Thursday, January 8, 2009

CitiBank and Mortgage Modifications


In a stunning and surprising turn-around, CitiBank has agreed to support Sen. Richard Durbin's bill to permit Bankruptcy Court judges to modify mortgages (see the most recent posting - January 3, 2009).The term being used is "Cram-Down", which has a technical meaning and a common sense one.

First, common sense: the Bankruptcy Court Judges will have the right to push mortgage changes down to the owner(s) of the mortgage, regardless of how many layers separate the Borrower/Debtor and the original Lender. The Legal usage is normally restricted to a Bankruptcy context. The theory allows a Debtor to ask a judge to permit the Debtor to alter the terms of a loan. The most common application has been automobiles, boats, etc, and second-homes. By statute Congress prohibited Bankruptcy Court judges from cramming-down mortgages on a debtors primary residence.

The modifications can be a nominal as allowing a small change in the interest rate, to reducing the PRINCIPAL OF THE LOAN, the AMOUNT OWED. Normally, if there is a reduction, it is to a level that is equal to the current value of the house, if it has lost all equity, or to a level that is fair based on the transaction itself. This cram-down based strictly on fairness is reserved for cases when there has been bad faith and bad conduct on the part of the Lender; in fact what is called egregious behavior.

Giving the Judges the right to modify loan terms would eliminate the risk, to a Loan Servicer or Trustee of a Mortgage Backed Security, of being sued by investors or other parties who bought a slice of every mortgage in a pool of loans. Further, it would encourage Lenders/Servicers/Investors to modify loans BEFORE there ever was a Bankruptcy. Almost every one of the Chapter 13 Bankruptcy filings I do is to protect a primary home. In the past 6 months, not one has come across my desk where the issue was not some how involved in a Lender refusing to modify the loan. While there has been no cram-down, a Chapter 13 allows up to 60 months for a Debtor to repay the amount he/she has fallen behind.

All to often, I am seeing loans that should not have been written the way they were. Adjustable Rates that has huge changes after 24 months; rates based on obscure formulas; and loans where the borrower pays less than the true interest that accumulates each month so that the Borrower actually owes more each month than what was owed the prior month (negative amortization).

The other major problem is the CRASH of housing prices. While not that critical in this Western part of Massachusetts, there are areas of the state where the value of a house has plummeted 30% or more in 12 months, and other parts of the country have faired worse.

Modifying loans to make them affordable and more in keeping with the value of a house so that the owner has a vested interest in struggling to keep his/her/their home makes all of the sense in the world. This can be accomplished by lowering the interest rate, extending the term of the loan, or REDUCING THE AMOUNT OWED. The last option must only be done with care, and on a case by case basis. The Bankruptcy Courts are equipped to do this, and have been doing it to all other types of loans right along.

As there will be daily developments in this key area for the time being, there will be daily postings to this Blog as well. As always, if you have a question about this or a related topic, e-mail or call me. Just follow the link at the end of the posting.

Author's Copyright by Richard I. Isacoff, Esq., January 2009

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