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BofA Underwater Mortgage Cases Hit Supreme Court

Philip R. Stein

The U.S. Supreme Court will hear two cases brought by Bank of America regarding whether a second mortgage on an underwater property can be voided during Chapter 7 bankruptcy. Both cases involve Florida homeowners who sued to void second mortgages when the debt owed to the holder of the first mortgage exceeded the value of the property.

Specifically, Bank of America is seeking to overturn rulings allowing homeowners to wipe out all liability on a second mortgage through bankruptcy liquidation proceedings, a practice known as “stripping off.” The U.S. Court of Appeals for the Eleventh Circuit, based in Atlanta and having jurisdiction over Florida, Georgia, and Alabama, issued the rulings that Bank of America is appealing. Bank of America says hundreds, if not thousands, of homeowners in those three states have sought to strip off the liens on their second mortgages.

Meanwhile, other federal appeals courts around the country, including the Fourth, Sixth and Seventh Circuits, have refused to let homeowners wipe out second-mortgage debt in bankruptcy liquidation proceedings. This disagreement among the various Circuit Courts has led to some degree of confusion on the part of the bank, attorneys and homeowners, and warrants resolution by the Supreme Court.

The Supreme Court’s decision to hear these cases is somewhat of a departure from prior practice, when the Court has refused to hear cases involving mortgage finance issues, including declining to hear a 2013 case in which an institutional investor claimed Goldman Sachs made material misrepresentations and omissions in offerings of mortgage-backed securities, and a 2011 case brought against Mortgage Electronic Registration Systems by a California resident. The Supreme Court, did, however, agree in recent years to hear two cases testing the federal government’s use of the “disparate impact” theory in claiming violations of “fair lending” laws. Those cases were resolved via settlement before being argued to the Court.

The cases appealed by Bank of America are Bank of America v. Caulkett, 13-1421, and Bank of America v. Toledo-Cardona, 14-163. A decision is due by the end of June.

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