Stripping Second Mortgages in a Chapter 7 Bankruptcy

For many years, it has been well settled law that a Debtor who owns real estate with more than one mortgage can file a Motion with the Bankruptcy Court to eliminate, or “strip,” the second mortgage or equity line from that property. More specifically, “[t]o the extent that a lien secures a claim against a debtor that is not an allowed secured claim, such lien is void.” 11 U.S.C. § 506(d). The caveat to this rule, however, it is that the law was just as well settled that only those consumers in a Chapter 13 case could take advantage of 506(d). Up until recently, a Debtor who filed a Chapter 7 bankruptcy case and wanted to discharge all unsecured debt was not allowed to strip a second lien. The reason for this rule was that, in a Chapter 13 case, the Trustee retains an interest in the property for the bankruptcy estate. Conversely, in a Chapter 7 case, presuming the Trustee abandons any exempt asset, there is no interest in the property by the estate and section 506(a) does not apply. As a result, the court cannot bifurcate the debt into secured and unsecured debt, and without this bifurcation there is no unsecured debt to discharge. Additionally, a Chapter 7 discharge does not extend to an in rem claim against property; the discharge is limited to a discharge of personal liability. Dewsnup v. Timm, 502 U.S. 410 (1992).

However, the rule that lien strips cannot take place has changed in the Middle District of Florida. In Re: McNeal, Case: 11-11352, Lorraine McNeal v. GMAC Mtg. held that, at least in the 11th Circuit, even though a Debtor still cannot cramdown the value of an investment property as clearly noted in Dewsnup, a Debtor can strip a junior lien from a primary residence. The Court reasoned that because the United States Supreme Court in Dewsnup disallowed only a “strip down” of a partially secured mortgage lien and did not address a “strip off” of a wholly unsecured lien, it is not “clearly on point” and as such, the issue was not intended to be addressed by that Court.

The court essentially held that, where the Supreme Court only discussed a cramdown in a Chapter 7 case under 506, entirely stripping a junior lien was not addressed. As such, the 11th Circuit Court reasoned, there is no restriction on lien stripping. Under this ruling, a Debtor cannot reduce the principal owed to a Creditor, but that Debtor can completely eliminate it. If this holds up, though, it could be very helpful to many Debtors who meet all of the criteria for a Chapter 7, but find themselves in a Chapter 13 for no other reason then to file a Motion to Avoid a Lien.  If you believe you may be a candidate to strip off your second lien and have a significant amount of unsecured debt, you should consult with a local bankruptcy attorney who can advise you of your rights.

RI: MERS’s Standing to Foreclose Upheld

RI: MERS’s Standing to Foreclose Upheld

by Jeffrey H. Gladstone and David J. Pellegrino

Rhode Island is the most recent state in a long line of jurisdictions to rule that Mortgage Electronic Registration Systems, Inc. (MERS) has standing to foreclose. The Rhode Island court further ruled that MERS, as mortgagee, may exercise the statutory power of sale in its own name.

The name of the case is Bucci v. MERS, C.A. No. PC 09-3888, which was filed in the Providence County Superior Court. The facts of the underlying action are typical of many foreclosure scenarios occurring across the country. A loan was originated and the borrower executed a promissory note made payable to the lender. Contemporaneously, as security for the repayment of the promissory note, the borrower granted a mortgage on the residential property to MERS. The mortgage was granted by the borrower/mortgagor to MERS as nominee for the lender; granting all the rights and privileges of a mortgagee to MERS, including the statutory power of sale.

As with many nonjudicial jurisdictions, Rhode Island’s legislature enacted a statutory process allowing a mortgagee to foreclose on its mortgage following a borrower’s default. Rhode Island Gen. Laws § 34-11-22 codifies the statutory power of sale, which many, if not all, MERS-originated mortgages incorporate by reference.

The borrower eventually defaulted on its repayment obligations under the terms of the promissory note. The loan was accelerated and the borrower failed to cure. Then, nonjudicial foreclosure proceedings were commenced whereby, pursuant to Rhode Island’s statutory scheme, a notice of foreclosure was sent to the mortgagor and foreclosure notices were published in the statutorily prescribed form and manner.

