Illinois Bankruptcy Lawyer Blog

The New York Times reports that the debate over whether to reduce the principle on mortgages is raging again in Washington. On one side of the debate is the White House and Democrats in Congress pushing for principle reduction. On the other side is the Director of the Federal Housing Finance Agency who has traditionally been opposed to reducing principle. One of the main issues is which course of action is cheaper for the taxpayers?

Another issue is what about properties with multiple lines or mortgages? If the principle were reduced on the first mortgage, that would be a huge benefit to the bank holding the second mortgage. If the principle were reduced on the first mortgage should the second automatically be wiped out? For those of you reading this blog, you already know that a second mortgage can be stripped in a Chapter 13 in some circumstances. However that process is both painful for the Debtor and takes 5 years for the 2nd to truly be stripped - and does nothing about the principle on the first mortgage.

Both sides agree that the housing market is a drag on the economic recovery. The question remains, what to do about it?

In re Pigg - 10-10168 (Middle District of TN)

It is common knowledge to readers of this blog that post-filing HOA fees are not discharged in a chapter 7 due to the BAPCPA changes. A little history lesson for all you new practitioners out there. Before BAPCPA came along, HOA fees could not be charged to Debtors in a Chapter 7 who surrendered their property and moved out. Unfortunately, this changed with BAPCPA, and now debtors are on the hook for post-petition HOA fees until the lender finally gets around to foreclosing.

This is the problem - Debtors are at the mercy of lenders who are in no hurry to foreclose. The whole concept of the fresh start for the honest debtor is jeopardized. The HOA fees just keep adding up. It used to be that the HOA wouldn't go after the owners, they would just wait for the property to sell and then force the new buyer to pony up. Flash forward to today - and properties aren't selling. HOAs are going after the owner of record - the Debtor.

One judge in Tennessee came up with an interesting solution. He forced the Trustee to sell the property, even though there was not any equity in it for the estate. In this case, the debtor owned property in a section of Nashville that was completed flooded. The property was uninhabitable, the HOA kept charging fees, and the bank would not foreclose. Unfortunately, under 523(a)(16), the post-petition HOA fees are not discharged, they just kept racking up. Also, since the property was uninhabitable (due to the flooding), the Bank wasn't in any hurry to foreclose.

An adversary action was filed by the Debtor seeking to force the lender to accept a deed in lieu or begin foreclosure proceedings. The court did not grant either of these items, but fashioned its own remedy. Under 105(a) the bankruptcy court is vested with equitable powers. The court ordered the Trustee to sell the property and to distribute the proceeds under 363(f). Under 363(f) one of 5 factors must be satisfied in order for the sale to proceed under 363(f). One of the factors is consent by the party. Here the judge determined that "the bank and the HOA consented to the sale by their inaction." The Trustee sold the property to a 3rd party and distributed the proceeds to: administrative expenses, the HOA fees and then the Bank.

Finally the Debtor got out from under the HOA and received her fresh start.

Credit Report Information Graphic

In U.S. v. Robertson the 7th Circuit weighed in on the factors that should be taken into account when sentencing the perpetrators of non-criminal fraud - in this case, bankruptcy and mortgage fraud. Here the Defendants, a husband and wife, appeared to have reformed themselves and were contributing to their community when the matter came to a head.

Facts: The defendants bought up residential properties then sold them to straw men at inflated prices. The inflated bank loans were justified using false information about the buyers' finances, down payment resources, and intentions about remaining in the properties. Before it collapsed, the scheme had resulted in 37 transactions that cost the lenders involved more than $700,000.

Once their scheme collapsed the Defendants declared bankruptcy. They were questioned in the process about their business, but not immediately prosecuted by the U.S. Attorney. Once they received their discharge, the Debtors settled down, got regular jobs, and raised 3 children. The Court even determined that they had become, essentially, upstanding citizens "fully engaged" in their community.

