Hello, I am Judge Elizabeth Stong of the Bankruptcy Court
of the Eastern District of New York. As anyone who follows the news is aware, there is a mortgage foreclosure crisis in
this country that doesn’t seem likely to end anytime soon. The great recession of 2008
may officially be over according to economists, but the housing crisis that preceded it, and then deepened in its wake, has left millions
of homeowners unable to pay their mortgages. In the worst hit states an estimated 40 percent
of mortgages are in some stage of foreclosure. Among the many consequences of this crisis
is the effect it is having in the nation’s bankruptcy courts and on those seeking relief there. In response, some of these courts have started programs
that attempt to bring debtors and mortgage lenders together in hopes of reducing the number of foreclosures
and expediting the resolution of their problems. The goal is to find a solution that is seen
as a win by both parties. We’re going to take a look at those programs,
how they work, and what their effect has been. We’ll talk to bankruptcy judges who oversee
the programs and bankruptcy attorneys who take part in them. But before we do that, the FJC’s Paul Vamvas
has this look at the foreclosure crisis itself and its effect in the bankruptcy courts. RealtyTrac, the online marketplace for foreclosure
properties, reported that almost 4 million foreclosure
filings were made in 2010. That means 1 in 45 U.S. properties
received at least 1 foreclosure filing last year. The foreclosure rate dipped slightly in the
fourth quarter of 2010, but that was credited primarily to some banks
halting foreclosures in response to questions about their legality. Those numbers do not suggest a quick resolution
to the problem. Jay Brinkmann is the chief economist at the Mortgage
Bankers Association. Well, they’re still well below where they were
in the Great Depression. But they’re much higher than we’ve seen in previous recessions, for a
few reasons. The first reason is that the types
of people who were getting loans going into this was never this large, so we had
the group of folks that would be most adversely impacted by a recession that were more likely
to be homeowners. The second issue is that we had a tremendous
amount of overbuilding, and so homes were built willy-nilly in California, Arizona, Florida, places like that. And that is important, says Brinkman, because while the foreclosure crisis is national,
it is much worse in some areas than others. If you pull out the California, Florida, Arizona, Nevada numbers, the rate of foreclosures maybe through
all this has doubled, whereas in those states–from what they would
normally be–in those states perhaps it’s increased
tenfold over what they had experienced in the years before that. There’s nothing we have
seen going back in our records 40 years to anywhere compare to what is still going on in
the state of Florida. And even short of foreclosure, mortgage delinquency
rates are up most in what bankers call the 90-day
bucket, that is, homeowners who are three or more months
behind in their mortgage payments– a trend that Brinkman believes will not be
reversed for the next several months. How is this situation affecting the work of
federal bankruptcy courts? William Rule is the chief economist for the
Bankruptcy Judges Division of the Administrative Office of the U.S. Courts. When an individual files for bankruptcy, an automatic
stay goes into effect that prevents creditors from taking any action against the debtor; that includes even talking to the debtor. So, obviously, in every case in which
an individual files for bankruptcy and then seeks modification of their mortgage,
you first have to have a motion for relief from the automatic stay so the two can talk. There are also many of these motions that are filed largely unopposed so that the foreclosure proceedings
can continue. There are also, as we discussed, the issues surrounding second trusts. In some districts, stripping off of a
second lien appears to be done through motions practice, particularly in filing a motion to value collateral, valuing the collateral associated with that second at
zero and then stripping it. In other districts, the predominant means of practice is to file an adversary
proceeding to determine the nature and extent of the validity of the lien, and it appears in my perusal of the
numbers that it breaks one way or the other for the most part. But, again, if you look at the statistics,
the numbers of motions to value collateral are up 500 percent, 1,000 percent, 10,000 percent in some of the districts that we are familiar
with from the mortgage crisis. In other districts, adversary proceedings to determine the validity or extent of a lien are up hundreds of percent, obviously suggesting that the mortgage crisis is indeed having
an impact on the courts’ dockets. In particular with respect to adversary proceedings, we know that the amount of time required to deal with this type of adversary
proceeding is fairly significant. And we can see large amounts of judicial resources and court resources in general being devoted
to processing these adversary proceedings. Rule also believes that some homeowners
are filing for bankruptcy pro se by paying firms to provide them with forms, or even finding the forms online, so that the automatic stay will give them
another 9 months to a year to live in their homes rent-free. And these kinds of filings take even more
time. Bankruptcy judges have a tendency to bend over
backwards for the pro se litigant to make sure that that litigant has an opportunity to say his piece in court and not to simply wash them out
on the first procedural defect that they find. And this has led to very long
workdays for some judges in some districts because of that. But whatever purpose has brought the homeowner
fighting against foreclosure to bankruptcy court and whatever caused him to be in that situation, the effect on the court is the same. Now that we have some idea of the scope of the
foreclosure crisis, let’s look at the programs that three bankruptcy
