JUNIOR SECOND LIEN STRIPPING, HAMP 2MP MODS AND BANKRUPTCY UPDATE June 2015
JUNE 2015 UPDATE RE JUNIOR (SECOND) LIEN STRIPPING APPLIED TO HAMP HOMEOWNERS (2MP HAMP), & BANKRUPTCY!
HAMP 2MP May Lessen First and Second Lien in Bankruptcy: Contrary to general (legal) knowledge, the filing of bankruptcy does not preclude a borrower from obtaining a HAMP cure option on his/her first and or second (2MP) mortgage lien, even on the continuation of respective Trial Period Plans (TPP). Under HAMP 2MP, the bank/servicer has an obligation to review the borrower’s second lien, offer a trial period on same, and or extinguish or reduce payments on it (rate/principal/term waterfall) in proportion to the HAMP granted first lien.
Analyzing a junior or second lien stripping issue (ala the concept to strip off, strip down, or cram down), in the context of a homeowner borrower, would not be complete without respecting the HAMP/2MP regulation directives. 2MP would potentially extinguish or lessen the junior (second) lien by payment, interest rate, and or principal. The recent U.S. Supreme Court commercial lender case (Bank of America v. Caulkett, June 1, 2015) does not supply a blanket prohibition precluding a homeowner borrower from extinguishing his/her junior (second) HAMP mortgage lien under HAMP 2MP- holding: “A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code. Pp. 2–7.” This recent case was not a challenge to HAMP/2MP borrowers, and does not limit the application of HAMP/2MP (in bankruptcy court). Once invoked by the borrower (trustee), the bankruptcy court (trustee) must properly apply the HAMP/2MP regulation directives, which include the lessening of the second mortgage lien in proportion to the granted HAMP first lien.
HAMP regulations state that HAMP protections and cure options, which expressly include HAMP 2MP process and solutions, are allowed in bankruptcy. Therefore, HAMP/2MP regulations supply borrowers’ protections in and out of bankruptcy - as defined in the HAMP/2MP regulation directives – according to bankruptcy procedural rules. Thus, proper bankruptcy administration requires compliance with HAMP/2MP. HAMP/2MP regulation directives must be respected in both the bankruptcy and non-bankruptcy context. The only requirement is that the borrower must request the bankruptcy court and or trustee to apply HAMP/2MP. Once he/she makes that request, HAMP/2MP is invoked and HAMP must be administered accordingly. See "Supplemental Directive 09-05 Revised March 26, 2010 Update to the Second Lien Modification Program (2MP); 2MP Supplemental Directives: Supp Dir 0905 *August 13, 2009 and Supp Dir 0905R *March 26, 2010 for Details.
Supplemental Directive 10-02 March 24, 2010 Home Affordable Modification Program – Borrower Outreach and Communication
Borrowers in Bankruptcy Borrowers in active Chapter 7 or Chapter 13 bankruptcy cases must be considered for HAMP if the borrower, borrower’s counsel or bankruptcy trustee submits a request to the servicer. With the borrower’s permission, a bankruptcy trustee may contact the servicer to request a HAMP modification. Servicers are not required to solicit these borrowers proactively for HAMP. Borrowers who are in a trial period plan and subsequently file for bankruptcy may not be denied a HAMP modification on the basis of the bankruptcy filing. The servicer and its counsel must work with the borrower or borrower’s counsel to obtain any court and/or trustee approvals required in accordance with local court rules and procedures. Servicers should extend the trial period plan as necessary to accommodate delays in obtaining court approvals or receiving a full remittance of the borrower’s trial period payments when they are made to a trustee, but they are not required to extend the trial period beyond two months, resulting in a total five-month trial period. In the event of a trial period extension, the borrow er shall make a trial period payment for each month of the trial period, including any extension month. When a borrower in an active Chapter 13 bankruptcy is in a trial period plan and the borrower has made post-petition payments on the first lien mortgage in the amount required by the trial period plan, a servicer must not object to confirmation of a borrower’s Chapter 13 plan, move for relief from the automatic bankruptcy stay, or move for dismissal of the Chapter 13 case on the basis that the borrower paid only the amounts due under the trial period plan, as opposed to the non-modified mortgage payments. Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible for HAMP. The following language must be inserted in Section 1 of the Home Affordable Modification Agreement: “I was discharged in a Chapter 7 bankruptcy proceeding subsequent to the execution of the Loan Documents. Based on this representation, Lender agrees that I will not have personal liability on the debt pursuant to this Agreement.” Borrowers are also able to modify their second liens in the new HAMP 2MP program: Borrowers in Bankruptcy
Borrowers in active Chapter 7 or Chapter 13 bankruptcy cases are eligible for 2MP if the borrower, borrower’s counsel or bankruptcy trustee contacts the servicer to request consideration. With the borrower’s permission, a bankruptcy trustee may contact the servicer to request a 2MP modification. Servicers are not required to solicit these borrowers for 2MP when they are under bankruptcy protection. Borrowers who are currently in a trial period plan and subsequently file for bankruptcy may not be denied a 2MP permanent modification on the basis of the bankruptcy filing. The servicer and its counsel must work with the borrower or borrower’s counsel to obtain any court and/or trustee approvals required in accordance with local court rules and procedures." "Supplemental Directive 09-05 Revised March 26, 2010 Update to the Second Lien Modification Program (2MP) For the full HAMP Supplemental Directive, go to: https://www.hmpadmin.com/portal/programs/directives.html Where the borrower filed the bankruptcy pro se, (without an attorney), it is recommended that the servicer provide information relating to the availability of a HAMP modification to the borrower with a copy to the bankruptcy trustee. This communication should not imply that it is in any way an attempt to collect a debt. Servicers must consult their legal counsel for appropriate language. Borrower Lawsuit Rights: Wrongful Collections; Rosenthal; FDCPA: If HAMP/2MP prohibit foreclosure (or collection of said mortgage debt(s)) during the HAMP process (including bankruptcy), then the Servicer does not have a right to foreclosure or collection of the second lien at times during the pendency of the HAMP/2MP process/protections. If the Servicer fails to properly apply HAMP and or 2MP, and or wrongfully asserts collection threats – at a time when it was prohibited - for any reason including HAMP/2MP/HAFA, then the borrower may enforce its rights against the Servicer. In California, such collection conduct may also be wrongful under the Rosenthal Act (RFDCPA with FDCPA remedies).
CA Attorney Author: Rich Rydstrom, Esq. www.RydstromLaw.Com; 1-877-WIN-4-YOU™ - New California HAMP Precedent; West Appeal Wins HAMP Wigod Rights to Sue in Superior Court CA; Demurrer Opposition, Complaint and Appeal Brief by Attorney Rich Rydstrom