Transcript First Judicial District of Pennsylvania Foreclosure

Philadelphia Residential Mortgage
Foreclosure Diversion Program
Philadelphia VIP
Negotiation Training for Pro Bono Counsel
May 11, 2011
Trainers:
Maisha Elonai, Esq.
Independence Fellow
Philadelphia VIP
Michelle Brix
Senior Housing Counselor
Center in the Park
Andrea Saah, Esq.
LawWorks Senior Staff Attorney
Philadelphia VIP
Alfonso Madrid, Esq.
Principal
Law Offices of Alfonso Madrid
1
Foreclosure Nationally




1 of every 11 residential mortgages in U.S. is
more than 30 days delinquent but not yet in
foreclosure
1 in 21 residential mortgages is in
foreclosure – over half of those being
subprime fixed or adjustable rate mortgages
More than two-thirds of mortgages are in
default due to unemployment or
underemployment
In Pennsylvania, foreclosures are
concentrated in modest and low income
communities
2
Reasons for Default
(based on currently open, reported cases referred to VIP attorneys)



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
Unemployment: 48%
Illness of homeowner or family: 23%
Combination illness/unemployment: 16%
Divorce: 8%
Other: 5%
3
Demographics of VIP-Assisted Clients
(for all households assisted by VIP at court or in ongoing representation = 1,744 as
of April 2011)

63% are female
58% have children in the household (more than
2,000 to date)
21% are single caregivers with children
10% are seniors
Mean client age = 37 years

63% African-American


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24% Caucasian
9% Hispanic
2% Asian
2% Other
4
Foreclosure Process in Pennsylvania

Foreclosure in PA is a judicial process – the
lender must commence an action in court in
order to be able to foreclose on and sell the
property
► See p.4 for a foreclosure process timeline

Homeowner receives notice before the
complaint is filed, before judgment is entered,
and before the sheriff’s sale can occur
► See p.5 for sample notices
5
Relevant Statutes and Rules

An action of mortgage foreclosure is governed by
PA Rules of Civil Procedure 1019, 1024, 1028,
1141-1150

Act 91 created HEMAP, the Homeowners
Emergency Mortgage Assistance Program
►“Act 91 Notice” is sent to homeowner prior to
commencement of mortgage foreclosure action;
provides HEMAP information to the homeowner

Act 6 governs mortgage foreclosure procedure in
PA
► “Act 6 Notice” is a Notice of Intent to Foreclose
See Appendix pp.57-64 for text of relevant rules and statutes.
6
Diversion Program

Residential Mortgage Foreclosure Diversion Pilot
Program established by Joint General Court Reg. No.
2008-1, 4/16/08; reauthorized by court order on
12/16/09

Provides an opportunity for homeowners and lenders to
avoid foreclosure by resolving the dispute through a
negotiated agreement under court supervision

Covers all mortgage foreclosure cases involving owneroccupied residential properties in Philadelphia

Owner-occupied residential properties cannot proceed
to judgment or to sale unless a conciliation conference
(CC) is held under court supervision

Every Thursday in Courtroom 676, at 9am and 1pm,
100 - 125 cases/session
► See Appendix p.65 for data on cases in the program
7
Foreclosure Process BEFORE
Diversion Program
8
Foreclosure Process WITH
Diversion Program
Notification of Conciliation
Conference Date
Homeowner calls Hotline
Referral to Housing Counselor
Homeowner, Housing Counselor meet
Loan workout proposal submitted
Conciliation Conference:
VIP Attorney assigned
All parties negotiate
Negotiation
Unsuccessful
Negotiation
Successful
Workout Agreement
Reviewed/Signed
9
How Process (Ideally) Works

Homeowner receives Act 91/Act 6 notice with HEMAP information
and information about housing counseling agencies

Plaintiff files complaint

Homeowner (HO) receives letter with conciliation conference (CC)
date and Save Your Home Philly hotline number (215-334-HOME)
with the complaint

HO calls hotline for appointment with a Housing Counseling (HC)
agency
OR HO calls agency as result of Office of Housing and Community
Development outreach or referral by a lender

