Cram Downs and Strip Downs

Mortgage Cram Down Report

Last week there was a great deal of controversy surrounding the topic of first mortgage cram downs based upon articles I had written about the subject.  Some attorneys became angry and upset while others researched the topic and sent me their comments which appear below.

I hope this article helps to resolve the issue and to calm down the attorneys who were angry and condescending in their analysis.  Let us always remember that we are all in the same boat and we should have a heart to help each other rather than post cruel slurs in an attempt to hurt others who try to do the best they can, based upon the information they know and experiences they have endured.

I wish all of you a happy Fourth of July.

Victoria Ring http://www.chapter713training.com http://www.mybankruptcyschool.com

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Victoria:

I went to a meeting at the Chapter 13 Trustee’s office for the Central District of California in August 2009 and was told by the Trustee that California would allow cram downs on first mortgages IF a hardship situation existed.  This is why many California attorneys proposed them and this is why you undoubtedly worked on them during the past 2-3 years.  However, almost 30 days later, the Chapter 13 Trustee posted a retraction stating that he made a mistake and he was actually referring to second mortgages.  I am sure the attorneys you were working with forgot to tell you this.

Although I did not examine the specific cases you worked on for these attorneys, I believe the reason some of the cases in California were confirmed for first mortgage cram downs was because the home was not placed inside the Plan. Therefore, the amount never really mattered to the Trustee since their office was not paying the claim.  I am sure that the first mortgage company filed a Proof of Claim on the full amount; therefore, the Proof of Claim amount was honored and no Objection was filed.

Finally, even though first mortgage cram downs are not legally recognized, your thoughts in educating others about first mortgage cram downs is exemplary. This legislation has already passed in the House and many Senators also voted for the Bill. I believe first mortgage cram downs will be realized in the near future and I thank you for all you continue to do to support this industry and help debtors.

Lydia Zlobnicki, JD

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Here in the Western District of Washington State, an Adversary Matter has to be filed in order to strip or cram down a mortgage.

Amy Wishart Do It Yourself Documents

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The Southern District of Florida will not allow modification of the first mortgage upon the primary residence.

Here is an interesting twist, though:  one of the 2 judges in the West Palm Beach division of the Southern District, Erik Kimball, takes the position that if a stripped off 2nd mortgage, or a stripped down 1st mortgage on a property other than the primary residence, causes enough stripped off secured debt becomes enough unsecured as to disqualify the debtor for a Chapter 13 under Sec. 109(e)

Jeffrey Lampert lampertletters@gmail.com

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Under Chapter 13 you have Section 1322(b)(2) and we can avoid junior liens via this section and ‘cram down’ non-owner occupied properties.  We have similar Sections under Chapter 11.

Congress has not granted bankruptcy courts to ‘cram down’ or otherwise reduce the first mortgage on a debtor’s primary residence.  I am reporting in from the Central District of California

Links: http://www.losangelesbankruptcylawmonitor.com

Christine Wilton Greifendorff Law Offices, PC

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I have been out of bankruptcy for a while, however as of last year, our three districts in Oklahoma were uniform in their treatment of home loans – IF a home was worth less money than the sum of the first and 2nd loan, the 2nd was treated as an unsecured debt, and paid that way, with its lien being stripped away. First loan cram downs were not allowed at all. I do not believe that has changed, however as I said, I have not been practicing this year, so am not completely positive.

Michael McCoy Oklahoma City, OK

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In 2007, our office was successful in cramming down a first mortgage because Washington Mutual was going out of business and did not file a Proof of Claim or Objection to Plan.  Since we listed the claim amount the same as the appraised value, the Plan was confirmed.

However, I recently learned that only second mortgages are permitted for cram downs in Ohio, but I do know that first mortgage cram downs are sometimes confirmed also.

Charlie Hafer Southern District of Ohio

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If you have any comments to add, please send them directly to Victoria Ring at: http://www.chapter713training.com/contact.html

How are cram downs handled in your jurisdiction?

There have been a lot of conflicting stories regarding the treatment of mortgage cram downs and strip downs in the various bankruptcy courts.

