With the mortgage foreclosure barrage the subject of long overdue attention, there is an atmosphere of scrambling and frenzy to try to head off the mudslide by which the nation's homeowners are still threatened. In the City of Philadelphia, there is a program in place which has proven effective enough to serve as a model for many other cities to produce some amelioration of the devastation that is befalling our citizens.
The source of the chaos was not those loans that were traditionally managed by the banks for the thirty year periods until paid on maturity. On the contrary, the groups of loans that were resold to investors were the culprits. The servicing companies would collect payments and decide on how and whether the foreclosures would or would not take place.
Philadelphia, often noted for innovative and effective legal solutions and procedures, has done it again. The hordes of aggrieved homeowners have found an answer directly under Billy Penn's hat.
Here's how it works. Immediately upon receiving Notices from their Mortgage Company that Foreclosure procedures are imminent, the homeowners, if they occupy the property, are required to contact a counseling agency. The Counseling agency and/or the homeowner's attorney will contact the Courts and indicate their clients' desire to enter into a Conciliation Program and Conference which is held in Room 676 City Hall, once a large courtroom. They and representatives from the Mortgage Company will try to work out a modification perhaps with a lower interest rate, a more affable payback program, or some device to keep them in their homes, to present at a scheduled Conciliation Conference. If the two sides are unable to reach agreement the counselor is to submit this plan to the foreclosing attorney and instruct the borrower to file a "Certificate of Participation" with the Prothonotary. It is the hope that the majority of troubled borrowers will be able to resolve their loans with the help of an experienced housing counselor and a cooperative lender prior to a conciliation conference. In the event that the loan cannot be resolved amicably, a conciliation conference will take place with a court-assigned Judge Pro Tempore (JPT) presiding, and if a resolution cannot be reached at conference, the JPT will then offer recommendations to the Court. What has happened so far is that once these conferences have been scheduled, many borrowers and lenders were magically able to reach agreement on affordable loan modifications in numbers not seen in any other jurisdiction. At the end of 2008, according to Court sources, 70 % of the homeowners entering into the program remained in their homes. Individuals from community organization were sent to the homeowners door to tell them about the program via community organizations and this made many aware that help was available.
Under the direction of two of Philadelphia's prominent and truly caring judges, Annette Rizzo, and former President Judge C. Darnell Jones, the program has become a life-saving and home-saving success.
As Senator Arlen Specter (D-PA) wrote last October in the Philadelphia Inquirer, "The program has prevented foreclosure in 80 percent of the 552 cases that have gone into mediation... what is happening in Philadelphia is working. Similar programs nationwide could restore trust and stability to the housing market."
The Obama Administration created the "Making Home Affordable" Program which is helping 4 to 5 millions homeowners current on their payments to refinance to take advantage of much lower rates, while also helping 3 to 4 million delinquent borrowers receive a loan modification through a combination of subsidies to investors and incentives to mortgage servicers including payment for modifications. This program is offsetting the financial incentive to foreclose, and requiring participating servicers to be bound by a rational loss mitigation protocol that will protect homeowners and investors. It also offers federal assistance for reducing a borrower's total housing payment down to 31% of income. Mortgage servicers have also increased hiring and improved their outreach to borrowers, but the industry is still foreclosing on too many homeowners when it would make more economic sense to modify their loans instead.
The Obama Program still is limited in scope. Many of the local and state governments still explore solutions to help the other 4 to 5 million families facing foreclosure who will not receive help from the federal program. Further, the Obama program will take some time to become effective and voluntarily adopted by the whole industry, although industry leaders are quickly warming to the plan. Its efficacy also depends on Congressional enactment of bankruptcy shelter for primary residences, which is very much in doubt in the Senate, although a version of this needed reform has passed the House of Representatives. Congressional delay in enacting bankruptcy remedies will enable fewer homeowners to obtain relief. The foreclosure crisis is far from abating, and far from being solved. Local and state governments, as the regulators of the foreclosure process itself, are uniquely positioned to mitigate foreclosures. President Obama himself understands this. Fortunately for the citizens of Philadelphia, their city leaders understood it as well.