HC submits loan workout proposal to plaintiff at least 10 days
before the conference

At CC, lender’s counsel, HC and HO discuss foreclosure
alternatives, hopefully with VIP volunteer’s assistance
OR If financial proposal was not submitted prior to 1st CC but HO
appears for the CC, a 2nd CC is scheduled automatically 35 days
hence, and the financial proposal must be submitted no later than
14 days prior to the 2nd conference
10
Housing Counseling Agencies

City Office of Housing and Community Development
(OHCD) has invested $4.3 million a year for the past
20 years in free first-time homebuyers counseling
for Philadelphia residents – began providing
mortgage foreclosure prevention counseling in 2008

31 housing counseling agencies in Philadelphia have
contracts with OHCD

Agencies typically have 1-6 counselors

In most agencies, the counselor who prepares the
homeowner’s loan workout application is also
present at the CC; in a few agencies, the counselor
representing the HO at the CC is not the counselor
who met with homeowner and prepared the proposal
11
What Happens at Conference?




Courtroom 676 City Hall
Homeowners check in at sign-in table and then at
Housing Counselor table – if they do not have a
Housing Counselor, they are assigned to one then
If HO and HC determine there is a need for pro
bono attorney, client comes to VIP table
Volunteer paralegals conduct client intake
See pp.11-12 for intake form

VIP staff member assigns client to volunteer
attorney – provides information on client and case
and makes introductions
► PA RPC 6.5 – rule regarding conflicts of interest in
provision of short-term, limited legal services
12
VIP Eligibility Requirements

Eligibility for continued representation – eligible
clients receive priority and may be represented
beyond conference date




At or below 200% federal poverty level for size of
household (see Appendix p.66)
Cannot own more than one residential property
Must be living in (or want to live in) and want to
keep the home, but need not be on the deed –
differs from diversion program guidelines, which
require that property be owner-occupied
Ineligible clients may receive representation on
day of conference only, will have to come back to
VIP table at future conference dates

Continuing representation for income-ineligible HOs
is not covered by VIP malpractice insurance
13
Initial Tasks for Volunteer Attorney


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Sign non-solicitation agreement and give to
VIP (at 1st conciliation conference only) (p.14)
Obtain client’s signature on representation
agreement (p.15)
Obtain client’s signature on authorization to
speak to third parties (p.16)
Look for potential title problems (HO not on
deed or mortgage) ► Alert VIP immediately!
Discuss status of case w/HC and HO, obtain
copy of budget info and loan workout proposal
if one has been submitted to the lender
14
Resources at the CC



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Foreclosure complaint – ask HC, client, lender’s
attorney
Mortgage/deed – ask VIP staff or PLA attorney
Court file – docket record can be requested
from VIP staff or court staff by providing
client’s call list number
VIP staff – provide assistance throughout,
review orders, have binder with foreclosure
mitigation program guidelines
PLA attorney – reviews orders when requested,
gives advice to HCs and VIP attorneys, can
look up docket and mortgages/deeds
15
Client Communication

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Clients are frightened about the prospect of losing
their home and intimidated by the legal process
Some clients cannot read well or comprehend the
documents they have received
Clients often have other problems in their lives:
illness, disability, unemployment, abuse,
separation/divorce
For all clients, VIP intake is a place to tell their story
to someone who is sympathetic
► Clients may become emotional – reassure them calmly
and let them know you will do your best to help them
► Clients may go into great detail – keep them focused
on the details YOU need to know, be firm but polite
16
Case Analysis

Examine relevant issues (verify answers with the
housing counselor):

