Bankruptcy Court’s Mortgage Mediation Program a Success

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By Daniel Gill

A bankruptcy court in New York has come up with a way to get bankrupt homeowners and mortgage lenders together voluntarily to modify loans to the benefit of each.

The loss mitigation program employed by the U.S. Bankruptcy Court for the Southern District of New York is an “awesome success,” Chief Judge Cecelia G. Morris told Bloomberg BNA.

The initiative may serve as a model for other jurisdictions throughout the country. It adroitly balances the desire of debtors to keep their homes with the needs of banks to maximize the value of their mortgage holdings.

An optional mediation, the program is conducted without a mediator. It is designed to help homeowners in bankruptcy manage their residential properties and their mortgages.

A majority of debtors in the program wind up with a reduction in mortgage payments, helping to enhance the chances they will be able to make their mortgage payments and retain their property.

Two law professors have compiled data on the program. In a Feb. 22 phone call, Susan Block-Lieb of Fordham Law School and Edward Janger of Brooklyn Law School told Bloomberg BNA that the majority of participants reach some kind of resolution within about 15 months.

In cases commenced in 2011, the parties achieved a loan modification about 56 percent of the time, they said. Twenty-four percent of the cases resulted in no agreement. Other results included surrender, foreclosure or short sales. Sometimes the bankruptcy cases were dismissed or closed.

In cases filed in 2012, Janger and Block-Lieb said about 49 percent resulted in loan modifications. Data for more recent cases are not available because it can take in some instances more than four years for the parties to reach a resolution, they said.

Good-Faith Negotiations.

One reason for the program’s success is that participants must agree to negotiate in good faith, and the judges are prepared to enforce that pact, Block-Lieb said. Another reason is that as many 98 percent of the debtors in these negotiations are represented by their bankruptcy attorneys.

The data suggest a vast success rate, especially when comparing loan modification negotiations which take place outside of the bankruptcy context, the law professors said.

The program began in January 2009 after two attorneys approached Morris and her colleague, Judge Martin Glenn, Morris told Bloomberg BNA in a Feb. 16 interview. Judge Morris is an editor of Bloomberg Law: Bankruptcy Treatise.

The two lawyers from the creditors rights firm Rosicki, Rosicki & Associates in New York told the judges they needed a means to negotiate with bankrupt debtors without being in violation of the automatic stay created by the filing of a bankruptcy case. The automatic stay halts all judicial proceedings against the debtor or its property.

A party must get court permission to lift the stay in order to proceed with an action against the debtor or property of the bankruptcy estate, but a bank holding a mortgage wouldn’t have the incentive to seek such relief simply to negotiate a loan modification.

But discussing a loan with a debtor without an order lifting the stay could be construed as attempting to collect on the debt, a violation of the stay potentially punishable by civil fines.

The loss mitigation program allows the mortgage holder and bankrupt homeowner to discuss payment terms without violating the stay, Morris said.

Program Offers Options.

The bankruptcy judges of the Southern District of New York thought the program was a great idea as it gave them a means either to keep debtors in their homes or to educate them that the property is too expensive to maintain and to find a way out of ownership.

“The goal is a healthy debtor,” Morris said.

Other jurisdictions employing similar programs include the Eastern District of New York and the District of Rhode Island, Morris said. Florida has a similar program, but professional mediators are used there, she said.

Despite some popular belief to the contrary, “the mortgage crisis isn’t over,” Morris said. “The loss mitigation program is more relevant now than ever.”

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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