Finding the Middle Ground by qingyunliuliu


									Foreclosure Mediation
Welcome & Introduction
        Before We Begin
Please make sure you have completed
  your Pre-Training Self-Assessment
 If You Build It,
 They Will Come
   The Milwaukee
Foreclosure Mediation
   The Milwaukee Foreclosure
Mediation Program is administered
 Marquette University Law School
     in conjunction with the
     Milwaukee Foreclosure
      Partnership Initiative
Funding Sources:

The City of Milwaukee
(A Common Council Resolution)

The Wisconsin Department of Justice
(Countrywide Settlement Funds)

A mutually acceptable agreement that is
       reasonable and sustainable
  for the homeowner and the lender.
 The Big Picture From Milwaukee

 Legal Framework of Foreclosure and

 The Lender Perspective

 Options for Foreclosure Mediation

 Mediating Foreclosures
   At the end of the day, you will be able to:
 DESCRIBE the relevant terminology, players and the
inter/intra-party dynamics of the foreclosure servicing
 UNDERSTAND issues that influence and impact settlement
possibilities in home foreclosure and loan default situations

 DEMONSTRATE thorough knowledge of the range of
settlement options

 COMPREHEND the limitations, advantages and
disadvantages of settlement options for the parties
  At the end of the day, you will be able to:

 RECOGNIZE the legal framework that applies to
foreclosure cases

 IDENTIFY  the information required from the
parties to come to an agreement

 PREPARE for cases
 DVD Presentation—
The Wisconsin Story:
 A Personal Portrait
     The Big Picture

Why are all of these foreclosures
            City of Milwaukee
Milwaukee Foreclosure Mediation Program
        Mediator Training Session
Marquette University Alumni Memorial Union
             October 1, 2009
I.    Foreclosures in Milwaukee

II.   Milwaukee Foreclosure Partnership
      Initiative (MFPI)

III. Neighborhood Stabilization Program
IV. Resources for Additional Information
Foreclosures in Milwaukee

       Over 10,000 foreclosure filings in Milwaukee
        (2007-2008); more than double historical

       Over 5,000 properties are currently subject to
        an open foreclosure filing

       1,500 Milwaukee homes are currently bank
        owned foreclosures (REOs)
Foreclosure Filings

City of Milwaukee Foreclosure Filings:

     •January 1 – May 31, 2007:   1,586
     •January 1 – May 31, 2008:   2,275
     •January 1 – May 31, 2009:   2,184
Lender Owned Properties

                    *Q1 2009 total is preliminary
    Sale Price Trends

Average Sale Price of Foreclosed Homes:

          Q1 2007: $80,727
          Q1 2009: $46,657
          % Change: -42.2%
Foreclosure Filing Outcomes

                     *Q1 2009 total is preliminary
Foreclosures in Milwaukee
       Hardest hit areas are Community Development
        Block Grant (CDBG) areas; significant City
        investments are at risk

       Subprime lending activity peaked in 2005 with
        over $1 Billion of activity in Milwaukee

       Subprime lending disproportionately impacted
        low income and minority families; 59% of
        2006 loans in CDBG areas were
Foreclosures in Milwaukee
    Effects on Homeowners

        Over 50% of subprime lending activity
         consisted of refinance loans for existing
         homeowners; long-term residents are being
        Long-term homeowners have lost significant
         equity after being inappropriately refinanced
         into subprime products
        There are few legal resources available to
         homeowners facing foreclosure
Foreclosures in Milwaukee
    Effects on Renters

        Evictions relating to foreclosure have risen
        Little to no notice provided tenants; security
         deposit often disappears
        Both foreclosed homeowners and evicted
         tenants have difficulty securing suitable
Foreclosures in Milwaukee
    Effects on Neighborhoods

        Over one half of foreclosed properties have
         open violations with DNS
        Board-up orders have increased 50% since
        Fires in vacant homes have doubled in past
         two years
        Crime at vacant properties has required
         additional police resources
       Milwaukee Foreclosure Partnership Initiative (MFPI)
                       Formed September 2008

       “Create a formal partnership that will formulate and
       implement coordinated policies and programs that
       effectively address the impact of the recent surge in
       mortgage foreclosures on our community as well as
       identify long term strategies and best practices that
       will prevent similar issues in the future.”