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Were the notice of intent to foreclose (Act 91 or 6
notice) and the complaint served upon the
homeowner more than 10 days prior to the CC?
► If not, alert court staff – plaintiff must serve
homeowner and file affidavit of service; new
conciliation conference will be scheduled
Why did client become delinquent on the loan (shortterm or long-term problem)?
How much is owed in arrears and in total?
Is the case pre- or post-judgment?
17
Case Analysis (continued)
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Who pays the property taxes and homeowner’s
insurance?
Is there a second or third mortgage on the property?
Are there other liens on the property? Other debt?
How often has client come back for a conference?
Why?
Has client been setting aside funds for mortgage
payments? If not, why not?
► Use Mortgage Foreclosure Issue Spotting Guide
and Evaluating a Mortgage Foreclosure Diversion
Case to evaluate homeowner’s options
See Appendix pp.67-77
18
Conference Tasks for Attorney

Reach agreement with opposing counsel re.
postponement of entry of judgment (or of sheriff’s sale)
– if HO comes to 1st CC, a 2nd CC is granted 35 days
hence and default judgment is postponed to no sooner
than the day after the 2nd CC

Review the court order completed by lender’s attorney
for accuracy and specificity BEFORE it is submitted
 Use correct “Day Forward” (action filed in or after
September 2008) or “Day Back” (action filed before
September 2008) order
See pp. 24-26 for orders

Order should include date of next conciliation
conference; entry of judgment should be postponed to
day AFTER next conference
19
If No Agreement with Lender’s Counsel
If counsel states that s/he does not have
authority to postpone entry of default
judgment or to grant another conciliation
conference, ask court staff for a JPT
conference
►JPT can recommend that judge order a
postponement “over counsel’s objection”

20
Judge Pro Tem (JPT)

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Experienced attorney
Must participate in training
Acts as a mediator – does not address issues
that must be litigated (e.g., lack of standing,
predatory lending)
Makes recommendations to Judge Rizzo
Often keeps case once involved – always ask for
the JPT’s contact info
► Obtain copy of JPT order (p.27)
21
Process Problems

Lender’s counsel unable to reach plaintiff’s representative to
obtain response:
► Court will not permit sheriff sale or entry of default judgment
without a response from lender; another conference will be
scheduled

Lender refuses to provide answer or cannot be reached
during multiple conferences:
► Court can order lender’s representative with authority to
negotiate to appear in person or be present by telephone during
next conference – notify Judge Rizzo’s Court Administrator if
lender’s response is lagging despite multiple (more than 3)
conferences

Lender refuses to negotiate:
► Examine whether retention of home is truly affordable
for client
 If NO, evaluate other options
 If YES, ask court for a conference with JPT or the judge
22
Concluding the Conference

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
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Obtain copies of unsigned court order and checklist
of documents HO must submit to lender’s counsel
for VIP, the client, and housing counselor
See p.17 for document checklist
Complete status form for VIP and return to VIP
staff person (pp.18-19)
Exchange contact info with all parties if continuing
the representation – client, HC, lender’s counsel,
JPT
Confirm with HC and HO that communications will
go to lender’s counsel; ask lender’s counsel if
documents should also be sent to lender directly
See Appendix p.78 for lenders’ counsel contact list23
If Attorney Keeps the Case
Once the case clears the attorney’s conflicts check, VIP
will send the case file to the attorney:
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Conference intake form, order and other documents
Philadelphia Legal Assistance intake form
Foreclosure docket
Recorded deed & mortgage history
Property tax information
Copies of relevant deed(s), mortgage(s), assignments
Formal referral letters to attorney and client, with copy
to HC
► Volunteer attorney is covered under VIP’s malpractice
insurance for ongoing assistance to eligible clients only
– if the client’s income increases during the continued
representation and volunteer is aware of the increase,
contact VIP to determine client’s income eligibility status
24
If Attorney Keeps the Case – continued
Documents lender’s counsel should be able to
provide without formal document discovery:

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Mortgage, possibly a title report
Itemized list of arrearages, fees and costs, reinstatement
amount and pay-off amount
Payment history (client should request from lender if lender’s
counsel does not have a copy)
Documents lender’s counsel is not likely to provide
without litigation or RESPA request (“discoverable
documents”):



Loan application
Loan closing documents (incl. HUD-1 settlement statement)
Loan note
25
Communication is Key

Communicate proactively communicate with client, HC,
lender’s attorney and court staff to ensure that process
moves forward

