Treasury’s Servicer Ratings for Modifications are Eye Opening

The Treasury Department recently issued The Making Home Affordable Program Performance Report Through April 2011 which reviews mortgage servicers in their administration of President Obama’s Making Home Affordable program. Bank of America, J.P. Morgan Chase Bank and Wells Fargo Bank did so poorly that the government will withhold the financial incentives it pays for mortgage modifications made through the program until these servicers show improvement.

The Report includes a number of metrics for the servicers reviewed but the one I found most interesting was the “Income Calculation Error %.” The borrower’s income is critical to a determination of whether the borrower qualifies for a Making Home Affordable modification. The Making Home Affordable-Compliance unit (MHA-C) did its own income calculation for certain applicants and compared it to the servicer’s income calculation. Differences of 5% or more between MHA-C’s and the servicer’s calculation were included in the “Income Calculation Error %.” Treasury set a benchmark of less than 5% meaning that Treasury believes that MHA-C’s and the servicer’s calculations should be within 5% of each other 95% of the time. None of the ten servicers reviewed met the benchmark. The results ranged from 6% for GMAC Mortgage and Litton Loan Servicing to 33% for Ocwen Loan Servicing. J.P. Morgan Chase was 31%, Bank of America was 22% and Wells Fargo was 27%.

This data means that many borrowers did not get mortgage modifications because the servicer miscalculated their income. We can applaud the Treasury for taking steps to correct the servicers’ miscalculations for future applications. But what’s being done for those who lost a modification opportunity because of an income miscalculation?

Forensic Mortgage Audits are of Limited Utility

A forensic mortgage audit is an analysis of the loan from the application, to the closing and through the default. The primary goal is determine whether there are violations of the Truth in Lending Act (TILA) or the Real Estate Settlement Procedures Act (RESPA). A secondary goal is to determine whether loan payments were properly applied and all loan charges are consistent with the loan documents. Forensic auditors maintain that this information can give a borrower leverage in mortgage modification negotiations. I’m not so sure.

TILA and RESPA violations, or improper payment applications and loan charges, are claims that the borrower must prove in court. Merely presenting a forensic mortgage audit report that concludes the bank engaged in wrongdoing does not mean that the bank engaged in wrongdoing. The bank is entitled to have the borrower’s claims follow the normal litigation process. This means pleadings, documents discovery, depositions, experts, dispositive motions and possibly a trial. The bank can subject the audit report, and the person that prepared it, to close scrutiny. The bank will have its own competing audit report. This is all time consuming and expensive for the borrower. The banks, of course, know this. They also know that a borrower in mortgage default is not likely to have the financial resources to pay a lawyer to fight the fight. It’s true that this type of litigation is also expensive for the bank, but the bank may just want to see how far into the litigation the borrower’s resources will take him. Think of it like a game of litigation chicken. The bank is in a better position to win that game.

New York’s Foreclosure Settlement Conference Program

New York’s Foreclosure Settlement Conference program provides court oversight to the mortgage modification process. The goal is to insure that the borrower timely submits the necessary information for the bank to make a modification determination. More importantly for the borrower, the program gives the bank some accountability for receiving the necessary information and for making a timely decision.

Only borrowers who are defendants in a foreclosure lawsuit are eligible for the program. After the bank serves the borrower with the summons and complaint, the bank is obliged to file with the court a form that notifies the court’s clerk to send the parties notice of the first conference. The conference takes place at the courthouse but not in a courtroom, although the borrower may be waiting in a courtroom for the borrower’s case to be called. When the case is called, the borrower will be escorted into a private room. The borrower, the borrower’s lawyer (if the borrower has one), the bank’s lawyer and a state employee who is not a judge are the only people in the room. There is no court reporter or clerk. The bank’s lawyer will give the state employee some basic information about the loan like the type of loan (fixed or adjustable rate, etc.), when the last payment was made and the outstanding principal balance. The state employee will then discuss with the borrower the reasons for the default and whether the borrower wants to retain the property. Assuming the borrower wants to remain in the property, the bank’s lawyer will provide the borrower with some forms to complete and a list of documents to submit. The forms ask for the borrower’s income, expenses, and assets. The documents normally include bank statements, pay stubs, tax returns and a current utility bill. The borrower will also have to submit a hardship affidavit explaining the financial hardship that caused the borrower to default. The hardship affidavit is often one of the forms for the borrower to complete but sometimes the borrower must provide it separately.

