THE legislative part of Obama’s mortgage relief plan was to adopt a law amending the bankruptcy code to empower bankruptcy judges to modify mortgages by reducing the balance of the mortgage to the current fair market value of the house to achieve a lower mortgage payment and mortgage balance. For instance, if the outstanding balance of the mortgage were $400,000 while the fair market value of the house is $250,000, the amendment would allow a bankruptcy judge to cut the balance owed to $250,000 and reduce the mortgage payment accordingly, in a chapter 13 case. Without this amendment, bankruptcy judges are only allowed to strip or avoid 2nd trust deed on properties that are not supported by any equity. Nothing can be done to modify the terms of a first mortgage.
For instance, in this example, if there is a second trust deed of $100,000, that trust deed can be avoided and converted into an unsecured debt while the Chapter 13 plan is being paid. When the plan is fully paid, the court discharges the 2nd trust deed. But bankruptcy courts cannot reduce the balance owed on the first trust deed from $400,000 to $250,000 even if the market value of the property is only $250,000. Relying on the Nobleman case which held that Section 1332(b)(2) of the old bankruptcy code bars a Chapter 13 plan from modifying rights of claims secured only debtor’s principal residence, the 9th Circuit court of appeals, said that this section did not extend to claims which were totally unsecured, in the Lam case. The court said that to do so would be contrary to the provisions of the bankruptcy code that allowed the discharge of totally unsecured claims. In Lam, debtor had 4 trust deeds against his residence, which had an undisputed fair market value of $300,000 in 1994. Chase had a first for $164,000, Boston Company had a second trust deed for $61,000, Tracy Federal had a third for $560,000 which was partially secured, and therefore not subject to modification under the code. Thrift had a fourth for $17,000, totally unsecured. The 9th Circuit affirmed that the $17,000 had been avoided and discharged.
Congress approved the cram down amendment several months ago but the Senate shot it down. It never became law. In the meantime, 9 million families are expected to lose their homes to foreclosure in the next 3 years. Obama’s Home Affordability program has had disappointing results so far and has not been effective to persuade lenders to voluntarily modify mortgages despite ads of self-proclaimed experts to the contrary. Quite simply, it is not in the lender’s interest to reduce mortgage payments and mortgage balances as a policy for doing business. Banks are in the business of making money. They are not in the business of voluntarily taking actions to lose money. So nobody should be surprised that banks have been slow to modify mortgages after bail out funds were given to them. Once they have the funds, they can do whatever they want. They can use them to buy more banks, as some beneficiaries have done, in China. Or, they can use the funds to window dress their liquidity or pay their employees more bonuses, but not to modify mortgages. Although ‘cash for clunkers’ works for the car industry, a long line of voluntary mortgage modification measures, TARP, HASP and FHASecure have not dented the foreclosure crisis. Although banks have given modifications to families needing assistance, these modifications do not follow guidelines of Obama’s programs.
The Senate Judiciary Subcommittee on Administrative Oversight held another hearing recently to revisit whether it’s time to pass legislation allowing bankruptcy judges to modify primary residential mortgages in Chapter 13. Sen. Durbin D- Ill has championed this amendment. for a long time. A bipartisan effort for the amendment may be starting. It may soon become a reality.
Contact my office if you need debt relief. I will analyze your case personally.
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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.
( Published on August 15, 2009 in Asian Journal Los Angeles p. C5 )
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