Cold calls. Cell phones and gift cards that activate when the borrower calls into the servicer call center. Financial packages delivered in hand. These are some of the creative means being used by the mortgage industry to get borrowers to the table or, at least, on the phone.
Now, local government is stepping into the arena: Local symposiums are being held to ascertain how we can fix the housing problem, and legislators' phones are ringing with people looking for answers.
"The lender does not want the property." This statement is made by plaintiffs' attorneys on a daily basis. The majority of lenders would prefer to work out their loan with the borrower, to come to terms whereby the borrower can become current on the loan and the loan can be classified as performing.
With the housing crisis at the center of media attention, it has also taken center stage for legislators, government officials and local communities that are seeing the effects of multiplying foreclosed properties (e.g., decreased property values, increased crime). It is in everyone's best interest to work out a settlement, if possible.
In recent years, legislators have focused their attention on the mortgage industry and issued legislation alerting borrowers of their rights, requiring notification of foreclosure on colored paper and providing contact information for counselors. The most recent legislative attempt to facilitate loan workouts and homeowner retention are the establishment of moratoria and mandated settlement conferences.
What does this change mean for servicers? Well, in regard to the actual workout, it does not change much. The majority of lenders are already heavily involved in homeowner assistance. Most default servicers maintain (and increase) staff in their homeowner assistance divisions that far exceed that of their foreclosure counterparts.
In many cases, the homeowner assistance/loss mitigation department is three times larger than the foreclosure department. The lenders are already working on loss mitigation, as are the attorneys. Many attorneys are actively involved with their clients via hot transfers, service of workout packages, loan modifications and more.
Still, many borrowers claim they can not reach a live person to speak with about their options. As a result, they have elicited the assistance of elected officials. In response to the media, the heightened focus on the foreclosure industry and increasing rates of real estate owned (REO) and abandoned properties, the New York state Legislature is now bringing the mediation process in-house – the courthouse, that is.
For some lenders, this will be another opportunity to reach out to borrowers. For others that are already active in homeowner assistance, it will be an added layer of necessary reporting.
Early notice, mandatory conferences
So what is the new process? In New York, two sections of recent legislation impact foreclosures, timelines and homeowner assistance. The first requires lenders and servicers to send a notice to borrowers with a high-cost home loan, or subprime home loan or nontraditional loan originated between Jan. 1, 2003, and Sept. 1, 2008, at least 90 days prior to commencement of foreclosure. The required language of the letter is specific and dictated by the legislation.
So far, New York does not top the list of states with high foreclosure rates. However, the actual figures are somewhat misleading. According to Realtytrac.com, reported foreclosure filings in the state of New York have decreased by 55.11% since November 2007. That number seems contrary to the current economic climate and loss of jobs in the New York City metropolitan area.
Bear in mind that the above legislation went into effect Sept. 1, 2008. So, in reality, commencement of all residential owner-occupied foreclosures (absent specific loans) have grinded to a halt while lenders send out 90-day notifications. Lenders had to adjust their internal systems to recalculate the mailing and expiration of the 90-day notice. Those that went out immediately are beginning to expire.
Although the number of foreclosures commenced in New York in the fourth quarter of 2008 may be significantly lower than the national average, the first and second quarters of 2009 will undoubtedly show a significant increase. Other states have implemented similar requirements. Massachusetts requires a 90-day right to cure after default, and California is considering a 120-day moratorium prior to sending notice of sale.
The second legislative change calls for mandatory settlement conferences. In a residential foreclosure of a subprime loan, high-cost loan or nontraditional loan originated between the aforementioned dates, the court must schedule a settlement conference within 60 days of filing the affidavit of service of the summons and complaint.
If the case was commenced pre-enactment (i.e., before Sept. 1, 2008), the courts sent a notice to the borrower stating they could request that a settlement conference be scheduled. In both cases, someone with settlement authority must appear at the conference to represent the lender.
In some cases, the judge will waive the physical appearance of the lender and permit a telephonic appearance, along with a physical appearance by counsel.
With the establishment of mandatory court settlement conferences also come various challenges. For one, the legislation did not provide for an increased budget in order for the courts to facilitate all of these conferences, so staffing issues arise as areas of concern. Also, delays – both of the actions by the court, as well as the additional time of attorneys spent in court and of clients waiting by the phone or flying into New York to appear multiple times – can be expected.