courts have implemented to mitigate these losses. With us to help do that are Bankruptcy Judge Robert Drain of the Southern District of New York, Chief Bankruptcy Judge Arthur Votolato
of the District of Rhode Island, and Patricia Antonelli of Partridge, Snow and Hahn, LLP, who practices bankruptcy law in Rhode Island. The programs in Judge Votolato’s court
and in Judge Drain’s court, and in my court in the Eastern District of New York are very similar
with only some minor differences. So let’s talk about these plans. Judge Drain, let’s start with you. We’ve said that the purpose of these programs is to provide
a negotiation opportunity to mitigate losses to both lenders and debtors in bankruptcy court
facing foreclosure. But what does loss mitigation mean in this context,
and what is the court’s role in promoting that? Well, loss mitigation is a judicially supervised
mediation between the homeowner and his or her lenders
on their residence. And it sets forth deadlines and procedures to complete
the mediation, but most importantly, there’s the backdrop of court supervision
that essentially keeps both sides focused and dealing with each other in good faith. Patricia, who is eligible to take part in these programs, and what kind of property are we talking about? Well, all individual debtors– Chapter 7, Chapter 13, even Chapter
11 debtors–are eligible, but the key thing is the property. The property that they’re seeking to
get loss mitigation or to save has to be their principal residence. So a debtor can’t
try and use loss mitigation for commercial properties. So it’s got to be their principal residence. Does a party have to take part in this process? Well, on the creditors’ side, yes. We have seen cases where creditors have
objected to participating and the court has come back and said
that you’ve got to have–you can’t just say we don’t
want to participate. So creditors do have to participate. And then debtors, if a debtor doesn’t
want to participate, and they’ve asked for loss mitigation at
the outset but then they decide they don’t want to be involved anymore, then the creditor can file to terminate the
procedure and you go on. But generally if the criteria is met and it’s residential property,
a principal residence, and there is a mortgage, the creditor has to participate. So how can a party
object? In the Rhode Island procedure
there is a process for either filing a motion to terminate
the process or just out-and-out objecting when the request for loss mitigation is filed
at the outset. So, Judge Drain, can the bankruptcy court order the parties
to take part over an objection to doing so? Yes, we have the power to do that. In practice there have been very few objections
to debtors’ invocation of loss mitigation–
I’d say well under one percent, perhaps a tenth of a percent. But of those, most of them are granted. But I have upheld, and my colleagues have upheld, a request over an objection. And the criteria for that is really based upon an evaluation of the debtor’s income, expenses,
and the value of the house, and whether in light of that there’s a likelihood that there will be a negotiated resolution if
the parties negotiate in good faith. So when there is an objection, what is the standard
that you apply? As I said, I think that the standard is whether in light of the facts, which is, again, the debtor’s income and expenses,
and the value of the house, there’s a likelihood that the parties will reach an agreement that will be beneficial to them. And I can say that generally the objections are granted
where the debtor doesn’t have income and it really appears to be a delaying tactic. As I said,
that’s very rare. They are denied where it appears the
debtor has made a legitimate request and the creditor really hasn’t even focused on it. They have just made a knee-jerk objection. So, Patricia, once the process starts, what happens next? Once the court issues the loss mitigation order, there
are deadlines and time frames set up whereby there is an exchange of information. The creditor has to get out a list
to the debtor of what exactly they want in terms of financial statements, etc., and a mediation session is set up, and the
parties go on their own and they try to do some negotiations to get the–to come out either with a loan modification or maybe a short
sale. So the process gets set right up front
with the order. Judge Votolato, who takes part in these sessions, and what is the
role of the court once the sessions begin? The sessions themselves, are, I think, the parties, their attorneys, usually the debtor’s attorney, and the creditors with their authorized decision makers–I think is a new buzzword that’s
evolved from this process– and that’s the trick to getting an authorized decision maker most of the time from either the the principal secured creditor or their servicers and that’s basically if there was an underpinning to
loss mitigation or the loss mitigation process, I would think that it’s getting these parties just in the same
room to talk. That’s been the main, I think, the driver for at least the Rhode Island loss mitigation process, which was patterned
largely after New York’s Poughkeepsie endeavor, which we have taken largely and made our own local changes. But the court doesn’t have, and I don’t think it should have

based on the principle of what this process is supposed to involve, is to get the parties
together and they talk. The court basically, I feel, is sometimes like a sheepdog who is trying
to keep these people in the same room as long as it’s a reasonable thing to do. Once a loss mitigation undertaking obviously becomes a fruitless exercise, I don’t think the court should require either
debtors or creditors to invest more calories in that than are necessary to to terminate. And that happens, unfortunately, in many cases. You can’t turn a financial loss into a financial operating enterprise when the resources just aren’t there. So, Judge Drain, Judge Votolato has focused
on the role of the parties. What are the responsibilities and the duties of the parties in the process? Well, first and foremost they have to
