Dual Tracking is the industry name for the practice of letting a foreclosure case tick on even while the homeowner seeks to modify their mortgage loan. The idea is simple: the Bank will take whichever solution comes through first – a modification or a foreclosure. The problem is that the Bank holds all the cards: the Bank’s Loss Mitigation Department decides how long it takes to review and approve an application to modify your loan, while the Foreclosure process in Court has been greatly simplified and streamlined for the benefit of the Banks. Illinois mortgage foreclosure laws, even Illinois Supreme Court Rules, now permit foreclosing banks to roll over homeowners and get to a judgment.
If you live in Illinois you know that the Economy has been sputtering: struggling valiantly but with little to show for it. Case in point: Is your home still underwater? For most people the answer is still yes – even as markets around the country rebound. So today we address a deceptively simple question: What is a mortgage and how does it work? Why don’t mortgages relate to the value of our homes? Here are a few things to consider: a mortgage is a loan secured by real estate. While the term “mortgage” is used colloquially to refer to both the loan and the security, there are actually 2 separate legal documents at work here: a Note and a security instrument – the Mortgage lien.
Note: When money is borrowed to purchase real estate, some States title the underlying property in the name of the Lender and permit that interest to hypothetically transfer over time to the Borrower. The arrangement is a bit like lay-a-way. These States are using the “Title Theory.” But Illinois, like many other States, places the underling property in the name of the homeowner and gives the Lender a lien on the owner’s interest – these States are using the “Lien Theory.”
On February 9, 2015 the Bankruptcy Court for the Northern District of Illinois, Eastern Division ruled in the case of Brandt vs. Rohr-Alpha, a case involving fraudulent transfers and whether certain debts can be avoided in Bankruptcy.
What is a “Fraudulent Transfer?”
A pre-petition payment is avoidable as constructively fraudulent according to 548(a)(1)(B) when the Debtor:
- Transfers property or an interest in property;
- Within the 2 years preceding its bankruptcy;
- Got less than reasonably equivalent value; and
- Was insolvent or rendered insolvent as a result.
Reasonably Equivalent Value
To determine whether reasonably equivalent value was exchanged the Court must determine:
- Whether at time of transfer the Debtor received value; and, if so,
- Whether that value was equivalent to what the debtor gave up.
Yotis, a former Illinois Attorney, borrowed over $50,000 from his Client Gasunas using various tricks and subterfuge: from outright lies to misrepresentations and material omissions of fact designed to manipulate his “friend” and benefactor. Once he had the money, Yotis filed a Chapter 13 Bankruptcy.
We represent many consumers in Bankruptcy, and getting our Clients back on their feet afterwards is a big part of what we do. Often, cases are driven by upside-down home loans or even reasonable loans in which payments have become too high because the homeowner lost their job or had to take a lower paying job as a result of the Great Recession. One option for those who’ve gone through Bankruptcy and are looking to borrow again is the FHA Loan.
Before the housing bubble burst in 2008 FHA loans were considered the choice for buyers with little credit or bad credit; or an option for those with low incomes. But since everyone’s home value began falling – often taking their credit standing with it – FHA mortgages have become more widely appealing, especially when compared to conventional loans that require private mortgage insurance (“PMI”). PMI is the mortgage lender’s way of ensuring it gets paid following default. It is insurance for which the borrower pays the premium, adding to the cost of the loan.
For those considering an FHA Loan, keep these points in mind:
As a Bankruptcy lawyer I can’t count how many times people have asked why Courts won’t reduce their mortgage debt to match the deflated value of their home, or why they should pay anything on that second mortgage, line of credit, or HELOC, when they’re underwater. I even discussed these questions and the state of the law concerning lien strips in this post. Now, the very cases referred to in that post have made it to the U.S. Supreme Court and the stage is set for the battle of the lien strip cases.
Of course this all started with the Supreme Court’s 1992 Opinion in Dewsnup v. Timm that the Bankruptcy Code does not permit the cramdown of a partially secured mortgage. Some Courts took this to mean that lien-strips are a no-no. Others interpreted it to mean that lien-strips were permissible under the right circumstances. So in some parts of the country a completely unsecured second mortgage can be stripped, but only in a Chapter 13 reorganization; while in other parts it can be stripped in a Chapter 7 liquidation, too.
So, with Courts in disagreement, what’s a home-owner to do? Remember, in Dewsnup the Court ruled the Bankruptcy Code doesn’t permit mortgages to be written down to the value of the home – even though that practice, known as the cram down, is acceptable as to vehicles. Ironically, one of the Court’s primary concerns in Dewsnup was to prevent windfall gains to home-owners who strip away their loans, then enjoy the profits as their homes rise in value.
Recently I got an e-mail from the newly-formed Consumer Financial Protection Bureau (CFPB). You remember the CFPB, right? No? That’s alright. But you probably remember the agency’s public face, now-Senator Elizabeth Warren of Massachusetts.
So, after coming out of the shoot a few years with the President’s blessing and much fanfare, the CFPB has released the first of several consumer-friendly web-based guides. This one is its Guide to Owning and Buying a Home.
The 3 primary resources offered on the CFPB site are:
So you’re doing business as usual and notice that payments from your customer are getting later and later. Turns out that customer is struggling to navigate in the sputtering economy. Waiting for your money is bad enough; but what if you receive a demand to refund what you’ve been paid? And not because of anything you’ve done but because your customer has filed for Bankruptcy?
Sound like a nightmare? Actually, it happens everyday. So what do you do if you’re next? That was the question addressed in the recent New York case of Davis vs. Clark-Lift, in which a reorganizing Chapter 11 Debtor paid vendors later and later as it listed towards Bankruptcy. But even those lucky creditors who got paid could not escape the demand of the Trustee (Davis) to fork over what they had received.
As the Court in Davis explained, to set aside a payment as a “Preferential Transfer” under Section 547(b) of the Bankruptcy Code the moving Creditor or Trustee must established that the Debtor made it: