The nation’s highest court is taking on the burning issue of underwater mortgages, agreeing Monday to hear not one but two cases brought by Bank of America (BAC).
The U.S. Supreme Court will examine the question of whether a second mortgage on an underwater property can be voided during Chapter 7 bankruptcy.
This could potentially affect thousands of similar cases in lower courts, and it's a departure from the high court's approach toward mortgage litigation.
Typically, the Supreme Court refuses to hear cases involving mortgage finance. In 2013, the U.S. Supreme Court punted on a chance to hear a case that could have a significant impact on the scope and size of residential mortgage-backed securities cases in the Second Circuit.
In that case, an institutional investor claimed Goldman Sachs (GS) made material misrepresentations and omissions in offerings of mortgage-backed securities, leading to losses on those securities later on.
Then, in 2011, the Supreme Court declined to review a case brought against Mortgage Electronic Registration Systems by a California man.
The two cases the Supreme Court will hear both involve homeowners in Florida, a state hit particularly hard by the housing crash, who sued to void second mortgages when the debt owed to the holder of the first mortgage exceeded the property.
David Caulkett and Edelmiro Toledo-Cardona sued and won before the 11th U.S. Circuit Court of Appeals, the court which oversees Florida.
That appellate ruling stated that Bank of America, the lender, lose its ability to foreclose on the property even when the property’s value increased.
Bank of America appealed to the Supreme Court that the 11th Circuit was out of line and it sets a dangerous for thousands of cases pending in lower courts.
The high court should rule by summer 2015.