On March 24th, The Supreme Court heard oral arguments in the cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona.
Ever since the 11th Circuit turned Chapter 7 lien stripping on personal residences on its ear, Bank of America has been desperate to get the arguments involved in these cases before the U. S. Supreme Court. The ability to strip unsecured 2nd and 3rd Mortgages from personal residences in Chapter 7 has the potential to help 10’s of thousands of homeowners by reducing the indebtedness on their homes. Chapter 13 has allowed debtors to strip totally unsecured 2nd and 3rd mortgages from their homes for years, thus allowing debtors to retain their homes and provide for their families during harsh economic circumstances.
Bank of America argues that the “Dewsnup”case (which was concerning limiting reduction of a FIRST Mortgage on a debtors home), should apply equally to 2nd and 3rd mortgages, even if the value of the home is LESS than the amount of the primary mortgage, thereby leaving subsequent mortgages totally unsecured.
The 11th Circuit and the homeowners in the cases, argue that since Primary and “Dewsnup” are unaffected by stripping of totally unsecured secondary mortgages, the same logic should apply to Chapter 7 debtors that allows Chapter 13 debtors to strip secondary mortgages. In reading the transcript from oral argument, it seems clear, that even a divided court was having difficulty finding Bank of America’s argument compelling.
At one point the conversation went off course when Justice Breyer expressed concern about business and commercial secondary financing having disproportionate impacts compared to residential mortgages because of the much larger size of these loans. However, “Dewsnup” refers to PRIMARY mortgages on residences. Investment properties are not affected by “Dewsnup” because they can be stripped to value anyway. Justice Scalia, who dissented in “Dewsnup”, would clearly overturn “Dewsnup.”
In reality, “Dewsnup” would probably not be an issue today but for the collapse in real estate values, partially brought on by the race between lenders to capture as much of the higher interest rates secondary mortgage financing yields; a feeding frenzy brought on by illusionary increases in value fed by an overheated real estate market. Lenders never considered that real estate values could go down, let alone collapse. The race for higher profits seems to have diminished the superior expertise of the experts!
The major lender’s (Bank of America included) have had their bail outs. “HAMP” and “HAMP 2” have been largely ineffective for the majority of people applying for relief through those programs. Even though lenders were supposed to apply the programs in good faith, it has not been until lenders realized even they could not support owning every home via foreclosure that better results are starting to happen. It could also be that bringing the programs into the oversight programs developed in Bankruptcy Court has also had a major hand in producing better results. In the Southern and Middle Districts of Florida, the success rate in Bankruptcy Court for obtaining modifications has been a resounding 72-82% success ratenas opposed to the unsupervised efforts by lenders of just 4% success nationwide. Regardless of these numbers, strappedhomeowners may get their bailout with the coming decision. The pendulum may just start swinging the other way.