                  MFPI Steering Committee Co-chairs

  Mayor Tom Barrett           Kathryn Dunn            Steve Chernof
   City of Milwaukee      Helen Bader Foundation      Godfrey & Kahn
           Milwaukee Foreclosure Partnership Initiative (MFPI)

    Collaborative Structure:

        22 Member Steering Committee
        Three Workgroups
                Prevention
                Intervention
                Stabilization
        Over 100 volunteers representing a diverse
         array of organizations participated in this
          Milwaukee Foreclosure Partnership Initiative (MFPI)
    Workgroup Charges

       Increasing foreclosure prevention through
        pre-purchase education and consumer

       Developing intervention strategies and
        identifying resources to aid homeowners in the
        foreclosure process

       Crafting and implementing appropriate
        responses to drive the stabilization of
        neighborhoods impacted by abandoned and
        foreclosed homes
       Milwaukee Foreclosure Partnership Initiative (MFPI)
 Prevention Workgroup Recommendations

I.    Form a permanent homeownership consortium
      for the purposes of increasing the number of
      purchasers and existing homeowners who
      receive homeownership-related education and

II.   Advocate for legislative reform to increase
      consumer protections in the areas of predatory
      lending, foreclosure rescue scams, and related
         Milwaukee Foreclosure Partnership Initiative (MFPI)
Intervention Workgroup Recommendations

  I.       Operate a centralized hotline to connect
           homeowners with an established local counseling

  II.      Increase foreclosure counseling capacity by
           expanding the ranks of Milwaukee’s non-profit
           counseling agencies.

  III.     Launch a court-based mediation program to reduce
           the number of homeowners losing their homes to

  IV.      Offer a rescue refinance loan product for eligible
       Milwaukee Foreclosure Partnership Initiative (MFPI)
Stabilization Workgroup Recommendations
I.     Aggressively monitor and preserve vacant properties.

II.    Leverage and utilize resources available for the responsible
       acquisition and disposition of foreclosed homes.

III.   Issue an RFP to identify development partners to participate in
       NSP activities.

IV.    Establish a land bank entity to support strategic acquisition of
       foreclosed properties.

V.     Create a program to support neighborhood investors, increasing
       their capacity to acquire and manage foreclosed properties.

VI.    Implement strategies to link buyers to foreclosed homes.
           Milwaukee Foreclosure Partnership Initiative (MFPI)
    Next Steps

         Efforts already underway to implement many
          of the MFPI workgroup recommendations.
           NSP Programming: Launched April 2009
           Housing Consortium: Launched May 2009
           Mediation Program: Launch July 2009
         The City and its partners will continue to
          work collaboratively to implement the
          strategic vision for responding to the
          foreclosure crisis outlined by the MFPI.
    MFPI Report of Recommendations Available at:
               Neighborhood Stabilization Program (NSP)

       The Housing and Economic Recovery Act of
        2008 (HERA) provided $3.92 Billion in
        Neighborhood Stabilization Program funds to
        states and local governments for the purposes
        of assisting in the redevelopment of
        abandoned and foreclosed homes
       City of Milwaukee direct allocation: $9.2
       Milwaukee is applying for additional NSP funds
        ($25 Million) available through the American
        Recovery and Reinvestment Act of 2009.
                           Additional Resources
  The Legal Framework of
Foreclosure: Procedure and
Substance and The Business
     of Securitization
  Foreclosure Process

Players, Policies & Practicalities
Let’s Look At Securitization
          What Is Securitization?
 Process of converting ordinary mortgage loans into
  securities traded in financial markets

 In brief, thousands of mortgage loans are sold into a

 Shares (“certificates”) of the trust are then sold “on
  Wall Street”

 The vast majority of all debt (car loans, credit card
  debt, etc.) is now securitized
   Contrast the Traditional
Borrower/Lender Relationship
               Why Securitize?
   In the “old days,” originating lenders got money
    back over the life of the loan

   With securitization, originators get lent money
    back as soon as the loan is sold

   Also insulates loans and lenders from each other
        Who Are the Main Players?
 Borrowers
                          Underwriter
 Originators
                          Rating Agency
 Aggregators
                          Credit Enhancers
 Warehouse Lender(s)
                          Pool Insurer
 Special Purpose
                          Special Purpose Servicers
                          Sub-Servicers
 Trust Sponsor/Issuer
                          Investors
 Trustee

 Document Custodian
   What Are the Main Documents?
 Note and Mortgage

 Note Negotiation         Ancillary Agreements
                            (insurance, underwriting,
 Mortgage Assignment
                            credit default swaps,
 Prospectus                etc.)

