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Yale Law School Files Amicus Brief in ‘Stripping Off’ Mortgage Case Headed to U.S. Supreme Court

Yale Law School Stripping Off Mortgages U.S. Supreme CourtYale Law School's Mortgage Foreclosure Litigation Clinic and the Connecticut Fair Housing Center (CFHC) have filed an Amicus Brief with the U.S. Supreme Court in support of the respondents in a case to decide whether underwater homeowners in Chapter 7 bankruptcy can legally eliminate the liability on second mortgages, a process known as "stripping off," according to an announcement on Yale Law School's website.

Yale's Mortgage Foreclosure Clinic, which provides legal assistance to individuals who cannot afford private counsel, and the CFCH, which represents homeowners in foreclosure litigation and counsels about 1,800 homeowners per year, filed the brief on behalf of David Caulkett and Edelmiro Toldeo-Cardona, two Florida homeowners in bankruptcy who had their second mortgages with Bank of America extinguished by a bankruptcy judge following the housing crisis of 2008 based on the fact that they were underwater – they owed way more than their houses were worth.

When Bank of America appealed the bankruptcy judge's rulings, both cases were both decided in favor of the homeowners by the 11th Circuit U.S. Court of Appeals in May 2014. Bank of America appealed the decision by the appellate court, and the U.S. Supreme Court agreed in November to hear the cases.

The SCOTUS blog describes the issue in the case of Bank of America v. Caulkett as "Whether, under Section 506(d) of the Bankruptcy Code, which provides that '[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void,' a Chapter 7 debtor may 'strip off' a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral."

In the brief, Yale's clinic and the CFHC contend that investors holding second mortgages, which are often large banks, often obstruct arrangements that would be beneficial to homeowners and first mortgage holders, and that homeowners would be able to stay in their homes if they were allowed to strip off second mortgages that had no value.

According to the Yale clinic, the bankruptcy code allocates the debtor's assets by prioritizing certain secured loans, and it allows financially-burdened borrowers to get a fresh start. Functionally, underwater second mortgages are no different from unsecured debt, such as credit card debt.

"In the aftermath of the housing crisis, fully underwater second mortgage holders have often been able to use their hostage power to destroy workouts that would be beneficial for first mortgage lenders, homeowners, and surrounding communities," said Alexa Milton, a Yale law student intern in the Clinic. "The Bankruptcy Code is designed to prevent exactly this kind of collective action problem."

The students at Yale Law School contend that second mortgages do effectively promote homeownership the way first mortgages do, and therefore the "American dream" of homeownership is not undermined by removing unwarranted protection for underwater second mortgages.

"Second mortgages really play a peripheral role in a healthy housing market,” said Beezly Kiernan, another law student intern in the clinic. "In fact, piggyback second mortgages contributed to an unhealthy housing market—as well as the financial crisis and subsequent recession—in the mid-2000s."

The Yale Law School has a particular interest in the Caulkett case because Hartford, Connecticut, is the most underwater city in the United States with a 56 percent negative equity rate. Connecticut also includes three other cities in the top 100 in the nation in negative equity rate, including New Haven, where Yale is located.

Arguments in the case of Bank of America v. Caulkett are scheduled to begin on Tuesday, March 24, in the nation's highest court. The Supreme Court is expected to make a decision in June, according to the press release.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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