You are not “attorney of record” – must follow up
regularly with lender’s counsel to obtain response and/or
copies of any documents (cc: Judge’s clerk on email if
lender’s counsel does not respond)

Insist that client notify you of all documents received in
reference to the foreclosure

VIP emails status update request to you 1 month after
referral and every 3 months thereafter until case closes
► VIP staff always available to answer questions and
provide support
26
Finalizing Negotiated Settlement




Request that both client and you receive copy
of the written agreement – participation in CC
does not mean you are attorney of record
Remind client to contact you immediately upon
receipt of any document
Review agreement to determine if terms are
those negotiated at CC – they often differ!
Get confirmation from lender’s counsel
(confirm on case docket record) that praecipe
to vacate judgment and/or stay the sale and
dismiss without prejudice was filed
27
Closing the Case

Once case is resolved, attorney should send client
a termination letter and send VIP a brief closing
report with details of outcome
Required information

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Copy of termination letter sent to client
Terms of loan prior to negotiation
Type of outcome (retention or non-retention) and details of the
resolution
Optional information

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Copies of any submissions made to the court that might be
useful to other volunteers (VIP will redact any personal info)
Comments about your mentor (if you worked with one)
Comments about the housing counselor on the case
Comments/documentation regarding any rescue scams
Comments about your experience working with VIP
28
Lender, Servicer, Trustee



Mortgage originator (issuer/initial lender): Usually
a bank, thrift company, or mortgage banker that
then sells the loan, which usually ends up in a pool
of mortgages backing a security purchased by
investors
Servicer: The company that collects monthly
payments from the borrower and passes them to
the lender or the investors in the mortgage pool
Trustee: Institution that manages the mortgages
held in mortgage-backed securities for the
investors
►Servicer or trustee is generally the plaintiff
29
Loan Insurers/Guarantors
Institutions that guarantee the loan against default;
may also hold the loan or the mortgage-backed
security
 Fannie Mae - Federal National Mortgage
Association
 Freddie Mac - Federal Home Loan Mortgage
Corporation
 FHA - Federal Housing Administration
 VA - Veteran’s Administration
► If the loan falls into one of these categories, this
may increase workout options available to the
homeowner – check with the HC or VIP staff
30
Loan Types


FHA (federally insured) loans – require payment
of mortgage insurance by homeowner
Conventional prime (for homeowners with good
credit and lower LTV ratio)


Fixed or adjustable interest rate
Conventional subprime (for homeowners with
poorer credit and higher LTV ratio)


Some fixed
Of late, almost always adjustable
Predatory loans: bait and switch tactics, solicited
by lender, settlement in HO’s house, required
disclosures often missing
► Alert VIP if you suspect a predatory loan!

31
Meeting with Housing Counselor
Face-to-face meeting with homeowner
 Counselor gathers information about
 Homeowner’s financial situation
 Type of Mortgage (FHA, Conventional, VA, etc.)
 Hardship, circumstances surrounding delinquency
 Counselor completes necessary forms, including
those required by specific lender
 Counselor submits applications to emergency
mortgage loan assistance programs if HO is eligible
 Forms are sent to lender’s counsel and possibly also
to lender

32
Counseling Session
Usual
Documents:





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Authorization to talk
to servicer on client’s
behalf
Income Verification
Bank Statements
Utility bills
Explanation of
hardship
Documents requested
by lender’s counsel
See p.17 for list
Making
Home
Affordable

Request for
Modification and
Affidavit
See Appendix pp.80-82

Form 4506-T
See Appendix pp.83-84


Income verification
Residency verification
(credit report or
utility bill)
33
Challenges
 Proposal
not submitted at least 10 days
before 1st conference or 14 days before 2nd
conference
 Missing or incomplete documentation by HO
 Homeowners don’t have documents available
 Clients are difficult to reach
 Conference may need to be postponed while
more documentation is gathered
 Constantly changing program- or lender–
specific forms and requirements
34
Determining Options – Basic Outline
35
Retention Options