While the settlement conference may get the borrower to the table, few borrowers come in with all of the information necessary to complete financial statements, hardship letters and similar documents, which makes it difficult to come to a meeting of the minds on the spot. This results in further delays, courts' scheduling of future conference dates and "control" dates so that the court can monitor the progress.
Lastly, mandatory court settlement conferences will prove challenging, because they require appearances by the plaintiff and the plaintiff's attorney, even if only by phone. Oftentimes, despite the appearance by the plaintiff and the plaintiff's counsel, the borrower and borrower's counsel – who requested the settlement conference – do not appear. It is not unusual for 33% of borrowers who request conferences to not attend the conferences, as noted during a recent Long Island Housing Symposium.
One must ask: Are the results any better than those in which the lenders and attorneys are contacting the borrowers on their own? For example, in one county in New York, approximately 2,100 letters were sent to borrowers for existing foreclosure actions advising the borrowers of their right to request a settlement conference. Approximately one month after the letters were sent, only 80 conferences had been requested – 3.8% of mortgagors had requested conferences.
The number of states incorporating the mediation process into the foreclosure process is small, but growing. Other states requiring mediation in some degree include – but are not limited to – Pennsylvania, New Jersey, Florida, North Carolina, Connecticut and Ohio. In some states, the requirement is not statewide, adding another layer of confusion to the mix. The legislation varies from state to state.
In Connecticut, although a judgment cannot be entered until mediation has expired, participation in mediation does not suspend a mortgagor's obligation to respond to the foreclosure. In Ohio, the conference is precipitated by completion of the financial package. The financial package is sent to the borrowers when the mediation is requested. The borrowers return the package to the lender prior to the scheduled settlement conference.
In this way, the settlement negotiations are productive, with each party knowing what means of payment and potential options are available. In this regard, a meeting of the minds is attained at the settlement table with the court present, and all parties walk away having accomplished either a settlement or the decision to continue the action.
The necessity of preparation
What can be done to make the mediation process more productive? Having financials and applicable documents (e.g., hardship letter, pay stubs and source of funding) prior to or at the initial conference will certainly make the process more productive and meaningful.
The servicer representative and attorney should also know the prior history. Has this mortgagor entered into prior workouts? And, if so, what was the success and reason for default? The idea is to get the loan performing and not create a repetitious cycle, and that is where the Department of Housing and Urban Development counseling comes in.
Another necessary question is whether or not the mortgagor received counseling and if a workout is the best option. As the Supreme Court of Ohio states in its Foreclosure Mediation Program Model, "Ohio has learned that mutually beneficial agreements do not always result in keeping people in their homes. In some cases, an agreement that is both commercially reasonable and sustainable over time cannot be achieved." Sometimes, it will just not be feasible for the mortgagor to remain in the home. In these cases, the focus switches to expedited foreclosure and relocation of the mortgagor.
Finally, settlement authority is key. Most states that have implemented required settlement conferences have recognized that the person with settlement authority is most often located out of state, and as such, in many cases, permits a telephonic appearance. When parties come to the table, it is imperative on many levels that the person appearing or on the phone has the authority to settle.
Lenders, servicers and borrowers all claim that the largest obstacle is getting in touch with the other side. At a settlement conference – provided that everyone appears – this obstacle is removed. It benefits no one if the bank's representative is the holdback.
Keep in mind the ever-prominent "big, bad bank" theory. Trying to dispel this perception is part of the attorneys' and lenders' daily activity. Attorneys constantly convey to the court how much time and energy servicers expend in the area of homeowner retention. What better way to demonstrate this to the courts than by the bank's active participation in the settlement negotiations?
Ultimately, settlement conferences are here to stay, at least for the near future. Are they time-consuming, costly, and do they delay the foreclosure timeline? Absolutely. Can a benefit be achieved? Most certainly.
It is like anything else – it all depends on what you put into it. Being proactive prior to negotiation, as well as at the negotiation table, can result in reductions of REO properties, the dispelling of old labels and the increase in performing loans, which is the goal for everyone.
Kelly Ann Poole is a partner with the New York-based law firm Rosicki, Rosicki & Associates PC. She can be reached at (516) 741-2585 or kpoole@rosicki.com.
