Can bankrupt homeowners void their second mortgage?

WASHINGTON (AP) – Nov. 17, 2014 – The Supreme Court said Monday it will decide whether homeowners who declare bankruptcy can void a second mortgage if the home’s market value has dropped below the amount they owe on the first mortgage.

The justices will consider two appeals from Bank of America, which asserts that bankrupt homeowners should not be able to “strip off” a second loan even if they are underwater on primary loans.

Both cases involve Florida homeowners who were allowed to nullify second loans held by Bank of America. The Atlanta-based 11th U.S. Circuit Court of Appeals affirmed both cases, but Bank of America says the rulings conflict with Supreme Court precedent and every other appeals court that considered the issue.

Bank of America claims hundreds – and possibly thousands – of homeowners in states covered by the 11th Circuit have moved to void underwater second mortgages since the appeals court endorsed the practice two years ago.

“This case presents a critical issue of bankruptcy law affecting a large number of chapter 7 cases,” lawyers for Bank of America said in a court filing. The company urged the high court to clarify the rules “and restore uniformity to the administration of chapter 7 cases across the country.”

About 28 percent of mortgaged houses in Florida are worth substantially less than market value, ranking the state second only to Nevada in underwater mortgages, according to the real-estate-research company RealtyTrac.

Bank of America says in both cases that it loaned money to the debtors secured by a lien on the home. The company argues that even if the primary mortgage is underwater, that has no effect on the lien securing the second loan.

Attorneys for the homeowners argue that none of the other appeals courts dealt with second mortgages “that would be entirely worthless in foreclosure.”