What Is Mortgage Bifurcation?
A mortgage bifurcation has two different meanings. One meaning refers to the separation of representations and warranties between the origination and the servicing of a mortgage. The other refers to the separation of the unsecured portion of a mortgage loan from the secured portion in a Chapter 13 bankruptcy proceeding.
Origination and Service Description
A bifurcated mortgage is a mortgage loan for which the current servicing entity is either not responsible for the origination representations and warranties, the previous servicing entity's responsibilities or liabilities, or both. The entity that is responsible is the loan originator or previous loan servicer. The dividing of these representations or responsibilities between two entities creates the mortgage bifurcation. This type of mortgage bifurcation generally occurs as a result of a foreclosure, mediation or workout with loans that have been or will be purchased by Fannie Mae.
Fannie Mae pools the mortgage loans that it purchases. It then packages the loans as mortgage-backed securities –or MBS--and sells them in the public markets. One of the major issues to resolving mortgages in default within this pool relates to the selling and servicing representations and warranties in the loan agreements attached to these mortgages. Mortgage bifurcation helps reduce the liability exposure for mortgage servicers, which helps pave the way for the smooth transfer of mortgage servicing rights.
A Chapter 13 mortgage bifurcation allows homeowners to retain their homes and pay less of the outstanding debt on their home. In this scenario, a mortgage bifurcation acts as a tool that enables the homeowner to manipulate her debt but only applies if the homeowner owes more on the mortgage than the property is worth. However, Chapter 13 bankruptcy law prohibits the inclusion of primary, or first, mortgages in a mortgage bifurcation. Chapter 13 only allows mortgage bifurcations with second or third mortgages on a homeowner's primary residence or with any mortgage on an investment property or second home.
If a homeowner has filed for Chapter 13 bankruptcy protection, she must include all of the information regarding her assets and liabilities, income and payment obligations. The bankruptcy court uses this information to determine eligibility for mortgage bifurcation. If a bankruptcy filer has a second or third mortgage that surpasses the value of her primary residence, the judge may divide out -- or bifurcate -- the portion that exceeds the residence’s value. The judge may redefine the divided out portion as unsecured debt and leave the portion that does not exceed the property's value as secured debt. The judge may then discharge the unsecured portion.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.