The next conference is normally scheduled at the conclusion of the first conference. The borrower should submit the forms and documents before the next conference. The subsequent conferences will address any requests the bank has for additional information or any questions about the information submitted. The length of the process normally requires the borrower to periodically submit updated paystubs and bank statements.

Connecticut’s Foreclosure Mediation Program

Connecticut’s Foreclosure Mediation Program provides court oversight to the mortgage modification process and can help borrowers obtain a mortgage modification that otherwise may have been beyond their reach.

The borrower must satisfy five criteria to be eligible for the program. First, the property must be the borrower’s primary residence. Second, the borrower must occupy the property. Third, the property must be a one to four family residence in Connecticut. Fourth, the person applying to the program must be the borrower. Fifth, the borrower must be the defendant in a mortgage foreclosure action.

If all five criteria are satisfied, the borrower completes and files with the court a Foreclosure Mediation Certificate together with an Appearance. Note that the “appearance” is a form; it does not require a physical appearance in court. A blank Foreclosure Mediation Certificate and Appearance form should be included with the summons and complaint. The borrower must file these forms with the court within 15 days of the return date listed on the summons but the borrower can move for permission to request mediation more than 15 days after the return date.

Shortly after the borrower files the Certificate and Appearance, the court will send the borrower a notice of the first mediation session. The mediations take place at the courthouse but not in a courtroom. They are informal. The only people present are the borrower (and if applicable the borrower’s lawyer), the bank’s lawyer and the mediator, who is a state employee but not a judge.

The program normally takes place over several mediation sessions. At the first session, the bank’s lawyer provides some information about the loan to the mediator, including the outstanding principal balance, whether there are escrows for taxes and insurance and the current payment. The mediator will discuss with the borrower the reasons why the borrower fell behind, the borrower’s employment or income situation and whether the borrower would like to stay in the home. If that is the case, the bank’s lawyer provides the borrower with some forms to complete and a list of documents to provide. The forms ask for information about the borrower’s income, expenses and assets. The documents requested usually include paystubs, bank statements and tax returns.

The court will send the borrower a notice of the next mediation session, which is usually 30-60 days after the first session. Subsequent sessions revolve around making sure the lender has all the documents and information it requested. Certain documents, like paystubs and bank statements, have to be updated as the mediation progresses.

A successful mediation results in a mortgage modification. The mediation process can be as exasperating as applying for a modification outside of the Foreclosure Mediation Program but in my experience the mediator’s oversight helps keep the lender on track.

Motion to Dismiss for Lack of Standing

Produce the Note, An Alternate View, Parts 1, 2 and 3 explained why borrowers might be better off asking the foreclosing party to prove ownership of the debt rather than asking it to produce the note. But how and when does the borrower go about asking the lender to do either of these things? In my view, the best way to do it is by a formal motion to dismiss for lack of standing. Part 1 of the Produce the Note series explained that standing is an aspect of subject matter jurisdiction and that if the foreclosing party lacks standing, the court lacks subject matter jurisdiction. If the court lacks subject matter jurisdiction, the case must be dismissed. When a borrower asks the foreclosing party to prove ownership of the debt (or to produce the note if the borrower goes that route), the borrower is really asking the court to dismiss the case because the foreclosing party can’t prove ownership of the debt (or produce the note). Whether the borrower does this informally, by making the request at a court appearance for example, or formally, by filing a written request with the court, the borrower’s request is a motion to dismiss for lack of subject matter jurisdiction. If the borrower chooses to ask the foreclosing party to prove it owns the debt, the borrower should make a formal written motion. The mortgage industry wants to prove standing merely by producing the note and that is all the courts have been requiring. The borrower needs to why producing the note is not sufficient and that requires a written explanation.