Some attorneys have proposed cram downs on first mortgages and those Chapter 13 Plans have been confirmed.  Other attorneys have only been successful in proposing second mortgage cram downs but unable to do first mortgages.

Still, some attorneys are only able to propose cram downs for rental property while others only propose cram downs on primary residences.

In order to substantiate their success, attorneys I have spoken to refer to either Section 502 of the bankruptcy code or 11 USC 1322(b).

And because of all these variances, much confusion has developed.

I understand that the ability to cram down the first mortgage to the market value on the primary residence has passed the House of Representatives, it failed in the Senate.  However, I have spoken to attorneys who were able to get first mortgage cram downs approved in hardship situations.  (Note: The key word here is: hardship.)

Therefore, to help me with my research, I would sincerely appreciate you taking a moment and let me know how mortgage cram downs are handled in your jurisdiction.  I will accumulate the information and write a future article that contains a summary of my research.  Hopefully, together, we can determine the cause of this confusion and work in the best interest of protecting the debtor.

You can submit your response either by replying to this post or email your response privately to me at victoriaring1958@gmail.com

Victoria Ring Chapter713Training.Com http://www.chapter713training.com and http://www.mybankruptcyschool.com

Homeowners = Losers and Lenders = Winners

Many bankruptcy attorneys that we prepare petitions for are normally apprehensive regarding cram downs and strips downs of mortgages. Although I have written many articles about these topics, one angle I have not covered before is the angle of NOT proposing cram downs or strip downs at all. This is great news for those bankruptcy attorney practicing in states where they encounter problems with the courts when they try to propose cram downs and strip downs to help their debtors. Read the rest of this entry »

Mid-Week Bankruptcy Case Review – Issue 01

Issue 01 – October 20, 2010

This is the first issue of a new publication I plan to publish each week.  The information in this publication is made possible by the Chapter 7 and 13 bankruptcy petition reviews we do for attorneys nationwide.  We felt by sharing this information with other attorneys and law firms, it will help them to pick up specific tips and techniques to help them in their practice.  I hope you enjoy the case review this week that follows.

CRAM AND STRIP DOWNS

Some attorneys make the mistake of assuming that all mortgages are eligible for cram and strip downs.  First, we need to establish the fact that cram and strip downs have not been written into law and it is up to each bankruptcy court as to whether they accept them or not.

But let us suppose that cram and strip downs are permissible in your bankruptcy court.  The next step is to qualify the debtors.  Qualifying the debtors for a cram and strip down on their mortgage could take in a wide range of possible scenarios depending on the situation the debtors are in.  This week we encountered a situation where the debtors were unable to qualify for a cram and strip down so I wanted to share it with you.

THE CASE OF BOB AND SUE

The debtors (let us call them Bob and Sue) had their home appraised for $275,000.  They owed $200,000 on the first mortgage and $150,000 on the second.  The attorney asked us to prepare a Chapter 13 and propose a cram and strip down for the primary residence.

Now although we are paralegals and the final decision is always given to the attorney, we do warn attorneys when possible objections could occur based upon our many years of experience.  The main reason the cram and strip may not work for Bob and Sue is because they have $275,000 of SECURE property.  If the bankruptcy court seized the home and sold it for $275,000, they could completely pay off the first mortgage company and still have $75,000 left over.  This also means that since $75,000 is left over, the second mortgage company would be able to claim that as SECURE also.  The only amount of the mortgage debt that is underwater and UNSECURED is $75,000 of the second mortgage.

We suggested to the attorney to propose paying $275,000 as secure and $75,000 as unsecured, non-priority inside the Chapter 13 Plan.  This still saved Bob and Sue a great deal of money but it was not the $200,000 they had originally anticipated.  (Note: I am still amazed at how people work to push the bankruptcy system in their favor. Many people today appear to not understand what is meant to act in a fair and moral manner; but this is just my personal opinion.)

