Justices Mull if Homeowners Can Wipe Out Underwater Mortgages

The U.S. Supreme Court heard argument in a couple of cases yesterday over whether homeowners can void mortgages that are completely underwater, Supreme Court Brief's Marcia Coyle reports. The U.S. Court of Appeals for the Eleventh Circuit allowed homeowners whose homes were worth less than their primary mortgage to void a second mortgage. Bank of America appealed.

At issue is whether a bankruptcy court can "strip off" those valueless mortgages. The lawyer for the homeowners told the justices that eight circuit courts allow liens to be voided in Chapter 13 bankruptcies, and that resolving subordinate liens has been the "biggest obstacle to the housing recovery." Bank of America's counsel, however, argued that properties can have real value if liens are not stripped off because the housing market is moving back up.