Mortgage Modifications: Senior Loans May Become Not So Senior
Posted on October 24, 2014 by BankruptcyRealEstateInsights
A junior mortgagee sought to subordinate the senior mortgage loan based on an argument that modification of the senior loan impaired the junior mortgagee’s rights. The debtor executed a note secured by a first mortgage in favor of the senior lender in the original principal amount of $323,000 that was originally due at the end of 2035. Subsequently the debtor executed a note secured by a second mortgage in favor of the junior lender for $55,000 that was due in May 2022. The senior loan was modified two times. The junior lender was not asked to consent to either modification.
The first senior loan modification reduced the interest rate from 6.925% to 3% for one year, with increases during the following two years, subject to a cap of 5.617%. No new funds were advanced. The junior lender did not argue that this first modification had any impact on its position.
The second modification, which was done pursuant to the Federal Home Affordable Modification Program (HAMP), lowered the monthly payments. Using the HAMP guidelines, the second modification: (1) extended the maturity of the note by one month to January 1, 2036, (2) capitalized $65,300 that was in arrears and deferred payment interest free to the end of the term of the note, (3) reduced the interest rate to 2% for five years, increasing to 3% in year 6, 4% in year 7, and 4.25% for the remaining term of the loan.
The debtor filed for bankruptcy relief under chapter 13. The property securing the loans was valued at ~$300,000 (based on appraisals). Thus, the debtor sought to have the junior creditor’s secured claim deemed to be wholly unsecured (since there was no equity left after consideration of the senior mortgage loan). In response, the junior mortgagee sought to subordinate the senior mortgage to its mortgage, or in the alternative to subordinate the principal balance that was deferred under the second modification.
The junior lender argued that by deferring principal to the maturity date of the note, the note and mortgage were more likely to default at maturity. Also, the junior mortgage was adversely affected prior to maturity because if there was a default and the senior mortgage was foreclosed, the deferred balloon payment and lower monthly payments meant that a higher amount would be due at the time of foreclosure.
In response, the senior lender pointed out that the deferred payment did not bear interest and was due 14 years after the junior loan matured. So, it was hard to see how the junior mortgagee was adversely impacted. The senior lender also argued that the lower monthly payments did not impair the junior mortgagee’s position, but rather improved it, because the debtor was already in default and unable to make its monthly payments before the modification.
Looking to state law, the court outlined the relevant principles as follows:
- Generally successive mortgages on a property have priority in the order in which they attach to the property (e.g. the order in which they are recorded).
- A senior mortgagee may modify the terms of its note and mortgage without the consent of a junior mortgagee.
- “However, if the modification prejudices the rights of the junior lien holder or impairs its security, and is made without the junior lien holder’s consent, courts have divested the senior lien holder of its priority and elevated the junior lien holder to a position of superiority.”
- If the actions prejudice a junior lender but do not “substantially impair their security interest or destroy their equity,” the junior lender obtains priority only with respect to the modified terms.
- In determining the impact on a junior lender, a principal consideration is whether the interest rate or principal amount of the senior mortgage is increased.
In considering the arguments made by the junior lender, the court noted that under the second modification the interest rate was substantially lowered. As to the deferred principal payment, it did not bear interest. So, the total amount payable by the debtor was reduced under the modification. And although the maturity of the senior loan was extended by one month, accrual of interest for this additional period did not offset the other savings.
The court noted that the junior mortgagee’s arguments also ignored that the debtor was in default at the time of the modification. The contention that reducing mortgage payments prejudiced the junior creditor assumed that the debtor had the ability to make the pre-modification regular payments – which it did not. As to the argument about the effect of the increase in payment due on maturity, the junior mortgagee ignored that its own loan matured 14 years before that date, so the deferral in fact improved its position.
Consequently the court found no basis for subordinating any portion of the senior mortgage loan to the junior mortgage loan since the modification did not increase the interest rate or the amount secured by the senior mortgage and did not otherwise impair the junior mortgagee.
The effect of a mortgage modification is a matter of state law. As the court’s analysis illustrates, a senior mortgagee should not take for granted that it is free to modify the senior debt as it sees fit without the consent of a junior mortgagee. In connection with a modification, it behooves the senior mortgagee to carefully consider the potential impact on the junior mortgagee position, and if there is an adverse impact, whether that poses any risk of subordination under applicable state law.
Vicki R. Harding, Esq.
Your loan, mortgage, and foreclosure may contain errors, violations, and fraud, and you could be entitled to financial compensation, a reduction in your principal balance, your property clear & free, or even better! If you are currently facing foreclosure, or you have already lost your house to foreclose, we recommend that you take immediate action and register for your free fraud analysis and consultation.
Register for Your Free Mortgage & Foreclosure Fraud Analysis
Get the help you need to save your house from foreclosure right now.
For more information on foreclosure offense and foreclosure defense please call us 773-877-3655. We offer litigation support, admissible evidence, expert witness testimony, education, training, and support in all 50 states to attorneys and pro se homeowners.
Legal Information Is Not Legal Advice: This site provides “information” about the law and is only designed to help users safely cope with their own legal needs. But legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. THIS SITE IS NOT INTENDED TO BE MISCONSTRUED AS LEGAL ADVICE. Fraud Stoppers LLC is NOT a law firm, non-profit organization, or government agency. Fraud Stoppers LLC is a company that can help you find what you’re looking for to save your house from foreclosure. If you want or need a Quiet Title Lawsuit, Securitization Audit, Forensic Audit, Mortgage Fraud Audit, Stop Foreclosure Sale Action, Reverse Foreclosure Sale Action, Loan Modification, Short Sale Transaction, Wrongful Foreclosure Lawsuit, Foreclosure Defense Documents, Court Ready Expert Witness Affidavit, Nationwide Network of Affordable and Competent Foreclosure Defense Attorneys, Nationwide Network of Short Sale Experts, Realtors, and Ethical Investors who have Investment Capital and can structure a win/win/win Creative Real Estate Transaction, Pro Se Educational Course and Training Materials, Investor Buyback Programs, Real Estate Investor Training Programs and Curriculum, Private Investment Capital, Pro Se Legal Training Programs, Easy Non-Credit Based Financing Options, and Affordable Monthly Payment Plans so you can save your house from foreclosure without breaking YOUR Bank. Fraud Stoppers has what you need and can help you get the facts, tools, evidence, documentation, training, professional help, and support that you need to stop your foreclosure, uncover the errors, violations, and fraud that may exist in your loan, mortgage, and foreclosure documents so that you can save your house from foreclosure and get the legal remedy that the law entitles you to, and that you deserve! Although we go to great lengths to make sure our information is accurate and useful, we recommend you ALWAYS consult a lawyer if you want legal advice as well as professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.