In this case, prior to the scheduled foreclosure date, the borrower filed a complaint seeking injunctive relief to enjoin the foreclosure sale. The complaint alleged, among other things, that: the Rhode Island statutory scheme does not allow MERS to exercise the statutory power of sale in the mortgage because Rhode Island does not recognize a “nominee mortgagee,” MERS, because it is not the lender, does not have standing to foreclose; and MERS is precluded from foreclosing because it is not the owner of the promissory note. The court granted the initial request for relief pending a substantive hearing on the issues. Five days later, a preliminary injunction hearing was held and, pursuant to Rule 65(a)(2) of the R.I. Rules of Civil Procedure, the court consolidated the preliminary injunction hearing with the trial on the merits.

Following the full hearing, on August 25, 2009, the court issued its decision denying borrower’s requests for relief. In so ruling, the court “specifically [held] that MERS, in the case at bar, has standing to and may foreclose the mortgage granted to it by the Plaintiffs utilizing the Statutory Power of Sale referenced therein.”

After a brief description of MERS’s functions, the court first considered MERS’s contractual right to foreclose pursuant to the mortgage document. Citing directly to the mortgage, the court noted that the borrower granted “the Statutory Power of Sale to MERS, as nominee for Lender, its successors and assigns.” The court went on to quote the mortgage, which stated that: “if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property” (emphasis in decision). In addition, the court, rejecting certain of the borrower’s other contentions, found that the “fact that paragraph twenty-two of the mortgage states that the Lender ‘may invoke the STATUTORY POWER OF SALE’ does not negate the previous language in the Mortgage directly granting MERS, as mortgagee in a nominee capacity, the right to invoke the Statutory Power of Sale.” Accordingly, MERS has the contractual right to exercise the statutory power of sale because it is the named mortgagee and nominee of the lender, and its successors, and assigns; and MERS was acting on behalf of the beneficial owner of the promissory note.

Next, the court tackled the borrower’s assertion that MERS does not have the statutory authority to foreclose. First, the court determined that there is no express statutory prohibition impacting MERS’s ability to foreclose. Next, citing to the statutory power of sale, the court determined that because the “mortgagee or his, her or its executors, administrators, successors or assigns” can exercise the power of sale, so too can MERS as the mortgagee. Simply put, the court found that MERS “is the mortgagee because the mortgage executed by the [borrower] so states.” “The fact that MERS acts in a nominee capacity for the lender ... does not diminish MERS’s role as the mortgagee nor is there created a new legal term ‘nominee mortgagee.’” Therefore, not only is there “[n]othing in the Rhode Island statutes prohibit[ing] MERS, as mortgagee in a nominee capacity, from foreclosing under the Statutory Power of Sale,” MERS “may invoke the Statutory Power of Sale as the mortgagee.”

In the clearest language, the court’s decision addressed the challenges to MERS authority to foreclose under Rhode Island law. As a result, the multitude of pending cases seeking to enjoin Rhode Island foreclosures by attacking MERS standing will most likely be resolved in a perfunctory and consistent manner in favor of MERS.

SJC Has New Order In Eaton Case - Should the Lenders be Worried?

SJC Has New Order In Eaton Case - Should the Lenders be Worried?

The Massachusetts Supreme Judicial Court has made a requires for more information from the parties in the case of Eaton vs. Fannie Mae.  The question remains as to whether this is a hint the court may be inclined to rule against Fannie, an outcome which could throw established Massachusetts foreclosure practices into further disarray.

Most would argue that the order itself is indicative of the court's deep concern over whether its ruling [will] have a disastrous impact on foreclosure titles and, if so, whether its ruling should be applied prospectively rather than retroactively.

Lawyers have until Jan. 23 to submit their arguments. A ruling on the Eaton case was widely expected early this year; it is unclear how long this request for more information will delay the issue of the ruling.

The existence of the order does not necessarily determine which way the court will rule. It is still possible for the court to rule in favor of Fannie, and the nuances of its decision will be significant in determining the wider impact of the ruling. 

"I don't think that's there's any way of being able to predict from the order itself which was they're leaning," said Pitt. "I would say that the fact that they're asking these questions acknowledges their interest in several issues that are very important to REBA, and REBA will certainly be submitting an amicus brief."  

For some background for those still not familiar with the Eaton case, this case involves a defaulted borrower, which a servicer was attempting to evict. Before doing so, the defense argued, the foreclosing entity or its servicer should have to prove it possessed the note, or debt, owed on the property - and not simply that it had been assigned the mortgage. Otherwise, a former homeowner could be placed in double jeopardy if it turned out the foreclosing entity did not own the note, and the true note-holder subsequently attempted to enforce it.

