An analysis in the March issue of the ABI Journal found that several bankruptcy courts are dealing with the foreclosure crisis through the adoption of loss mitigation programs (LMPs). As Congress examines a possible repeal of the Home Affordable Modification Program (HAMP) due to ineffectiveness in modifying mortgages, John Rao of the National Consumer Law Center Inc. in Boston writes that several bankruptcy courts have provided a useful solution through the adoption of LMPs.
“Bankruptcy courts can play an important role in avoiding unnecessary foreclosures and facilitating mortgage modifications through implementation of LMPs,” said Rao.
Oregon Sen. Jeff Merkley recently wrote a letter to President Barack Obama urging a greater focus on helping families stay in their homes and avoid foreclosure. Sen. Merkley noted the shortcomings of the HAMP program in securing mortgage modifications for families facing foreclosure and called for a renewed focus on repairing the battered housing market. More than 300,000 foreclosures have been filed against American families each month for the past 20 months.
As struggling homeowners seeking HAMP modifications have experienced lengthy delays and frustrating documentation issues, Rao found that bankruptcy court loss mitigation programs inject additional layers of supervision, accountability and timelines for debtors seeking modifications. LMPs adopted in bankruptcy courts in the Southern District of New York, Rhode Island and Vermont designate loss-mitigation periods and require dates for the filing of status and final reports. Servicers who wish to terminate negotiations must state the reasons in a filing with the court, providing basic due process for homeowners. Rao cites that one of HAMP’s major weaknesses is that “homeowners are often never told the reason their modification requests have been denied.”
While foreclosure proceedings must be stopped for homeowners found eligible to receive HAMP loan modifications, HAMP does not provide the same protection for homeowners while their applications are under consideration.
“Bankruptcy court mediation programs can fulfill a much-needed role in ensuring that foreclosures do not proceed without consideration of alternatives if requested by the parties,” said Rao. The automatic stay will protect the debtor who has filed a loss mitigation request at least until the settlement negotiations can be concluded. The compounding issues of second mortgages for struggling homeowners are also solved by the LMP process because all of the liens on a property can be provided for in a debtor’s Chapter 13 plan.
Rao found that the results of bankruptcy court LMPs have been promising thus far; approximately 35 percent have resulted in successful approved loan modifications in Rhode Island and New York for cases in which loss mitigation requests were filed from Nov. 1, 2009, through Dec. 31, 2010.
“The number of modifications attained should not be the only goal of the LMPs,” said Rao. “Providing for a fair and transparent process, judicial efficiency and speedy outcomes are other measures of success.”
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