Foreclosure Mediation During Bankruptcy

On September 30, 2010, reported in “Mediation program successful in keeping families in homes” that mediation found success with homeowners by reinstating loans at lower interest rates over longer terms, with little emphasis on winning or losing.

Center for American Progress reported in “Idea of the Day: Foreclosure Mediation Programs Are Necessary” on October 26, 2010, that “…jurisdictions and the federal government should implement foreclosure mediation programs so that responsible homeowners and their lenders or mortgage servicers have at least one chance prior to foreclosure to review the documentation and ensure the foreclosure is both legal and appropriate”. This idea might be a positive for debtors filing Chapter 13 bankruptcy in New York who want to renegotiate their mortgage payments during the housing market uncertainty. After the robosigning and notarization ills, banks such as Bank of America Corp. and Ally Financial Inc., two of our nation’s largest home mortgage lenders, announced resuming active foreclosures.

For New York individuals, Chapter 13 bankruptcy may be the problem solver for people who are behind on their mortgage payments. Chapter 13 is for someone who wants to consolidate mortgage arrearages into a repayment plan. During the automatic stay in a bankruptcy, a debtor can negotiate with the lender when coming up with a repayment plan. Home mortgage mediation may be the tool for the parties to (1) negotiate a sustainable loan modification for the debtor and nets the mortgage servicing company more value than from foreclosing on the home, or (2) discuss the foreclosure process for borrowers who default on their mortgage payments even if modifications were made.

Home mortgage foreclosure mediation involves borrowers, lenders, and mortgage services companies coming together to resolve foreclosures. Mortgage services companies represent investors in mortgages bundled into mortgage-backed securities and sold worldwide.

The foreclosure ills played out in the press in late 2010 brought renewed claims that banks’ use of the Mortgage Electronic Registration Systems, instead of recording mortgages with local counties where land was situated hurt their ability to establish they owned the loans on which they were foreclosing. As a result, mortgage-backed securities investors were sold mortgages the banks may have to purchase back because investments did not meet standards set for the securities. The foreclosure crisis not only put borrowers into bankruptcy, but investors into financial hardship.

Even bank foreclosures resuming, challenges from borrowers overload New York state and bankruptcy courts with expensive, time-consuming foreclosure lawsuits. Foreclosure mediation may speed claims, save money from not having to carry declining property, reduce housing vacancies, and stabilize government income from property tax.