Recent Entries

Foreclosure Rates Rise To Their Highest Levels In First Quarter of 2009

Published on April 20, 2009 in Real Estate. 0 Comments

On Thursday April 16, 2009 RealtyTrac reported that foreclosure rates in March 2009 increased by 17% from February.  The increase came as many mortgage lenders ended temporary moratoriums imposed on the filing of foreclosures.  The March and first quarter totals also jumped 24% from a year ago and were the highest since RealtyTrac began reporting foreclosure rates.  In the first 3 months of the year, 1 out of every 159 U.S. Households received a foreclosure filing, which includes a notice of default, auction sale or bank repossession.  Filings were reported on over 803,000 properties in the first quarter of 2009.  The states with the highest percentage of foreclosure filing were: California, Florida, Nevada, Arizona, and Illinois.  Those 5 states accounted for nearly 60% of the U.S. foreclosure activity.  Ohio still ranks in the top 10 for the states with the most foreclosure filings.

It seems that Congressional programs aimed at limiting the number of foreclosures have had little affect on lowering the rate of foreclosures.  However, it may yet be too early to see results from these recently passed Congressional programs.  In this market, lenders should continue to work with borrowers to modify loans for homeowners who are able to continue making payments.  Working directly with borrowers is the most cost effective and efficient way to limit the damage of the worst housing market since the Great Depression.

Unintended Consequences: Bankruptcy Cram Down May Actually Case Decrease in Bankruptcy Filings

Published on April 8, 2009 in Bankruptcy Act 2009, Chapter 13 and Real Estate. 0 Comments

With the proposed amendments to the Bankruptcy Code placed on temporary hold by Congress until at least late April, it seems appropriate to take a step back and examine the possible unintended consequences of the passage of such a law.

While providing troubled borrowers with an effective tool to rework their mortgage terms under the protection of the Bankruptcy Code, is it possible that the mere threat of such a modification by a borrower could lead an increasing number of lenders to agree to rework the loan terms outside of the bankruptcy process?

Debtor’s counsel have always operated with the knowledge that, while they have the ability to tie up a pending foreclosure for months or even years by aggressively opposing the case, the reality has always been that mortgage lenders held the upper hand once a Chapter 13 bankruptcy was filed. A borrower could not alter the terms of the loan, but could only seek breathing room to bring delinquent payments current.

If the proposed amendments become a reality, the leverage will clearly shift into the borrower’s favor, which may lead more and more lenders to seek a negotiated modification prior to bankruptcy, saving both sides from litigating over valuation of the home and risking assessment prior to plan confirmation.  The end result could be a decrease in Chapter 13 filings within the pool of borrowers who, but for their mortgage delinquency, might not be in financial difficulty.

Of course, the flip side to this argument would be that with all the economic indicators clearly showing a downturn, the actual number of borrowers whose only financial difficulty consists of their mortgage, is likely becoming smaller and smaller each month.  Therefore, it is likely that even with the offer of a voluntary loan modification by the lender, the vast majority of borrowers will still seek bankruptcy relief.

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.