Allegheny County Mortgage Foreclosure Mediation Begins: A Shift in the Balance of Power.

Posted By Cliff Tuttle | January 7, 2009

Posted by Cliff Tuttle

With little fanfare, the Court-sponsored mediation program for mortgage foreclosures was announced on January 6, in an article on the Local News page of the Post Gazette. The article said the news that Judge James, former President Judge, had signed an order of court creating the program was broken in a press release by the activist group ACORN. Read the article here. However, readers of PLBT knew about Judge James’ order around Thanksgiving. See our November 24 post: Click here.

It remains to be seen, however, which face of the mortgagor will be presented at these meetings. If the trustees of the mortgage pools (who are the real owners of the debts) take control and give the orders, mediation may be difficult. But if they leave the decisions to the original lenders, who still manage (“service”) the mortgage accounts, the outcome could be quite different.

When residential mortgages are sold into pooling trusts, the seller of the mortgage generally retains servicing — that is, it continues to receive payments and administer the account. This “servicer” receives a fee for services, a percentage of the payment deducted before sending along the balance of the proceeds to the trustee of the pool. It continues to act in most respects like the owner of the loan. The real owner, the trustee, doesn’t know or care about details of loan administration — just send the money. The servicer has policies and procedures for loan administration and the owner doesn’t interfere. This system works well enough as long as the account continues to be paid as specified in the mortgage and note.

It was anticipated, of course, that a certain percentage of loans would default. Once a specified number of days of delinquency was reached, the servicer is required to initiate foreclosure (usually in the name of the trustee) and the account would, in due course, be liquidated.

However, the number of foreclosure-eligible delinquent accounts today greatly exceeds anybody’s expectations. It doesn’t make sense to foreclose more properties than can be sold on a very depressed market. But the trust instruments provide no other remedy. Of course, this process may be delayed and impeded by legal procedures, including bankruptcy. But settlement with the borrower on terms other than payment of arrearages in full is not in the trustee’s playbook.

This policy has proven to be a financial and political disaster. As the number of foreclosed properties taken over increases, the value of the inventory spirals downward. In some places, only a handful of foreclosed residences can be sold, reducing the fair market value of the rest to zero. Each “real estate owned” property added to this traffic jam just increases losses that will never be recouped. Too many foreclosures has brought down mega-giants such as IndyMac and Washington Mutual and forced others, such as Countrywide and National City, into mergers brokered by regulators.

Servicers are mostly regulated by State and Federal agencies like the Pennsylvania Department of Banking, FDIC, OTS and OCC. They require institutions they regulate to prepare written plans and guidelines for fair administration of loans. This process goes a long distance toward protecting consumer rights.

But when trustees and servicers clash, despite bank regulators on the sideline, the trustees usually won. It has been a common occurrence that borrowers negotiate and even make payments to the servicer under a forbearance agreement, only to see the trustee order the case into foreclosure, in breach of the agreement.

That won’t be happening anymore. The lender’s representative is now required to explain himself before a judge. The power equation has shifted. The judge has the power to refuse to permit the foreclosure to proceed. If he hears about a case going to foreclosure despite a forbearance agreement, he can right that wrong. If he hears that a borrower can make payments under a reasonable plan, he has the power to make it so.

CLT

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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