Banks, most especially Wells Fargo, seem to relish denying refinance applications for debtors who didn’t reaffirm home mortgage in bankruptcy.
You didn’t reaffirm your existing home loan, so we can’t refinance that debt, they chortle.
Sometimes, the dig is even more painful (to me at least): your attorney didn’t do this right so you are screwed.
As is often the case, the bank’s claim is unfounded in the law and even in its own lending standards. Not to mention that none of the judges I practice before would approve the reaffirmation of a home loan even if I sought it for a client.
But that doesn’t stop the banks.
Let’s piece together the truth about home loans after discharge.
Mortgage lien survives discharge
A basic rule in bankruptcy is that liens survive the bankruptcy discharge. Put another way, the discharge wipes out your personal liability for a secured debt, but doesn’t alter the lien.
Procedures exist in bankruptcy to alter some liens, but it requires a separate motion, with service on the creditor to be affected.
So, the only way the bank’s claim is affected by the bankruptcy discharge is that it can’t sue you for the debt; it can still foreclose on your home if you don’t pay.
Judges can nix reaffirmation
Reaffirmation amounts to waiving the bankruptcy discharge as to a particular debt. Because of the possibilities of creditor overreaching, reaffirmation agreements are subject to a veto by the bankruptcy judge in the case.
If the reaffirmation agreement presents a hardship to the debtor, or it is unclear how the debtor can pay the debt to be reaffirmed, the judge can decline to approve it.
In many jurisdictions, including the Northern District of California where Moran Law Group practices, judges will not approve a reaffirmation of a home mortgage. So even if a debtor proposed to reaffirm a home loan, it wouldn’t be allowed.
Rejection is simply bank policy
If you are turned down for a refinance on your home loan, it’s strictly because the bank has decided that’s how it wants to do business. Nothing in the law prevents a secured lender from pocketing your mortgage payments after bankruptcy nor from modifying the loan or replacing it with a new loan.
I’m not even certain that rejection without a reaff is bank policy. I confronted a bank lawyer at a bankruptcy seminar and he flatly denied that the bank required reaffirmation as a condition of doing further loan business. His advice was to take the matter up the chain of command in the bank.
Lots of fish in the sea
My advice is to take your business elsewhere. There are lots of lenders out there. Find one that is eager for your business.
The practical challenge becomes proving up your post bankruptcy payment history to a new lender. The old lender may not be reporting your payments to the credit bureaus for fear of violating the discharge injunction.
Credit reports aren’t the only way to show you’re current. Gather up proof of payments in the form of canceled checks or bank records. Get a payment history from the current lender through a request for information. Go to a prospective new lender with paper proof of payment.
Consider that your existing lender may not want to refinance your loan because the current loan has a higher interest rate than the current market rate. They just don’t want to let you legally pay less for housing.
Clearly a crock in California
The bank’s excuse for not refinancing is a pure fantasy under California law. Two state laws essentially eliminate a California borrower’s personal liability for a loan secured by his home.
California has an anti deficiency provision which prohibits the lender from getting a judgment against the borrower for any amount of a purchase money home loan not repaid.
Secondly, use of the power of sale, found in the deed of trust which creates the lien, precludes a judgment for any deficiency. When the lender uses the expedited procedures under the power of sale, they elect the foreclosure as the exclusive collection device.
So, under the typical California home loan transaction, the borrower has no personal liability for the loan, anyway.
Don’t buy the excuse
It seems to me that many banks have an interest in making the lives of bankruptcy debtors difficult. As an institution, they don’t want consumers to get out of debt; debt is, after all, how they make their money.
Understand their game and use your payment history and the competitive nature of lending to get what you need.