OTHER REFERENCES

Pre-Qualifying Debtors for a Mortgage Cram Down http://chapter7and13bankruptcyblog.com/archives/710

How Banks are Viewing Cram Downs Proposed in Bankruptcy http://chapter7and13bankruptcyblog.com/archives/18

Mortgage Cram and Strip Down Questions and Answers http://chapter7and13bankruptcyblog.com/archives/24

Recommended Book on Foreclosures from The National Consumer Law Center http://shop.consumerlaw.org/foreclosures.aspx

DO YOU NEED A BANKRUPTCY PETITION REVIEW?

You can save a great deal of money and ensure you have a well-detailed Chapter 7 or 13 bankruptcy petition before filing.  Here is how it works:  You prepare the petition with as much detail as possible. But before filing the petition, email it to us (PDF or Best Case format) and we provide you with a complete petition review.  This review is provided on the telephone and if a visual is needed for training purposes we will provide that at no additional charge. The costs are only $200 for a Chapter 7 and $275 for a Chapter 13.  To schedule your bankruptcy petition review call Victoria Ring at 719-659-0743.

Talk to you next week ….

Victoria Ring My Bankruptcy School http://www.mybankruptcyschool.com

Good News for Bankruptcy Attorneys: Loan Modifications May Be Automatic for Your Client When the Bankruptcy Petition is Filed

I can remember a time (less than 2 years ago) when proposing a loan modification to a mortgage company meant hiring an expert who could work the system internally with their established contacts. But today, more than 80 percent of the mortgage companies are bending over backwards to give debtors loan modifications when they file bankruptcy and often before the 341 Meeting of Creditors. Read the rest of this entry »

Pre-Qualifying Debtors for a Mortgage Cram Down

I had two attorneys this week send us bankruptcy cases where they wanted to propose a Cram Down on the FIRST mortgage and a Strip Down of the SECOND because the house was underwater. Unfortunately, both of the bankruptcy clients were not eligible for a cram down. I had to call both attorneys and let them know. They were shocked and were not aware that pre-qualification was necessary to propose a mortgage cram down and strip. This is when I decided to write this article to help other attorneys and their law firms. Read the rest of this entry »

Understanding the New Foreclosure Proposal by President Obama

— a perspective for the Chapter 7 and 13 bankruptcy professional

On February 25, 2010, President Obama proposed a bill that would prohibit foreclosures on home loans unless they have been screened and rejected by the governments Home Affordable Modification Program, also known as HAMP.

At the present time, companies have the ability to proceed with foreclosure actions against homeowners, even though they have registered with HAMP.  However, the proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan.

DOES THIS INCLUDE ALL HOME LOANS?

No.  Only home loans that are owned by Fannie Mae and Freddie Mac are eligible for this preferential treatment.  However, President Obama has asked the major banks to grant more loans to American citizens since it was all of us who donated the billions of dollars to save the banks less than 2 years ago; but that is a separate story.

HOW DO YOU KNOW IF A HOME LOAN IS OWNED BY FANNIE MAE OR FREDDIE MAC?

At the present time, if a mortgage loan is owned by Fannie Mae or Freddie Mac, the borrower may be eligible for a Home Affordable Refinance to take advantage of lower interest rates.  To find out if a loan is owned by Fannie Mae or Freddie Mac, visit: http://www.makinghomeaffordable.gov/loan_lookup.html

Additional eligibility requirements are provided at: http://www.homeloanlearningcenter.com/files/HAMPEligibilityRequirements.pdf

SUGGESTIONS FOR USE OF THIS INFORMATION WHEN PREPARING BANKRUPTCY PETITIONS

Bookmark the http://www.makinghomeaffordable.gov/loan_lookup.html website.  Make sure you add this to the links you use for online searches.  That way, when you start a new petition where the debtors are homeowners, you should automatically run the property address through both Fannie Mae and Freddie Mac to see if the home loan is owned by these two entities.  If so, alert your attorney to this at once by providing him or her with the Eligibility Requirements document referred to above.

The debtor may be eligible for a loan modification which may prove more advantageous than using the cram down or strip down method.  Because every bankruptcy petition is unique and different, you need to have a wide variety of options and resources available to you so that the attorney can utilize the best and appropriate action that is in the best interest of the debtor.