This is inverse of the argument in the now infamous Ibanez case, in which the SJC ruled that under Massachusetts law, a lender or servicer possessing the note must also be assigned the mortgage before commencing a foreclosure.

The "show me the note" foreclosure defense at the heart of the Eaton case has been argued by foreclosure defense lawyers across the country, with varied success.

If the SJC were to rule in Eaton that a lender must have both, it could call into question the chain of title for thousands of loans, as it has been industry practice for more than a decade to separate the note and the mortgage during the process of securitization. This was almost always accomplished by assigning the mortgage to the Mortgage Electronic Registration System, or MERS.

"Since the note is not a matter of record, and has historically not been a matter of record in Massachusetts, there's no way of telling who has the note. Assignments of the note are not put on record. So every title that has a foreclosure in it, indefinitely [far] back, is going to be potentially affected by this," said Chris Pitt, president of the Real Estate Bar Association (REBA).  "I don't think that's there's any way of being able to predict from the order itself which was they're leaning," said Pitt. "I would say that the fact that they're asking these questions acknowledges their interest in several issues that are very important to REBA, and REBA will certainly be submitting an amicus brief."  

The SJC's recent order issued Jan. 6, shows its concern as it requests that interested parties submit further arguments on the question of whether "requiring a unity of the mortgage and the underlying promissory note, in order for there to be a valid foreclosure, would cloud any title that has a foreclosure in the chain of title, regardless of how long ago the foreclosure occurred.

The SJC asked parties to "Address whether they believe that such a requirement would have such an effect, and if so, what legal or practical measures exist that might limit the consequences of such a requirement."

The court also asked for more arguments on whether "if the court were to hold that unity of the mortgage and note is required under existing law," the court's ruling should be prospective - in other words, that it would apply only going forward, and not to prior foreclosures. In the Ibanez decision, the court declined to make its ruling prospective because it said it was only clarifying and reinforcing existing law.

The items of concern to the court ought to raise grave concerns for Massachusett's real estate attorneys. If the court does what it did in Ibanez, and rules that existing Massachusetts law has long required that the note and the mortgage must be united, the vast majority of foreclosures which have taken place during the foreclosure crisis of recent years could be called into question.

Real Cash Back Available up to $35,000 to the Owner in a Short Sale - Can This Be You Too?

My clients have authorized me to personally confirm that after years of headaches in helping homeowners to process their short sales there are finally two lenders who have offered the homeowners substantials sums of money to help assist in the short sale process.  Citi approved an $14,000 "assistance" payment to one homeowner and Chase allowed another $35,000 "incentive" payment to another seller.  It seems to be true that lenders finally seem to be speeding up their short sale programs – at least for some.  

Banks have long had “cash for keys” programs in place which offer a few thousand dollars to incentivize badly delinquent borrowers to move on and avoid lengthy eviction battles. The federal Home Affordable Foreclosure Alternatives (HAFA) program also offers up to $3,000 in relocation funds for borrowers who complete a short sale.

But these new cash at closing deals are different.

“I have a couple people who are years behind, and they’re generally flagged into these programs where they get a few thousand dollars,” said Minna Reid, an agent in Connecticut who specializes in working with short sale clients. “It’s just to incentivize the people to [complete a] short sale rather than foreclose…Bank of America just seems to never foreclose anymore.”

Other who specialize in short sales report they’ve completed deals where the former homeowner walks away from the closing table with as much as $30,000 in cash.

More To Come

Sometimes banks are sending “solicitation letters” to borrowers, often those who’ve sought and failed to get a loan modification. The loans in question are those held on the bank’s own books. And those who deal in short sales report completing sales with banks like Citi, Bank of America and Chase where borrowers walked away with $12,000, $20,000 or as in my clients case, a whopping $35,000.

Anthony Lamacchia, a real estate broker in Waltham, also completed a sale involving a Chase loan in which the borrower walked away with $35,000 in November.

Gina Braza, a real estate attorney, says she too, has worked on several such deals. “I’ve begun seeing this [type of] money from people over the last year,” she said.

Four years into the foreclosure crisis, it seems banks have finally come up with a way to make this process work. 

