Many of us marvel at and are frustrated by the troubling economic problems of the era. Without question, these are serious problems and the prospect of a short-term solution is dim. We have suffered horrific losses to our net worth — by virtue of the real estate freefall and a recession that, for all intents and purposes, is starting its third year. We wonder and debate — what should we do as individuals and as a nation?
In recent weeks, I’ve pondered the future of our nation as I witness a deploable commitment to partisan politics and deadlock among our elected representatives. I say to myself,“As a nation we are only 235 years in existence. The Roman Empire lasted more than 2,000 years before its arrogance claimed its lifeline. What chance do we have?” At first blush — my conclusion — “It’s not looking good.” Last week, I happened to watch the newly released miniseries The Kennedys and gained a different perspective. I was reminded of the turbulent ’60s — the fight against communism, the battle over civil rights, the Bay of Pigs, the Cuban Missile Crisis, Vietnam and our loss of cherished leaders who stood for principle beyond economics — Jack, Bobby and Dr. King. I realized that other than the era beginning post-Vietnam and abruptly ending on Sept. 11, 2011, we have been at war, on its verge or just beyond its conclusion, or in the midst of some form of economic trauma or civil rights controversy for our entire history. Ultimately, we face and overcome these problems, and it is usually because leaders emerge that have the guts to stand for what is right and are able to overcome those who seek to perpetuate the mistakes of the past.
As we age, we gain the benefit of experi-ence, as well as the knowledge that our insight and what we know is limited by our experience — which also applies to our elected representatives and pro-claimed political leaders. So what do these revelations mean and how to they bear upon the financial crisis? Since controversy is part of our American way of life, we should embrace it rather than fear it. We must question those in authority that demonstrate an unwillingness to seek new solutions and simply continue to preach unsupported claims of the past. We need to take such action that we can to improve our situation — and we need to take such action based upon the current times without regard to what others think is the right thing to do. Individually, this means looking at opportunities to recoup the losses sustained as a result of the economic disaster that has ensued, by shedding debt and seizing opportunity. As a country, the time is now for leadership — for someone to emerge that fears not what to say because of political expediency — a leader who can reach to our nation’s soul and carve a path that addresses what is best for our future.
Ken Gross is an attorney with Thav Gross and host of the Financial Crisis Talk Center, a radio program that airs weekly at 10 a.m. Saturdays on WXYT 1270 “Talk Radio.”
The Effect of U.S Debt Crisis Affects the Global Economy
By Kevin Craig
Even after recession, the United States is still considered to be the financial ‘safe heaven’ by investors across the globe. It has become a deeply ingrained myth that America is an exceptional nation having a special motto. So, whatever be its financial state of affairs and its increasing national and public debt, investors always tilt their focus on this country. We know how China and Japan have huge investment in U.S debt market. However, this over-complacency got a jolt as Standard and Poor reviewed its long term credit rating on U.S economy. It suggested on Monday, April 25, 2011, that America may be downgraded from its ‘stabilize’ status to ‘negative’ status. However, this does not in any way indicate that the country is on the brink on debt crisis. If any negative sign erupts in the U.S economy, its immediate shockwave hits the global economy. After Standard and Poor circulated the report, investors immediately retreated from risky asset and rushed to the secured items.
We should not get apprehensive considering the magnitude of U.S debt amount. Japan’s debt is greater than America in respect to its GDP. Until recently, European countries were scrambling for debt aid to bail out of sovereign debt crisis. If Portugal or Spain falls in debt crisis, it may generate a wave of uncertainty among global markets. But this will never prove to be catastrophic. On the contrary, if the U.S economy stumbles, it can shake the very foundation of the global economy. The role it plays in global economy is so crucial and indispensable that if it crushes, it will suspend the operating system of the global economy.
The U.S dollar is still the dominating currency in most of the transactions of foreign exchanges. When uncertainty stirs investors, most of them prefer to take recourse to the U.S dollar. America may have increased its percentage of national deficit, but until now there has never been any difficulty for America to obtain huge foreign credit at a low interest rate.
However, if this positive perception among global investors starts to alter after the report issued by Standard and Poor, the U.S will no longer be able to retain its prestigious status among nations. Its currency could sink. Its national treasury security would no longer entice the investors. The government will be forced to pay higher rates of interest on its debt and this will create difficulties in stabilizing the budget deficits and mitigating the burden of debt.
Kevin Craig is a financial writer associated with Oak View Law Group. He has been providing advice on debt relief since 2007. With his advice, many people are now living a debt free life.
Thav, Gross, Steinway & Bennett, P.C., Bingham Farms
Education: Wayne State University Law School, 1982
Specialty: Financial crisis management, business law, estate planning
Kenneth L. Gross, co-founding shareholder of Thav, Gross, Steinway & Bennett, P.C., puts a lot of people back on their feet after they’ve had the financial rug pulled from underneath them.