 Pooling and Servicing    Certificates of
  Agreement                 Investment

 Trust Agreement
    End Result of All These Factors
   Fragmentation of ownership of mortgage loans

   Fragmentation of authority

   Inertia from risk of third-party lawsuits

   Lack of transparency

   Multiple differing motivations to avoid the problem

   Proliferation of toxic mortgage loans
Upside Down Nation
Terminology: Recovery Process
   Default event (note or mortgage)
   Collection efforts by servicer
       Collection Department
       Loss Mitigation Department
       Liquidation Department

   Notice of default at some point
   Lender recovery efforts more active now than
    even six months ago
    Terminology: Recovery Process
   Loss Mitigation
       It is a place/organization/department
           (“How do we get this loan out of the collections
            department and over to loss mitigation?”)

       It is a process
           (“Is this loan a candidate for loss mitigation?”)

       In general, it is a set of options and
        requirements to return a defaulted loan to
        productive status (e.g., to “cure” it)
              Primary Recovery Players
   Borrowers
                                   PMI Insurer

                                   Credit Enhancers (indirect)

                                   Pool Insurer (indirect)

                                   Special Purpose Servicers

                                   Sub-Servicers
   Trustee (indirect)
                                   Investors (indirect)
   Attorneys all around
    (but 90%+ borrowers pro se)
 Primary Foreclosure Players
 Borrowers

                          Special Purpose Servicers
                          Sub-Servicers
                          Attorneys all around
 Trustee                  (90%+ borrowers pro se)
 (Document Custodian)
          Foreclosure Process
   Notice of default (usually required by mortgage)
   Title exam by lender/servicer (Preliminary Judicial
   Foreclosure suit filed (usually trustee or MERS)
       20 days for defendants to respond in court
   Judgment (default, summary/pleadings, or by trial)
        Foreclosure Process

   Order for sheriff’s foreclosure sale

   Publication and Posting

   Confirmation order

SEE “Foreclosure Timeline” Handout
  Foreclosure Players in Court

 Borrowers         primary defendants

 Others with interest in the property    also defendants
  (Judgment creditors and other lien holders)

 The Trustee (or other Note holder)        Plaintiff

 BUT – plaintiff’s attorney consults the Servicer, not the

 Servicer controls the plaintiff process
    The Foreclosure Complaint
   Names as defendant EVERONE who has
    interest in property
       Action for judgment on promissory note
       Equitable/statutory suit to sell property
        subject to mortgage lien
       Determine order of priority of interests in
The Foreclosure Complaint
   Speak now, or forever hold your peace”
   Public auction sale
   Distribute sale proceeds in order of priority
        Foreclosure Timeline
   Notice of default (usually 30-day notice to
   Foreclosure suit filed
   Default Judgment (if no defendant response
    within 20 days)
   Redemption Period: 6 months if Plaintiff
    waives deficiency/ 12 months if Plaintiff
    maintains right to pursue deficiency.
        Foreclosure Timeline

   Posting (3 weeks) Publication (6 weeks) and
    then Sheriff Sale
   Confirmation order
   Writ of Assistance or Eviction
       Foreclosure Timeline

 From Notice of Default to plaintiff regaining
  possession via writ or eviction =
            300 days/10 months

  (if the borrowers default (over 90% of all cases)).
 If the defendant/borrowers   contest the case,
  litigation can take years. (One Milwaukee case
  pending since 2002).

 Definition: A bank, mortgage company or a
  similar business that communicates with the
  borrower concerning their mortgage loan.

 Usually works for another entity that owns the
 Servicers typically:

   accept and record payments (passing them on
     to the owner(s),
   account for taxes and insurance,

   maintain an escrow account,

   negotiate workouts and supervise foreclosures
    in the event of borrower default.
The Lender Perspective:
    Loan Servicers,
    Loan Products,
    Loss Mitigation,
     and Lawsuits

The contract between a servicer and
mortgage owner(s) (often a Trustee) is
very complex and governed by a contract
called a Pooling and Servicing Agreement
Servicers work under a fee structure outlined in the
PSA. PSA usually calls for the servicer to advance
interest payments to the owners, even though they
have not been received from the borrower. (There are
other special circumstances that change the flat fee
structure between owners and servicers.)
 If the mortgage payments come in on time from
  all the borrowers, the fee received by servicers
  is usually between .25% and .5% of the interest
  generated by the mortgage pool being serviced
  (see below).
 Servicers will usually charge additional fees to
  borrowers for any service or circumstance out of
  the ordinary (such as late payments and

Servicers are merging into larger and larger entities.
Top 15 Mortgage Servicers

 Source: National Mortgage News
Top 15 Mortgage Subprime Servicers

     Source: National Mortgage News
The top 75% of the mortgage servicing industry –
      mostly they’re not from around here.
     Economics of Compensation
 A “servicing fee” is received each loan equal to a % of the
    interest paid.

