Managing the Underwater Mortgage

{591A83C3-EE82-46D3-A0B9-F0B07F20A31C}09232011_Underwater_Mortgages_articleWhen I was growing up my father was quite the home handyman and seemingly could fix anything around our house. He used to emphasize the importance of selecting the proper tool for every job.

I like to think of my legal knowledge as a tool kit–there may be several ways to handle a particular problem, but some methods may be more effective than others. Among the most useful tools in the bankruptcy tool kit, and one unique to bankruptcy law and especially designed to help the homeowner with an underwater mortgage, is the “Mortgage Lien Strip”.

Simply put, the Bankruptcy Code allows the owner of residential, or even commercial, property to “strip” away a Second or Third priority mortgage lien if there is no equity in the property above and beyond the balance of the primary mortgage to support the subordinate lien.

Prior to 2008 I very rarely saw clients whose home was underwater–the assessed value was usually higher, often substantially more, than the loan balance. With the recession came a downturn in property values, and in some areas of Marietta and Cobb County the decline was as much as 50% to 75%.

And where I used to commonly advise clients navigating the bankruptcy process to hold on to their home as the cornerstone of an investment or retirement portfolio; in recent years I have often found myself suggesting surrender of the property where there seemed to be little or no hope of the property ever being worth more than was owed.

But where the client is otherwise in need of debt relief through the bankruptcy process, the mortgage lien strip can allow the homeowner to restore them to more or less a “break-even” position.

In order to strip a mortgage lien, the homeowner must first be in an active Chapter 7 or 13 bankruptcy proceeding.

  • The property must “appraise” for less than the balance on the primary loan. In most Northern District of Georgia courts the property’s tax-assessed value may be utilized, at least in an uncontested case.
  • A “Motion to Strip” must be filed with the bankruptcy court, and the various lenders and servicers properly served. In the majority of cases the lender or servicer of the subordinate loan elects not to oppose the motion, and an Order stripping the lien is granted by the Bankruptcy Court.
  • This Order must be filed in the real estate records of the Superior Court. Where the lender feels there is some equity in the property and the motion is opposed, often a compromise may be reached where the loan balance on the second mortgage can be reduced to reflect the actual fair market value of the property.

Neither the bankruptcy itself or the lien strip prevent the homeowner from seeking a modification of the primary mortgage loan, and I am constantly amazed at how few homeowners seek relief from a high interest rate or crippling payment before seeking bankruptcy relief.

The combination of debt relief, the mortgage lien strip and a loan modification can put the homeowner once again on the path to financial security.

Before you make any decision about surrendering your home, you should consult a professional who is experienced in loan modifications and bankruptcy law on the best course of action.

The Marietta law firm of Roderick H. Martin & Associates, P.C. has represented numerous Atlanta homeowners in successfully saving their homes, or in surrendering their homes without tax consequences.

Contact us today so we can help you make an informed decision about the best way to handle your problem mortgage debt.