In our December 8, 2014 Newsletter, we discussed the possibility that the U.S. Supreme Court would come to the aid of Wayne County Homeowners and permit the "strip off" of a second mortgage. What is not widely known is that the Bankruptcy Court for the Eastern District of Michigan has taken the lead in helping homeowners to obtain loan modifications. The loan modification process currently takes place only when the homeowner files a chapter 13 bankruptcy. The loan modification process is not dependent on whether the homeowner is behind in payments on the mortgage. It does not matter whether there has been a prior request for modification. It does not matter if there was a prior rejection to a request or whether there is an ongoing request already in process.
The U.S. Supreme Court has recently agreed to hear two Florida chapter 7 bankruptcy cases where the 11th U.S. Circuit Court of Appeals has ruled that a bankrupt homeowner with two mortgages on their home may "strip off" or "strip away" the second mortgage. The "strip off", according to the 11th Circuit, can occur where the first mortgage balance on the home exceeds the value of the home. There would be no remaining value left in the home to support the lien of the second mortgage. A "strip off' of a mortgage should be distinguished from a "strip down" or "cram down" of a mortgage. What the latter two words mean is that the mortgage's principal balance is reduced to the current market value of the property which only partially supports the second mortgage. The Supreme Court has ruled in the past that a "strip down" or "cram down" cannot occur in a chapter 7 bankruptcy. It has not yet ruled in a chapter 7 bankruptcy that a second mortgage can be "stripped off" where it is wholly unsecured.