 The usual servicing fee for prime loans is .25% for fixed
    rate and .375% for ARMs;

 FHA/VA loans are .44%.

 Subprime loan fees vary widely, but is often more than
    VA/FHA loans.

     Economics of Compensation

 The worse the credit quality, the more the servicer
    is paid.

 There’s more work for the servicer (i.e., collection
    calls to get the payment each month, etc.).

 Servicers are the “client” of the foreclosure
   Need to approve or disapprove of any
 A major complication:
   the Pooling and Servicing Agreements that
    govern the fees and duties for servicers never
    anticipated that servicers would be faced with
    so many defaults.
one more major
Servicers will have
many different
They agreed to buy
into the mortgage
pool at different
levels of risk and
return (tranches).
        one more major problem:

Disparate risk/return levels mean any
given settlement on a troubled loan
will affect one tranche more severely
than another, causing conflicts among
investors and exposing servicers to
the risk of later litigation . . .
Investors in mortgage-backed
securities (MBS) and CDOs (collateral
debt obligations), CDO2s and even
CDO3s or CDO4s will never, or rarely,
be involved in a mediation of a
foreclosure or the foreclosure itself.
Their presence is felt through the type
of MBS they invested in and that
factor will in turn usually define the
options for workouts and settlements
for loans aggregated in that type of
mortgage pool.
Private Investor Securitization
  Most prime loans will be pooled in the Federal
   National Mortgage Association (Fannie Mae) and
   Federal Home Loan Mortgage Corporation (Freddie
    government sponsored enterprises (GSEs)
    the oldest securitized loan investment pools
    typically the most conservative
    They both have separate policies governing how
     loan defaults are to be handled (FPC, pp. 105-113)
Private Investor Securitization

  Subprime loans are also “private” but are
   not usually found in the GSE mortgage
  Securitized in specially created, higher
   yielding securities with varying workout
  Private Investor Insurance

 Private mortgage insurance (PMI) companies

 Insure the investors from risk when a
  mortgage loan goes into default.
 They have a stake in any settlement between a
  borrower and lender.
  Private Investor Insurance

 Often a workout means that an imminent loss
  is avoided by the PMI insurer.
 Have a stake in the outcome of settlement

 Their role is often obscured in the background
  of the authorization process.
  Private Investor Insurance
 Mortgage insurers have become more
  proactive in loss mitigation.
 The same is true for pool insurers, credit
  enhancers, and other insurers of default risk.
 Not clear how that will impact foreclosure
  mediation or litigation.
      Terminology: Types of Loans

   Prime Loans
     Borrower has excellent or very good credit rating
     Sometimes called “conforming loan”
      or “conventional loan”
     Does not include government insured
      (FHA, VA, RHS) loans
     Does not include subprime loans
      Terminology: Types of Loans

