Tuesday, February 19, 2008

Mortgage and foreclosure update

This month, we’re going to update you on the latest Congressional and judicial developments in the rapidly escalating debate over mortgages and foreclosures.

1. On December 12, 2007, the House of Representatives Judiciary Committee narrowly ordered H.R. 3609, the “Emergency Homeownership and Mortgage Equity Protection Act of 2007” to be reported as amended out of committee for consideration by the full House. The bill would allow bankruptcy judges to modify the terms of a Chapter 13 debtor’s mortgage loan. Among those terms that a judge could tweak are the loan's interest rate, remaining value and maturity.

The substitute bill that was reported out of the committee would limit relief to subprime or nontraditional loans that are in foreclosure or at least 60 days overdue. Judges would also have the authority to determine if debtors qualified for relief under the current means test. The bill applies to existing nontraditional and subprime mortgages originated between Jan. 1, 2000 and the bill's enactment.

Although the compromise bill was nominally bipartisan, only one Republican on the committee voted for the bill. Many opponents of the bill, including The Financial Services Roundtable, argue that the changes could have unintended consequences, by pricing people with poor credit risks out of the mortgage market and causing lenders to require higher interest rates or down payments or both.

However, the bill gained the support of the National Association of Federal Credit Unions, since the definition of a “nontraditional” loan would be limited to interest-only mortgages and adjustable-rate mortgages with payment options that can lead to negative amortization. Credit unions don’t typically provide these types of loans.

On October 3, 2007, Sen. Dick Durbin (D-IL) introduced S. 2136, the “Helping Families Save Their Homes in Bankruptcy Act.” It would allow bankruptcy court judges to reduce the remaining values, interest rates, and maturities of existing mortgages. Specifically, the bill allows cramdowns for principal residential mortgages for homeowners in Chapter 13 bankruptcy. During proceedings, judges would have the discretion to fix the APR over a 30-year period. The bill also exempts the debtor from the requirement for credit counseling if the court receives certification that the home has been scheduled for a foreclosure sale. In addition, any prepayment penalties can be waived. Another provision in the bill prohibits a bankruptcy judge from allowing a claim that is subject to any remedy for damages or rescission due to failure to comply with the Truth in Lending Act or any other state or federal consumer protection law. The bill has been the subject of hearings in the Senate Judiciary Committee.

Look for closely contested floor votes on these bills this spring.

2. In In re Maisel, No. 07-43324-JBR (Bankr. D. Mass. 11/15/07), Wells Fargo Bank was allegedly the current holder of the note and mortgage and filled a motion for relief from the automatic stay. However, the Bankruptcy Court called upon the lender to prove that it was the holder of the note and mortgage. At the hearing, Wells Fargo presented an assignment of the documents dated four days after Wells Fargo’s motion was filed.

The Court observed that Section 362 of the Bankruptcy Code plainly limits motions for stay relief to parties in interest and that Federal Rules of Bankruptcy Procedure 9011 requires movants to make factual assertions that have evidentiary support. In this case, Wells Fargo was unable to provide evidentiary support for its assertion that it was a party in interest when the motion was filed because it did not yet have a colorable claim to the property.

Judge Rosenthal wrote:

“Today, more and more homeowners turn to the bankruptcy system for protection when facing financial hardship or impending foreclosure. It is this Court's responsibility to ensure that these debtors receive the full protection of the Bankruptcy Code, including the benefit of an automatic stay, for as long as they are entitled to it. Unfortunately, concomitant with the increase in foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system. It is the lenders' responsibility to comply, and this Court's responsibility to ensure compliance. with both the substantive and procedural requirements of the Bankruptcy Code. Compliance with these rules is not difficult and this Court will require it in order to preserve the rights of debtors. Any motion filed with the Court must be true and have support as of the date of the motion. For example, a movant cannot state that it is the ‘current holder’ of an instrument if it is not. Similarly, this Court has seen motions for relief that state that a debtor is in postpetition default where the last payment was due prepetition, or allege that the debtor will be In default by the time of any hearing; these types of allegations are unacceptable to this Court. Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims.”

Although Wells Fargo did not have standing. the court granted the relief because the debtors intended to surrender the property.

Judge Rosenthal’s decision follows in the footsteps of In re Foreclosures Cases, a case decided last fall in the U.S. District Court for the Northern District of Ohio, Eastern Division, in which Deutsche Bank claimed to hold the notes and mortgages for properties it was attempting to foreclose on. The cases were dismissed without prejudice.

The lesson to be learned from these cases is that if a client is the target of a foreclosure action, it is incumbent upon counsel to review the mortgage and note and verify that the party making the motion for relief from the automatic stay or foreclosure is the party that owns those instruments and has standing to commence the action.

For the latest news on real estate and bankruptcy, please contact Shenwick & Associates.

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