That Lien And Hungry Look
Las Vegas Business Press
10/27/2008
Homeowners upside down in their mortgages and facing foreclosure may have a new recourse. The relatively new practice of "lien stripping" is becoming a popular way to get out from under double mortgage payments and sometimes save homes. Not everyone, however, is praising the practice.
The lien removal business has increased in recent months as property values continue to sink. At least a handful of local bankruptcy attorneys are performing lien stripping for clients. One is making it a focal point of her practice.
Lawyer Dorothy Bunce has started a marketing campaign to let the public know that they may be able to drive down mortgage payments by stripping away the second or third liens on their homes. She has been sending out statements on the topic, has started a Web site, www.lienstripping.com, and has established a hot line.
Las Vegans are definitely interested, she said.
"I get three calls an hour on it, sometimes," Bunce said.
The lawyer says many people find her claims of being able to remove unpaid liens hard to believe, but she cites both bankruptcy law and a precedent-setting 2002 9th U.S. Circuit Court of Appeals decision as the basis for her mortgage-stripping practice. Nevada is under the 9th Circuit's jurisdiction. A lien, she said, has to be tied to something. Once the equity is gone in a home, there is nothing to make the lien a secured debt. At that point, separating the lien from the title becomes more of a procedural matter.
The homeowner must first file for Chapter 13 bankruptcy protection and have the lien removal approved by the bankruptcy judge. That type of bankruptcy allows the individual to repay a portion of their unsecured debts based on their income level.
Creditors don't generally oppose the motion to strip the second lien because they will walk away from a foreclosure sale with nothing anyway, if they aren't the first lienholder, she said.
"I've been doing this for a few months. The reality is, the reason we didn't see this before is that now nobody thinks there will be any equity left," she said. "We never thought this would happen."
Home equity lines of credit are typical second mortgages and, unlike many first liens, they tend to be predominantly bank loans. But bankers really don't have many options in cases where the homeowner already owes more on their first loan than the property is worth, said Bill Uffelman, president and CEO of the Nevada Bankers Association.
"I'll pay to have an attorney investigate on the second one, and we'll get nothing anyway. How much money are you going to throw away on this?" he said.
That's not to say bankers are happy about the lien-stripping practices Bunce and others are doing, he added.
"It's just an attorney doing business, obviously," he said of Bunce. "She is probably not the darling of the banking industry and she is probably not going to get work from bankers."
Homeowners are never put in Chapter 13 just to strip a lien, Bunce said. It has to be determined that they can actually save their home by removing the second or third mortgages from it.
Another personal bankruptcy attorney, Philip K. Goldstein, who also practices lien removals, agreed.
"Sometimes, I say, 'This is a very high first mortgage payment. Maybe you should walk away (from the home).' That's what they don't want to hear," he said.
And the lien-removal process is not a cure-all to mortgage woes, Bunce said.
"Even with lien stripping, they are not getting themselves in a position where there is equity in their homes," she said.
Goldstein said the option is beiing allowed more often in bankruptcy courts because the subprime foreclosure crisis has made judges view lenders in a different light.
"In my opinion, the judges are seeing a system where the mortgage companies aren't dealing fairly with consumers and Congress isn't taking action."
Goldstein said a lien can be removed, as he sees it, if it doesn't "touch" any equity, thus making it unsecured. He gives the example of a $100,000 second mortgage where there was still $5,000 in equity left over after paying off the first. That second lien couldn't be removed because it still had $5,000 in equity tied to it.
Stipulations can sometimes be put in lien removal orders to require debtors to fulfill their repayment obligations under Chapter 13 or have the liens reinstated, Bunce said.
Typically, creditors don't show up to protest the lien removal, attorneys say. That has also been the observation of Kathleen Leavitt, a U.S. Bankruptcy Court, District of Nevada trustee for Las Vegas.
Bankruptcy judges are now looking more favorably on practices such as lien removal, especially if it allows a debtor to keep their home, the trustee said.
"The values were inflated and the mortgage instruments were a little too creative. Judges aren't blind to the economy. They see the dip in prices," she said.
Lien stripping could make a major difference in stemming the tide of foreclosures, Leavitt said.
"Most people don't know about it until they see their bankruptcy attorney," the trustee added. "The only downside is on your credit history, but that is outweighed by the positive side."
Chapter 13 filings are up considerably for the fiscal year just ended Sept. 30. That 12-month period, beginning Oct.1, 2007, saw about 4,880 Las Vegas Valley Chapter 13 filings in U.S Bankruptcy Court, District of Nevada. That is up from approximately 3,200 filed during the previous fiscal year, Oct. 1, 2006 to Sept. 30, 2007, Leavitt said.
Though much-maligned lately, lenders shouldn't take all the blame for the foreclosure crisis, Uffelman said. Most borrowers, he believes, never even tried to work out back-payment arrangements with their lenders. And many homeowners knew what they were getting into.
"If somebody has real income of $82,000, what are they doing buying a $400,000 or $500,000 home with no equity? They said, 'Let's take the liars' loan and declare income that we don't have,'" Uffelman said.
"There is a boatload of blame to go around."
Contact reporter Valerie Miller at vmiller @lvbusinesspress.com or 702-387-5286.