Recent Entries

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.

“Cram-Down” Provision May Be Dropped from House-Passed Banking Bill

Published on April 6, 2009 in Bankruptcy Act 2009, Chapter 13 and Real Estate. 0 Comments

Congressional Leaders may drop the “Cram-Down” provision if it threatens the passage of the overall banking bill.  Recently, at a Christian Science Monitor Breakfast, Senate Majority Leader Harry Reid stated, “If we can’t get the votes for that, and I am hopeful we can – I am semiconfident we can – then what I’ll do is take that off [the bill] and do the other banking provisions”.  Currently the legislation is facing stiff opposition in the Senate from Republicans and moderate Democrats who are pushing for a watered down version of the cram-down provision.  Senate Republicans and moderate Democrats led by Senator Evan Bayh and Senator Arlen Specter are pushing a version of the cram-down provision that applies only to homeowners with subprime loans.  There reasoning is that the subprime problem has done enough damage to the banking industry.

The cram-down provision in Obama’s plan is designed to encourage lenders to modify at-risk mortgages so that they are more affordable to struggling homeowers.  The plan gives lenders who voluntarily modify loans a cash bonus of $1,000 for each loan modified.  For now lenders will have to hold their breath a little longer as the Senate futher debates the specifics of the cram-down provision.

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.

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.