Mary Pat Gallagher ; New Jersey Law Journal; July 28, 2011
A new program debuting Monday in New Jersey’s U.S. Bankruptcy Court is aimed at helping debtors and mortgage lenders find common ground to avert foreclosure.
The Loss Mitigation Program — so called because it allows for an array of solutions besides mortgage modification — is open to individual debtors who face the loss of their homes.
It is described as “a forum for debtors and lenders to reach a consensual resolution when a debtor’s residential property is at risk of foreclosure” by opening lines of communication between the debtors’ and lenders’ decision makers and encouraging them to reach agreement.
Solutions may include loan refinance, forbearance, short sale or surrender of the property to satisfy the debt.
Though broader in scope than the foreclosure-mediation program run by the New Jersey state courts, it is narrower as well in that there are no counselors or mediators — just debtors and creditors and their lawyers.
New Jersey’s Chief Bankruptcy Judge Judith Wizmur, who sits in Camden, says the impetus for the program was “the plight of debtors” faced with the “loss of value in their homes, arrearages and almost inevitable foreclosure,” combined with the “difficulties that both debtors and lenders were having in terms of connecting.”
Debtors seeking modifications complain that the materials they submit to lenders are being lost, while lenders grouse that debtors are not giving them information they need to process the modifications, she says.
Either side can initiate the process by submitting a Notice of Request for Loss Mitigation with a copy to the other party. They have until three days before the first creditors’ meeting to do so.
If a creditor has a stay relief motion pending when the parties start the program or files one during it, the judge can condition the stay on the debtor’s compliance with the program.
Participants have 90 days from the entry of a loss-mitigation order to reach a result. Within 14 days, they have to designate a contact person and request information, and they have 21 days to respond to requests. The court can allow more time if one or both parties request.
As originally proposed, the program would have lasted for 45 days but it was lengthened based on comments from lawyers and trustees.
Within seven days of identifying a contact person, the parties must agree on what solutions they are willing to consider as well as a time, place and method for loss-mitigation sessions, which can be held in person, on the telephone or by video conference. Someone with full settlement authority must be present.
A party can leave the program early only for cause.
Good faith is required, and lack of it can subject participants to sanctions.
New Jersey’s bankruptcy court is following in the footsteps of at least three others with similar programs: the Southern and Eastern Districts of New York and the District of Rhode Island.
Its program resembles theirs but has some distinctive features.
For example, instead of postponing confirmation of a Chapter 13 while awaiting the outcome of loss mitigation, judges here can enter interim confirmation orders on the recommendation of the trustee, thus not holding up payment to other creditors.
Interim confirmation was added at the request of Chapter 13 trustees.
Also unique to New Jersey are “adequate protection payments.” During the program, debtors have to pay at least 60 percent of the monthly principal and interest, plus 100 percent of any required monthly escrow.
The idea is “that the debtor can’t use this process just to have a free ride, to put off the inevitable, to stop paying the mortgage and have the benefit of months of delay,” says Wizmur.
The payments are also “seen as a show of good faith by debtors and a reflection that mortgage companies are entitled to some protection during this period” to cover expenses like taxes and insurance, she says.
The program can provide a meeting ground in more than one sense.
Some mortgage lenders have adopted the use of electronic portals that enable debtors to file information electronically. The Rhode Island court website contains a link to one such portal, which is used by more than a dozen lenders and servicers, including Bank of America, Chase and Wells Fargo.
That link and possibly others will also be available on the New Jersey website, Wizmur says.
The process of putting together the program began in March, when the court called together a group of lawyers for consumer debtors and lenders, judges and trustees to discuss the idea.
The court then drafted a set of protocols based largely on those used by other courts and posted them on July 1 for a period of public comment that ended July 22.