Refinance
State and local payment assistance programs:

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




in U.S. ► Emergency Homeowners Loan Program (EHLP)
in PA ► Homeowners Emergency Mortgage Assistance
Program (HEMAP)
in Philadelphia ► Philadelphia Housing Retention Program
Loan Repayment
Forbearance
Loan Modification
Partial Claim (for mortgages with mortgage
insurance)
Reverse Equity Mortgage (used by senior
homeowners age 62+ to convert the equity in their
home into a loan – not used often, contact VIP for
more information)
36
FHA-Specific Retention Options
Lender must evaluate HO’s eligibility for these
options in specific sequence
►Lenders often don’t follow FHA guidelines, so
housing counselors and attorneys with a client with
an FHA loan must push lender to ensure
consideration of all options (see Appendix p.79)
 Repayment Plan
 Special Forbearance
 Loan Modification
 Partial Claim
 FHA-HAMP
►In PA, failure to consider HO for all options is an equitable
defense and may provide HO with leverage in negotiations
37
Refinancing

A new loan that pays off the delinquent mortgage in
full or in part (lender must agree to a “short pay” if
refinance is less than what is owed) and results in
satisfaction of the mortgage
►Homeowner in default is unlikely to be approved for a
refinance other than through a public (state or federal)
program
In PA : Homeowners’ Equity Recovery Opportunity
(HERO) has been phased out; no replacement
 Federal: Home Affordable Refinance Program
(HARP) – not relevant to homeowners in the
diversion program because they are already
delinquent and therefore ineligible for HARP

38
Payment Assistance - HEMAP
Homeowners Emergency Mortgage Assistance Program
PA program for conventional loans (not FHA loans)
 Loan for homeowners who became delinquent
through no fault of their own: death, unemployment,
disability, etc. and have reasonable expectation of
resuming employment and mortgage payments
 HEMAP can provide a one-time lump sum payment
to cover arrears or can provide monthly assistance
for up to 36 months
 Homeowner must begin repayment of HEMAP loan
immediately; repayment plan will be based on
affordability (min. $25 per month) – interest rate for
HEMAP loans given in 2011 is 5.25%

39
HEMAP (continued)
If homeowner applies for HEMAP within 30 days of
receiving Act 91 notice, lender cannot continue
with foreclosure until PA Housing Finance Authority
has made a determination
 Homeowner must apply through a housing
counseling agency
 If denied for HEMAP, homeowner can appeal
 If homeowner comes to conciliation conference and
realizes that s/he can apply for HEMAP, can still
apply, but the application will not stall the
foreclosure proceedings

NOTE: Funding for this program may be eliminated in the 2011/2012 state budget – the
program may not exist after June 30, 2011.
40
Payment Assistance – EHLP
Emergency Homeowners Loan Program (ntl. version
of HEMAP)





Administered by PA Housing Finance Authority in
PA - state received $105 million that must be
spent by 9/30/2011; operational since 4/1/2011
HO’s income must have declined by at least 15%
because of unintentional unemployment,
underemployment or medical problems
HO must have reasonable prospect of resuming
mortgage payments within 2 years of receiving
assistance
HO must be at least 3 months behind on payments
and have received notice of foreclosure
Must be 1-4 unit property and HO’s principal
residence
41
EHLP continued





All first mortgages may be eligible, including FHA
and VA loans
HO must pay 31% of gross income towards
mortgage payments, but no less than $25/month
Maximum loan amount is $50,000 – includes
arrears and then monthly mortgage payments
above the amount contributed by the
homeowner for up to 24 months
After last payment is made, money advanced
becomes a declining balance, 0% interest loan –
will be forgiven over five years if homeowner
remains current on mortgage and remains in
home for five years
Application does not stall foreclosure process; no
appeals process
42
Philadelphia Housing Retention Program

Grant program initially to prevent homelessness,
now also available to homeowners facing
foreclosure

Can provide $1,500 - $2,500 grant to be used
towards delinquency, but only if HO will then be
current on the mortgage

