Recent Entries

United States Trustee’s Scrutiny of Mortgage Creditors (N.D. Ohio)

Published on March 20, 2009 in Local Procedures & Rules and Proof of Claim. 0 Comments

Yesterday, representatives from the United States Trustee’s Office (“UST”) conducted a town hall meeting with representatives from the creditor’s bar to provide details on a new initiative they are moving forward with called the “Credit Abuse Program.”  During the meeting, the UST indicated that it will be more closely scrutinizing documentation submitted by mortgage lenders with their proofs of claim, Reaffirmation Agreements and attachments to Motions for Relief from Stay.  This increased scrutiny will not just be limited to the Cleveland Bankruptcy Court, but will extend to all five (5) courts in the Northern District of Ohio.  The UST will be focusing its inquiry on the following issues:

  • Whether the collateral was properly perfected
  • Whether the moving party is entitled to enforce the claim
  • Whether payments were misapplied
  • Whether escrow was miscalculated
  • Whether certification attesting to lost notes is in a blank form
  • Whether certification attesting to missed payments was pre-signed
  • Whether the documents filed with the courts are legally and factually sufficient

If an issue comes to light, the UST will informally contact creditors by phone or letter to correct an issue or provide additional documentation.  Also, the UST may formally make its requests through objections to proof of claims or objections to motions for relief and abandonment.  In extreme situations, the UST indicated that it would file motions for an order to show cause or motions for sanctions to correct an issue or provide additional documentation.

 
Specific Areas of Concern

The UST is paying particular attention to the following issues that come up with mortgage creditors:

  • Failure to attach assignments of mortgage
  • Failure to attach documents showing who owns the claim
  • Failure to itemize statement of amounts (UST is requesting the items be specific)
  • Failure to take out improper fees or fees that are vague, estimated, excessive or unsubstantiated by law or contract
  • Miscalculation of arrearage
  • Failure to attach supporting documents
  • Attaching boilerplate affidavits of lost note
  • Disclosing personal identifiable information in violation of Rule 9037

What does this mean to mortgage creditors? 
With closer scrutiny by the UST, it is imperative to have your documents together before any timelines or deadlines come due.  Also, review the documents you are providing to the court and omit any items that are not appropriate.  If this additional work is not done on the front end, the result may very well be increased cost and time in attempting to respond to and comply with UST inquiries and/or requests.

What does this mean to all creditors? 
Documentation is important to substantiate your claim.  All creditors should make it a practice to attach the appropriate documentation and make sure all personal identifiable information is omitted or risk contact from the UST seeking remedial action.

“Cramdown” Bill Put On Hold To Avoid Possible Filibuster

Published on March 19, 2009 in Bankruptcy Act 2009, Chapter 13 and Real Estate. 0 Comments

Sen. Evan Bayh (D-Ind.) stated that currently there is not enough support to prevent a filibuster, or “talking out a bill”, of the proposed legislation, which would allow mortgages to be restructured through a Chapter 13 filing.  Currently, the legislation proposes to: 1) modify the principal of a mortgage to the fair market value of the property; 2) adjust the interest rate of the mortgage; and 3) extend the terms of the mortgage loan out to 40 years. 

Senate Majority Leader Harry Reid is working with Judiciary ranking member Arlen Specter to narrow the eligibility for borrowers who could take advantage of the “cramdown” provisions.  The debate in Congress currently revolves around whether an eligible homeowner offered a “qualified” loan could still take advantage of a “cramdown” if they did not take the offer for a “qualified” loan workout.  The legislation, which passed the House, did not mandate that the borrower had to take such an offer if eligible, in lieu of a “cramdown”.  Senate moderates are pushing for a mandatory requirement that borrowers try to modify their mortgage with lenders before seeking help in bankruptcy court or they will not be eligible for “cramdown”.

To overcome a filibuster, the Senate must have 60 votes to invoke cloture and end debate on the Bill or it will be defeated.  For now, debate on the Bill will be put on hold until after the Senate’s April recess ends on April 19th, 2009.

Protect Your Mortgage Lien: Dealing with Ohio’s Dower Interest

Published on March 16, 2009 in Motion and Real Estate. 0 Comments

The Ohio legal principle of “first in time, first in right” applies to mortgage liens as well as dower interest as indicated in a recent ruling in the Northern District of Ohio(1).  The bankruptcy court states that, “if a couple is married before property is mortgaged, the dower interest has priority over the mortgage lien.”  Usually, dower interest is not an issue when it comes to the creditor holding the mortgage, as the non-title holding spouse signs the mortgage to release dower interest at the same time the title holding spouse is executing the mortgage.  The release of dower interest acts as a subordination document rendering the dower interest secondary to the mortgage lien. 

