By Katy Stech
The country's top court Monday agreed to hear arguments on
whether homeowners can cancel their second mortgages in bankruptcy
when their properties aren't even worth the value of the first
mortgage.
The Supreme Court said it would review two appeals filed by Bank
of America against bankrupt homeowners who are trying to remove the
bank's liens on their property.
The two Florida homeowners say that filing for Chapter 7
bankruptcy protection with a first mortgage that is worth more than
their property's value allows them to "strip off" the lien from the
second mortgage. When both loans are underwater, the second lien is
essentially valueless, the homeowners' lawyers argue.
Lenders, however, have fought to keep the second mortgage liens,
arguing that the debt could someday be fully paid, especially as
property values rise.
"There is no such thing as a 'truly valueless' lien on property
capable of appreciating," Bank of America lawyers said in court
papers.
The 11th U.S. Circuit Court of Appeals upheld bankruptcy court
decisions that stripped Bank of America of its liens. The bank
appealed.
In court papers, lawyers for Bank of America said that the
question "may be the single most important unresolved issue in
consumer bankruptcy."
About 2.1 million borrowers had partly or wholly underwater
junior mortgages at the end of the second quarter of 2014, said
lawyers for Bank of America, citing a CoreLogic report.
Lobbying groups for the corporate loan market and banking
industry, including Loan Syndications and Trading Association and
American Bankers Association, plan to fight alongside the bank with
a brief.
The Supreme Court can now clarify the rules for bankruptcy
judges who have disagreed on this issue. In 1992, Supreme Court
justices determined that a bankrupt homeowner doesn't have the
power to cancel the lien on an underwater first mortgage, but it is
less clear what power a bank with an underwater second mortgage has
in bankruptcy. Second mortgages were far less common at the time of
the U.S. Bankruptcy Code's last major overhaul in 1978.
Lawyers for one of the homeowners said in court papers that if
the Supreme Court makes it easier to cancel the lien on a second
mortgage, it could "help unclog the housing market."
A ruling in favor of homeowners could make it easier for people
who file Chapter 7 bankruptcy to keep their homes, said Cynthia
Riddell, a Florida bankruptcy attorney.
Last year, more than 700,000 individuals and couples filed for
Chapter 7 bankruptcy, the most popular type of consumer bankruptcy,
which enables a court-appointed trustee to sell a person's property
to repay debts and then cancel the rest.
Before the housing crash, lenders were willing to extend a
second mortgage, sometimes in the form of a home equity line of
credit that gave the homeowner cash. It is a riskier loan because
the first mortgage is scheduled to be repaid first if the homeowner
files for bankruptcy.
Nick Timiraos contributed to this article.
Write to Katy Stech at katherine.stech@wsj.com
Access Investor Kit for Bank of America Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0605051046