To Strip or Not To Strip; That is the Question

March 25, 2015 at 8:44 am Leave a comment

Yesterday, the Supremes heard oral arguments in a key bankruptcy case it will decide this term. As I discussed in a previous post, in Bank of America, NA v. Toledo-Cardona the Court must decide whether a second mortgage lien can be voided in a Chapter 7 bankruptcy proceeding where the debt owed on the first mortgage exceeds the value of the property.

For example, in one of the cases under review by the Court, a homeowner declared Chapter 7 bankruptcy. He held two mortgages. Bank of America held the second mortgage which had a value of $100,000. The bankrupt homeowner successfully argued to the lower court that the second mortgage should be treated as an unsecured debt since the value of the property had tumbled far below his outstanding first lien. Bank of America appealed to the Supreme Court arguing that banks rely on a decades-old interpretation of bankruptcy law under which second mortgages survive Chapter 7 bankruptcies.

To consumer advocates, lenders holding wholly underwater junior liens should be out of luck. They argued in a brief before the Court that junior lien holders “hold up” efficient resolution of housing problems by blocking short sales and loan modifications. Conversely, lenders argued, with the support of the United States, that voiding junior lien is too draconian a result. For example, housing values in many areas are beginning to rise again. But under the approach being advocated by the homeowners in this case, lenders would have no means of capturing the value of these increases.

A decision in this case will come before the Court’s session ends in June.

Entry filed under: Legal Watch, Mortgage Lending. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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