In the process, he’s evolved the law practice that he and Charles Thav founded 29 years ago, the day after Gross graduated from law school.
For many years, he said, Thav Gross “was a normal business practice.” The bulk of the work was mergers, new companies, contracts and commercial disputes.
Then, in 2008, the national economy melted down, unemployment shot up, and the real estate market crashed.
“A lot of people connected to the real estate market were put out of work,” Gross said.
In response, he led the firm to a new type of practice: financial crisis management.
“We had a tax collection defense and bankruptcy practice, so we rechanneled the focus and expanded it from a standpoint of what’s going on the economy,” he explained.
“The real estate developers, the mortgage brokers, the trade workers, the suppliers — all those people have suffered horrendous losses as a result of the housing crisis. They’re fighting for survival. They’re trying to save their homes. They’re trying to figure out how to put food on the table.”
This troubled Gross. He also was frustrated by “the arrogance and the lack of practically the banking industry has displayed with regard to the mortgage crisis.”
When homeowners are underwater with their mortgage and their income drops, “it would make more sense to renegotiate the principal and let the people stay in there,” he said.
“But the lending market and the banking industry absolutely refuses to recognize any concept of principal reduction.”
So Gross views his advocacy as if “it’s almost a war, an ‘us versus them’ mentality in terms of the banking industry.”
But, he added, “what’s incredibly interesting is all of the possible ways to improve a bad situation that we’ve learned by doing.”
Gross’ approach is to assess a client’s particular circumstances and determine which creative combination of the available tools — bankruptcy, debt settlement, loan modification, short sale tax relief — will work best to resolve the client’s problems.
This approach has worked well for his clients in many instances.
Gross’ business strategy has worked well for his firm.
Due to the slow economy, fewer clients seek “pure” business services and many more clients seek help with their personal financial circumstances.
Gross is invigorated by the shift in focus, saying, “I used sit there sometimes and say, ‘Is there any good that I do as a lawyer?’
“When I’m engaged from a pure business standpoint, I’m doing good for my client. But when you start moving into this financial crisis area, where you’re trying to help and solve people’s problems on a long-term basis, it is more inspiring and in some respects it’s more fun.
“I think I’m more charged-up about practicing law now than I’ve ever been,” he said.
Though he admitted feeling guilty at times about being too impatient to bring about the result he’s after, “I’ve learned over the course of time that you need some level of impatience to stay on track.” By Ed Wesoloski, Esq.
Help for Homeowners – announced last year, has, unfortunately, evolved into nothing more than government acronyms. HARP (Home Affordable Refinance Program) and HAMP (Home Affordable Modification Program). HARP permits a refinance of a home if the homeowner but the homeowner must be current for the last year and meet normal underwriting criteria. The only benefit to the program is that the lender can refinance up to 125% of the market value of the home. In practice, the government mandated appraisals have been on the low side of market so that few properties can fit within the 125% framework. Worse than that, this program affords no help for people who have sustained financial hardship because if they were 30 days late on a payment in the last year, they are not eligible.
The HAMP program allows modifications to reduce the mortgage payment down to 31% of the Gross Monthly income of the homeowner. This program helps people who have sustained a reduction in their income so that if their present payment exceeds 31% (i.e. Monthly Income is $7,000 per month, Mortgage Payment $4,000; the reduction could go to $2,170 if all other program requirements are met) they are able to obtain a reduced monthly payment. The problem with this program is that the participating lenders have not made the effort to adequately process the modifications applications. Homeowners are told to fax papers in, and then weeks pass and they are informed that the paperwork is missing – so refax. When you call a lender, such as Bank of America, they will not even allow you to speak to a negotiator for the modification. All you can get is a status report. As an attorney, we want to speak with someone to make sure they are properly evaluating the file – but that is impossible because they refuse to come to the phone. End result – of the estimate 4,000,000 people who to be helped, few modifications have been put in place – with only 66,000 permanent modifications in place as of January of this year.
The poor outcomes of HARP and HAMP are not the big story. The biggest problem facing our country – is an economy that is undermined by high unemployment and nonexistent stimulus for the growth of small business. What Washington has missed, is understanding that the dismal real estate market is the underlying problem that must be solved in order to stimulate small business growth.
It does not take a Rhodes scholar to understand the process. Consumer spending drives our economy. Consumers cannot spend if they are unemployed. Even employed consumers will not spend if they have no available credit from the credit card companies and live in fear of losing their jobs. We all recognize to correct this problem, small business must begin to thrive – thereby employing more people, offering more goods and services and driving our GNP. Small business, however, will not and cannot thrive unless banks make credit available to businesses. Banks, however, are not lending. The reason – banks require collateral to underwrite loans. The collateral typically pledged is inventory and accounts receivable and real estate. Real estate is acceptable collateral ONLY if and to the extent there is an “Equity Cushion” in the property.