One of the best features of the lack of subject matter jurisdiction is that in some jurisdictions, like Connecticut, it cannot be waived or conferred by consent. This means that the borrower can raise it at any time. Other jurisdictions may require the borrower to do something, like raise it as a defense in the pleadings, to preserve the right to move to dismiss later. Assuming the borrower has properly preserved it, or doesn’t have to, the question of when to move to dismiss for lack of subject matter jurisdiction is really a question of strategy in a particular case. It may not be beneficial to do it early in the case when, for example, the borrower is participating in the Foreclosure Mediation Program (CT) or the Foreclosure Settlement Conference Program (NY). The goal of these programs is to modify the mortgage to keep the borrower in the property. They are essentially “court-annexed” programs, which means that if there is no case pending against the borrower, the borrower cannot participate in the program. A successful motion to dismiss will take the borrower out of the program because it results in there being no case. On the other hand, it may be beneficial to do it early in the case when no court-annexed program is available to the borrower as in the case of an investment property. In those circumstances, the borrower might get some leverage in negotiating a workout or modification if the foreclosing party is facing dismissal.

Foreclosure is Not Neccessarily Flipping a Switch

When you took your mortgage loan, you signed a mortgage instrument, which gave the lender an interest in your real estate as collateral for repayment of the mortgage loan. The mortgage instrument normally is called a “mortgage deed” or “deed of trust” depending on the state where the property is located. The mortgage instrument provides that if you do not pay the loan, you are in default. This activates the lender’s right to take the collateral. “Foreclosure” is the process by which the lender takes the collateral.

The steps in the foreclosure process are determined by the state where the property is located. Some states, like Connecticut and New York, are “judicial” foreclosure states. This means that the lender must start a lawsuit against you in order to foreclose. The lender’s goal is a foreclosure judgment. The lawsuit is, for the most part, like any other lawsuit, which is to say that it can take considerable time for the lender to obtain the foreclosure judgment. The borrower has rights that it can exercise as part of the foreclosure lawsuit that can delay the foreclosure judgment or, in some circumstances, stop the lawsuit entirely. This is “foreclosure defense.” So, in Connecticut and New York (and possibly any other judicial foreclosure state) a lender does not foreclose merely by flipping a switch. With proper assistance, the property owner can often retain the property for an extended period.

I frequently use a train analogy to describe the foreclosure lawsuit process. The first stop on the train is the summons and complaint, which starts the lawsuit. The foreclosure judgment is the last stop. There are a number of stops between the summons and complaint and foreclosure judgment. Foreclosure defense is trying to make sure the lender moves as slowly as possible between stops and attempting to insure that the lender makes every stop. Sometimes a borrower can derail the train, which means that the lender has to start the process all over again.

Connecticut and New York have programs associated with foreclosure lawsuits that are designed to help homeowners and lenders achieve a mortgage modification. The programs, in addition to helping with modification, slow the foreclosure lawsuit process. Connecticut’s program is called “Foreclosure Mediation” and New York’s is the “Foreclosure Settlement Conference Program.” Borrowers are admitted to these programs when the foreclosure lawsuit starts.

The foreclosure process is closer to flipping a switch in nonjudicial foreclosure states because the lender does not need to involve the courts. Instead, it follows the procedure set forth in the mortgage instrument, which ordinarily provides the lender the right to sell the property at an auction on a specified number of days notice to the borrower.

Some states provide for both judicial and nonjudicial foreclosures. Click here for RealtyTrac’s state-by-state listing of foreclosure procedures. I don’t know how RealtyTrac calculated the “Process Period” but my experience in Connecticut and New York has been different.