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Mortgage Investor Loses Half of the Principal Amount Through Bankruptcy Cram Down on the 1st Lien

I will not go into bankruptcy basics here and only will give an example of the first position mortgage cram down as recorded in county records. If you are buying mortgage notes with active or prior bankruptcy filings by borrower after the date of the acquired mortgage, a bankruptcy search (which we can do using attorney staff specializing in bankruptcy file reviews) is a necessity. Most of the funds and investors will run a Pacer or Acer search to review all motions and bankruptcy plans for any strips of the liens or cram downs (in other words, reduction of the mortgage’s principal amount). In the example we will show here, the investor discovered that the first position lien was a cram down approved to reduce the principal in half. The order by the federal bankruptcy court was also recorded in the county records and picked up on a title search. While running due diligence on the asset, we recommend reviewing any documents that are related to bankruptcy for similar cases.

This particular example was a Chapter 13 bankruptcy with 1st lien cram down in Middle District of Florida Bankruptcy Court. The investor wanted to acquire a mortgage with a principal amount of $135,000 but the foreclosure process was halted when the borrower filed for bankruptcy. The final judgment filed in the foreclosure process showed the borrower owing to the lender over $146,000. The 1st position mortgage could not be stripped from the property, but the borrower was successful to get the 1st position mortgage as a secured mortgage with an allowed secured claim of $70,000, which reduced the amount owed in half. The investor’s data tape had the origination amount of the acquired mortgage, while the real amount was only half of that.
Part of the Acquisition Due Diligence process should include a bankruptcy review for any active and recent bankruptcy filings by a knowledgeable attorney who knows state to state variances in filings.