Morgenson At The NY Times Isn’t Telling The Whole Story

A couple of weeks ago, Gretchen Morgenson at the New York Times ran a piece about how JPMorgan Chase and Bank of America were forgiving mortgage debt on second mortgages that had already been discharged as part of bankruptcies filed by homeowners.  Everyone from activist websites like Fire Dog Lake to Max Keiser picked up the piece and put their spin on it. Basically, everyone assumed it was some type of elaborate accounting trick or scam.  Max Keiser did have the best quote of them all by saying, “I’m from JPMorgan and I’m here to help.”  

The blogosphere was a buzz about the “debt that wasn’t there” and in their haste to pounce on Jamie Dimon and Brian Moynihan they forgot to mention one fact.  In most cases, the debt is still attached to the property.   Morgenson found Neil Crane, the one attorney in Connecticut who apparently doesn’t understand the difference between a mortgage and a note.

“I never thought in my wildest dreams that the banks would do this properly,” Mr. Crane said last week. “But I think it’s really wrong to be foreclosing on mortgages you don’t own and relinquishing debt you don’t own.”

As I sat down to write about how everyone seems to be analyzing bits and pieces of this article instead of the whole thing, I learned Martin Andelman at ML-Implode was working on a similar piece and in the spirit of competition, he decided to one-up me and got a quote from bankruptcy and foreclosure guru, Max Gardner. Since you can’t get any better than Max Gardner, I’ve decided use the same quote (with a link to Martin’s piece) because it adds a little clarity,

“Chapter 7 will cancel the personal debt on the note but not the lien on the real estate.  In a Chapter 13, we cannot modify a first mortgage on the primary residence but can strip away the 2nd if there is no equity above the first mortgage.  However, the holder and owner of the 2nd is under no legal duty to cancel the 2ndmortgage of “record” until the debtor completes the plan and secures the discharge. So, do these acts of simply canceling the 2nd help, even in bankruptcy, yes.”

What most people don’t understand and what most bankruptcy attorneys don’t explain is that all a bankruptcy will do is delay a foreclosure.  A bankruptcy will not put a permanent stop on the foreclosure because even though the debt has been erased, the lender still has a lien on the property in form of a mortgage that can still be enforced.  This means the lender can come back after a bankruptcy and either demand the homeowner refinance the mortgage through them (no one else will do it) with a high interest rate or they proceed with foreclosure.  I have had clients who finally begin putting their lives back together and are shocked when out of the blue their mortgage servicer initiates a foreclosure action months or even years after the Chapter 7 or Chapter 13 has been discharged.

What Morgenson glosses over in her in her piece, is that Bank of America and JPMorgan Chase are discharging any recorded second mortgages from the public record that are attached to any notes that have been discharged as part of a bankruptcy.  This officially clears the mortgage from the title to the property.  As Morgenson points out, “Releasing the liens provides a benefit to borrowers when they go to sell their homes”

Kelli Meeks, a bankruptcy and foreclosure defense attorney in Ann Arbor, Michigan says that removing a second lien from title really doesn’t matter unless there is equity in the property and adds some more clarity to Morgenson’s article:

“Their “kind offer” to release the second mortgage lien is absolutely meaningless if there is no equity in the property.  If a Chapter 7 Debtor has a first and second mortgage, the debtor’s personal liability to pay is discharged in the bankruptcy.  The lien holders still have the right to pursue their foreclosure remedies under state law.  However, the second lien holder in the current market nearly always would get nothing because market value of most homes is less than what is owed on the first mortgage.  So for Chase and Bank of America to say they are “generously offering to extinguish those liens” is generally meaningless as (1) the debt is already gone having been discharged in the Chapter 7 and (2) a foreclosure would result in no proceeds going to the second lien holder.  So it is an illusory benefit to the homeowner/Chapter 7 debtor for Chase and Bank of America to suggest that releasing the 2nd lien is somehow a generous gift.  Sure, the lien could otherwise remain in place for years and if the debtor continues making voluntary payments on the 1st mortgage loan, that lien holder won’t foreclosure.  If and when the debtor decides to sell the property someday, if there is then equity in the home, any proceeds would have to go toward the 2nd lien to prevent that lien holder from pursuing its foreclosure remedies.  However, has anyone ever seen that happen?!!”  

After reading this article a second time, I noticed Morgenson made a comment about Jackie Esposito at the bottom of the article,

“AS for Ms. Esposito, she said she found the bogus loan forgiveness letter from Chase especially upsetting because of the years she has spent trying to have the bank modify her first mortgage. She pays 9 percent on her loan and cannot refinance it into a lower-rate mortgage, given her recent bankruptcy.  Chase won’t help her modify her loan, Ms. Esposito said, but it is happy to help by forgiving a loan that has already been discharged and releasing a lien that is already gone.”

This got me to start to thinking about Jackie Esposito’s situation. If she filed for bankruptcy in 2009, her second mortgage was wiped out in her BK and Chase didn’t modify her first mortgage (now her only mortgage) then what was purpose of the bankruptcy? It sounds like there is more to this story than Morgenson or Neil Crane are telling us.

Original linkOriginal author: Steve Dibert