The lien is not discharged in the bankruptcy, even thought the personal debt or obligation is wiped out.  If you can’t bring the payments up or make arrangements with the lender during the bankruptcy, the the debtor should seek a loan modification outside bankruptcy in order stay in the house.

If you filed Chapter 13, you cannot modify a mortgage loan secured on a debtor’s primary residence under provisions of the Bankruptcy Code.  However, if the lien on the house is totally unsecured, no equity protecting the lien and house is totally underwater) you can strip it off in a “cram down.”  Obama said that he would sign such a bill if presented to him, but legislation that would have allowed that died in Congress earlier this year, after much outcry from people complaining that the law should not help people when most people were making their payments, and strong opposition from the Banking Industry.

In a Chapter 13, the debtor needs to get approval for any kind of modification, refinancing or sale of the property, from both the Chapter 13 Trustee and the Court.  The debtor may not be able to confirm a Chapter 13 plan unless a 1st deed of trust consents to a loan modification.  The question is feasibility.  If the debtor’s plan does not propose to cure the default in the Chapter 13, the plan cannot be confirmed.  In this case, the debtor may not be able to confirm a plan and will as a result end up losing the house.  Another question is whether the loan modification would alter the debtor’s disposable income and increase the amount available to unsecured creditors.  If the debtor is able to cure default, the language of Chapter 13 provides that all disposable income must be pledged into the plan.  That might mean that if the debtor obtains a loan modification during the pendency of the Chapter 13 plan, both the plan payments and the plan need to be modified to reflect the change in disposable income reflecting decrease in mortgage payments.

The bottom line is that if you can’t afford the payments, contact your lender.  The sooner you get started on a loan modification, the better.   There have been numerous articles about the effectiveness of loan mod programs.  Anyone working in the industry will tell you that it is not easy to make contact with the lenders who have been besieged with loan mod requests.  At the same time, while the banks are attempting to ramp up their loan mod programs and have been adding staff, the number of loans in default is expected to increase over the next two years.  Like anything, it takes persistence and consistency.

So as developers like Angelo Tskapolous, Pulte and Centex acquire properties to develop at bargain basement prices, and new players enter the market, what kind of housing do they plan to build?  Not only was the housing market artificially overpriced, it appears to have been grossly overbuilt, so if you’re are going to build today, the successful market is going to consider the market, and build what people want to buy, not what they want to sell based on how much profit can be made on large houses.  It appears the housing trend will be toward smaller, lower maintenance living.  If the real estate industry is going to recover, it is going to have consider marketing demographics and do a better job in feasibility studies.