30 Jun Refinancing Without Reaffirming in Bankruptcy?
When you file Chapter 7 bankruptcy, one option you have is to reaffirm your mortgage. Do you have to reaffirm in order to refinance later? Of course not, but your lender may try to tell you otherwise.
Other articles here discuss the actual process of reaffirming a debt. And the pros and cons of doing so. But as the mortgage market begins to unfreeze (slightly) these days, we are again hearing an old lie from mortgage servicers and mortgage salesmen (er, “mortgage bankers”): You have to reaffirm your mortgage or you can’t refinance it.
This is completely untrue. Reaffirming a debt makes you personally liable for the debt. It puts you at risk for a deficiency claim, if you don’t pay the debt. But if you did not reaffirm, the mortgage did not disappear, it is still a lien on your house. It is still owed and must be paid unless you are willing to risk losing the property. The mortgage company — the servicer — virtually always wants you to make these payments. And they often don’t care about the reaffirmation and will not waste their time (and your money) asking for it during the bankruptcy case.
So why do they later on claim you can’t refinance since you didn’t reaffirm? There are different explanations I’ve been given, some simple, some bizarre, some bizarrely stupid. The problem is compounded by a new generation of loan salesmen (er, loan officers) who have little experience with this process.
A common problem is that your new loan officer can’t “see” the mortgage on your credit report. So you can’t refinance what doesn’t exist, right? This is from the school of “credit reports are written by God” logic. Mortgage brokers at times appear to believe with fatal absoluteness in credit reports as holy writ and have a tendency towards nervous breakdowns if the data on a report is misleading or incomplete. That’s a bad habit, if you’re a mortgage seller.
Occasionally, the problem is related to reaffirmation but not a legal issue. If you do not reaffirm, the payment history after bankruptcy may not appear on your credit report. That can make it more difficult to prove you are a good credit risk. It can make rebuilding your FICO score harder — unless you make a lot of late payments of course. But it is possible to get copies of your payment history from the mortgage company and a decent broker can use those to try to convince their loan underwriters to reconsider a lower FICO score problem. This can be an issue but there are other ways to rebuild credit without reaffirming large debts like a mortgage.
Sometimes the problem is muleheadedness at the mortgage servicer’s office. It’s easier to refuse to provide a payoff to a new lender than to provide it. And, lo and behold!, these good customers did not reaffirm in their bankruptcy last year. There’s an excuse — tell the broker to go away, there’s no “debt” because there was no reaffirmation. (Remember customer service reps are sometimes docked for spending too much time on the phone with you — so finding a way not to do the job is a survival skill.)
And at times the mortgage servicer is misunderstanding the law. They think they cannot provide billing or account information because someone will treat that as a demand for payment of the discharged debt. And accepting the payoff by refinancing is the same problem. Of course this is not true. And they ought to realize it is untrue because the borrower has probably been making payments for awhile and they have been accepted. And bills have been sent to them. All without trouble. But saying no is often easier than saying yes.
It is also possible that some servicers simply do not want to have good performing accounts paid off. If your loan is paying them more in interest and fees than they could make re-lending the money to another borrower, a lender may not really want you to refinance early. If you are inclined to believe mortgage companies think about their investors and their own long-term financial interests with some care and planning, this would make sense.
On the other hand, very little in the last decade of American mortgage lending should make one really believe the industry does much long-term planning. We can all hope that will change of course. I’d like to look like Tom Cruise too. But, as Dirty Harry once said, “A man’s got to know his limitations.”
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