REFERENCE:

Direct link to Bloomberg news article: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahuuwBS8KYq8

How Banks Are Viewing Cram Downs Proposed in Bankruptcy

Dear Victoria Ring:

Thanks for all you do.  And I appreciate the information you provide to us.  I just wanted to add that I currently work for a major bank.  I work with borrowers with defaulted business loans.  And let me tell you that on a lot of the deals we have, I have seen quite a few attorneys propose cram downs.  And a lot of our mortgages have been stripped off because there is no equity in the home.

One of the things we talk about all of the time is why many other attorneys are not doing this.  It is a great tool for the consumer.  No additional litigation is involved.  Once an attorney files the motion during the proceeding, it is up to the trustee.  We do not file responses to these requests.  Especially if there is no equity in the home.  And banks and mortgage lenders know that the bankruptcy court favors the debtor.  We have never been successful in blocking these.  You have to remember the cost that the banks incur in pursuing foreclosure or trying to liquidate the collateral.  We weigh the costs.  Banks make no money on homes they have to take back.  You may find that you will get more with negotiating with the lender too.  The attorney for the debtor is in a greater position than attorneys for the banks.

We knew that most of the mortgages we took at loan inception were abundance of caution.  And unfortunately, many people are filing for bankruptcy and having their debts discharged.  But if they do not do anything to release the liens on their home, then they still end up paying when there is equity in the future or if they want to sell their home.  As long as the lien stays on the home, you are basically giving the banks a long term investment.

I can tell you that many of our borrowers who filed for bankruptcy and were discharged are stunned when they see our lien is still on their home.  And the only way we will release it is if they give us all of the available equity in their house.  I just had a deal where the borrowers had filed for bankruptcy several years ago.  Unfortunately, the attorney did not contest our lien or ask that it be removed.  If the attorney had done this or at least proposed a settlement, we would not be in the great position we are now.  As opposed to getting $25,000 several years ago, we are now looking at almost $80,000.  The owners are senior citizens.  If they ever decide to sell their home, they will have to deal with the fact that we will be getting the bulk of the proceeds.  I believe they assumed when they reaffirmed the first mortgage, that ours was released.  And that was not the case.

From what we have seen, many trustees and bankruptcy judges side with the debtor in these cases.  We do everything we can by filing a proof of claim.  But at the end of the day, if there is no equity available at the time of filing (or equity of sizable value), we anticipate having our mortgage stripped and being put in the category of unsecured creditor.  That is why I am happy to see you offering this training to VBAs and attorneys.  Proposing this makes you a much added value to your clients.    So, for all of the attorneys who fear the drawn out litigation with mortgage lenders and banks, there is no need to worry.  You have to remember that banks have to pay outside attorneys.  And I can tell you that we just as soon not have to pay attorney fees fighting for properties that have little value.  I would tell them to do what is best for the consumer.  They are hiring you for your help.  So I implore them to pursue every avenue possible.

Crystal Brooks Email:  clbrooks67@comcast.net

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Mortgage Cram Down and Strip Down Q and A

The following questions and answers were submitted to Chapter713Training.Com either at a teleconference or by email during this past week. The answers are provided by Victoria Ring who is not an attorney.  Therefore, the information provided in this material is for training purposes only and no whole or part should be regarded as legal advice.

QUESTION

How successful have the attorneys you work for been in confirmation of a proposed strip down?

ANSWER

An attorney I work for as a virtual assistant in Victorville CA has been successful in the confirmation of two Chapter 13s where a strip down of the second mortgage was proposed.  As soon as the attorney provided me with this information I quickly developed training materials to teach other attorneys how it was done.

Additionally, the Central District of California Bankruptcy Court began offering classes to teach attorneys how to be successful in proposing strip downs.  This fact alone confirms the information I have been blessed to be privy to.

QUESTION

How successful have the attorneys you work for been in confirmation of a proposed cram down?

ANSWER

I have personally worked on only one case where an attorney in Ohio was successful in getting a cram down of the primary residence confirmed.  The mortgage company was Washington Mutual and the attorney filed the case during the same time they were transitioning.

