In a victory for Bank of America, the U.S. Supreme Court ruled this week that the lender isn’t required to void second mortgage liens on “underwater” homes when borrowers file for a certain type of bankruptcy.
The ruling, which is also a win for other lenders, stemmed from Chapter 7 bankruptcy cases that involved Florida homeowners and in which the Charlotte-based bank had argued the bankruptcy code does not permit mortgage liens to be “stripped off.” A mortgage lien is a legal claim a lender can hold against a property until home loans are fully repaid.
At issue specifically was whether liens on a second mortgage may be voided for people in Chapter 7 who owe more on their home than it is worth.
In their unanimous decision on Monday, the justices ruled that the liens may not be voided in such instances. That decision came after the U.S. Court of Appeals for the 11th Circuit in Atlanta ruled against the bank. Bank of America then appealed to the Supreme Court.
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Bank of America spokesman Lawrence Grayson declined to comment.
Consumer advocates said the ruling is a setback for bankrupt homeowners at a time when the values of many properties have not returned to levels they were at before the housing bubble burst.
According to real estate data firm RealtyTrac, 7.3 million U.S. residential properties were “seriously underwater” at the end of the first quarter, representing 13.2 percent of all properties with a mortgage.
A home is “seriously underwater” when what’s still owed on the property is at least 25 percent higher than its estimated market value.
The percentage of homes seriously underwater has been falling. In 2012, roughly 28 percent of homes were in the category. But many seriously underwater homeowners remain stuck in their homes as short sales and other alternatives to foreclosure lose momentum, RealtyTrac said in April when it released its first quarter report.
The Supreme Court ruling does not mean homeowners can’t strip off second mortgages through other methods.
Homeowners can still get rid of a second mortgage lien through a Chapter 13 bankruptcy, if the value of their property is less than they owe on their first mortgage.
But legal experts say the Chapter 13 process can be costlier than the Chapter 7 route.