identify the negotiators, and as Judge Votolato said, the negotiators have to be people with authority. That’s, I think, about 95 percent
of the process. What we kept hearing, and I’m sure courts around the country kept
hearing, is that creditors simply wouldn’t return phone
calls or you get different people returning the phone calls and you get different requests for
information. This program is intended to set up clearer areas of authority and contact, and so that’s the first step. The second step is to provide the information
that is needed to make the analysis of whether a loan should be modified or not. And then the parties need to deal with
each other in good faith. And that’s the fundamental requirement of any mediation, of course, and I agree with Judge Votolato that the court’s
role is really to make sure that those requirements are complied with and not to intrude on them, but
just to make sure that the parties are dealing with each other in good faith, and taking the facts into account in making
their decisions in light of the facts. I would say that’s where the the court might intervene somewhere in these proceedings between the debtor and
creditors is to keep a good eye on whether both sides are
operating in good faith. I think that’s an important watchword in this process. And when you say good faith, it’s not to question
people’s motives. It’s really just to make sure they’re asking the basic questions. For example, what’s the
house worth? What can you get in foreclosure? Well, why are you asking for three times that from the debtor? You’re never going to get
that. Would you let someone steal five copying machines worth $200,000
from your bank? Well, if you’re throwing away $200,000
when the debtor is willing to modify a loan that let’s you keep that, have you thought about that? Those types of questions. That makes sense. Judge Votolato, you have talked
about delay. Are there deadlines or milestones in the process that keep it moving forward? Sure, there are. There are both, there are deadlines and milestones to be observed by both
sides. I think our standard one seems to be 14 days to answer requests for either loss mitigation
or respond. The deadlines, I think, at least in our court and
in our experience so far has shown that we’ve allowed the parties to kind of run the negotiations themselves.
But with some hindsight, we’ve
seen that both sides have fallen into a process of the
litigants being much too liberal with the continuances
and extensions so that the court has recently,
very recently, changed our procedure a little bit so that
we’re going to have more court oversight starting in the clerk’s office with an experienced clerk who can spot obvious delay. Questionable ones that come to the court, I guess they run through the law
clerk first and then eventually end up on the judge’s lap. But the process is basically one of oversight, and that’s all individual with each judge, and
I am assuming even in the same court, the standards are a little bit different depending
on which personality you are in front of. But that appears to me to be, I think, originally when loss mitigation was
first brought to my attention. I think there was only one bad guy, and that would be the creditor who
was impossible to contact. And recently we have been at least with the understanding that maybe both sides
need the monitoring and with debtors who become dilatory in furnishing their stuff. The old mantra has been I’ve supplied these things five
times and the servicer keeps losing them and here I am, trying number six to get my material, which is always outdated because
they don’t keep track of it when I send it in. There are similar complaints,
I would say, on the parts of the creditor’s representatives at least alleging, and we will have to have, I guess, some
hearings or conferences or status hearings to determine whether the debtors are in fact dragging their feet as well. So, Judge Drain, that’s the process. How does the process end? As with any mediation, there are really
two outcomes. Either there is an agreement reached or there is a failure to reach an
agreement. The types of agreements that can be reached
are not limited. I think the the model or what everyone is
aiming for is a loan modification that can be within a governmental program
like HAMP, but it certainly doesn’t have to be. Many lenders
have their own programs. In a bankruptcy context there’s
a great deal of room for creativity. But you can also have a modification that results in a short sale, that results in a graceful exit, so that the homeowner could
stay there perhaps through the school year and then leave, and then that is noticed up in a, you know, fairly streamlined way, under 9019
with the modification attached. We have forms for all of this to make it pretty easy for the lawyers to handle and for
the court to handle. I’ll review it, and the Chapter 13 trustee
or the Chapter 7 trustee may review it for
certain things, like are there excess fees being charged,
or in Chapter 7 are they asking for
a waiver of the discharge? Those things are not permitted in our procedures. But generally if the parties have reached
agreement, they’re going to have that be approved. Judge Votolato, you recently wrote a very thoughtful opinion
dealing with my next question, which is this: Under what authority can bankruptcy courts
order these negotiations? I don’t think that the the court’s reliance on the present loss mitigation programs that we use and that we’ve basically
borrowed from New York. I think that they are amply supported by the Bankruptcy Code itself, the Federal Rules, the Federal Rules of Civil
Procedure, our own local court rules. And there is plenty of case law too from Court of Appeals decisions in the First
Circuit without question. That court’s inherent ability to manage its handling of cases that are on the docket in whatever
fashion, whether it involves enforced mediation and even involuntary mediation, I think, that some of the decisions I’ve seen go much
further than what I consider is a very . . . the Rhode Island program is very laid back and almost apologetically conservative in what we tell people that they have to do.
