Lender Ordered To Swallow $200K 'Cramdown' On Home Loan Modification In Chapter 13 Bankruptcy Case Despite Fact That Loan Was 1st Mortgage On Borrower's Primary Residence
- Even though a Miami man made money renting part of his duplex, a judge ruled in his favor and lowered the debt on his residential mortgage by nearly $200,000 in a Chapter 13 bankruptcy case.
The question wasn't whether the duplex was Luis L. Ramirez's primary residence, U.S. Bankruptcy Judge A. Jay Cristol wrote in an April 7 order. It was whether the multifamily home on Northwest 26th Street met the legal test that allowed the modification of a first priority mortgage.
"If you're using the home as part of an investment, then there's more of a risk to the lender," said Jacqueline Ledon, staff attorney at Legal Services of Greater Miami Inc.
,(1)the nonprofit that filed the motion on Ramirez's behalf. "Primary residences are less risky. Most people will do whatever it takes to save the roof over their head."
The bankruptcy code typically bans the modification of interest rates, principal and other terms on residential first priority mortgages.
But in a case that hinged on how the court would treat a duplex where the homeowner rented part of the property, Cristol ruled in the homeowner's favor and allowed the mortgage modification.
For "bankruptcy purposes the inquiry is not whether the property is the debtor's primary residence," Cristol wrote.
"Rather the inquiry is whether the property is solely the borrower's primary residence. Where the borrower resides in one unit and rents out the other unit of a duplex, the property is not solely the borrower's primary residence and as such the mortgage is subject to modification."
The question was whether lender Lansdowne Mortgage LLC expected Ramirez to occupy the full two-unit building.
Landsdowne argued it did. Its attorneys at Herron Ortiz in Miami objected to Ramirez's third amended Chapter 13 bankruptcy plan that proposed monthly payments of $718 plus interest and a final balloon payment of interest and $66,094 in the 60th month. The mortgage company rejected the proposal, saying it feared Ramirez would renege on the new terms in the 59th month.
In its proof of claim for a first priority residential mortgage at a Jan. 29 evidentiary hearing, the lender told the court it viewed the mortgage transaction as "providing the borrower with a residence."
But Ramirez's attorneys disagreed.
"There are extensive examples throughout the case law that say you can modify the mortgage with a duplex because it's not solely the borrower's primary residence,"(2) Ledon said. "In most cases a single borrower can't occupy both units."
For Cristol, an omission in the mortgage documents was a key factor in deciding whether the anti-modification provision applied.
"The creditor responds that the mortgage does not actually contain a borrower-occupancy provision and suggests the rider was simply an error," Cristol wrote.
The Legal Services attorneys argued the error was on Landowne's part because the lender drew up the contract. And in the end, that omission cost the Miami mortgage company about $200,000.
In his ruling, Cristol permitted the cramdown, ordering Landsdowne to refinance the property and reduce the debt to $100,000—based on the lender's appraisal of the house—down from $297,087. Ramirez now has five years to repay the loan.
"The court further finds that to the extent any ambiguity exists as to the applicability of the rider deleting the borrower-occupancy provision, such ambiguity is construed against the creditor as drafter of the mortgage contract," Cristol wrote.
After the housing crash, Cristol supported a change in bankruptcy law that would have allowed judges to reduce the principal on first mortgages on single-family homes, something that was possible until 1979. Bankruptcy judges already have the power to cut second mortgages and credit card debt. The legislation failed.
For the court order, see In re Ramirez - Order Confirming Chapter 13 Plan.
Go here for In re Ramirez - Debtor's Response To Creditor Objection To Confirmation.
(1) Legal Services of Greater Miami Inc. is the largest provider of broad-based civil legal services for the poor in Miami-Dade and Monroe Counties in Florida. Each year it provides free civil legal services which benefit more than 30,000 members of the community who have nowhere else to turn for help- women, children, seniors, veterans returning from combat, people with disabilities, low wage workers and the homeless who have problems in the areas of tenants’ rights, homeownership, health, income maintenance, employment, special education, tax and consumer rights, according to its website.
(2) In its order, the court noted:
- As a preliminary matter, the Court notes that the cases permitting modification of residential mortgages secured by multiunit-properties are legion. In re Zaldivar, 441 B.R. 389, 390 (Bankr. S.D. Fla. 2011) (collecting cases). A totality of the circumstances test, analyzing the facts of each case, is used to determine whether a cramdown is permissible. Id. Specifically, the Court looks to the predominant character of the mortgage transaction: [...].