What Makes Sense - A Simple Solution

Services for Real Estate Pros with Law Offices of Louis J. Esbin
The solution to the current and prospective ongoing foreclosure crisis and failure of the banks to effectively modify loans lies, quite simply, in an ability of the Bankruptcy Courts to do the following with respect to home mortgages when an individual or couple files for relief under Chapter 13 or Chapter 11 of the Bankruptcy Code for the purpose of saving their home residence: (1) Value the real property that is claimed as the principle residence of the debtor to an amount based upon not only a customary appraised valuation, but valuation based upon affordability – the amount after regular household necessary expenses that remains to pay for housing. The traditional Fannie/Freddie Guidelines are a start. (2) Remove from the residence any lien, be it voluntary, statutory, or judicial, that is not otherwise secured by any (not a dime) of equity in the residence; (3) Allow the debtor to confirm a Chapter 13 or 11 Plan based upon their current ability to service the balance of the mortgage that has been reduced, based upon an interest rate that is set over a period of 40 years at an interest rate equal to two points over that which banks are allowed to borrow from the Federal Reserve (the Fed Funds Rate); (4) Require that the debtor remain in the Chapter 13 or 11 for a period of 5 years, during which time all mortgage payments must be kept current and all real property taxes must be paid through the Chapter 13 or 11 (so as to assure payments) and all personal income taxes must be kept current, so as to assure the treasury is funded; and (5) Allow student loans to be paid as a priority debt in the same class as taxes and domestic support obligations and allow the court to reduce the interest rate charged on student loans down to the actual costs of funds to the banks making the loans, as those loans are guarantied by the government and otherwise nondischargeabie in bankruptcy; otherwise risk free. What happens to the liens that have been “stripped” away from the residence? Those liens are not effectively “stripped” until the debtor has satisfied in full all mortgage default payments due under the Chapter 13 or 11 Plan and has fulfilled all other obligations due under the Chapter 13 or 11 Plan. Those liens are not treated like general unsecured debt, because they are not, and they are not treated as secured debt either, because they are not. They are separately classified and broken down in the following priorities: (1) statutory tax liens; (2) the undersecured portion of the mortgage that has been reset; (3) the wholly undersecured mortgage that once may have been a HELOC; and (4) the judicial lien. If at any time during the Chapter 11 or 13 the debtor seeks to sell or refinance the property, the lenders whose liens are stripped or principal reduced to the value of the property would share in the equity on a sliding scale from 50% in the first year down to 10% in the fifth year. In this way home ownership is spared, foreclosure are reduced, and families are protected against the ravages of the financial ruin that is at the root of the rising (and ever rising) divorce rates.

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