Legal issues

Modifying the Mortgage

Feb 2nd, 2009
by Doug Jacobs.
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The “Helping Families Save Their Homes in Bankruptcy Act of 2009” (the Act) will allow a Bankruptcy judge to modify the existing mortgage.  Although the details of how this will work will need to be ironed out after the bill passes, the basic concepts are not alien to bankruptcy judges or lawyers.

For years the courts have had the power to modify loans on property that is not the debtor’s principal residence.  No doubt the new law will work similarly.

Specifically, the Act will allow a Bankruptcy Judge to reduce the secured amount of the loan to the fair market value of the home.  Thus, if the house is only worth $250,000 but the debt is $300,000 the judge can reduce the secured portion to $250,000 and the debtor can treat the other $50,000 as wholly unsecured.   A debtor in a chapter 13 plan pays only a portion of her unsecured debts depending on several factors.  A likely scenario is that the debtor may only have to pay 5 to 10% of that $50,000.

Additionally, the Act will allow a judge to dictate a reasonable interest rate for the loan.  He will also be able to extend the term of the loan to 40 years from the normal 30. Both of these provisions will dramatically and substantially reduce the monthly payment amount.

All in all, the Act will save thousands, if not millions, of homeowners from losing their houses to foreclosure.

Who’s eligible to modify mortgage in 13 under new law

Jan 31st, 2009
by Cathy Moran.
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While we wait, watch, and write Congress about amendments to bankruptcy law to enable judicial modification of home mortgages,  I take comfort that those with  Chapter 13 cases pending when the change becomes effective will be covered by the new provisions.

Often, a change in the law applies only to cases filed after the law becomes effective.  Wisely, the bills under consideration will apply to all cases then open.

There are lots of unanswered questions about how it will work:

  • is the value of the property the value at filing or at the filing of the procedure to modify?
  • will the bill require some sort of threat of foreclosure to qualify
  • how will the clawback formula apply when the case is already several years old at modification?

I will be delighted to deal with these unknowns if we get a bill that will keep people in their homes.

So, there is no need to wait for Congressional action to file bankruptcy if there are other issues that make filing necessary beforehand.

Holder, holder, who’s the holder?

Jan 29th, 2009
by Cathy Moran.
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The current version of  H.R. 200 requires that a borrower attempt to negotiate a modification with “the holder of the claim” before they are eligible to propose a modification through Chapter 13.  Chip Parker points out that who holds the claim is a big unknown.

Presently in bankruptcy court, servicers who bring motions for relief from stay  often can’t tell you who owns the note.  They  haven’t a clue who has physical possession of the instrument, and even more often can’t tell you correctly  whether the debtor has made a payment or what they did with the money.

If you interpret this provision as requiring the borrower to contact the servicer in search of loan modification, the law will be easily satisfied.  The debtor can certainly testify what they’ve done, and the credibility of any servicer who disputes such assertions is likely to be suspect.

If “holder” is intended to invoke its technical meaning in the Uniform Commerical Code, then the courtrooms will be awash with questions on this score.

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