Friday, December 14, 2007

Mortgage foreclosures

Happy holidays! This month we’ll be discussing something we hope you avoid this holiday season-mortgage foreclosures.

With the falling real estate market, many of the readers of this e-mail are aware of the rise in mortgage foreclosures. It is predicted that in 2008 there will be 1.8 to 2 million foreclosures. When a client calls an attorney and indicates that their house is being foreclosed upon, there are a number of options that the attorney should suggest or discuss with the client.

1. Is the party that is commencing the foreclosure action actually the party that owns the mortgage and the promissory note? On October 31, 2007, a federal District Court Judge in Ohio issued an opinion and order which dismissed 14 foreclosure actions by Deutsche Bank based on the fact that Deutsche Bank was unable to provide proof of ownership of the mortgage. This case can be read on our website here.

2. Is the client or the defendant able to work out a forbearance agreement with the mortgagee or the bank? Forbearance agreements may include the following different scenarios: an increase in the number of years in which the loan is due, a reduction in the interest rate on the loan, a separate payment plan for arrears on the mortgage, or the arrears being backended and paid after the mortgage is paid off in full.

3. Chapter 7 bankruptcy. With the increase in the New York State homestead exemption, each debtor in bankruptcy is allowed to keep a house in bankruptcy with no more than $50,000 in equity, so if a couple files for Chapter 7 bankruptcy, they would be able to keep a residence which is their homestead (a house, townhouse, co-op or condo which is their primary residence) and in which they have no more than $100,000 in equity. For bankruptcy purposes, equity is calculated by the difference between the value as determined by a broker price opinion letter or a formal appraisal less any outstanding mortgages, home equity loans or mortgage arrears.

4. Chapter 13 bankruptcy. If the debtors have a regular source of income and they’re generating sufficient income, they may be able to file a three to five year plan with the Bankruptcy Court where they would remain current on their mortgage payments and pay the arrears due the bank over a three to five year period. The debtor would need to show that they have a regular source of income and that the plan is feasible (i.e. that they have sufficient after-tax monies or disposable income to fund the plan).

5. Finally, there are several bills before Congress (in fact, one bill that has passed the House) that would allow a Bankruptcy Judge to modify the terms of a first mortgage which is a subprime mortgage and which would allow the judge to modify the interest rate or the term of the mortgage. Currently, Bankruptcy Judges are unable to modify first mortgages on houses. Shenwick & Associates is monitoring this bill and we will provide updates regarding the status of this bill and if the bill becomes law.