It’s, in my view, almost soft-pedals too much on what in the form of appeasement of you’re trying to anticipate a secured creditor’s
problems with these procedures. I think we tried to anticipate those when working up the
loss mitigation program. But the authority is ample.
It showed up in the the amicus brief in the case that was handled
in Rhode Island. And there seems to be, as I say, I was pleasantly surprised to see how much authority there is outside of the old 105 argument that doesn’t really wash too well with the
appellate courts these days. And it’s very well set out in your decision. Can I say that these programs were developed
with heavy input from creditors’ lawyers, and we’ve never had anyone contest the authority to do it, and I think that’s probably because creditors, the people with the money at stake, in contrast perhaps to servicing law firms, realized that there is an ability to mitigate their losses as well as the homeowners’
losses. So here is my last question and this is for each of you. Stepping back, we have all had some experience now with loss
mitigation. How well do you think these programs have worked so far, and how are you measuring
that? Patricia, let me hear first from you. Well, I am going to speak from the creditors’ side. Having experience representing
large creditors, some of the big national servicers, and then small banks and credit unions and things, I think no secured creditor wants to be told
that now there is going to be a three month to maybe six to nine month delay in trying to go after their collateral. However, none of our clients have asked to oppose any of these loss mitigation requests,
and it’s a good thing to have structure and to know what the rules are. And so there are the milestones, and we know
when this has to happen by a certain date, a status report has to be filed, etc., and if one of the parties on the other side–
the debtor, say–isn’t doing what they’re supposed to do, we have some type of structure to go to the
court and ask for an order or ask to terminate the process. And so for us it’s been a kind of a no-nonsense process. That is such a good
point that these programs are about process and structure. Judge Votolato, how well do you see that the program in
your court has worked so far? Again, we’re dealing with small numbers. Statistically, I think, when loss mitigation is requested there is no objection in probably 80 or 90 percent
of the cases, and they proceed with the loss mitigation. I think that the number of proceedings that go on to a successful loss mitigation result is much less. I am not sure again; the numbers are puzzling to me when I see the statistics. But, you know, if we saved a hundred or 200 houses in the course of our loss mitigation program to completion that haven’t gone belly up afterwards, I think that that would be a decent number. I think as far as making a dent in the entire– I don’t want to use the word “crisis” again– but the loss . . . you know, the mortgage
situation, it’s tiny when you look at the big picture. But it’s making a dent, one small dent, at a time? Judge Drain, how
are you measuring this? How do you see these programs working so far? Our program has been in effect now for about 18 months, and we reevaluated it with the bar after a year. And unanimously, people decided it was worth
continuing it. I think it first of all– again, our statistics are not as good as I’d like them to be–but I think from what we can tell from
the numbers, almost half result in a loan modification, which is a better success
rate than Chapter 13 confirmations by far. Secondly, in most of the cases it’s the first
time that debtors and creditors really have talked
to each other, and the frustration that you see nationwide over that–that disconnect, if you can solve that, then I think that’s
a major achievement too. So, given the government programs in place that in essence require litigation to be put on hold, well HAMP, we decided it was important to put the processes
in place to deal with things in an organized way. And I think it’s worth the work. I’d say that our experience has been very much the same.
It’s been positive for the debtors and it’s been positive for creditors in so many ways, and
communication and process have been central to that as well as the oversight of the courts, as
we’ve discussed. Thank you all for helping us understand
these programs and giving us an idea of how well they have worked. In our next segment, we are going to look at loss
mitigation from the different perspectives of debtors and creditors. Even when courts have loss mitigation programs like
the ones we are discussing, they have to operate in the context of other
requirements and expectations in the bankruptcy courts. HAMP, for example, is a federal program meant
to help homeowners facing foreclosure to avoid that outcome. And, of course, any program has to deal with not just the
needs of debtors, but the legitimate expectations and demands of creditors. To look at all this, we are joined now by two
nationally known attorneys who are deeply involved in these issues. John Rao is an attorney at the National Consumer
Law Center, and Victor Milione is a partner at Nixon Peabody,
where he represents creditors. John, what kind of help is the HAMP program designed
to provide to borrowers facing foreclosure, and who is
eligible for the program? Well, to be eligible for the program the
homeowner has to either be in default–in foreclosure– or in imminent threat
of default and their monthly mortgage payment has to
be more than 31 percent of their income. And the whole goal of the HAMP program, if they
are found to be eligible, is to modify the loan to bring their monthly mortgage payment
down to 31 percent. And the way that is done is through effectively a waterfall of different