Apply through one of specified counseling agencies

Income eligibility guidelines must be met

Proof of delinquency required

Program shuts down when funds are expended
43
Repayment Plan
 Simplest
work-out
option
 Written agreement
where borrower
agrees to cure the
delinquency by adding
additional amount to
regular monthly
mortgage payments
until current
 3 -12 months
 Must be in writing
When to use:
 Financial crisis has
been resolved
 Unemployed but
found work
 Temporary disability
 Issues:
 Must have income to
make higher payment
 Often difficult to
complete without
significant surplus

44
Forbearance Plan


Agreement to
suspend or reduce
normal monthly
payments for a fixed
period of time
At end of forbearance
period, borrower
must cure default
through lump sum
payment or longterm repayment plan

Viable option when:

Cause of the default is
specific and
temporary

There is reasonable
evidence that the
borrower will be able
to resume making
payments by a certain
date and will have
surplus income to
support a repayment
plan
45
Loan Modification

Written agreement
that permanently
changes one of more
of original terms:
 Interest rate
 Term
 Unpaid principal
balance

When to use:




Issues:


►Results in permanent
change in the
mortgage payment
Change to terms would
reduce payment amount
Failure to modify would
result in foreclosure
Only way to make
payments affordable

Paperwork
More work for servicer
Extreme delinquency
may prevent lender’s
cooperation or may
result in higher, not
lower payments
46
Steps for Affordable Loan Modification






Interest rate reduction, preferably permanent
Capitalization of arrears
Principal reduction (rare)
Extension of mortgage term
Extension of amortization period
Fees/costs reduction:




Easier to do before judgment than after judgment – saves
about $2,000
Inspection/appraisal
Late charges
Attorney’s fees (ask for itemization - often excessive)
47
Home Affordable Modification Program
 HAMP: for any eligible



homeowner
whose servicer
participates in the
program or
who has a loan owned or
guaranteed by Fannie
Mae/Freddie Mac
FHA and VA versions
 For
more information:
www.makinghomeaffordable.gov
www.hmpadmin.com/portal/programs
www.fanniemae.com/loanlookup
www.freddiemac.com/mymortgage
 Eligibility





Current monthly payments
(PITI) are greater than
31% of gross monthly
income
Property was purchased
before January 2009
Primary residence
Mortgage equal to or less
than $729,750 (for one-unit
property)
Projected income to lender
from modified loan would
exceed projected income
from foreclosure sale
48
Lender Programs

Many lenders/servicers have their own in-house
loss mitigation programs, which are in constant flux
– housing counselor will submit application for nonHAMP modification or other loan workout

VIP provides a binder at the conferences with
information on federal, state, city and individual
lender programs
Links to lender-specific programs:
www.consumerlaw.org/issues/financial_distress/loan_modification.shtm
l
www.palegalaid.net
49
Partial Claim


Available primarily in the context of FHA and VA
mortgages:
 Insurer pays the lender the amount of the arrearage
(“partial claim”) to bring the homeowner current on the
mortgage; amount paid becomes a loan the homeowner
must repay over time
 Borrower may not be more than 12 months in arrears
when application is made – sometimes can pay down
arrears to reach the 12-month limit
 Can use partial claim for up to 12 months of payments in
total (could be 3 partial claims for 4 months of payments
each)
 VA uses the term “refunding” rather than “partial claim”
NOTE: Loans with private mortgage insurance (PMI) may
also have this option
50
Non-Retention Options
Straight sale (if HO has equity in home)
 “Short” sale (home’s value < mortgage debt)
 Mortgage assumption by qualified prospective
buyer (e.g., HO’s family member)
 Deed in lieu of foreclosure/no delinquency
 Sheriff’s Sale – takes about 3 months from entry of
judgment to date of sale (1st Tuesday of the
month); after the sale, new owner must file action
in ejectment – takes about 8 weeks before Sheriff
evicts
Additional assistance to homeowner:
 “Cash for Keys”
 Local and state housing resource referrals