   Subprime Loans

     Borrower has impaired credit rating or no credit
     Higher cost (points, fees, interest) that prime
     Most predatory loans are subprime loans
     Most subprime loans are not predatory loans
      Terminology: Types of Loans
   Alt-A Loans
     Borrower has good credit but enhanced risk
     Self-employed or irregular employment
     High loan-to-value (LTV) ratio
     High debt-to-income (DTI) ratio
       Terminology: Types of Loans
   Government-Insured Loans
     Borrower has good credit rating
     Includes loans from FHA (Federal Housing Administration),
      VA (Veterans Administration), and RHS (Rural Housing Service)
     Does not include subprime loans
     Payments slightly higher than private loans
      due to loan insurance factors
     Different qualification requirements than private loans
     Often different workout options than private loans
      Terminology: Types of Loans
   Government-Securitized Loans
     Fannie Mae (Federal National Mortgage
      Association) or
      Freddie Mac (Federal Home Loan Mortgage
     Services also through Ginnie Mae (Government
      National Mortgage Association)
     Borrower has good credit rating
      Terminology: Types of Loans
   More About Government-Securitized Loans
     Also called “conforming loan” or “conventional
     Does not include government insured (FHA, VA,
      RHS) loans or subprime loans
     Standardized qualification requirements
     Standardized documents and underwriting
     Regulations govern workout options
     Terminology: Types of Loans
   ARM Loans
     “ARM” = Adjustable Rate Mortgage
     Variable interest rate adjusts on defined dates
     Index (e.g., LIBOR) times margin
     Inappropriate for most home mortgage loans
     Maybe OK where discretionary income = 2x
      Terminology: Types of Loans
   Fixed Rate Loans
     Interest rate locked (fixed) for entire term of
     Principal/interest payment same for entire term
      of loan
     Escrow deposits are only payment variation
     Current market rate is 5.3% for good credit
      Terminology: Types of Loans
   Balloon Loans
     Do not fully amortize over loan term
     Balance (often large) due at maturity
     E.g., maturity date set before amortization date
      (30-year amortization loan due in full in 5 years)
      (30-year loan with 40-year amortization
     Seldom appropriate except for wealthy
      borrowers, or for commercial loans
      Terminology: Types of Loans
   Piggyback Loans
     Loan split into simultaneous first/second
      mortgage loans
     Used where negative equity or very low LTV
     Large first mortgage, ~80%, often ARM
     Second mortgage ~20% for “down payment,”
      often high fixed rate (>12%) and short term (5-
      15 yrs.), often balloon
      Terminology: Types of Loans
   Teaser Loans
     “2/28,” “3/27,” etc.
     Payment artificially depressed during initial
      teaser period
     Sometimes by initial lower interest rate
     If direct payment reduction, unamortized
      principal and interest back-loaded into remaining
      Terminology: Types of Loans
   Option Payment Loans
     Often “option ARM”
     Payment options offered on monthly statement
        Full amortization amount
        Interest-only payment
        Some other option for less than full amortization
        “Minimum Required Payment”
     Unamortized principal/interest back-loaded
     Full amortization required when balance > ~115% value
Foreclosure Mediation: The
    MFMP Process and
   Settlement Options

A mutually acceptable agreement that is
       reasonable and sustainable
  for the homeowner and the lender.
 Facilitative Style of Mediation

 Mediators guide the parties through a party self-
 determination process.

 Mediators provide resource information.

 Mediators are not advocates for either party.

 Mediators do not give advice.
                 Key Points
 Appearance of impartiality/neutrality is
 paramount to program success

 Mediators must report any potential conflicts of

 Safeguard the perception of neutrality
                Mediation Goals
            Keeping people in their home

 Amicable/workable transition strategies when a
   commercially reasonable and sustainable
          agreement is not possible.

Some foreclosure cases need to be resolved through litigation.
            Mediation Session

 Borrower must request mediation within 15
  days of receiving notice of summons and
  complaint (email or postmark on envelope).
 Voluntary – both must agree.
 Scheduled within 40-60 days of receiving
  request for mediation.
             The Main Players
         In Mediation Settlements
 Borrower(s)
 Borrower Attorney
 Servicer
  (Master Servicer, Sub-Servicer, Special Purpose Servicer)
 Lender Attorney
 Trustee (occasionally, often documentation only)
 Mediator
   Who Is Normally Present
       for Mediation?

 Borrower(s)

 Servicer
  (may participate by telephone – special confidentiality issues)

 Lender Attorney

 Mediator
     Preparing for Mediation

 Documents Required
  Questionnaire/forms providing basic
   information from both parties
  Financial information worksheets
  Supporting documents
     Preparing for Mediation
        Before Mediation
Key factor for mediation success:

   Verifying prior to mediation that all the necessary
   documents have been completed correctly by the

MFMP requires Borrower meets with a HUD Certified
   Counselor prior to mediation.
          Preparing for Mediation
Housing Counseling Session
     Borrower’s current & future circumstances?
     Is there cash available for a lump sum,
      good faith payment?
     Terms of the note and remaining number of payments
     Default rate
     Type of loan: Prime, Subprime, ARM, Fixed, Alt-A, Gov’t.
     Interest Rate
           Preparing for Mediation
    Housing Counseling Session
       Monthly Payment (including principle, interest,
        taxes, insurance and association fess (PITIA))

       Loan Balance

       Other liens on the property (2nd mortgage, etc.)

       Current Value of Property/Property Condition

       (Real) Equity of the borrower

            Preparing for Mediation
               Before Mediation
Do a conflict of interest check and provide qualifications if asked.