Legal Theory: One day before the statute of limitations would have expired, the U.S. Attorney charged the couple with a single count of wire fraud under 18 U.S.C. 1343 and 2 counts of bank fraud under 18 U.S.C. 1344. The Defendants quickly plead guilty. Using prevailing sentencing guidelines the wife was sentences to 41 and the husband to 63 months in prison; and both were ordered to pay more than $700,000 in restitution.

Opinion: On appeal, the Seventh Circuit vacated the sentences handed out by the District Court and remanded the case with the admonition that the sentencing Judge take the unusually strong evidence of the couple's self-motivated rehabilitation into account.

The Upshot: Hard not to read too much into this case. At first blush it looks like the 7th Circuit was trying to balance the unilateral and inflexible nature of the Sentencing Guidelines imposed on the courts by Congress in response to the mortgage debacle. Read more narrowly however, the truly self-motivated rehabilitation of the Defendant/Debtors seemed to be the key. In other words, this was an exception, not a crack in the rules.

Recent changes made to the Home Affordable Refinancing Program (HARP) by the O'Bama Administration will allow some, but by no means all, homeowners to refinance to a lower interest rate and save on their monthly payments - even if they would not ordinarily qualify for refinancing from their lender.

Those changes to HARP cut fees for borrowers who want to refinance into short-term loans and pay off their loans faster. The changes also permit borrowers who owe more than 125% of their home's value - i.e. that are underwater - from accessing the program.

To qualify borrowers must have a mortgage that

1. Is now owned or guaranteed by Fannie Mae or Freddie Mac
2. Was sold to one of the agencies on or before May 31, 2009
3. Is now worth between 80% and 125% of your home's value
4. Has never been refinanced under the HAR program before
   

Step #1: Find out if your mortgage is owned by Fannie Mae or Freddie Mac

Step #2: Contact a HARP-approved lender to discuss your refinance options

Have any feedback? E-mail me to share your thoughts or leave a reply to this post.

We help Debtors keep their homes in a Chapter 13 reorganization by making the mortgage company accept past due payments over time. But even that won't reduce future payments. That calls for mortgage modification or a lien strip. What's a Chapter 13 lien strip? Allow me to explain.

The lien strip technique permits Chapter 13 debtors to remove wholly unsecured mortgages from their primary residences. See In re McDonald, 205 F.3d 606 (3 Cir. 2000), which explains a lien strip may only be used by one in Chapter 13; Dewsnup v. Timm, 502 U.S. 410 (1987) explains why Chapter 7 debtors may not take advantage of the lien strip. Not that if joint debtors own their primary residence jointly or in tenancy by the entirety, they must both be in bankruptcy to affect a lien strip.

Example:  Debbie and Danny Debtor bought a house in 2002 for $150,000 and put down $0; so the first mortgage is $150,000. Over the next few years the house appreciated in value on paper (ahhh, the good old days ...) so they naturally took out a pair of $25,000 lines of credit. In 2011 however, their house is worth a mere $100,000 but they still owe $140,000 with respect to their 1st mortgage and $25K a piece on the two HELOCs. Hence the two junior mortgages are wholly unsecured and can be dealt with via lien strip.

From the post Avoiding a Foreclosure

Foreclosure vs Bankruptcy - AVOIDING A FORECLOSURE You have received a Notice of Default or a Lis Pendens - either way the lender has initiated a foreclosure against you. […]

Mortgages in default and foreclosed homes now account for just over 7.3-million homes. The report for April released by Lender Processing Services shows that there is at least some sign of an improvement in the foreclosure crisis with the number of loans 90 days or more delinquent declining from March. However, there are more than 4-million homes in default nationwide and deterioration levels remain excessively high with two loans rolling to a "worse" status for every single loan that has improved. The overall volume of mortgages moving from delinquent to current status declined to a three-month low supported primarily by "artificial cures" associated with the Obama administration"s housing relief program known as HAMP.

Read the full article from Housing Predictor