In a win for banks, the U.S.'s top court Monday ruled that
underwater homeowners can't get rid of a second mortgage by filing
for bankruptcy protection.
All nine Supreme Court justices agreed that filing for chapter 7
bankruptcy protection doesn't give homeowners the power to cancel a
second mortgage when their properties aren't even worth the value
of the first mortgage.
The case involved two Florida homeowners who tried to cancel
their second mortgages from Bank of America, arguing that because a
second mortgage gets paid after the first, it is essentially
worthless. Lenders, however, fought to keep the second mortgage
liens, arguing that the debt could someday be fully paid once
property values rise.
In Monday's opinion, Justice Clarence Thomas said the court's
decision took into consideration "the constantly shifting" value of
real estate.
"Sometimes a dollar's difference will have a significant impact
on bankruptcy proceedings," he wrote in the nine-page decision.
Consumer advocates said the ruling will make it harder for
bankrupt homeowners to get a fresh start.
"Some consumers may be forced to catch up on thousands of
dollars of [payments] or lose their homes," said Carol
Colliersmith, an Atlanta bankruptcy lawyer.
Bank of America declined to comment Monday on the ruling. But
the bank's lawyers had argued that the dispute "may be the single
most important unresolved issue in consumer bankruptcy."
The 11th U.S. Circuit Court of Appeals upheld bankruptcy court
decisions that stripped Bank of America of its liens. The bank
appealed.
The dispute pitted homeowners, who saw property values plummet
during the housing crisis, against mortgage lenders and their
allies. Lending groups, including the Loan Syndications and Trading
Association and American Bankers Association, backed Bank of
America.
The AARP Inc. fought for loan cancellation, saying in a brief
that it is "far more difficult for older people to bounce back from
enormous financial setbacks" like bankruptcy or medical
problems."
Monday's opinion clarifies the rules for bankruptcy judges who
have disagreed on this issue. In 1992, Supreme Court justices
determined that a bankrupt homeowner doesn't have the power to
cancel the lien on an underwater first mortgage, but it is less
clear what power a bank with an underwater second mortgage has in
bankruptcy.
Second mortgages were far less common at the time of the U.S.
bankruptcy code's last major overhaul in 1978.
Amid the confusion, some consumer experts argued that despite
the sticking power of a lender's lien after bankruptcy, bankruptcy
should also give struggling homeowners a way to fix their
housing-related financial problems.
Last year, more than 700,000 individuals and couples filed for
chapter 7 bankruptcy, the most popular type of consumer bankruptcy,
which enables a court-appointed trustee to sell a person's property
to repay debts and then cancel the rest.
Manhattan bankruptcy lawyer William Waldner said he still sees
people who are underwater on both their first and second
mortgages.
"I don't think we have as big of a housing recovery as we
think," Mr. Waldner said.
About 2.1 million underwater homeowners had second liens at the
end of the second quarter of 2014, said lawyers for Bank of
America, citing a CoreLogic report.
Write to Katy Stech at katherine.stech@wsj.com
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