   Pre-conference mediation
       Confirm attendance of the parties
       Check current status of the case
       Verify attending parties have authority to settle the case.
       Preparing for Mediation
          Before Mediation

Do the parties have authority to settle case?
The Borrower and Servicer/Lender must have authority
to settle a case at the time of the mediation session and
participate in person or receive approval from the MFMP
to participate by phone.
Does the MFMP have contact information for all parties
necessary to settle the case?
                   Mediation Session
                   Opening Statement
Explain mediation to parties including process and procedure
  Do not assume that the parties, attorneys, financial counselors, etc. know
  what mediation is.

 Agreement to mediate
 The extent of confidentiality
 What are the goals/objectives of the parties?
           Mediation Session

Questions for the mediation:

  Do the borrowers have a realistic budget
  worked out?

  If not, what does the homeowner
  want from the lender,
  or expect from the mediation process?
              Mediation Session
BATNA/WATNA: Best/Worst Alternative to a Negotiated Agreement

       Cost of litigation: It can cost $4,000 – $7,000 in
        standard processing for the lender before litigation
        actually takes place and as much as $15,000 if fully
       Credit Reporting: Options?
       Local Research: What are properties selling for –
        how many cents on the dollar? What factors are
        relevant to motivate lenders in your area? Contact a
        local real estate agent for exact numbers.
           End of Mediation
Write the agreement –

Agreement Pending review? If so, of who?
   Will both parties sign it?

Follow-up schedule, if any. With the mediator
    via phone or a second mediation session?
             Mediation Session
              Mediator Tips
   The truth is probably somewhere in the middle as it
    relates to the borrower and servicer’s position.

   MFMP will request accurate information gathering and
    preparation from both sides before the mediation.

   Understand prevailing factors (vacant homes on the
    street, deferred maintenance on the subject property,
    etc.) when mediating.
Use the Terminology - Abbreviations
  ARM              F/S
  BAPCA            GFE
  BPO              HOEPA
  CMA              PITIA
  ECOA             PMI
  FDC              RESPA
  FHA              REO
  FHLMC            QWR
  FICO             Etc., Etc., Etc.
                  Best Practices
                   BEFORE MEDIATION
 Timing
   Cases are scheduled for mediation within 40 – 60 days
    of foreclosure filing.
     As the case proceeds it becomes more difficult to
     Lenders prefer sooner rather than later.
   Cases will be mediated up to just before sheriff’s sale.
              BEST PRACTICES
                    BEFORE MEDIATION

 HUD Certified Financial Counselors assist borrowers with
  their overall budget, homeowner education, completion of
  necessary documents and forms.

 Pre-mediation conference call – verify receipt of necessary
  information and confirm attendance.

 Verify settlement authority.
  Three Typical Borrower
1. Seek to retain the home
2. Seek to relinquish the home without residual
   liability (transition strategy)
3. Seek recovery of damages or other relief
   through litigation
These objectives are not mutually exclusive!
         Foreclosure Settlement
           Options Summary
       Retention/Keep Borrower’s in Their Home
 Reinstatement               Loan modification
 Forbearance                 Refinancing/short
 Temp. rate reduction
                              Chapter 13,
 Temp. payment               sometimes Chapter 7
Source: Foreclosure Self-
Defense for Dummies, Ralph R.
Roberts & Lois Maljak, 2008
          Retention Option:
    Temporary Rate/Payment Reduction

    Reduce interest rate, or just payment amount,
     for a short period
    Perhaps reschedule the reset date on ARM into the
    Perhaps establish a reduced-payment teaser
        Retention Option:
        Forbearance Agreement

  Temporary fix only – does not cure the
 Without further agreement, arrearage still
  due in full as soon as forbearance concludes
 Useful if a temporary “breather period”
      Retention Option:
      Forbearance Agreement
 The flexibility on forbearance plans
  will often depend on the investor
  that holds the mortgage –
 i.e. Fannie Mae different that
  Freddie Mac and FHA is different
  from and more flexible than either
  Fannie or Freddie.
       Retention Option:
  Repayment/Reinstatement Plan

 Cure default in fixed period of time
 Regular monthly payments PLUS
  additional payment to cure default
 Simplest method to avoid foreclosure
  and retain home
           Retention Option:
    Repayment/Reinstatement Plan
 Usually requires a much higher monthly payment from the
  borrower over a six to twelve month period (sometimes as
  long as 24 months)
 Need to be certain it’s practical if there are high payments
 There are variations on a repayment plan, such as an FHA
  Type I Special Forbearance where the borrower may be
  given time to recover from an economic setback before
  beginning the additional payments to make up the mortgage
         Retention Option:
        Refinancing/Short Payoff

