Mortgage "Cram Down"...

[ez1973]

Hi. We just filed (2/1/11) chapter 13, and when I was reading the filing I saw the part about the secured debts (mortgages) and how the owed portion above the value of the home could become unsecured and rolled into the plan. Here is a quick rundown of my situation...

3 mortgages. The first is $91000. The second is $86000, and the 2nd second is $145000 for a total of approximately $322000 owed. According to Zillow.com and other comps the home is worth approx. 250-260k.

When I brought this up to my attorney he informed me of the possibility of a "cram down" in which the 86k mortgage could become unsecured and rolled into the plan. However, he said the entire portion of the $86k mortgage has to be unsecured in order to do that, meaning the home would have to appraise for less than $236k ($91k + $145k). Those are just principal amounts owed not including the arrearages that will be paid back through the plan. He said that even if the home did appraise for less, the mortgage company would then perform their own appraisal and it could still be a battle.

My questions are, do I pay for the appraisal and hope it comes in low? Is my attorney correct that it has to be completely unsecured and we can't at least cram down the portion above the appraised value of the home? If I can't go this route will the mortgage company be willing to modify payments (all 3 owned by BOA) now that I am filing 13?

If I do get an appraisal, the attorney said it needs to be real soon being that my 341 meeting is scheduled for 3/24.

Thanks in advance for any insight...

[despritfreya]

According to your post you have three mortgages in this order:

$91,000.00 - 1st mortgage
$86,000.00 - 2nd mortgage
$145,000.00 - 3rd mortgage

Is this correct as your post is a bit confusing? If it is, you cannot strip off any mortgage if your property is worth between $250,000.00 and $260,000.00. The first 2 mortgages total $177,000.00. For you to get rid of the bigger 3rd mortgage through a bk, the appraised value would have to be below $177K.

The proper term is "strip off" of a wholly unsecured lien. You cannot cram down (reduce the 3rd mortgage secured portion down to the value of the lien - approx. $73k in this situation) a mortgage that is solely secured by your principal residence. Therefore, if your property is worth $255,000.00 you cannot get rid of any of the mortgages as there is some equity to support the 3rd.

For you to strip off the 3rd, the value of the home can be no more than the combined debt to the 1st and 2nd. And, if you get an appraisal that is even close to that amount you can bet the 3rd will get its own appraisal that is over that amount. The judge will simply average the 2 appraisals and, if there is 1 cent of equity after consideration of the 1st & 2nd, you are stuck with the 3rd - at least as it relates to bankruptcy law.

Even if the $145k loan was in 2nd position (again your post is confusing) unless your appraisal is below $236,000.00 and the 3rd ($86K) either rolls over or obtains an appraisal similar to yours, if there is 1 cent of equity, no deal under bk law.

The question for you is - do you want to spend the money to fight this issue? Only you can make that decision.

Des.

[ez1973]

Thanks, I think that pretty much answers my question. I know it is a confusing situation having three mortgages. I originally took out a second (heloc) for 90k. I borrowed against it and when I came close to the limit, BOA contacted me with an offer to extend it to $145k. I was under the assumption that the 90k line was being paid and closed and replaced by the 145k line(leaving me with an additional 55k to use). In reality they treated it completely seperate and never paid off the 90k line. I continued to draw against the 145k line until it was maxed and I am in the situation I am in now.

I still wonder if there is something else I could do to have the second reduced due to BOA's unscrupulous lending practices...

Thanks again!!

[BKParalegal]

Not unscrupulous you apparently signed without reading and spent the money, I am not trying to attack but blame your mistakes on others. Not healthy. You are so far upside down on this house that I don't seeing you breaking even for many years. Best to take full advantage of the BK and surrender the house. Don't make an emotional decision that you will pay for years.

You can buy a new house in 2 years or so.

Good luck

[HHM]

A more fundamental question...is this your primary residence or an investment property.

I am forced to agree with BK paralegal...I mean really, you ran up the line of credit and over the months it took you to do it, you never figured it out...not likely.

There are phases to financial distress just like severe illness
Denial, anger, bargaining, depression, and acceptance.

My sense is you are somewhere between denial and anger as you want to shift blame. Not being judgmental, but hopefully providing an objective perspective.

In reality, it is impossible to do a cram down on a primary residence (as in the BK code does not permit it), and for investment or second properties it is practically impossible to do a cram down over trustee objection. A lien strip is POSSIBLE if the house is worth less than the primary mortgage(s). Sounds like this house is toast...not even worth saving. Banks are NOT doing principal reductions.