51
Straight Sale
 Lender
allows homeowner to sell property
on the market
 Good option if homeowner cannot afford to
keep the property but has equity in the
property – allows homeowner to retain that
equity
Lender requires a valid listing agreement with
a real estate agency
 Need enough time to complete sale

52
Short Sale


Lender allows homeowner to sell property
at a loss
Good option when situation is incurable and
client has no equity



A deficiency judgment may follow a short sale –
you should request that lender waive the
deficiency judgment
Potential tax issues – forgiven debt may be
considered taxable income to homeowner
Must be arms-length transaction – homeowner
cannot receive any of sales proceeds
53
Deed in Lieu (of Foreclosure)


Borrower voluntarily conveys title to lender
in exchange for discharge of remaining debt
Good option when other options have been
exhausted



Lender may require property to be listed for sale
for at least 90 days before accepting deed in lieu
No other liens on property, or liens must be
cleared before lender approves
Requires lender/investor approval
54
Sheriff ’s Sale

Might be the only option if homeowner has
little or no income and lender refuses deed in
lieu – but may affect HO’s ability to find rental
housing



Sale usually occurs 2-4 months after entry of
default judgment – on 1st Tuesday of the month
Homeowner has right to “cure” the loan (pay off
all the arrears and reinstate the loan) up to one
hour before the sale
Purchaser (or lender, if property is retained)
must file an action in ejectment to evict the
homeowner – process takes 6-8 weeks after
action is started if homeowner does not defend
55
“Graceful Exit”/Cash for Keys


Borrower agrees to leave property on a certain
date and in ‘broom-swept’ clean condition in
exchange for cash payment
Good option when default is incurable and
sheriff’s sale goes forward – saves new owner
the cost of an action in ejectment



Can negotiate more time before homeowner
must leave the property
Homeowner receives funds to help with
transition
Housing counselors can help HO find other
housing and sources of rent assistance
56
Bankruptcy as an Option

Two types of personal bankruptcy filings:

Chapter 7 – assets of a debtor are liquidated by a
trustee who pays off creditors with proceeds on a
pro rata basis; purpose is to discharge personal
liabilities of debtor; liens on the property cannot be
discharged

Chapter 13 – used by a debtor with regular income
to reorganize debt; trustee collects payments and
distributes them to creditors over a period of time (5
years max); at end of payment period, most unpaid
debts are discharged
57
Chapter 13 Bankruptcy and Foreclosure

Gives HO a chance to repay the mortgage
arrears over time if lender won’t otherwise
agree to a repayment plan


HO must be able to make regular mortgage
payments and additional monthly payments
to pay off arrears in 5 years
Provides a centralized, timelier forum to
litigate claims against the lender or servicer

Useful in reducing the arrearage claim or
negotiating a modification
58
Chapter 13 Bankruptcy Terms

Automatic Stay: injunction that springs into
existence upon filing of bankruptcy petition



Bankruptcy Estate: includes all property rights of
the debtor


Freezes foreclosure proceedings and prevents sheriff’s
sale (with notice to sheriff and creditor prior to sale)
If there are prior bankruptcies, stay may be limited or
not granted at all
Property owned by H/W as tenants by the entirety is
immune to a creditor of just one spouse
Discharge: absolves debtor of personal liability
on most debts (except alimony, child support,
taxes, student loans)
59
Chapter 13 Process and Timeline





Before bankruptcy can be filed, debtor must
complete on-line, telephone or in-person credit
counseling course
3-page petition and certification of credit counseling
are all that need to be filed in an emergency,
supporting documentation must be filed soon after
Meeting of creditors: 45-60 days post-petition;
usually only debtor attends; payment plan is
reviewed by trustee for feasibility
Discharge entered after all plan payments are
completed, generally 3 to 5 years post-petition
After discharge, automatic stay ends, but discharge
protects debtor from creditors’ continued attempts to
collect discharged debts
60
Disadvantages of Bankruptcy

Costs

Basic bankruptcy without additional services







Chapter 7: $1,000-$1,500
Chapter 13: $3,000-$3,500
Filing fees: minimum of $300
Interest accruing over payment period
Creditors’ reasonable attorneys’ fees and costs
Trustee’s commission: when mortgage
repayment is involved, 10% of arrears
May make it more difficult to negotiate a
loan modification with lender
61
Bankruptcy and the Diversion Program

When is bankruptcy a viable option for a
homeowner in the diversion program?