Loans which may be in default and yet potentially salvageable through either a private or government sponsored modification aren’t getting the offers.  But for loans which may have been delinquent only a short time, but which the bank determines will be headed straight down the tubes if left to rot, owners are getting cash offers in an effort to address the problem quickly.  

The challenge for the homeowner is to be sure they are offered this kind of "incentive" if their loan is one of the ones that qualify.  The homeowner needs a professional to manage the process if they are to maximize the possibility of receiving a meaningful incentive.

Banks have wised up to the fact that if a homeowner can’t pay their mortgage, it’s very unlikely they’re keeping up with maintenance and repairs – which can cause progressive deterioration in a home’s value. Add the months’ worth of legal fees they’ll have to spend as they go through a lengthy foreclosure process; substantial maintenance fees and management fees required to keep up the properties once the owner does move out; and hefty discounts expected by buyers willing to take on distressed property, and all of a sudden even eye-popping offers of $20,000 and $30,000 cash on the closing table become more reasonable.

Cheaper Alternative

And it’s not necessarily all high-end properties that are receiving such offers. When Chase first came out of this program, it was kind of known, though they wouldn’t admit it, that they were doing them on higher-end properties.  That is no longer the case.  Both of the deals I negotiated incentives of $35,000 and $14,000 were on sales of $225,000 and $240,000, respectively.

A Chase spokesman confirmed the lender has been sending out the letters for about a year, and that it monitors homeowners for eligibility and flags people who appear to be struggling to pay their mortgage, but declined to explain what criteria the company uses to determine eligibility.

I am working on several deal with Bank of America, Citi, and Wells Fargo who so far have made similar offers but, generally in the $10,000 to $20,000 range.

But there’s one big caveat to the bonanza: All the offers seen so far seem to have involved loans being held by the banks themselves, which make up only a small portion of the delinquent loans in the country. Those loans held by Fannie and Freddie or locked in securitized investor pools are NOT eligible, and processing them still often drags on for months.  

If Fannie Mae, Freddie Mac and the securitized trusts were to wake up and recognize the advantages of providing incentives to existing homeowners in a short sale, the housing market would work through the problem loans quicker and cheaper and we may actually see a recovery in our lifetime.

Can you imagine what would happen if some of the politicians found out that borrowers that weren’t paying their mortgage were getting paid $30,000 incentives by Fannie and Freddie? The criticisms would be endless.  The sad thing is when you analyze the numbers fully, and look at the bottom line to Fannie and Freddie, it is far cheaper to offer an incentive through a short sale than be dragged through the foreclosure process.   The questions remains will they ever learn?

Rhode Island's Not So Perfect Storm of Economic and Housing Problems Is Behind the States High Foreclosure Rate

A large portion of the Rhode Island population consists of blue-collar workers who need moderate housing, despite the state being mostly known for its ritzy enclaves like Newport and its fine coastline.  So while the rest of New England felt the recession in keeping with the rest of the country, Rhode Island has the highest rate of foreclosures and serious delinquencies in the whole region.

In the fourth quarter of last year, the country's tiniest state boasted 13,300 mortgages either in the foreclosure process or more than 90 days delinquent. That meant the state's foreclosures and delinquencies were 20 percent higher than neighboring Massachusetts; 17 percent greater than western neighbor Connecticut; 34 percent more elevated than New Hampshire; 7 percent bigger than weak-economy Maine; and double Vermont's rate.

What happened to Rhode Island was unique from anywhere else in the country and created the perfect storm of economic and housing problems. The biggest underlying problem with Rhode Island was that coming into the recession the state experienced a severe undersupply of affordable homes.

"We have a different foreclosure crisis than other parts of the United States," said Nellie Gorbea, executive director of HousingWorks RI, whose members include banks, builders, Realtors, chambers of commerce, and community-based agencies and advocates.

Between the first quarters of 2000 and 2006, home prices increased at the steepest rate in the state's history, peaking at a median price of $283,500. Conversely, during the same period of time, Rhode Islanders experienced a decline in median wage. The rapid rise in home prices, up to twice the increase in other New England states, combined with declining wages, contributed to a situation of "severe housing unaffordability," Gorbea said.

None of that stopped Rhode Islanders from buying homes because we had the mortgage bubble going on. Despite the loss of wages, Rhode Island homebuyers could borrow buckets of dollars for those ever-increasing prices on homes, which, of course, pushed prices even higher.

