PART of President Obama’s plan to reduce foreclosure was to amend the new Bankruptcy Code to empower bankruptcy court judges to reduce the balance of mortgages to be in line with the current fair market value of residences, reduce interest rates and extend the term of the mortgage. Under the proposed amendment, a Chapter 13 debtor who lives in a house that has a current fair market value of $250,000 but with a fi rst trust deed balance of $400,000, and a second trust deed balance of $75,000, would be able to ask the judge to reduce the $400,000 to $250,000, and void the second trust deed balance of $75,000 completely.
The House approved this proposal last month, and with the Democrats controlling the Senate as well as the House, it was expected that the Senate bill would sail through without any obstacle. But 12 Democrats joined Republicans with a voteof 51 to 45 to reject the proposal. Current Bankruptcy law does not allow judges to reduce any balance of the fi rst trust deed that exceeds the current fair market value of real property but allows judges to lien strip the second trust deed if there is no equity supporting it. This has been the law in California for the last ten years when Judge Mund of the Woodland Hills bankruptcy court fi rst allowed it. The unsecured second trust deed is converted into an unsecured debt, just like a credit card debt, and is discharged when all plan payments are completed. In many cases, where debtor operates on a very tight budget, available disposable income is small, and debtor’s end up paying only the default portion of the fi rst trust deed over 3 years where the second trust deed holder practically gets nothing.
Many homeowners have been waiting for this part of Obama’s plan for foreclosure mitigation to take effect. Loan modifi cations allow creditors to pick and choose accounts they want to modify, but the proposed amendment to bankruptcy law would allow debtors to force modifi cations to the terms of the mortgages that they want. In addition, many homeowners in California have two mortgages, a senior and a junior lien because many people here bought houses using 80/20 loans, and many homeowners here obtained home equity lines when house values continuously escalated. Thus, many homeowners in California could not qualify for the TARP program which allows refi nancing up to 105% of the current fair market value because they had second trust deeds, not to mention the fact that house values here have plummeted too drastically leaving large balances on fi rst trust deeds unsecured by any equity. But with the new program introduced by the President last week, the government will swoop in to buy second trust deeds at 5 to 10 cents to a dollar, relieving homeowners of the second trust deed burden. Whether or not this program will work remains to be seen. A proliferation of loan modifi cation experts has emerged in the last several months. Even McDonald’s offers loan modifi cation with the Big Mac, and KFC offers loan modifi cation with the 20 pc. Family bucket.
The defeat in the Senate was a surprise to Democrats themselves. Citibank and other banks had signaled their consent to the proposed amendment several months ago. But that was during the time that the government was doling out bail out funds to them. Now that the banks have lined their pockets with the lion’s share of bail out funds, they have done an about face. Banks lobbied very strongly in the Senate to have this bill defeated. No wonder 12 Democrats were convinced to join Republicans in voting against the amendment to bankruptcy law. What else is new? Politics and bank lobby money have always gone hand in hand. However, we certainly hope that the President will bring his tremendous charm to bear the next time this bill is taken up by the Senate.
If you need debt relief, contact my offi ce. 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 fi ve 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 May 9, 2009 in Asian Journal Los Angeles p. C4 )
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