Any Port(al) in a Storm (of Foreclosure): Refining Loss Mitigation Through Technology, 0916 SCBJ, SC Lawyer, September 2016, #38

• Author: Hon. John E. Waites and Andrew A. Powell, J.

Any Port(al) in a Storm (of Foreclosure): Refining Loss Mitigation Through Technology

No. Vol. 28 Issue 2 Pg. 38

South Carolina Bar Journal

September, 2016

Hon. John E. Waites and Andrew A. Powell, J.

Introduction

The Loss Mitigation/Mortgage Modification Mediation Program (LM/MM Program) was developed for certain cases in the U.S. Bankruptcy Court for the District of South Carolina to assist borrowers and mortgage creditors in resolving loan defaults through the facilitation of good-faith communication regarding loss mitigation and mortgage modifications. This article explores the origination, development and success of the LM/MM Program in the South Carolina Bankruptcy Court.

What is loss mitigation?

As a result of the 2008 mortgage crisis, loss mitigation became a part of the national policy as a means of addressing the significant increase in mortgage loan defaults.^[1] Loss mitigation is the negotiations between a mortgage creditor and a borrower to avoid foreclosure after the borrower has missed mortgage payments. While there are several forms of loss mitigation,^[2] the most significant is a consensual permanent loan modification. With modifications, mortgage creditors will reconsider the terms of the loan, which can include extending the length of the loan, lowering the borrower’s interest rate, and forgiving or delaying outstanding arrearage. These modifications typically reinstate the loan as current and reduce the borrower’s ongoing regular monthly payments. In turn, mortgage creditors benefit as they avoid the costs of foreclosure and increase the likelihood that they will receive ongoing monthly payments.

For the majority of consumer mortgage loans, the servicer of the loan has an obligation to review the borrower for loss mitigation eligibility. The servicer is a separate company that serves as the mortgage creditor’s agent to collect on the loans, including collecting payments, bringing foreclosure actions and conducting loss mitigation reviews. Most new U.S. mortgage loans are either guaranteed or backed by Fannie Mae, Freddie Mac, the Federal Housing Administration or the Department of Veteran Affairs (GSE Loans)^[3] and are obligated by those entities’ requirements to consider loss mitigation.^[4] In addition, in 2009, President Obama’s administration and the U.S. Treasury established the Home Affordable Modification Program (HAMP), which allows for modification of many non-GSE Loans.^[5] Currently, 78 mortgage servicers, including most major servicers, participate in HAMP.^[6] Because of these guidelines and modification programs, loss mitigation consideration has become the norm rather than the exception.

Issues in loss mitigation

As the participation in loss mitigation negotiations increased, issues involving loss mitigation also rose. Traditionally, to commence a loss mitigation review, borrowers are required to provide several documents evidencing their current financial situation and hardship to the creditor.^[7] This exchange of documentation and communication between the borrower and the mortgage creditor typically occurs through mailings and telephone calls. Further, most borrowers participate in loss mitigation without the assistance of experienced counsel. However, as loss mitigation reviews require borrowers to complete lengthy forms about their financial situation and compile several documents for consideration under time deadlines, borrowers acting without counsel can be at a disadvantage due to their unfamiliarity with the process.

While many borrowers successfully obtain loan modifications through this approach, it is not uncommon for issues to develop during the loss mitigation review. For example, loss mitigation reviews can be protracted if the initial documentation submitted is incorrect or incomplete and requires additional documentation to be submitted. Further, if a document is not reviewed in a timely fashion, the document can become “stale” and require further submissions, which also delays the process. As documentation is generally mailed, disputes can occur about whether the borrower in fact submitted the documents and whether the mortgage creditor received them.^[8]

Confusion can also be created by the servicer who conducts the loss mitigation review on behalf of the mortgage creditor. Many servicers are divided into different departments including separate foreclosure, bankruptcy and loss mitigation departments. These departments can be located in offices in different states, increasing the likelihood of miscommunication. This internal disconnect can cause mixed messages to be sent to the borrower regarding the status of loss mitigation.^[9] Also, it is not uncommon for the loan to change servicers during the loss mitigation review. If the borrower is not adequately advised of the change in servicer, the borrower may not be aware to continue communications with the new servicer. Further, due to employee turnover at the servicer, borrowers may have multiple loss mitigation representatives with whom they are communicating, some of whom may not be familiar with the complete history of the loan or the prior communication made to the borrower.

It is also not uncommon for communication to break down because a party becomes nonresponsive or because of a...