A Supreme Court victory for Bank of America this week may boost home-equity lending by banks, according to a Bloomberg story on the ruling.
In a unanimous decision on Monday, the Supreme Court said second-mortgage liens may not be voided, or “stripped off,” for homeowners in Chapter 7 bankruptcy when they owe more on their properties than they are worth.
Thomas Norton, president of Norton Group, a bank consulting firm in New Jersey, told Bloomberg the ruling may spur more home-equity lending by reassuring lenders they can try to recoup losses in a Chapter 7 bankruptcy.
“The risk for all lenders is less today than it was the day before the court’s decision, which means they’re going to be more willing to grant someone a home-equity loan,” Norton said. “This ruling means if someone hits a bump in the road, lenders are more likely to get some of their money back.”
The ruling comes at a time when home values continue posting large annual gains, injecting equity into homes.
Banks are originating home-equity loans at the fastest pace in seven years, as Americans tap into that equity to pay for home renovations, colleges and cars, Bloomberg reports, citing credit reporting agency Equifax. Banks are making those loans at a time when overall revenue growth in the industry remains sluggish thanks in part to low interest rates.
Monday’s ruling resulted from cases involving Florida borrowers with second mortgages held by Bank of America. The borrowers, who filed for Chapter 7 bankruptcy in 2013, had sought to void those second-mortgage liens.
The Supreme Court heard the matter after the bank appealed a decision last year by the U.S. Court of Appeals for the 11th Circuit in Atlanta. The appeals court had rejected the bank’s bid to overturn a lower court’s rulings in favor of the borrowers.
Bankers “are sure to be happy” with the Supreme Court’s ruling, Robert Lawless, a law professor at the University of Illinois, told Bloomberg.
But the ruling is seen by consumer advocates as a setback for homeowners attempting to void liens for home equity loans and other second mortgages in Chapter 7 bankruptcies. Although borrowers can still get rid of the liens through a Chapter 13 bankruptcy, legal experts say that process can be costlier than Chapter 7.
Richard Green, sales manager in the mortgage division of Presidential Bank in Bethesda, Md., told Bloomberg banks would have begun looking for ways to eliminate risks tied to home-equity lending if the Supreme Court had ruled against Bank of America.
“If the court had allowed lien-stripping to continue, banks would have put the kibosh on home-equity lending,” he said.