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How to Fail My Secured Credit Exam Two Different Ways

posted by Bob Lawless

By way of Underbelly comes this story from the Seattle Times chronicling the many failures at the now defunct WaMu. Among the stories was that a WaMu banker gave O.J. Simpson a second mortgage on his Florida home despite the existence of a huge judgment lien against Simpson arising out of his civil trial for killing his wife and her friend. Why did WaMu think it could collect the second mortgage? According to the news story, Simpson had put a note in the file saying he did not do it, and therefore the judgment was "no good." OK, that's pretty dumb and, for my students who read the blog, would not be a passing answer in my secured credit class.

What the reporter (but hopefully not my students) missed is that the second mortgage was likely collectible anyway. Florida has an unlimited homestead exemption that would prevent enforcement of the judgment lien against the home, assuming it otherwise met the definition of a homestead. Voluntary transfers, like a second mortgage, are not protected by the homestead statute. (If you're wondering why that is, consider how much mortgage lending there would be if the mortgage could not be enforced because of a homestead statute.) A comment on the Daily Weekly blog (hosted by the Seattle Times) picked up on the point about the homestead exemption and the role it should have played in this lending decision.

The "note in the file" story sounds too funny to be true, and in this case, I think it probably is. Florida (and every other state) law is the reason some WaMu Florida banker thought they could enforce the second mortgage. Of course, this is just the legal part of the lending decision. As the Daily Weekly blog story asked, why was WaMu so willing to give Simpson the benefit of the doubt and extend a loan?

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Comments

Suppose the second mortgage is made after the recorded judgment, and thereafter the owner then ends up under water and moves out (uh, real estate slumps do happen, you know). What happens to the priorities? I don't know Florida law, but my educated guess is that the second mortgage holder is SOL. If that guess is right, the homestead exemption would have provided limited, and very likely inadequate, reassurance to the lender considering this loan.

Giving OJ the loan raised the credibility of both parties?

Under In re Tanner, 217 F.3d 1357 (11th Cir.2000) and In re Dickerson, 222 F.3d 924 (11th Cir. 2000), the second mortgage - which would be behind the judgment lien - could be stripped under Section 506 as wholly unsecured in a Chapter 13.

It doesn't appear to me that WaMu was too bright here, regardless of their reasoning. The issued a mortgage that, at the time it was given, could be legally stripped and treated as an unsecured claim.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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