Cramdowns & Lien Stripping Of Home Mortgages Under Existing Bankruptcy Law

Buried at the end of a recent story in The Wall Street Journal contains an excerpt referencing how the existing bankruptcy rules can be used when stripping second mortgages from "underwater" real estate(1) (either owner-occupied or investment properties), and how the current bankruptcy cramdown rules (unless changes currently under consideration are enacted) can only be used to modify (ie. cramdown) existing first mortgages on investment properties and not those that are owner-occupied:

• Samuel Schwartz, a Las Vegas bankruptcy lawyer, has a client who is facing foreclosure on her primary residence even though she has been able to modify the loans on her two investment houses. Under the current bankruptcy rules, she was able to "strip away" the second mortgage on one of the investment homes and she "crammed down," or reduced, the principal balances on the first mortgages for both rentals -- reducing her combined loan balances to a total of $355,000 from $590,000.

• She was also able to strip away the second mortgage on her primary residence but couldn't modify the first mortgage. That mortgage, Mr. Schwartz said, is more than $100,000 above the current value of the property. Thus, she still may lose her own home. Under the [proposed] new law, her first mortgage on her home also could be modified.

For the story, see Power to Modify Mortgages Sits Well With Judges.

(1) Property that is worth less than the amount owed on the existing mortgage(s) encumbering the real estate.