Archive for the ‘Mortgage modifications’ Category
Tuesday, August 3rd, 2010
I recently received an email from a blog reader asking about his obligations to his mortgage company when he does not reaffirm:
I have read your blog and you are very through so I write you with hopes that you might answer this question for me. I file Chapter 7 in 08, and did not reaffirm my loan. I am still living in the house and did make some payments. However, i have not for the last 8 months. It is my understanding that I must sign a document to reaffirm and that continuing payment in itself is not a reaffirmation…or? Well it gets a little more complicated. My house is valued at $410,000 and the bank has offered me a deal that is going to be hard to refuse. They have agreed to let me do a short re-fi in the amount of 180k. If I agree to that is that in itself a reaffirmation?
Here is my response: in most cases, when you take out a mortgage loan, you are signing two different types of agreements. The first type is a promissory note whereby you personally agree to make the payments. The second type of obligation creates a property lien, meaning that you, as the owner of the property, pledges that property as collateral for the loan.
When you file a Chapter 7 and receive your discharge, your personal obligations are extinguished. However, a Chapter 7 discharge does not eliminate the mortgage company's lien against your property. If you "reaffirm" your mortgage, you are actually reaffirming the promissory note and your personal obligations to pay.
For years, many bankruptcy attorneys advised their clients to avoid signing reaffirmation agreements for mortgages, car loans or any other secured debt. The reasoning – even without a personal "guarantee" lenders are protected by the property lien. If the lender is willing to accept payments (the so-called "stay and pay" option), the now discharged debtor keeps his property, keeps making payment, but does not have personal liability on the note.
If the debtor misses payments, the lender would still have the right to foreclose or repossess based on the property lien. The debtor would not have personal liability for any foreclosure or repossession deficiency because his personal liability was extinguished in the bankruptcy.
There is a downside to this "stay and pay" strategy. First, the debtor does not get any credit report benefit for making payments. Because the debtor's personal obligations have been extinguished, the lender no longer reports either a positive or a negative payment history. A positive payment history from a mortgage company can be a good way to restore credit after bankruptcy, and if you do not reaffirm, you will not get this benefit.
Second, there is the "uncertainty factor" if you do not reaffirm. Most mortgage or vehicle finance installment notes contain a default provision that includes bankruptcy as a default trigger. In theory, at least, once your bankruptcy is closed (and the automatic stay of bankruptcy terminated), your lender could declare your loan in default and take action under State law to recover the collateral. In my experience, lenders would much rather have monthly payments than your collateral but this risk does exist.
Finally, many of my readers have asked me if there is such a thing as "constructive reaffirmation" meaning that by making payments, are you in effect re-obligating yourself? Are you creating a contractual obligation by your actions?
I think that the answer to this depends on State law but I would suspect that a mortgage or vehicle lender would have a hard time making this argument. In many States (such as in Georgia) a financial obligation related to real estate must be written and they must have specific terms. As a matter of general contract law, a contract usually will not be enforceable if its terms are not specified. I would argue therefore that a debtor's actions of simply making payments and the lenders actions of accepting such payments should not be enough to create personal liability on the part of the debtor. I would be interested to know if any of the attorneys who read this blog have a different opinion or if anyone is aware of any case law that says otherwise.
At a minimum, if a lender tries to make the argument that you have somehow re-obligated yourself personally by your act of making payments, I would insist that the lender provide you with case law or other support for its position, and you should consult with a lawyer before agreeing to any payment or taking any action (like signing a new, valid contract) that could create personal liability.
My reader states that his lender has proposed a refinance for $180,000. He did not say, but I presume that his prior (discharged) mortgage was much higher than this and that his current payments under the "stay and pay" are based on this higher balance. If he enters into a mortgage contract for $180,000, that contract will function like any other mortgage – and include both personal liability under a promissory note as well as a property lien. It is not a reaffirmation because the bankruptcy is over – instead, the proposed $180,000 loan deal is equivalent to a new mortgage. This proposed deal could result in lower payments plus positive credit history, but it will also create personal liability that currently does not exist. I would certainly advise my reader to discuss his options with an attorney so that he will fully understand the implications of his decision.
Posted in Chapter 7 issues, Lenders, Mortgage, Mortgage modifications, Obligation, Post bankruptcy credit rebuilding, Reaffirmation and negotiation, a, actions, agreements, and, avoid, clients, contract, create, creates, enters, history, history , liability, liability my, lien, making, mortgage loan reaffirmation, negative, note, payment, payments, personal, positive, promissory, property, reader, reaffirmation, reaffirmation after bankruptcy, reaffirming, refinance and bankruptcy, signing, simply, states, the, type | Comments Off
Monday, May 31st, 2010
Every week I receive several phone calls from homeowners who want to take advantage of the federal HAMP (Home Affordable Mortgage Program) but do not know where to start. Often these callers are behind two or three months and are receiving foreclosure notices, but they really do not want to file Chapter 13 before exhausting all non-bankruptcy alternatives.
