In recent days, some distressed homeowner have started to receive offers for mortgage modifications from their mortgage companies. These appear to be prompted by the new guidelines under the Treasury Department's "Making Home Affordable Program." The proposed modifications appear to reduce the monthly payment on a first mortgage to about 37% of the family's gross monthly income. The proposed modifications do not appear to propose to reduce the principal balance which usually greatly exceed the value of the home. A further amount may also be due on a second mortgage. Distressed homeowners may contact their mortgage servicer if they desire to review options for refinancing or modification.
One approach which may be considered where appropriate, is to "piggy-back" or combine a first mortgage modification with avoidance of a wholly "underwater" second mortgage while in a chapter 13 bankruptcy reorganization. The goal would be to avoid a wholly underwater second mortgage and modify a first mortgage. The modification of the first mortgage would either under the Treasury Department's "Making Home Affordable Program" or possibly a even better modification terms upon any appropriate review of "defects" of the first mortgage (such as a "lost note", unfair terms, etc.) during the chapter 13 case. Proposed changes to the chapter 13 laws are pending in Congress and may be adopted in the near futures. These changes are expected to be retroactive to pending chapter 13 cases and may offer modification of first mortgages by reducing the principal balance down to the present value and a reduction in interest rate.
1. Present Real Estate Crisis
Many homeowners owe more on their home mortgages than their present value (are “underwater”) and many are unable to pay their monthly payments. Many South Florida homeowners are in a situation where the amounts owed on their first and second mortgages substantially exceed the value of his or her home. Many of the comparable sales are short sales or sales of foreclosed homes. Many first mortgages may be adjustable rate mortgages. Property taxes may be high as they are based on pre-decline assessments. Condominium and association fees may have risen dramatically due to the default of other unit owner’s default.
2. Non-Bankruptcy Refinancing or Modification - the Treasury Department's New Guidelines for the “Making Home Affordable Program”
Most distressed homeowners should immediately contact their mortgage servicers or lenders to attempt refinancing or modifications. Patience may be required as the new provisions of the “Making Home Affordable Program” are now being implemented. Efforts should be made even if you were previously turned down.
Last week the federal government announced updated information on its “Making Home Affordable Program.” This program provides for the refinancing or modification of a mortgage on owner occupied principal residences (1-4 units) under certain circumstances. More information is available from the federal government’s “Homeowner’s HOPE Hotline” at (888) 995-HOPE. Borrowers in bankruptcy are not apparently excluded from consideration for modification. There is "no requirement to use principal reduction" under this program but "servicers may forgive principal to achieve" a certain monthly debt service to gross monthly income target.
3. Participate in Florida Circuit Court Foreclosure Actions
A person who has been served with a mortgage foreclosure action should appropriately address foreclosure actions filed in the the Circuit Court. There may be opportunities to mediate a modification with the mortgage company. The participation should begin by “answering” the foreclosure complaint within the time period set forth in the summons attached to the foreclosure complaint.
4. Chapter 13 Bankruptcy for Mortgages on Principal Residences
In the past (before the general decrease in South Florida real estate prices), Chapter 13 bankruptcy plans typically provided to reinstate first and second mortgages on a principal residence over a five year plan while at the same time paying the ongoing regular monthly mortgage payments. This was due to the fact that mortgages secured only by a principal residence are generally not “modifiable” under chapter 13 bankruptcy laws. Second mortgages though that are wholly “underwater” may be avoided and deemed as “unsecured” claims and put in the same category as credit cards.
5. Negotiation of First Mortgage Modification in Chapter 13 for Principal Residences
Although under the present provisions of chapter 13, a debtor cannot force the modification of his or her first mortgage on his or her principal residence, he or she may be able to obtain an agreed modification while under chapter 13. The debtor may pursue modification under President Obama's “Making Home Affordable Program” or on any other voluntary basis. As mortgage companies usually appoint a bankruptcy attorney to represent their claim in the chapter 13 process, there is usually an increased ability to communicate with the mortgage company. While in chapter 13, the debtor is able to explore any defenses to or defects in the mortgage which may provide more leverage to negotiate a mortgage modification.
Furthermore, the homeowner may yet be able to obtain modification of his or her first mortgage if the proposed changes to chapter 13 bankruptcy are passed as in their present form, they are retroactive to pending cases. The proposed bill allows certain mortgage modification by way of reduction of the principal balance down to the value of the home and a change in interest rate. Adjustable rate mortgages may be modified to be fixed.
6. Chapter 13 Bankruptcy for Investment Property
The rules as to modification of mortgages on non-principal residences in chapter 13 bankruptcy are actually be more liberal although prior to the recent steep declines in property values, modifications of mortgages on non-principal residences was not very common. Modification may include reduction in principal amount and interest rate. The ability to modify may be limited by a need to payoff or refinance the reduced principal amount during the five year chapter 13 plan. There may be arguments available or an ability to negotiate a payoff that continues after the chapter 13 plan is over. Since the recent declines in property values, many mortgage companies have agreed to reduce the principal balance upon the filing of a motion to value during the chapter 13 process.
7. Chapter 12 Bankruptcy for Family Farmers
Chapter 12 also provides for more extensive mortgage modification for family farmers.
8. Other Chapter 13 Considerations
a. Automatic Stay – With certain exceptions, the filing of a chapter 13 bankruptcy stays or stops much creditor collection actions, including mortgage foreclosure. The automatic stay provides a homeowner a “breathing spell” in order to allow him or her an opportunity to reorganize their debt while under the protection of the U.S. Bankruptcy Court.
b. Timing – Generally, a chapter 13 bankruptcy must be filed before a foreclosure sale if a person desires to attempt to save their home under a chapter 13 bankruptcy plan. A foreclosure sale is normally set by the Florida Circuit Court a number of weeks after the entry of the final judgment of foreclosure.