Mortgage Act: When Can You Strip Away A Second Mortgage In Bankruptcy?

As a mortgage or real estate professional, hopefully by now you’re familiar with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). This mortgage act establishes nationwide requirements for the licensing and registration of all Mortgage Loan Originators (MLOs). Although states determine the timeframe for completing the SAFE requirements, there are guidelines that need to be met by all MLO professionals in a timely manner. If you are involved in any MLO activities, this means that you need to fulfill specific requirements.
Why the Secure and Fair Enforcement for Mortgage Licensing Act? The Secure and Fair Enforcement for Mortgage Licensing Act is designed to enhance consumer protection and reduce fraud through the setting of minimum standards for the licensing and registration of state-licensed mortgage loans. It serves to regulate the mortgage industry and decrease the number of faulty loans that are approved to non-qualifying buyers.

As per law, the MDIA stipulates that the borrower should receive a disclosure from the bank, within seven days of having received the good faith estimate. The annual percentage rate as specified in the disclosure cannot be increased by more than 0.125% as mentioned in the good faith estimate. The entire process starting from the good faith estimate has to take a minimum of seven working days, excluding Sundays and holidays. This is a law that has taken all banks and lenders by surprise, as the law was supposed to come into effect from 1st Oct 2009, but has been expedited and put into circulation earlier.

In Bankruptcy Court, it is quite common to strip away a judgment lien if it is unsecured by the value of the real estate. Stripping away a judgment lien in Bankruptcy Court means that the debt is turned into unsecured debt, which is either wholly discharged in a Chapter 7 bankruptcy, or paid off under a Chapter 13 bankruptcy for pennies on the dollar. A second or third mortgage may likewise be stripped away in a bankruptcy proceeding if the amount of the second or third mortgage is “wholly unsecured” by the real property. The bankruptcy law in New York provides that, as long as a mortgage is 100% unsecured by the real estate, then it can be stripped away into an unsecured debt.

What Happens if Mortgage Loan Originators Don’t Complete the S.A.F.E. Requirements? As a professional involved in the mortgage loan origination process, it is imperative that you complete the S.A.F.E. requirements by your state’s deadline. Failure to comply will result in a delay to your career because you will not be able to conduct loan origination activities. Additionally, if you do not properly prepare for the MLO test and fail to pass, you will have to re-take the exam, leading to more out-of-pocket costs and disruption to your career – there is a required 30-day waiting period between failed exams. There is no reason not to comply – get started today, avoid career interruption.

As a professional MLO, you need to complete the Secure and Fair Enforcement for Mortgage Licensing Act requirements in a timely manner so you meet your state’s deadline. Plan ahead today so you have ample time to prepare and complete all of the S.A.F.E. requirements. From the 20-hour course to prepping for the national and state components of the MLO test, the key is to be proactive. This is your career and you need to take action so that you are in compliance before the deadline.

Learn more about Obama Mortgage Relief Plan Qualifications.