Can the Supreme Court rescue drowning homeowners?

 

By Noah Feldman, Bloomberg NewsBloomberg

Critics of the Supreme Court’s conservative wing like to say it’s instinctively pro-business. The justices on Tuesday tested that proposition in a fascinating case about whether bankruptcy law instructs judges to void liens on underwater properties. On one side lie the interests of Bank of America, which is the petitioner and doesn’t want the loans to be “stripped off,” that is, voided. On the other side is the plain statutory text, which says they should be. The poetic twist is that, in a very similar 1992 case, the Supreme Court ignored the plain text and held in favor of the banks — over the forceful dissent of one Justice Antonin Scalia.

The facts of the case are simple, and reflect a common situation post-2008. In each of two consolidated cases, a debtor had two mortgage liens on a property, one subordinated to the other. The property lost so much value that the debt on the first mortgage was greater than the value of the house — in common terms, the house was underwater. Given that this was so, the second, subordinated lien, owned by Bank of America, was completely underwater. When filing for bankruptcy, the debtor asked that the second lien be eliminated under the federal Bankruptcy Code.

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