Today's new bailout legislation - "TARP" - did not include changes to the bankruptcy laws that were sought by pro-consumer groups to allow greater modification of mortgages secured only by a principal residence. But for homeowners running out of time before a foreclosure sale, the present Chapter 13 bankruptcy law may present an avenue to save their South Florida home, the average of which the media reports has fallen about 28% in the past 12 months.
The media reports that a major problem that first priority mortgage holders or servicers have in arranging a mortgage modification is coordinating their mortgage modification with the debt owed on the second mortgage. Apparently often the holder or servicer of the second priority mortgage does not cooperate with the holder or servicer of the first priority mortgage. The avoidance of the second mortgage under a Chapter 13 bankruptcy would eliminate the need to coordinate with the holder or servicer of the second mortgage if the second mortgage holder's lien is avoided.
As reviewed in this blog previously, the present Chapter 13 bankruptcy laws allow a homeowner to avoid his second mortgage if it is not a "secured claim" - meaning that there is no equity to secure the second mortgage holder's lien. In other words, the second mortgagee is wholly underwater. Under section 506 of the bankruptcy code, the lien of the second mortgagee would be wholly avoided and deemed a wholly unsecured claim. In many or most cases in Miami homes, the second mortgage is wholly "underwater" as it was typically made in the amount of 20% of the value at the time of the loan and values have fallen so dramatically.
The media reports that some mortgage servicers have increased their staffs due to governmental and industry pressure to address the rising number of foreclosures. It is reported that Countrywide, Chase, and Ocwen, among others, have increased their staffing. The filing of the Chapter 13 bankruptcy would present an opportunity to stop the foreclosure action in most cases and consider the avoidance of the second mortgage together with a modification of the first mortgage.Jordan E. Bublick, Miami, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983