HO has significant unsecured debt that may
be dischargeable in bankruptcy, and the high
debt-to-income ratio makes HO ineligible for
a loan modification
Value of home is less than total mortgage
debt because of 2nd or 3rd mortgages;
secondary loans need to be reduced or
eliminated
HO has consumer debt judgments which
may be liens against the home
62
Bankruptcy and the Diversion Program



Lender offers only a short repayment plan
that HO cannot afford
HO has equity in the property and lender will
not give HO time to sell the property (should
take this to a JPT before considering
bankruptcy)
Lender will not offer repayment plan/loan
modification because HO not on the note,
but HO has an interest in the property by
inheritance or by co-signing for a loan
► Common situation in diversion program!
63
Outcomes of VIP-Assisted Cases
(Data from loan modifications in cases closed 10/2008 – 9/2009)

Average mortgage payment (mean)



Prior to VIP assistance: ~ $750/month
After VIP assistance: ~ $560/month
Average interest rate range (mode)


Prior to VIP assistance: 7 – 9%
After VIP assistance: 5 - 7%
►See Appendix p.85 for sample loan workouts
64
Outcomes of VIP-Assisted Cases
(Data from 438 continued representation cases closed 6/2008 –
4/2011)
Retention Options
Non-Retention Options








3 refinance (1%)
8 HEMAP loans (3%)
24 repayment plans (10%)
14 forbearance plans (6%)
185 loan modifications
(73%)
2 partial claims, 1 reverse
mortgage (1%)
16 bankruptcies (6%)
TOTAL: 253 homes saved



3 market sales (4%)
10 short sales (13%)
1 deed in lieu (1%)
65 sheriff’s sales (82%)
TOTAL: 79 homes
NOTE: 8 homes sold at sheriff’s sales
received Cash for Keys
Unreported Outcomes
(no information available)
TOTAL: 106 homes
65
Impact of VIP Attorney Assistance

Ongoing legal representation increases homeowner’s likelihood of
retaining home
 from 29% (for all homeowners participating in diversion
program) (see Appendix p.65 for data)
 to 76% (VIP clients with ongoing representation for whom
outcome has been reported)

Average time spent on a case: 7.5 hours over
3 - 5 months

Pro bono hours donated by VIP volunteer attorneys to program:



►
For continued representation cases June 2008 – October 2010: 4,342
At conciliation conferences June 2008 – October 2010: 3,088
Monetary value of pro bono service (at $200/hr): $1,486,000
Of 438 ongoing representation cases that closed
between June 2008 and April 2011, 253 homes were
saved!
66
Requirements for Attorney Participation

Must attend VIP training, 3 free CLE credits for representing
clients at 3 separate conferences OR representing 2 clients
beyond the initial conference

Volunteers encouraged to keep clients – much higher
likelihood of positive outcome!

Per Rule 6.5 of the PA Rules of Professional Responsibility, no
need for conflict waivers for participation at conferences

To continue to work with client after the conference, must
clear conflicts with firm

Scheduling issues:
► To reschedule “day-of” participation in a court conference
session, contact VIP program administrator
► To reschedule a conciliation conference during ongoing
representation of a client, contact opposing counsel
67
Additional Resources




Philadelphia VIP website: www.phillyvip.org
National Consumer Law Center:
www.consumerlaw.org/issues/homeownership
PA Legal Aid Network: www.palegalaid.net
Federal program info and updates:
www.makinghomeaffordable.gov
www.hmpadmin.com
www.fanniemae.com/loanlookup
www.freddiemac.com/mymortgage
http://portal.hud.gov/hudportal/HUD?src=/pro
gram_offices/housing/sfh/nsc/lmmltrs
68