Thursday, June 23, 2011

Update on Bankruptcy Appellate Court Ruling on the "Produce the Note" Defense

As a follow up to my blog from last evening, I am reviewing the recent Bankruptcy Appellate Panel (BAP) decision that has far reaching implications on all short sales. I am reviewing the decision with several colleagues because this will have a substantial impact on foreclosure and short sales.
Our collective review indicated that it is clear that this decision means that lenders will no longer get relief from the automatic stay in bankruptcy unless or until they prove that they possess the original note and thus have standing to sue (or get relief from the automatic stay). This case will be cited by attorneys in all foreclosure defenses (not just in bankruptcy). This is especially true because the decision was from a federal appellate court.
HOWEVER, as I discussed the case with a colleague and reviewed the decision further…it appears that there may be ground breaking additional news. The language in the decision seems to indicate that a lender may only foreclose up the to the value of the collateral and NOT the amount owed!! This will put HUGE pressure on lenders to modify existing loans and approve short sales. As an example, let’s assume that a home owner is in default on a $400,000 note and that the property value is about $200,000. Reasonable assumptions. Under this new decision, the lender can only foreclose up to the property value or $200,000. Deficiency judgments would be a thing of the past and lenders would have to write down values etc. Lenders would have to consider lower short sale offers too.
I will be presenting more about this on a syndicated radio show in the future and will be posting more information as well. Yes, this is a bankruptcy court opinion but it is from a federal court and an appellate court. Since my father was an appellate court judge, I have the deepest respect for the appellate courts.

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