Advertiser Disclosure

Mortgage, News

Supreme Court Case Has Big Implications For Mortgage Debt

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

MagnifyNews-02-01

On Tuesday the Supreme Court heard a case, Bank of America vs. Caulkett, that could have huge implications for the mortgage market. At stake is whether or not a judge can forgive mortgage debt completely in a Chapter 7 bankruptcy if a home is underwater. The practice is often referred to as “lien stripping.”

In a Chapter 7 bankruptcy, almost all unsecured debt is completely forgiven. For example, credit card debt is typically written off completely, providing a fresh start for borrowers and an immediate credit loss for banks. Mortgages, however, have been kept out of Chapter 7 completely. Even if your house is underwater, most states treat your mortgage as secured debt and exclude it from the filing. Because the bank has a lien on your home, the mortgage debt remains after the bankruptcy.

However, three states (Florida, Georgia and Alabama) allow second mortgages that are completely underwater to be considered unsecured and have the debt eliminated in bankruptcy.

Imagine a home is worth $100,000.

There is a first mortgage for $100,000 and a second mortgage for $50,000. The second mortgage is completely underwater because the home is only worth $100,000.

In Florida, Georgia, and Alabama you could have the second mortgage lien stripped, which means the second mortgage would no longer be attached to the property. The debt would then be treated like any other form of unsecured debt in the Chapter 7 bankruptcy, and would be completely forgiven.

Outside of these three states, the only way to reduce your second mortgage debt is through a different kind of bankruptcy called Chapter 13.

In Chapter 13, the court determines how much you can afford to pay towards your debt, and creates a repayment plan. The repayment plan lasts three years (if your income is below the median) or five years. At the end of the repayment plan, any remaining debt is forgiven.

Clearly, second mortgage lenders much prefer Chapter 13 bankruptcy, where the borrower must pay back a portion of the loan based upon affordability. In Chapter 7, the entire balance is wiped out, leaving a lender with nothing.

Details Of The Case

The case focuses on the travails of David Caulkett, a Florida homeowner who used the equity in his home to borrow. By the time of the foreclosure, Mr. Caulkett had a first mortgage balance of $183,000 and a second mortgage balance of $47,855.

Although the home had been worth $300,000 at its peak, the price had dropped dramatically and the home was only worth about $98,000 at the time of the foreclosure.

Mr. Caulkett wanted to avoid foreclosure and stay in his home. He decided to file for Chapter 7 bankruptcy.

And in his case, the judge stripped the lien from the second mortgage and treated the debt as fully unsecured. The full $47,855 second mortgage was written off in the bankruptcy.

Bank of America was not happy with the outcome, and sued.

They used a 1992 case (Dewsnup) to make their case. In Dewsnup, it was ruled that judges are not permitted to reduce the principal of first mortgage balances to the current value of the home. The ruling implied that mortgages are protected up to the contract value, not the market value of the property.

Underwater homeowners could get more relief

After the 2008 mortgage crisis, property prices declined dramatically and many homeowners are still underwater on their mortgages. If Chapter 7 bankruptcy becomes an option for homeowners with large underwater second mortgage balances, banks fear a rapid increase in the filings would follow.

Chapter 7 would provide an easy way for consumers to eliminate second mortgage debt completely and quickly, while remaining in their homes.

There are really only two ways to eliminate second mortgage debt completely (outside of Florida, Georgia and Alabama).

One way is to agree a short sale with the lender.

Alternatively, the borrower can go through the foreclosure process and then file Chapter 7 bankruptcy after the foreclosure is complete. The deficiency balance (the remaining balance after a foreclosure is complete) would be treated as unsecured debt in a future Chapter 7 filing. Both of these require a significant amount of time, and result in a foreclosure.

Banks argue that easier lien stripping would restrict access to credit and drive up the cost of borrowing.

However, the lawyers arguing for Mr. Caulkett pointed out that mortgage borrowing is not more expensive in the three states that allow the lien stripping practice.

The entire argument comes down to a relatively simple question.

Are mortgages immune to bankruptcy up to the contract (mortgage) value, or the market value of the property?

The decision, which will be made later in the year, will have massive implications for anyone who is underwater on their property today. If it is upheld many more people will be able to more quickly escape an underwater home and leave a bad mortgage behind.

And it could also have big implications for anyone who wants to take out a mortgage in the future if banks decide to tighten lending criteria.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

Advertiser Disclosure

Mortgage, News

Senators Propose Law To Increase Mortgages For Mobile Homes

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

MagnifyNews-02-01

An estimated 20 million people live in mobile homes, otherwise known as Manufactured Housing. The states with the highest share of mobile homes include South Carolina, New Mexico, West Virginia, Mississippi and Alabama. Guidelines, written by the Consumer Financial Protection Bureau, went into effect in January 2014 and have significantly reduced the availability of mortgages for people looking to purchase mobile homes. In a rare sign of bipartisanship, two Republican (from Pennsylvania and Arkansas) and two Democratic (from Indiana and West Virginia) Senators have teamed up to introduce legislation that will relax the rules and increase the flow of credit.