options. The first one is that all the arrears are capitalized and then the
next step would be to lower the interest rate as much as to 2 percent, and then from there, there could be potentially an extension of the term of the loan and then a principle forbearance, and then the
last resolve, although not mandated under the HAMP program, is a principle forgiveness. And that ultimately will get the homeowner down to that 31
percent mark. Now, does being in bankruptcy reduce a debtor’s chance of being able to use the
HAMP process? Well, it shouldn’t if the guidelines are followed. The Department of Treasury has issued
guidelines for the program, and what they have said on that is that
if the debtor is in an active Chapter 7 or Chapter 13 bankruptcy,
they still must be considered for HAMP. And even if they’ve had a Chapter–they were
in a bankruptcy in a Chapter 7, and they received a discharge and didn’t reaffirm the debt,
they’re still also eligible. And if they’ve been put on a trial
plan, which is how the program begins, they need to stay on a trial plan for
at least three months before they’re granted a permanent modification. If they’re on a trial plan and
they file bankruptcy, they cannot be denied a permanent modification because they
filed bankruptcy on the basis of the bankruptcy. So how does a borrower apply for the HAMP program? Well, it’s done–the way Treasury has designed
the program is that all of the benefits, if you will, of the program are done through a servicer, so it’s not the lender themselves or the owner or holder of the
mortgage who is the portal, if you will, to get the mortgage. It’s all done through the servicers on the mortgage. So the servicers,
and almost all of them have signed participation agreements with the Department of Treasury, and the applications then would be made to
the servicer. And the application–what the homeowner
needs to fill out is an application form; it’s called an RMA, it’s a request for
modification and an affidavit. The affidavit is where they need to basically attest that they are, indeed, a hardship affidavit,
that they are actually in need of a modification. And the required information is actually not
much different than what debtors need to file when they file bankruptcy. They need to provide tax returns
and pay stubs and other information that would verify
their income. Once that’s submitted to
the servicer, that would begin the process. In bankruptcy, I might add, there’s actually
an additional advantage that there is a portal that’s been set up
by actually a private company but many of the servicers–almost all of them are using
it where the bankruptcy attorney can submit a lot of this information electronically,
and that can potentially speed up the process. So how does applying to HAMP affect the foreclosure process? Well, in– outside of bankruptcy, the Treasury
has tried to ensure that the foreclosure process should stop once the application is made, but there have been some problems with
that. So it’s–if the homeowner has been granted a temporary trial plan, the foreclosure process should stop immediately. If there has not been a referral for a
foreclosure and the homeowner applies for HAMP, that should suspend it. There
should not be a referral for foreclosure, a referral of the case to a
foreclosure firm. The problem has been when a foreclosure has already been initiated and then the homeowner applies. The guidelines
say that that should stop, but, unfortunately, there’s
been some issues with that. Actually there’s been a fair amount of discussion of that
even in congressional hearings about what’s referred to as this dual-track problem,
where the the one arm of the servicer shop, the
loss mitigation department, may not be communicating that well with the foreclosure department. And, therefore, the foreclosure proceeds
even though it should be suspended. So what if a borrower is found ineligible for HAMP? Can the lender immediately proceed
to foreclose on the property? No, the guidelines provide that there should be at
least a 30-day period before it starts again. And how does being turned down for HAMP affect the borrower’s relationship with the lender? Well it, it doesn’t necessarily preclude other options.
In fact the guidelines are designed so that if the homeowner is found to be ineligible
for HAMP, they’re encouraged, the
servicers are encouraged, to consider whether the homeowner is eligible
for some other program. Sometimes they are referred to as these
in-house modifications or proprietary modifications. And
on that point, I would say that the servicers actually do engage in that process where there
has been a decline in the HAMP application. They will actually go ahead and look at other modification programs that apply. Have creditors been doing the HAMP analysis
before offering borrowers these other modification options? Well, that actually has been
a concern that’s been raised on the homeowner side. What we have found at least, for example,
that the statistics which have been provided through the Department of Treasury for the
first part of last year, 2010, almost 70
percent of the modifications that were made were non-HAMP modifications–they were these
proprietary modifications. And the concern is that servicers may be putting homeowners into these proprietary
modifications before they’re actually considering them for
HAMP. And the HAMP guidelines are clear on that– that the homeowner must be considered for
HAMP before the proprietary modifications are considered. And the real issue there
is that while it is very good that servicers do offer these as an alternative if HAMP–if the homeowner is not eligible, the concern is that these proprietary modifications
are not on the same favorable terms as HAMP. In fact, the– there’s been one report which has
