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Mortgage Modification, Equitable Subordination, and the Honest but Unfortunate Creditor


Juliet M. Moringiello


Widener University - School of Law

October 26, 2010

Fordham Law Review, Vol. 79, p. 1599, 2011
Widener Law School Legal Studies Research Paper No. 10-10

Abstract:     
Mortgage foreclosures are at an all-time high and property values in many parts of the country have declined precipitously. Yet bankruptcy, which is often a last resort for individuals in financial distress, provides little relief to a homeowner who finds that her mortgage debt exceeds the value of her home. The reason for bankruptcy’s inadequacy in this regard is the Bankruptcy Code’s prohibition on the modification of home mortgages, a prohibition that became part of bankruptcy law in 1978, when most home mortgage loans were 30-year fixed rate loans made by savings and loan associations. While most secured loans can be stripped down in bankruptcy, reflecting the payment that the lender would receive if it were forced to foreclose on the collateral, a home mortgage loan must be paid in full, giving the lender more than it would receive under state law.

In recent years, abusive mortgage practices have proliferated. These abusive practices, which have prevented homeowners from building equity in their homes, harm not only the debtor, but also the debtor’s other creditors. Despite their behavior, however, home mortgage lenders who engage in these practices continue to receive favorable treatment in bankruptcy. In this paper, I argue that creditors should be denied special treatment in bankruptcy unless they behave in an “honest but unfortunate” manner. Judges can deny this special treatment by using a time-honored bankruptcy principle, the principle of equitable subordination, to subordinate the unsecured portion of a home mortgage loan to all secured and priority claims. While equitable subordination, by itself, will not solve the foreclosure crisis, it may, by reducing the claims of abusive mortgagees, deter abusive lending practices in the future.

Number of Pages in PDF File: 66

Keywords: mortgage modification, equitable subordination, chapter 13 Bankruptcy, subprime lending

JEL Classification: K1, K11

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Date posted: March 30, 2010 ; Last revised: April 3, 2011

Suggested Citation

Moringiello, Juliet M., Mortgage Modification, Equitable Subordination, and the Honest but Unfortunate Creditor (October 26, 2010). Fordham Law Review, Vol. 79, p. 1599, 2011; Widener Law School Legal Studies Research Paper No. 10-10. Available at SSRN: http://ssrn.com/abstract=1578348

Contact Information

Juliet M. Moringiello (Contact Author)
Widener University - School of Law ( email )
3800 Vartan Way
P.O. Box 69382
Harrisburg, PA 17106
United States
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