However, I have talked to attorneys in Texas, Florida and Missouri who have discussed cases with me where they have been successful in negotiating cram downs and saving their clients money.

Again, as soon as I learn about something that can benefit the debtors I tell you about it through my articles and training products.  However, I cannot guarantee that all cram downs and strips downs will be successful.  That would be impossible and illogical for me to even try and attempt.

QUESTION

If a strip down of a mortgage is confirmed, what will be the outcome at the end of the 3 or 5 year Chapter 13 plan period?

ANSWER

No one knows.  The law could change at any minute or change 100 times between now and then.  I believe this question would even be unpredictable by President Obama at this time.

QUESTION

I am an attorney and I feel very uneasy about proposing a cram down or a strip down.  I am afraid that it would cause additional litigation with the mortgage company and perhaps cost me more than I charged the client for the petition.  Do you have any suggestions to ease my fear?

ANSWER

There are a couple of good choices available to you that you may want to consider:

1.  If you propose a cram down or a strip down and the mortgage company files an Objection, this would open door for negotiation to still save the debtors a great deal of money.  Once a number was reached, the attorney would charge the client for this negotiation and enter into an Agreed Order with the mortgage company.

2.  If you propose a cram down or a strip down and the mortgage company files an Objection, you can simply change the figures on Schedule A and file an Amendment if you are too timid to negotiate on the debtors behalf.

Remember, all creditors must file a Proof of Claim.  Most attorneys I have worked with who propose cram downs and strip downs will monitor the case on PACER and look for any Proof of Claim filed by a mortgage company.  They compare the claim amount stated by the mortgage company with the cram down amount proposed in the Chapter 13 Plan.  At this stage, the attorney contacts the attorney for the mortgage company and begins the negotiation process to come to an Agreed Order.

QUESTION

Can I propose a cram down or a strip down for every client?

ANSWER

Not at this time.  From the teleconferences I have listened to, taught by judges and attorneys; cram downs and strips downs are only approved in HARDSHIP cases until the Senate passes the proposed Bill.  In other words, if a debtor can afford to pay back more than the first mortgage, a strip down is then paid back as UNSECURED.  If the debtors income is considered hardship and they file a Chapter 13 (demonstrating their ability to at least try and pay back all they can afford) cram downs and strip downs are often normally confirmed.

QUESTION

Can you guarantee that my proposed cram down and strip down will work?

ANSWER

Of course not.  No one can.  The goal here is to TAKE A CHANCE to help keep homeowners in their homes.  A cram down or a strip down may or may not work at this period in time.  It is a chance you take.  If you do not want to take the chance, and are not willing to take that extra step of CARE for your clients, then do not propose a cram down or a strip down and call it a day!!

QUESTION

I am a publisher for the creditor side of bankruptcy. I heard that you are teaching debtor attorneys how to reduce mortgages.  Could I interview your attorneys for my book?

ANSWER

I will tell you the same thing I told this person:  Proposing cram downs and strip downs are something that attorneys must TAKE A CHANCE in proposing.  I am NOT an attorney.  I am a paralegal training instructor; which means that I would never tell people that cram downs and strip downs work in every case and without any snags or problems.  The information I am teaching at this time will change at any minute.  The Bill is currently before the Senate; therefore, we only have a SMALL WINDOW of time to use these training methods and they will become obsolete.  Publishing this information in a book is worthless because it will be out-of-date before the book is printed.

SUMMARY

Please STOP taking my drive to KEEP CONSUMERS IN THEIR HOMES and turning this into a she-said, he-said scenario.  I realize that the legal world does this almost spontaneously (which is why I chose to leave the confines of a back-biting office staff environment long ago.)  But I wrote this article to help attorneys to stop thinking about all the bad things that can happen and TRY to help your clients.  Even if you should fail with some cases and excel in others, at least you know you did your best and provided your clients with the best possible service you can.

I wish all of you a beautiful Christmas holiday and peace of mind.

Victoria Ring Certified Paralegal and Training Instructor