California Civil Code
Section 2923.6
(a) The Legislature finds and declares that any duty servicers may have to maximize net present value under their pooling and servicing agreements is owed to all parties in a loan pool, not to any particular parties, and that a servicer acts in the best interests of all parties if it agrees to or implements a loan modification or workout plan for which both of the following apply:
(1) The loan is in payment default, or payment default is reasonably foreseeable.
(2) Anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.
(b) It is the intent of the Legislature that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority.
(c) This section shall remain in effect only until January 1, 2013, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2013, deletes or extends that date."
So let's say a borrower gets foreclosed on in California. Despite the fact that the borrower had been actively engaged in loan modification discussions with their lender. Over the telephone representatives continued to reassure the borrower that their file is in review. However, they don't mention that the sale of their home is still going forward. (This is not an uncommon occurrence as many of you know dealing with Countrywide and Aurora).Why couldn't you file for chapter 13 bankruptcy. Indicate the equitable interest in the home based on the lender's failure to comply with CC, Section 2923.6 & 2923.5 and that due to their violation they should restore title to the borrower. File an adversary complaint in the bankruptcy court alleging the violation. the damages are huge because now the borrower lost their home and are emotionally distraught over the loss of their home. AND the code provides for attorneys fees.
By doing it this way you have one Judge decide the value of the home for purposes of lien stripping any junior liens against the home, AND the same judge determines the cost of damages and reduces principle on the first mortgage after restoring the debtor's interest in the home?
Of course this would only apply to a borrower who has lost their home and are just now coming to consult you. I wouldn't want to take the risk of someone choosing to let the home go to foreclosure and then chancing it in bankuptcy court. But for the borrower who already lost the house, they could pursue this remedy. Would give them more time in their home and a shot to get the house back.
Note however, my idea of doing this also includes plan payments to the Trustee of the first mortgage based upon a reduced principle to fair market value, paying a reasonable percent interest each month.
I think there is a mistake bringing this sort of action in state court because of the risk that the second will foreclose on the property or take some action on the property. At least in bankruptcy the courts have more power to use equity in a legal sense to work out a fair adjudication regarding the home. You can get both the benefits of lien stripping of the junior liens and set the fair market value of the home.
Just a thought. Feel free to give some input on this idea.