See Mortgage Rate Quotes for Your Home

See RatesSee RatesSee RatesTerms Apply. NMLS ID# 1136

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

High-Cost Mortgage Rules

The rules that went into effect in January 2014 were targeted at high cost mortgages. The definition of high cost mortgages includes any loan that is less than $50,000 and has an interest rate that is greater than Prime by more than 8.5%.

According to the CFPB rules, which are outlined on their website, high cost mortgages require that the lender must:

  • Provide documentation to the borrower explaining that the mortgage is high cost.
  • Receive certification from a housing counselor that the borrower has received counseling about the high-cost mortgage that is being offered.
  • Refrain from charging pre-payment penalties. In addition, there are limitations on a number of other fees as well.
  • Use a certified appraiser, who visits the inside of the home.

The increased disclosure and reduced fees have resulted in a significant reduction of manufactured housing loans. Both mortgage companies and consumers have been complaining.

According to a press release, the Senators want to relax the definition of high-cost mortgages. The bill would change the threshold and allow the interest rate to exceed Prime by 10% for loans up to $75,000. The documentation and counseling would no longer be required on products that meet these thresholds.

Senator Cotton, a Republican from Arkansas, said that “manufactured housing plays an important role in homeownership options, which have unfortunately been constrained by excessive regulations by the CFPB. As we’ve seen, unintended consequences of these regulations have limited the housing and mortgage choices of hard-working Americans in many rural areas.”

Do Consumers Really Win?

Manufactured housing loan portfolios typically have very high delinquency and loss rates. With a traditional residential mortgage, the bank is protected by an appreciating asset (with the exception of 2008), and the ability to repossess and resell properties when consumers default.

Manufactured housing is much more difficult. Unlike traditional homes, manufactured homes regularly lose value. Although you can easily find articles online that talk about the ability of mobile homes to gain market value when properly cared for, the loss experience of banks tells a different story. When people stop paying on their mobile homes, they often stop taking good care of the property as well – because they know it will be taken by the bank. This wear and tear, along with overall market conditions, mean that when banks repossess a mobile home, it is often worth a fraction of the original price.

As a result of the unique nature of mobile home risk, banks need to charge significantly more for mobile homes than for traditional mortgages. Unfortunately, the high default rates and risk associated with mobile homes keeps many credit unions away. For example, PenFed is a market-leading mortgage lenders. However, it does not finance mobile homes, as it explains here.

Removing the appraisal requirements makes a lot of sense: the make and model of a manufactured home makes it easy for a bank to understand the value at the time of purchase. Wasting money on an appraisal seems excessive.

However, the reduced disclosure and ability to charge additional fees does not seem like a good deal for consumers.

Disclosure and Transparency Is A Good Thing

The reality is that mobile home mortgages are very expensive. Before signing on the dotted line, consumers should understand exactly how much that mortgage is going to cost them over the life of the loan. Removing the added disclosure and counseling would certainly result in the sale of more mobile homes. But, we don’t think it benefits consumers.

Think about this in a slightly different way. If banks disclose the true cost of a product, fewer people will take out that product. So, the solution of the banks – in partnership with the lawmakers – is to reduce the disclosure, so that consumers will not hesitate to sign. That feels rotten.

Put It In The Interest Rate

Prepayment fees can dramatically increase the cost of the loan for the most responsible borrowers. Lenders often use these fees as a way to keep the headline interest rate down. At MagnifyMoney, we do not believe people should be punished for getting out of debt faster. Prepayment penalties, especially on mortgages with double-digit interest rates, feels like a responsibility tax, which we do not support.

Mobile Homes for Everyone?

 

Mobile homes are an affordable way for millions of American to live. And we believe that a credit market should exist to help people finance these purchases.

From our experience in banking, we are very familiar with the high frequency of defaults on these loans. This is a risky lending product for banks, and many credit unions just stay away. Credit unions avoid the product because they do not want to charge the interest rates required that make it profitable.

Banks have no such trouble charging the interest rate. But, they feel they need to do more. They are fighting the tough appraisal requirements, the limits on fees, and the disclosure requirements. We have some sympathy on the appraisal requirement. However, if a product is so expensive that merely disclosing the price causes a customer to turn down the product, then we have a bigger issue here. And the law introduced by the four Senators would not be a complete win for consumers. While we applaud the rare sign of bi-partisanship, we wish it wasn’t for less disclosure in the mobile home mortgage market.

 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.