 Refinance defaulted loan with new loan from
  another lender
 Often not practical – new loan not available to
  borrower in foreclosure, and sometimes not
  available when in default
 New loan sometimes provided by family member or
         Retention Option:
        Refinancing/Short Payoff
 “Short payoff” is refinancing for less than balance
  of defaulted loan
 Servicer may get more from short payoff than
  Requires provisions (discussed below) in settlement
  agreement to avoid income tax on amount of
  defaulted loan not paid
         Retention Option:
             Loan Modification
 Permanent change in the terms of the loan that
  results in a lower loan payment that the borrower is
  able to afford. “In-house refinance” – current
  lender provides a different (modified) loan.
   Reduce interest rate, reduce principal balance
   Extend term
   Substitute different loan type (e.g., ARM to fixed
         Retention Option:
             Loan Modification
 Often the most difficult workout option to obtain
   Requires the investor(s) to accept a permanently
    reduced return in their investment
   Becoming more common under the Obama Plan
 Requires provision (discussed below) in settlement
  agreement to avoid income tax on amount of
  defaulted loan not paid
       Retention Option:
            Loan Modification


by Richard D. Shepherd-former General Counsel,
Executive Vice President, and Secretary of Saxon
Capital, Inc. (a residential subprime and nonconforming
mortgage lender, securitizer, and servicer)
        Retention Option:
             Loan Modification

Relaxed REMIC Requirements: IRS and Treasury
Efforts to Address the Subprime Mortgage Crisis

by McDermott Will & Emery, October 16, 2008
REMIC – real estate mortgage investment conduit
[A tax entity that issues multiple classes of investor
interests (securities) backed by a pool of mortgages]
         Retention Option:
 Chapter 13 payment plan; sometimes Chapter 7
 Current and arrearage payments in Chapter 13 plan
 Reaffirmation/retention in Chapter 7 bankruptcy
 In either case, may agree to modification
        Retention Option:
 Loan modification from adversary proceeding
 Need bankruptcy court permission to negotiate
  once petition is filed
 Negotiate workout before bankruptcy, but execute
 Borrower needs experienced bankruptcy counsel
        Foreclosure Settlement
          Options Summary
           Relinquishment/Transition Strategy
 Short sale
 Deed in lieu
 Chapter 7 or 13
 Abandonment
 Cash-for-keys
   Relinquishment Option:
          Transition Strategies

 A plan to ease the homeowner into a
  different, more affordable housing situation
 Goal of least amount of distress possible
 Attempts avoid residual liability on mortgage
  loan and income tax liability on waived debt
 Relinquishment Option:
       Transition Strategies
Sometimes lenders are willing to provide a
small cash payment (“cash for keys”) to
induce the homeowner to cooperate and
vacate the premises in a planned and
mutually beneficial manner.
   Relinquishment Option:
          Transition Strategies

Also might agree to continue possession for a
short time longer than legally required, to
provide time for apartment search, placing
pets, moving/storing furniture, etc.
    Relinquishment Option:
 Chapter 7 straight bankruptcy, with intention to abandon
 Chapter 13 plan that provides for abandonment (rare)
 Need no provisions for avoiding income tax liability on
  forgiven debt, because bankruptcy is one of four IRS safe
 Again, borrower needs experienced bankruptcy counsel
        Relinquishment Option:
         Deed in Lieu of Foreclosure
 Before or after default
 Borrower voluntarily deeds and relinquishes the home
  to the lender to avoid foreclosure
 SLIGHTLY less credit rating impairment than
 Lender may seek deficiency if net proceeds of
  eventual sale less than loan balance –need to include
  anti-deficiency provision in settlement agreement
   Relinquishment Option:
      Deed in Lieu of Foreclosure
 Also need provision for avoiding income tax
  liability on forgiven debt
 Servicer may prefer foreclosure
  Assures good title (as when junior liens) and
  PSA often provides fees for foreclosure but not
   for other recovery methods
  Relinquishment Option:
                    Short Sale

 Sale of the property to a third party
   Lender agrees to accept the proceeds of the sale as full
    satisfaction for the outstanding balance on the loan
   Sale price is less than the loan balance
 Servicer believes that the short sale price will be
  higher than the final recovery from a foreclosure
  and sheriff sale
  Relinquishment Option:
                   Short Sale
 Often do not work, due to lack of timely servicer
  consent and homeowner paperwork issues.
   Servicers usually will not give consent in advance of
   Servicers may fail to respond within even long closing
   Homeowners need to have financial info, appraisal and