That all seemed to work until the housing bubble deflated. Rhode Island housing prices dropped like a red brick falling off the roof of an old Pawtucket house. Over a three-year period, home prices dropped from $283,500 to $199,000 before recovering a bit to $210,000. Still, that meant a lot of Rhode Islanders faced a mortgage crisis.

About 1 in 5 Rhode Island homeowners are underwater with their mortgages, according to HousingWorks RI.

The recovery in prices hasn't been solid. At the end of second-quarter 2011, median home prices declined again to $205,000, said Stephen Antoni, president of the Rhode Island Association of Realtors and a broker associate with RE/MAX Professionals in East Greenwich.

"The recession has made people unsure as to which direction to move. They are used to looking at the house as being the No. 1 investment in their lives and in some cases the homes have been devalued by as much as 50 percent," Antoni said.

That's not Rhode Island's only problem. The state is dotted with small, multifamily buildings, most of which are older, three-unit flats. During the bubble, these were the target of small investors, and median prices for multifamily homes shot up from $96,000 in 1999 to $290,000 in 2005, reported HousingWorks RI. When the bubble burst, so did prices of the multifamily buildings, falling all the way to $90,000 in 2009, before seeing a recovery to $121,900.

That didn't help those investors who bought at or near the top of the bubble. More than 35 percent of all Rhode Island foreclosures between 2009 and 2010 were multifamily homes that form the bulk of the rental housing in many communities.

That's been a rental disaster because multifamily properties in foreclosure usually means tenants have to move. "During the first six months of 2011, 28 percent of foreclosures were in multifamily homes," Gorbea said. "We estimate that 908 rental units were lost due to 317 multifamily closures in the first six months of this year."

Basic economics says when you have less supply, prices rise, and that's what happened in Rhode Island. "The average rent for a two-bedroom apartment was $1,165 in 2010 and that's 50 percent higher than in 2001," Gorbea said. "One in four working families in Rhode Island spent more than half of their income on housing-related expenses in 2008 and 2009. We have the highest percentage of cost-burdened people in New England in regard to wages versus housing expense."

To make matters even worse, Rhode Island is not replacing its housing or even adding much in the way of new housing.

Looking over the data from this past summer, Leonard Lardaro, professor of economics at the University of Rhode Island, shakes in wonderment. "The last summer month that we have data for, we had just 53 building permits for the whole state. That's been typical in recent months. On an annualized basis, we are looking at between 600 and 700 permits a year. That's incredible."

Could things get any worse for Rhode Island? The answer is yes, because the state's unemployment numbers have been awful. Recently, Rhode Island was the fifth-worst state for unemployment with a rate of 10.8 percent, which is at least better than in 2009, when the state was No. 1 for unemployment with a rate close to 13 percent.

Although Rhode Island is a major location for defense contractors, a large percentage of jobs are service-related.

"Our employment peaked in December 2006," Lardaro said. "That's what happens when you don't have technology or other growth-oriented industries. We didn't have the insulation that a Massachusetts or Connecticut had, where the growth industries propelled the economy longer going into the recession. We went into recession well before the other states."

For the short term, Lardaro is not optimistic. "To some extent, the lack of new-home construction will help the healing, but it doesn't generate the construction employment and multipliers that thrive when you are in recovery."

GMAC Mortgage has more problems in Massachusetts

The drama continues as Massachusetts is calling for a congressional hearing on GMAC Mortgage, a division of Ally Financial, claiming that the taxpayer-owned bank is illegally foreclosing on people's homes in the state.  It seems as if GMAC feels they just don't have to follow the law or maybe they are too big to fail.

Massachusetts sued GMAC Mortgage and four other banks last week, saying they engaged in deceptive foreclosure practices. A day after the lawsuit was filed, GMAC Mortgage said it would stop much of its mortgage lending business in the state.  Are they punishing Massachusetts?

Ally Financial is 74 percent owned by American taxpayers after being bailed out by the government during the 2008 financial crisis.

In a letter to the U.S. House Committee on Financial Services, Attorney General Martha Coakley said Ally Financial's subsidiary GMAC had broken laws by cutting corners while foreclosing on homes, which has exacerbated the nation's foreclosure crisis.

Massachusetts Foreclosure Petitions and the New 150 Day Right to Cure