These homeowners may have received foreclosure notices that suggest that the mortgage lender intends to negotiate or modify their mortgage. Georgia law now provides that all foreclosure notices must include a "negotiation provision." O.C.G.A. Section 44-14-162.2 provides:
Notice of the initiation of proceedings to exercise a power of sale in a mortgage, security deed, or other lien contract shall be given to the debtor by the secured creditor no later than 30 days before the date of the proposed foreclosure. Such notice shall be in writing, shall include the name, address, and telephone number of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor, and shall be sent by registered or certified mail or statutory overnight delivery, return receipt requested, to the property address or to such other address as the debtor may designate by written notice to the secured creditor.
However, in real life, very few of these homeowners have had much success in reaching a deal with their lenders.
What about the highly touted HAMP program? A quick search on the Internet reveals dozens of articles suggesting that, to date, HAMP is not working.
Now comes word that the federal government has modified HAMP to include homeowners in bankruptcy with new guidelines effective on June 1. Supplemental directive 10-02 specifically addresses the applicability of HAMP to homeowners in bankruptcy.
These directives are intended for mortgage servicers and set out numerous obligations for servicers. I did find a fairly comprehensive Making Home Affordable FAQ section written for borrowers on the MakingHomeAffordable.gov site.
In reviewing the HAMP materials, it appears to me that the program is designed to direct homeowners to approved HAMP counselors, rather than to have homeowners apply directly. Further there appear to be regulations that apply to mortgage servicers where they must proactively advise homeowners of possible eligibility. The on-going issue – the HAMP rules are so complex that most individuals will have no idea about whether they are eligible. For example, to qualify for a modification, here are the requirements set out in the FAQ:
- Be the owner-occupant of a one- to four-unit home.
- Have an unpaid principal balance that is equal to or less than:
- 1 Unit: $729,750
- 2 Units: $934,200
- 3 Units: $1,129,250
- 4 Units: $1,403,400
- Have a first lien mortgage that was originated on or before January 1, 2009.
- Have a monthly mortgage payment (including taxes, insurance, and home owners association dues) greater than 31% of your monthly gross (pre-tax) income.
- Have a mortgage payment that is not affordable due to a financial hardship that can be documented.
Would you know what documents to produce, or how to calculate 31% of your monthly gross income? The government goes on to advise you that "only your servicer will be able to tell you if you qualify." In other words, you are expected to turn to the foreclosing lender to help you apply for a program that will stop foreclosure.
Thanks to Las Vegas bankruptcy attorney Randy Creighton for highlighting the June 1, 2010 HAMP changes on his well researched blog post.
Posted in 1 , 10 02, Borrowers, HAMP, Mortgage, Mortgage modifications, a, addresses, affordable, applicability, approved, bankruptcy and HAMP, bankruptcy and mortgage modification, changes to HAMP, counselors, directive, eligibility , federal, highly, home, homeowners, issue, june, lenders what, makinghomeaffordable gov, materials, modified, on going, program, program , quick, reviewing, rules, search, site in, specifically, supplemental, the, touted | Comments Off
Wednesday, September 9th, 2009
This afternoon (September 9), I had a chance to observe a very interesting case heard by one of the judges in the Northern District of Georgia. The issue at hand was a motion filed by a mortgage creditor to "validate" a foreclosure that had been cried out on the courthouse steps back in July.
The mortgage creditor went first and presented her client's case: the debtor had filed a bankruptcy on the morning of July 7, 2009 minutes before the lender sold the debtor's house on the courthouse steps. The lender was not aware of the filing and proceeded to foreclose. When the lender's attorney returned from the courthouse, he discovered that a bankruptcy had been filed, so he did not record the deed.
Instead, the lender retained bankruptcy counsel who filed a motion have the bankruptcy annulled and the foreclosure validated. If validated title would pass and the lender would now be the title owner of the property. In such a situation the debtor's bankruptcy would offer no protection and the debtor would be subject to eviction.
The mortgage company's attorney noted that this was the fifth bankruptcy filed by the debtor and his wife, and the third case filed this year to stop a foreclosure. In none of the cases filed this year did the debtor or his wife make any payments to the trustee or pay anything to the mortgage company. In none of these cases did the debtor or his wife file any of the required bankruptcy paperwork.
Clearly the debtor and his wife were acting in bad faith, argued the mortgage company's lawyer, and they should not be allowed to misuse the bankruptcy process.
What would the debtors have to say? The debtor and his wife appeared pro se (without an attorney). They told the judge that they filed this bankruptcy to save their home, where they lived with their 4 children, and the wife's sister and her 3 children.
They further explained that the bankruptcy paperwork they filed was prepared by a "paralegal" from a "foreclosure prevention" company. The paralegal had instructed them to file the Chapter 13 to stop the foreclosure and to give the company a chance to continue its negotiations with the mortgage lender. Now, however, the foreclosure prevention company did not seem to be in business anymore – its telephone number was disconnected and its st0refront abandoned.
Now, they just needed some time to obtain representation and to restart negotiations with the lender. They were victims of a foreclosure rescue scam (the same company that had misled them twice before this year) and now they finally realized that they were on their own.
What would you do in this situation? What did the judge do? The answer – see my next post….
Posted in Automatic stay issues, Georgia Bankruptcy, Mortgage modifications, mortgage modification scam, mortgage rescue scam, motion to annul a bankruptcy, motion to annul the automatic stay, motion to validate foreclosure | Comments Off