suggested that these non-HAMP modifications have a much higher
default rate, primarily because in some
cases they actually increase the homeowner’s monthly payment rather than decrease it. So how does the HAMP process merge with the standard bankruptcy process, and how can these two processes work together? Yeah, I think, that they–there is some
potential for conflict, but in general they can work together. One of the main issues that has arisen outside of bankruptcy is the delays that have been caused
in getting a decision about HAMP. And one of the advantages of being in the bankruptcy
process is the homeowner is often represented by counsel,
and that will help at least on the homeowner’s side to make sure that documentation is provided
in a timely manner. And there is the potential at least–especially
in a loss mitigation program, but even if there isn’t– there is the potential for there to be . . . more . . . quick decision making being
made on these . . . modifications. The other
issue, I think, is that it gives the– both the servicer and the homeowner
the opportunity to consider all of the homeowner’s financial . . . problems, really. I mean outside of bankruptcy, the homeowner is only going to be dealing
with their mortgage with this modification. Yet they may have other debt which is still causing problems for them, and there could be issues of second
mortgages on the property. In the bankruptcy context, all of the debt load of the homeowner can be dealt with
in one place, and I think that has advantages to both the homeowner and the servicer. So if one of these agreements is reached, what happens next? What is the foreclosure rate
on the mortgages that have been modified under HAMP? Well, actually there’s good news there. The Treasury statistics have
shown so far that for homeowners who have been on permanent
modifications for as long as a year, that the default rate has been 15 percent and lower, which,
again, is really quite good for these programs. And when you look at some
of the more recent vintage modifications, those default rates are
even potentially lower. The other interesting thing which is not at
all surprising is that for homeowners where there’s been significant
payment reduction–so those where there’s been at least a 30 percent drop in their mortgage payment– the default–the success rates are actually
very high, even better than the 15 percent. And I might add that when Treasury designed
this program they had presumed that the default rates would
be closer to 40 percent, so the 15 percent is really good. The question is how that will
look a year and a half or two years from now.
But so far there really is good news on that front. So far so good? Yes. So far so good. Victor, thank you for joining us. What is the role of securitization of mortgages
in the foreclosure situation, and how does this affect the ability of servicers
to take part in mortgage modification programs of any kind? Well, I think what we’re talking about in servicing
is private label, label servicing, and this is separate and apart
from the servicing that’s been done by the government entities for so long, which really took off in the late 90s and into the last decade. And in 2007, private label servicing
was essentially at its height. Servicing begins with–so to answer
the question–there really hasn’t been a significant impact on the servicers’ ability
to participate in programs like HAMP or in modification programs. The securitization has added a layer of complexity because there are multiple players. And I think
it’s helpful to take a step back and hear a little bit about the background and how a
pool of mortgages is assembled and who the players are to get a sense of what the divergent viewpoints are in the process and so everyone
here can understand the complexity of this arrangement. Essentially, it begins with the depositor assembling
thousands of mortgage loans, and individual residents, their loans are assembled and
deposited by the depositor into a trust. And the trust is then divvied up between certificate holders,
who are the beneficiaries of that trust, and then all of the other players in
that trust instrument. So there’ll be a master servicer and a special servicer, and then there will be some other servicers who may have different responsibilities,
for example, when the loan goes into a default. While the loans are being administered the
servicers do the normal servicing, administration of the loans, they collect payments, and they report back to the master servicer
as to what’s going on with the loan pool, the individual loans. And then the master servicer will report to the trustee about what the revenues are and what the certificate holders
should be distributed. In servicing the loans, the special servicer has to abide by an agreement called the pooling and servicing agreement. You hear a lot of the acronym PSA–that’s
what it stands for. The pooling and servicing agreement sets forth the rights of all of these different
parties. And if you look to the pooling and servicing agreement–
many are publicly filed because a lot of these are publically filed entities– you will find that there are defined rights
and responsibilities of these different entities within that servicing entity. The servicer is bound by the servicing standards,
and now these things have evolved over the course of 10 to 15 years
so that the servicing standards have evolved as well. And some of these PSAs will have servicing standards that are general guidelines, you know, prudent
investment and servicing standards for that particular
servicer. Others will have specific guidelines. They may not be as specific to go into defaults, but they may have more precise guidelines that the servicer has to