 Need anti-deficiency and tax avoidance provisions
            Junior Liens
       What You Need to Know
 Affect Deed in Lieu, Short Sale and
  Cash for Keys
 A charge or encumbrance upon
  property for the satisfaction of a debt
  or other duty that is created by
  agreement of the parties or by
  operation of law
           Junior Liens
      What You Need to Know
 Examples:
  2nd Mortgage
  Home equity loan
  Child Support Lien
  Court judgments
         Reverse Mortgages
        What You Need to Know
   What are they?
   Advantages
   Disadvantages
   Costs
   Other
              Reverse Mortgages
             What You Need to Know
 Another new trend that has developed is the use of Reverse
   Mortgages, sometimes referred to as Home Equity Conversion
   Mortgages (HECM).

 Some Mortgage Brokers are showing up at seniors’ homes and
   offering to do Reverse Mortgages to save their homes from

 This type of loan is available for homeowners that are 62 years of
   age or older and does not have to be paid back until the borrower
   dies, sells their home, or permanently moves out of the home.

 For some, this is a good option, but for many others, it is not.
   There are many costs associated with these loans.
 A Litigation Reality Check
 Litigation costly and time-consuming
 But can be grounds for substantial recovery
    Servicer loan balance often incorrectly overstated
    Servicer sometimes unable/unwilling to prove right to sue
    Violations of FDCPA, FCRA, etc.
    Variety of predatory lending claims

 Litigation often leverage for negotiated settlement
 Settlement often occurs at preliminary motion stage
 Settlement agreement must provide for disposition of suit
Settlement Documentation
 Agreements for either retention or relinquishment are
  typically documented with a “settlement agreement”
  either named as such or bearing a different name, such
  as “forbearance agreement.”
 Settlement agreements that change the terms of the note
  (nearly always to retain the home) will also typically have
  a related loan modification document.
 If litigation is pending, there will also be a related court
  entry terminating the litigation by agreement, either by
  dismissal or entry of judgment.
Settlement Documentation
 Whenever settlement provides for
  waiver/forgiveness of all or part of loan
  balance (whether in context of retention
  or relinquishment), agreement
  documentation should include provisions
  (express/inherent) waiving claim for
Settlement Documentation
 Whenever settlement provides for
  waiver/forgiveness of all or part of loan balance
  (whether in context of retention or
  relinquishment), agreement documentation
  should include provision seeking to put waiver
  within one of four IRS safe harbors from income
  tax – settlement of disputed claims, bankruptcy,
  waived amount is entirely interest and fees, or
 Sample provisions available on the website.
  Foreclosure Settlement Options Summary
       Retention/Keep         Relinquishment/Transition
   Borrower’s in Their Home            Strategy
 Reinstatement                     Short sale

 Forbearance                       Deed in lieu

 Temp. rate reduction              Chapter 7 or 13

 Temp. payment reduction           Cash-for-keys

 Loan modification
 Refinancing/short payoff
 Chapter 13, sometimes 7
Identifying Challenges
    in Mediation
                   Special Issues
1. Working with pro se litigants
     Challenge – one side with counsel and the other without
       Provide Information for Retaining Counsel
       Characteristics and Communication
       Goal – agreement that is mutually acceptable to the parties
       Additional Resource: Bench Guide Developed by the
        California Administrative Office of the Courts under a State
        Justice Institute (SJI) Grant
                     Special Issues
2. Termination of the Mediation
      Bankruptcy
      Authority to Settle (or lack thereof)
      Lack of Information
      Will it Work?
      Is it Legal?
           See servicer/lender/note holder policies
      Capacity
           Mediate without fear of coercion or control,
            imbalance or coercion between the parties
           Ability to Understand the Agreement
                   Special Issues
3. Agreements
       Each case is unique; there are no standard forms

4. Reporting the Outcome of Mediation
       What goes to the Court
                  Special Issues
5. Volunteer Mediators
     Liability

6. When Can Mediation Occur?
     At this point any time before the sheriff’s sale.
     May change as program matures.
                 Special Issues
8. Unauthorized Practice of Law (UPL)
    What about?
     Functioning as a Scrivener

      Filling in forms
      Education
      Giving advice
      Interpreting law or legal issues and/or decisions
      Creating or modifying contract language

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