If the dower interest is acquired before the mortgage lien and there is no signature releasing it, the dower interest will hold priority. Without a dower interest release, the dower interest is entitled to priority in proceeds from the sale of the property.  From a foreclosure perspective, the dower interest will receive payment after taxes are paid and before the creditor holding the mortgage claim is paid.  From a bankruptcy perspective, the trustee will want to object to any motion for relief from the automatic stay and for abandonment in order retain the dower interest on behalf of the bankruptcy estate.

The bankruptcy court in the Northern District of Ohio ruled that the value of the dower interest must be calculated on the full fair market value of the property.  In this particular case, the bankruptcy court noted that the dower interest value was significant and could provide funds for distribution to unsecured creditors.  The bankruptcy court went further to deny the creditor’s request for the trustee to abandon his interest in the property due to the significant dower interest value.

What does this ruling mean for creditors?

1. Trustees will be scrutinizing dower rights to see if there is any value, if applicable.  Such scrutiny and objection will result in a delay from receiving relief from stay and abandonment if you hold a mortgage claim on the property, or a general delay in administration of the estate if you are a general creditor.

2. Motion for relief from stay and abandonment will be denied or only relief from stay will be granted, providing a drastic delay in foreclosure proceedings as certain common pleas courts require both relief from stay and abandonment before a foreclosure can take place.

3. Creditors should review their documentation to make sure procedures are in place to deal with those states that have dower interests.

(1) In re Rosario, Case no. 08-14392 (N.D. Ohio March 9, 2009)

In Attempting To Limit Certain Mortgage Modification Bankruptcies, House Bill Has Loopholes

Published on March 13, 2009 in Bankruptcy Act 2009, Chapter 13 and Real Estate. 0 Comments

H.B. 1106 attempts to limit the mortgages that may be ìcrammed downî or otherwise modified. It permits modifications only on loans that were originated before the billís enactment.  A case may not be reopened to modify a mortgage.  These are substantial (however, debtors are not prevented from filing a new case).

Several provisions are designed to discourage debtors that would file bankruptcy solely to modify their mortgage, but they may not be effective.  Thirty days before filing, a debtor must contact the mortgage holder or servicer for a modification.    The creditor must be provided with the same schedules and statement of financial affairs that would be filed in bankruptcy.  While this would give the creditor some needed information to consider a modification, some issues arise immediately.

While the debtor is required to contact the lender 30 days before filing, it is not clear that the debtor must also provide the information within that thirty-day period.  Consider the scenario where a debtor writes a letter requesting modification thirty days before filing, but does not provide the creditor with the required information until one day before filing.  Is this a good faith issue that would result in a denial of confirmation? Even if the information is provided thirty days before filing, is this enough time for a creditor to consider a modification? Finally, because debtors must prepare their bankruptcy documents while seeking modification, doesnít this encourage bankruptcy filings?  Moreover, debtors that are facing a foreclosure sale on their residence within thirty days after filing a bankruptcy are exempted from these requirements.

The Senate Bill would permit far more modifications at this point, but is expected to also place some limits on filing.  We will advise you of any changes to the Senate Bill as they arise.

Ohio House Bill Proposes Mortgage “Cram Down” Without Filing Bankruptcy

Published on March 11, 2009 in Bankruptcy Act 2009, Chapter 13 and Real Estate. 0 Comments

Currently Congress is hammering out the details of a law that will change the Bankruptcy Code and grant bankruptcy judges the authority to cram down mortgage loans to the current market value of the real property and modify interest rates.  On February 17, 2009 Ohio representatives Mike Foley and Denise Driehaus introduced Ohio House Bill 3 in the 128th General Assembly.  House Bill 3 takes the mortgage cram down a step further as it gives state court judges the power to reduce the principal amount of a mortgage loan and adjust the interest rate on the loans for properties in foreclosure without the need to file bankruptcy.

The proposed legislation grants a “judge”, the discretion to reduce the principal amount of the loan if, (1) both parties would benefit from such a modification, (2) the court finds under all circumstances, the modification appears just and equitable, and (3) the modification would enable the borrower to make payments and retain the property. A judge may also reduce the interest rate of the loan to an amount the judge determines is just and equitable as long as reducing the interest rate would enable the borrower to make payments and retain the property. The cram down provision would be effective for three years after the passage of the legislation.

If this becomes law, it will be a tremendous inducement for lenders to work with borrowers who are behind on their mortgage payments rather than taking a chance with a state court judge who may be more interested in being re-elected than crafting an equitable solution for the lender.