Here lies the problem. The “Equity Cushion” on residential and commercial real estate has been lost in the Financial Crisis. Because there is no equity in real estate, the banks will not accept it as collateral and therefore ½ of the historical collateral used to support lending is gone with the result that the banks will not lend due the lack of adequate collateral. You can scream and holler all you want about how the banks have improperly conducted themselves in the context of executive bonuses, credit card abuses and everything else. It is not going to matter – unless there is equity in real estate to support lending, you are not going to see lending occur, which means continued virtual no growth for our economy.
So where does the solution lie? The answer is we must return to an economy where there is equity growth in real estate. Right now, ¼ of all homeowners are underwater in their homes. This statistic was revised from 1/3 based on a change in accounting assumptions – but the reality is that there is virtually no Equity Cushing that homeowners have in their residential homes that can support a second mortgage to finance the start up costs of a new business. The commercial sector is even worse off.
The return of an Equity Cushion in real estate will come from only two outcomes. The foreclosure process is one. The other is modification of mortgages that include a reduction in the principal balance of the loans. Equity in real estate will not return if we modify mortgages that only reduce interest rates and extend mortgage terms to 40 years. This is what HAMP allows and what the banks are pushing. The modification process, as it presently is situated, is in reality a method which hampers our return to and Equity Cushion in real estate and therefore delays the goal of returning to a vibrant economy.
Another obstacle to a return to an Equity Cushion that has evolved is the problems that are occurring nationwide in completing short sales on homes facing foreclosure. The short sale, if approved by the lender, accomplishes the task of transferring the property to a new buyer at fair value, thereby giving the new buyer equity in the real estate and future growth. The problem that has occurred, however, is that lenders are refusing to release the selling homeowner from the deficiency on the first mortgage arising from the short sale. The result of this intransigence by the lenders is that the short sale process is far too slow and a selling borrower would be well advised to refuse to a short sale unless the lender gives the release of the short liability as part of the deal.
The clear solution is that our government must intercede to expedite the return to the creation of an Equity Cushion in real estate so that banks will then loan money based upon valued collateral. The foreclosure process take too long and the current effort to modify mortgages without principal reduction only serve to delay the process longer and thereby extend the time it will take for a true recovery. To correct this, we must shift the modification process to mandate principal reduction of the property to within reasonable estimates of fair market values. The “Cramdown” legislation that was voted down by the Senate last April, which allowed a cramdown of the mortgage in a Chapter 13 bankruptcy of a borrower’s primary residence to the fair market value of the home, would have accomplished this goal. Accomplishment of the goal would have occurred not as much through the actual bankruptcy process but by virtue of giving the homeowner’s the leverage of the “threat of bankruptcy” as a means of bringing the lender to the bargaining table to voluntarily reduce principal. This legislation was advocated by the President during his campaign. Unfortunately, with Health Care and the many other items on the agenda in 2009, the banking lobby pervaded on the issue and the Administration did not push for the passage of the bill when it hit the Senate floor last year. This legislation should be reintroduced and pushed forward. Alternatively, the government needs to adopt a mandatory Modification With Principal Reduction Program.
The gist of the opposition to principal reductions to mortgages as enunciated by the banking industry is that there is a “fear” that people who can afford to pay their mortgages on homes underwater would use this process as a means to reduce their mortgage. This argument is the fiction that needs to be resolved. If you accept that the critical goal is that we need to return to an Equity Cushion in real estate, as a critical component of banks lending money and thereby allowing our economy to grow, then there is no need for this alleged “fear” because the better result would be for all underwater mortgages to be modified.
The Banks, of course, fear this result because they will have to absorb greater losses. The Banks, however, are nearsighted. Eventually, the banks will realize that they cannot make money merely by charging usurious interest rates on credit cards, bank overdraft fees and renewal fees – but that they have to loan money to people and businesses. (Isn’t that what banks are supposed to do?) It may be true that in the end the banks do have to take the loss on the real estate that is underwater. It was, however, their lending practices and greed that drove us to where we now sit. So let them take the loss they deserve. Their stock value may decline, but we know it will return. Once this occurs, we will all, including the banks, be in a position to grow.
Ken Gross is a the Managing Shareholder at Thav, Gross, Steinway and Bennett, P.C. The firm is gaining national notoriety for its Financial Crisis Management strategies. Mr. Gross is host of the Financial Crisis Talk Center which airs at 8:30 AM, Saturdays, on Detroit Sports Talk Radio 1130 AM, www.detroitsportstalkradio.com, in the Metro Detroit market.