follow. And still other PSAs have guidelines that
combine the two. There will be a specific guideline and then a default to a more
general principle. And the servicer has to figure out what it
has to do once a loan goes from a non- default situation to a default situation. There are certain guidelines within those standards. The trouble comes when the servicer has to
decide how to approach something between a modification
of a loan and a foreclosure. And typically what the servicer will do will
look to see– in the various software programs that are
out there that they analyze these loans through– he will look to see what the higher net present
value is between a modification proposed, whether it be through HAMP or some alternative program,
and a foreclosure scenario. And that’s essentially where the servicer is
going to make its decision about whether or not to go forward with the modification or a foreclosure. The–as you can see, the various layers in the servicing
approach and in the SPA vehicle itself require the servicer to account
to a number of different constituents. And the certificate holders themselves have an interest
in making sure that resolution of mortgage loans is to their interest as well. And the servicer
has to abide by those. So those are the overriding concerns the servicer has when dealing
with a defaulted mortgage loan within the pool of loans that it’s servicing. And these are thousands of loans– trillions of dollars of residential loans
are involved in these pools, so it gets to a very complex degree. Whereas, 20 years ago a private servicer didn’t have all of those
reporting in constituents to . . . to abide by. So what do creditors want from the bankruptcy courts in dealing with
foreclosures? From a servicer’s standpoint, I think, it’s pretty clear that the servicers want
the same thing that the homeowner wants– we just all have to get together on this– and that is that they want a quick resolution that doesn’t cost a lot, and that doesn’t involve a lot of delay, all
while abiding by the various interests that I just outlined, which are not only that it has to be within the servicing
guidelines of that PSA but it also has to address the best
interests of the creditors who hold those certificates
as owners of that trust. Are the servicers aware of the mortgage modification
programs that exist in the Eastern District of New York and the Southern
District of New York and the District of Rhode Island? Yeah, the servicers are aware of
mortgage modification programs generally and are becoming more aware of the loss mitigation
programs that are actually in those districts. They’re relatively new, so the servicers
are still getting their arms around them, and there’s no institutionalized approach that I know of at the moment, and those are typically being addressed on an ad hoc
basis by each servicer within the context of a particular loan. Obviously,
they don’t come into play unless there’s a defaulted loan and unless there is a bankruptcy filing. So what kind of analysis do servicers do when
they’re considering the options in a potential foreclosure? They look at everything that John outlined
when he was going through the HAMP program. There are software programs designed to consider all of the different
modification programs that exist nationally, also to consider some of the mitigation programs
that are now being implemented in the bankruptcy court and then to ultimately conduct the analysis
that I described earlier, which is to figure out whether or not the NPV, the net present value, of the modification is better than the net present value of a foreclosure liquidation result. I should just add that the Department of Treasury
has developed a net present value testing program that is used by virtually all of the servicers as part of
the HAMP program. And while some of the largest servicers have
been able to modify that, largely they’re all using the same NPV test. Yes, that is true. So are servicers concerned that loss mitigation
programs in these courts could add time and cost to the process? Absolutely,
and what we see now is that the process
has some advantages but also has some disadvantages in that it
adds delay. The delay, though, seems to be outweighed by some of the advantages that
we see from the loss mitigation programs. Those advantages being a consistent approach,
a formal approach that has regular scheduled benchmarks, an approach that has all the constituents assembled in one room, and an approach that actually can deal with
some of the issues that servicers have in dealing with modifications, for example,
if there’s a junior lien holder on the property and that junior lien holder objects to the modification the senior lien holder who’s willing to go
forward with the modification can’t agree to it. In bankruptcy court that might be resolved through a
lien stripping approach. So what is the best way to “sell” these mortgage modification or loss mitigation
programs, if you will, to the servicers? I think it’s a combination
of everything that we’ve just discussed, which is– and everything the panel prior discussed–which is essentially making sure that there’s effective reporting
of the results of the loss mitigation programs, so in that I mean we need to understand how effective they are, how much time is spent, why the time is spent that it is in the mediation
process, and what the results are. I think also broadcasting the fact
that and emphasizing the fact that there are reduced costs as a result of assembling
all of the parties that need to be part of this decision for modification is an important thing
to broadcast to the servicers to help them embrace the process. When we think about mediation we usually think
about a process with a neutral. Is there usually a neutral involved in these negotiations?