Philadelphia was most concerned about the surge in foreclosure activity and the imminent effect of having neighborhoods destabilize. It was a gutsy move to say the least, but Sheriff John Green ordered the stoppage of foreclosure proceedings in April of 2008. Lenders, counselors, and residents, with the help of advocates, joined forces to effectuate a solution. On April 16, 2008, two of Philadelphia's prominent and highly respected judges, Judge Annette Rizzo and President Judge C. Darnell Jones ordered the creation of the Residential Mortgage Foreclosure Diversion Pilot Program. All future residential foreclosures were required to be certified as owner-occupied or non-owner occupied by the creditor, and all owner-occupied properties were then scheduled for conciliation conferences, the first round being set for mid-June. After this order, the Court postponed later foreclosure sales scheduled for June, July, August and September. September 8 was a magic date when new foreclosure actions required a conference before a judgment of foreclosure could be entered.
It had been hoped that the mortgage servicing entities would provide modifications to a more affordable payment plan rather than allow the wrath of foreclosure to descend upon the hapless homeowners. These various companies were not devised to manage any type of crisis such as we face now and did not carry enough staff as the rates of delinquency started to increase beyond expectation. Only a small group of the mortgage service company employees were authorized to approve modifications. To add insult to injury, the rest of the staff were told to perform collections and offer only unaffordable repayment plans. Many of the agreements by which the mortgages were sold and pooled to these companies had deceptive obstructions to reasonable and useful payment alternatives. The investors had the right under these agreements to sue the service companies if they felt they were offering generous remedies. Another obstacle was that these companies were paid for conducting foreclosures, but not for modifications even though the staff had to spend significant time and effort in doing the comprehensive analysis needed to bring about a modification. This was so self defeating because the cost of a modification is significantly less than a foreclosure and many a family facing this horrible fate would have received modification. Then, the modifications often produced a less affordable mortgage structuring which placed the homeowner in such a bind that there was a host of re-defaults.
Part of the advantage of this program is the minimal cost of administration and outreach. Just letting the people effected by foreclosure know of the availability of the relief compared to the expense of standard foreclosure programs involving federal monies and long drawn out procedures. In true Philadelphia Bar form, the participation of area lawyers has been eager and intense.
"Mandatory Participation by Servicers. A successful mediation program must have a strong lever to induce industry participation, especially a halt to all foreclosure actions including sales if the service agency does not comply with good faith mediation and fully participate in the process. Critically, the mediation participant on behalf of the mortgage servicing company must have final decision-making authority to modify the loan terms. Arbitrators, mediators, or judges overseeing the mediation should be well versed in mortgage affordability issues, and should be empowered to send the parties back for additional mediation if the settlement offer made by the servicer is not affordable and is likely to result in redefault. Some jurisdictions levy a reasonable fee on the party seeking the foreclosure to
pay for the time of mediators. Servicers must not simply be able to wait out the clock and continue to foreclose without negotiating in good faith."
Community Organizational Outreach
The constant phone calls to borrowers in trouble often have resulted in their being victimized by lending predators with propositions too good to be true. There must be trusted community organizations knocking on doors if necessary and having websites, town meetings and other outreach efforts to prevent the unwary from falling prey to the unscrupulous.
Effective Use of Housing Counselors
Documents being as complicated as they are, especially to non-English-speaking consumers,
Contributed to predatory lending victimization. Counsellors are needed to advocate for these individuals. They can determine how much the homeowner can afford and what type of modification procedure is effective for the respective candidates.
National efforts have included the recently announced Making Home Affordable program which is expected to help four to five million homeowners take advantage of historically low interest rates to refinance their government-backed loans. The program is also expected to assist several million delinquent borrowers receive modification through a combination of incentives to mortgage servicers. However, this program still fails to help an additional four to five million families facing foreclosure who will not receive help from the federal program because their lender may not take part in the voluntary program. The moratoriums in many cases are over and were very brief. They did afford opportunities to implement programs, but more like Philadelphia's have to be implemented quickly and in abundance.
It is also suggested that a more realistic view of homeowner participation in mortgage programs should go the way of social promotion and other programs that place individuals in further danger of futility through impossibility of realistic compliance with the needed criteria for viability of loans. Perhaps consistency and leniency would be joined together so that those who can approach new heights in home ownership can hold on to the dream they are now realizing and not be kidded or forced to kid themselves. The credit card companies and bank financiers must be totally stopped from the huge overdraft and late fee free-for-all which affects the creditor's income and expenses making affordability of the home less likely. The greed of bankers only leads to their own downfall and a repetition of history.
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