The Law Offices of
Eugene S. Melchionne,
designated as a Federal Debt Relief Agency by an Act of Congress and the President of the United States, has proudly assisted consumers seeking relief under the U.S. Bankruptcy Code for over 25 years.

Vice President of the Bankruptcy Law Network



Connecticut State Chairman of the National Association of Consumer Bankruptcy Attorneys



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Foreclosure. Bankruptcy. Divorce. Over the past six months, the meltdown in the sub-prime lending market has had a devastating impact on many consumers.

That's meant busier days for consumer law attorneys. On a daily basis, they're seeing a flood of distraught clients who can't meet their higher mortgage payments. It's also meant increased activity for lawyers who represent mortgage lending services. And in Connecticut, it's brought about the formation of a task force that includes a number of lawyers.

Waterbury consumer bankruptcy attorney Eugene S. Melchionne said his business has "easily doubled or tripled what it was last year." As many as five new clients are walking into his office each day, many of them paying 50 percent or more of their income toward their mortgage.

Waterbury consumer bankruptcy
attorney Eugene S. Melchionne said
some of his clients with sub-prime loans
are devoting half of their incomes to
mortgage payments. 'People can't
refinance their way out of this problem,'
he said.

"People can't refinance their way out of this problem," said Melchionne, the Connecticut chairman for the National Association of Consumer Bankruptcy Attorneys.

Sub-prime loans are mortgages and mortgage refinancings offered to borrowers with weak credit or those who have trouble documenting their income for lenders. Many loans feature low introductory rates that jump drastically after two or three years. As a result, many borrowers have been hit by mortgage payments that are beyond their means.

The result has been a record number of new foreclosures around the country. Nearly 1.3 percent of all outstanding loans at the end of the first quarter of 2007 were in the process of foreclosure, compared to 0.98 percent from a year ago, the Mortgage Bankers Association reported.

In Connecticut, Gov. M. Jodi Rell convened a sub-prime task force this spring. Her office estimates there are approximately $8.1 billion worth of sub-prime loans outstanding on in-state properties, with nearly 10 percent of the loans past due. One of the task force's directives is to determine an exact number of potential foreclosures in the state.

The task force is scheduled to host a public hearing starting at 5 p.m. on July 10 in the Legislative Office Building. Howard F. Pitkin, the state's banking commissioner, co-chairs the task force with Gary King, president and executive director of the Connecticut Housing Finance Authority.

The task force includes subcommittees on research analysis and data; program development, and regulation and consumer education. Pitkin said the subcommittee work is in its initial stages.

"The end of this will be to identify who the people are who have been harmed by sub-prime loans and extend help to them," Pitkin said. "We're not saying sub-prime lending in and of itself is bad, [but] when it's done the wrong way, it can be devastating."

Time For Legislation?

Norman H. Roos, managing partner of Thelen Reid Brown Raysman & Steiner's Hartford office, is a member of the task force, contributing his knowledge as counsel for sub-prime mortgage lenders.

Roos said he has been busy advising his clients of the stricter regulations and credit standards adopted in many states. He's also helped them toe the line in an industry that is heavily regulated because mortgages are both a consumer credit transaction and a real estate transaction.

Low interest rates and the accompanying expansion of credit over the past several years resulted in new mortgage products, including adjustable rate mortgages. Some critics say that many loans were written based on the borrower's ability to pay the initial rate, without consideration of their ability to pay at the higher adjusted rate later on. Some loans were approved after either the borrower or a mortgage company overstated the borrower's income.

In Washington, D.C., Senate Democrats have vowed to push legislation that would require lenders to consider a borrower's ability to repay an adjustable rate mortgage at the fully indexed rate.

"It's an ideal time to consider thoughtful legislation to address the fallout from the sub-prime meltdown and consider ways to streamline the residential mortgage closing process," said Roos.

Daniel S. Blinn, of The Consumer Law Group in Rocky Hill, is also a member of Rell's task force. He said his caseload related to mortgages has increased tenfold in the past two years and constitutes "close to half" of his practice.

His cases involve predatory lending practices, truth-in-lending issues and fraud. Falsified income levels and inflated home values have been reported on credit applications, Blinn said, sometimes without borrowers' knowledge.

In part, he blamed the meltdown on profit-oriented parties such as mortgage brokers and loan originators, among others.

"As recently as 30 years ago, it was next to impossible to get a loan you couldn't afford to repay," Blinn said. "Now you have decision-makers who stand to profit by loans going through, and they're not concerned about loans getting paid. Unfortunately, the sophistication of the consumer has not increased to keep up with these changes."

He said he has met with clients who are going through a divorce and are on the verge of losing their home while they consider filing for bankruptcy.

There are clear signs at national firms of the growing demand for counsel related to sub-prime loans. For example, Pillsbury Winthrop Shaw Pittman announced in April that it has launched a new practice group focused on legal issues related to such loans.

"We're seeing this hit across multiple practice areas," said Jerry Biederman, an attorney at Neal, Gerber & Eisenberg in Chicago. His firm has litigators and finance and bankruptcy attorneys working on a wide range of sub-prime issues. "You have significant financial players that have interests in this market," Biederman said.

McDermott, Will & Emery attorney Bill Smith said his firm is advising some banking and hedge fund clients on how to recoup some of the funds that they loaned to the sub-prime lenders. It's not a huge part of their portfolios, but it's still an exposure in the tens of millions of dollars, he said.

Rocky Hill's Blinn predicts that sub-prime mortgage-related business "is going to increase another year or two and then level off" as bad loans cycle out and regulations are strengthened. Others, however, aren't so sure they can see the end of the line.

Some financial institutions are predicting that the fallout from the sub-prime loans could include higher across-the-board mortgage rates. That would trigger further rate hikes - and monthly payments - for people already holding adjustable rate mortgages. And that could send a new flock of sub-prime consumers scurrying to lawyers like Waterbury's Melchionne.

"When Congress starts talking about a bail-out, you've got to wonder what's going on," Melchionne said. "I'm worried about autumn, to tell you the truth. Right now, people are on vacation and not thinking about it."

This article contains information from the Dow Jones Newswires, and The National Law Journal, a sister publication of the Connecticut Law Tribune.

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