Or are these direct between the borrower and the lender? Go ahead, John. I was just going to say that both the New York and Rhode Island programs are set up
to allow for a mediator to be appointed, but so far the experience has been that the parties have not requested that
there be a mediator involved. And that’s our experience as well. Most of
these discussions occur without a mediator between the parties and in a context
that allows for a sort of court-supervised discussion without actually having the court
involved in the discussion. And if you give the parties the opportunity to
have those conversations, the kind of results we’ve been talking about are
what follow? Is that right? I think that is the significant advantage from our perspective to these
programs over a mediation–voluntary mediation program. Yeah, I think, comparing those with some
of the mediation programs that have been implemented in state courts, I think the real difference in bankruptcy courts,
as I mentioned earlier, is that most of the debtors are represented by counsel, and that–
when both parties are represented by counsel there is less need, I think, for a mediator than we’ve
seen in the state foreclosure proceedings, where as many as 60 percent of the homeowners
are not represented by counsel. Thank you both. Thank you for being here today. We have another perspective on the questions
of loss mitigation–that of a Chapter 13 trustee–in our next segment. Debra Miller is the Chapter 13 Trustee
in the Northern District of Indiana. She is here to help us understand how trustees
view these loss mitigation programs and how they fit into the trustee’s responsibilities
to the debtor, the creditor, and the bankruptcy court. Debra, what kinds of reactions have you seen from
both debtors and creditors to loss mitigation attempts? I think that we have seen the whole gamut. Some debtors come into a 341
meeting and talk to us about how they have contacted their servicer over and
over, provided documentation, and haven’t been able to get into a loss mitigation
program. Some debtors will come in and say they were in the
loss mitigation program but they didn’t qualify for a permanent modification. We have debtors’ attorneys who will come in and
say that they’ve tried to do the loss mitigation for their client, and since the foreclosure track was still running, they had to file the Chapter 13 in
order to stop the house from foreclosure. And then we have creditors who will actually
call our office, servicers who will actually say, “We’ve been trying to work out a loan modification
with the debtor’s attorney, and they’re not calling us back. Could you please help out?” So you’re the Chapter 13 trustee. What do
you see as your role in this process? There’s a couple of different roles that
I think the 13 trustee actually has. On a national basis, the Chapter 13 trustees
have actually been working with the servicers, with the debtor’s attorneys in order to try and come up with some best practices, some are a loss mitigation packet, get some names out
to the debtor’s attorneys in order to help kind of speed the loss mitigation process along. In our offices, I think there’s a couple of things we have
to do. Sometimes a debtor’s attorney may not be aware
of loss mitigation, may not be aware of the HAMP programs, so we put on training, we give the
packets to them. In rare cases we’ll actually make referrals
ourselves as a trustee to a servicer asking to look at it for a loan modification and ask the servicer to contact the debtor’s
attorney to do the loan modification. We can’t actually
be involved in the process, but we can make the referral. So what kind of relationship do the trustees and the mortgage servicers have, and what are trustees doing to deal with the
foreclosure crisis? I think it depends on the servicer as to what the trustee’s relationship
is with the servicers. There are so many issues that are going on.
They are so busy. We have the whole issue about what has to be attached to a proof of
claim and the litigation that’s going on, which would probably keep us from talking to them too much. On the other hand, we have working groups
where we sit down, we talk to them, we try and come up with better practices. So it’s kind of a–not a love- hate relationship, but I would say
just a working relationship with the servicers. So what kinds of things do you hear from each
side–from the debtors, from the creditors– about working through the modification process? From the debtors we hear a lot that they sit on the phone a lot, they send the documentation, the information that the
servicer has wanted 5, 6, 7 times and they never get a return
phone call. We hear the same sort of thing from the
debtor’s attorneys also. From the creditor’s attorneys we hear that the debtor attorney isn’t willing to help on
the loan modification because they’re not getting paid. One of the things that we actually ask both the servicers and the debtor’s attorneys
to do is actually use– I think John Rao talked about it–is
the portal on the Internet, because one of the things it allows us to do
as a trustee is we can actually track has the debtor actually
sent in the documentation, has the creditor actually sent the information
back to the debtor. Has– are we hearing the true story from both parties? So many times we go into a confirmation hearing
where the mortgage as it currently stands certainly is not able to be confirmed. The arrearage is too high, the payment is too high, and by having this portal it allows us to kind
of track and see whether or not the modification is actually going to work and make the bankruptcy feasible. The other thing that we have to do as
a trustee is once the modification is actually approved, we are no longer usually paying the prepetition
arrearage amount. So we have to stop paying the prepetition arrearage amount. We have to
make sure that we’re paying the right payment if it is a trustee pay jurisdiction and just make sure that financial
things are in order after the modification is done. I think you’ve touched on this in the context
of the portal, but are there software programs or other new
technologies that make this process easier? There are actually two ways to do it on
the Internet that I’m aware of. City Financial–City Mortgage, I’m sorry, actually has a link on their website in which debtors
or homeowners can actually go on and ask for the modification and upload the programs. There is an additional portal that is
for pro se debtors and debtor’s attorneys which also allows the homeowner to ask for a modification and
upload the documentation. And those are fairly new; they’ve been around
about a year or a year and a half. I hear wonderful things about it. I know I actually
go on, and I check to make sure that I’m kind of getting the right story from the
debtor’s attorneys that, you know, the modification is in place. And there actually is the ability that courts
and the judges can actually get a user name and ID and actually check
the cases also. So that’s one thing that the judges maybe want to look into if they are actually worried that they’re not getting the true story. Alright. Thank you so much. Thank you, Debra. That is our program. We hope
you have found it interesting and useful as you deal with the issues surrounding foreclosure
in your court. We are providing a great deal of related material
with this program that explains the loss mitigation programs and a number of issues related to
them. You will find links to those materials on
the same page at FJC Online as the streaming video version of this program. And you should check the websites of each of
our courts– those of the Bankruptcy Courts for the Eastern
and Southern Districts of New York, and the District of Rhode Island– for the latest updates to those materials. I’m Judge Elizabeth Stong. Thank you for watching