The President unveiled his much awaited foreclosure prevention program announcing on television today that he would put $75 billion into helping as many as 9 million homeowners obtain affordable mortgage terms. He proposes to help homeowners modify mortgages basically in two ways. One way is through legislation that will amend bankruptcy law to allow judges to modify the mortgages of distressed homeowners, including reducing the principal of the loan to the property’s current market value. Through this amendment, debtors who file chapter 13 can petition bankruptcy courts to reduce their mortgage payments by reducing interest rates and extending the duration of the loan as well as reducing the secured portion of the loan to equal the current value of the property. I would imagine that bankruptcy judges would have the power to split the first trust deed into secured and unsecured portions. Under current bankruptcy law, bankruptcy judges have no power to divide first trust deeds into secured and unsecured even if there is not enough equity to support the entire loan. And judges will have the power to nullify junior liens on the house such as second and third trust deeds and home equity loan lines. These will probably be converted into unsecured debt. But even under current law, bankruptcy judges do have the power to strip junior trust deeds into unsecured debt in California. Thus, the major thrust of the proposed amendment will be to cut first mortgages down to the current value of the property and lower mortgage payment to an amount that the debtor can actually afford, thus allowing debtor to keep his house permanently. I fully endorse this amendment to bankruptcy law. It’s a good thing for debtors to have this option. Debtors can use this amendment to legally force a mortgage reduction payment and the cut the loan balance. This is something that cannot be done at this time except through negotiation in a loan modification program that creditors do not have to agree to if they choose not to.
The non legislative part of the President’s proposal involves a $75 billion program to keep homeowners out of foreclosure by allowing them to refinance into mortgages with reduced interest and longer terms and increasing the government’s investment in Fannie Mae and Freddie Mac to $400 billion. This side of the proposal will rely on a bunch of incentives to entice banks to participate in the program. Unlike the amendment to bankruptcy law that will allow debtors to force the modification of their mortgages to something they can actually afford, creditors can pick and choose which debtors they decide to favor with a loan modification. In addition, if there is a second trust deed on the property, it throws a monkey wrench into the equation because the second trust deed holder is not required to modify the loan even if there is no equity supporting it.
Under the program, homeowners will be eligible to refinance as long as their mortgage does not exceed 105 percent of the current value of their home. Hence, if the fair market value of the home is $300,000, to qualify for refinance, the balance of the mortgage cannot exceed $315,000. What this means of course is that many new homeowners in the inland empire, Palmdale, and other areas where property values have plummeted by 30% to 40% are out of luck because they bought their homes at the peak with zero down and are now carrying half a million dollar first trust deeds on homes that are worth less than $300,000. However, homeowners who bought their homes a long time ago and did not refinance in the last 4 years for a large amount may be in luck.
If you need debt relief, contact my office. I will analyze your case personally.
Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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