Recent Entries

Mortgage Cram Downs in Bankruptcy: Congress Creating More Questions Than Answers

Published on March 9, 2009 in Bankruptcy Act 2009, Chapter 13 and Real Estate. 1 Comment

As proposed legislation winds its way through Congress, it would appear to be inevitable that mortgage lenders can expect to see a viable law within the next 90 days that will dramatically alter the manner in which mortgage loans are treated in bankruptcy.  While attempting to amend the Bankruptcy Code to enable borrowers to reduce home mortgage balances down to the current value of the real estate, Congress has left key questions unanswered for the mortgage industry.

Of particular concern, Congress has failed to adequately detail the actual manner by which mortgage loans will be modified under the new law.  Will borrowers and lenders be required to execute a modified loan or Promissory Note?  What about the underlying mortgage deed?  Or, will Congress leave this important alteration of terms up to the borrower to include as part of their Chapter 13 plan?

The manner in which Congress and the Courts determine the way in which these amended loans are memorialized in bankruptcy will reverberate throughout the mortgage industry for years to come, as parties on both sides will be forced to rely upon such documents for the remaining term of the loan and will look to such documents for their respective rights and obligations.

Stretching Out the Loan Term: Will Lenders Be Stuck with New Terms Forever?

Published on March 5, 2009 in Bankruptcy Act 2009, Chapter 13 and Real Estate. 0 Comments

One of the key components of the “Helping Families Save Their Homes in Bankruptcy Act of 2009”, currently pending in Congress, is a provision allowing a borrower to extend the repayment period on their mortgage loan for up to 40 years.  While such a provision appears straightforward at first glance, Congress to date has failed to indicate whether a borrower will need to actually complete their Chapter 13 plan and receive a discharge in order to enjoy the benefits of the modified terms for the remainder of the loan.  In other words, what if a borrower seeks Chapter 13 relief, modifies the loan term and then has his case dismissed 6 months later for failing to stay current on plan payments?  Does this cancel the loan modification?

Another unanswered question centers on how many “bites at the apple” a borrower gets to utilize for this loan extension provision.  What if, hypothetically, a borrower with a 30 year fixed rate loan files for Chapter 13 relief, modifies the loan term out to 39 years and completes his plan in 3 years.  Then, the same borrower files a second Chapter 13 case 3 years later and attempts to recast the loan back out to 34 years? 

The answers to these questions will have dramatic effects upon the mortgage lending industry and how it assesses risk going forward for all potential borrowers.  Congress should take these issues to heart in determining the final version of the Bill, lest it create more problems for the public than it seeks to solve.

Spike in Chapter 13 Filings Expected Upon Passage of Bankruptcy Law Amendments

Published on March 2, 2009 in Bankruptcy Act 2009 and Chapter 13. 0 Comments

Recent anecdotal evidence suggests that creditors should expect to see a substantial increase in new Chapter 13 filings subsequent to passage of the “Helping Families Save Their Homes in Bankruptcy Act of 2009.” Many prominent debtor’s attorneys have indicated that they have a backlog of new cases waiting to be filed once this proposed Bill becomes law.

As the law is currently formatted, borrowers will have the ability through Chapter 13 to cram down an existing first mortgage to the current value of the home, while also extending the repayment period up to 40 years and locking in a new, fixed, lower interest rate.  This option will obviously be quite attractive for the vast majority of troubled borrowers who were already contemplating bankruptcy and will also serve to draw in borrowers who had not considered bankruptcy before.

The benefits of the law will be limited to those mortgages in effect prior to the date the new law is enacted. Further, borrowers will be required to certify that, prior to seeking the benefits of this new cram-down provision, they had made an attempt to contact their lender to work out a loan modification.

In advance of this expected change in the law, creditors and their counsel should take proactive steps to prepare for the expected onslaught of cases and be prepared to litigate over the current values of homes serving as collateral for their loans. With recent filings already on a record pace, the only question remains: just how large of a spike will this new law create and how long will it last?