Mortgage modification: In bankruptcy? In foreclosure? When is the right time?

Let me start by stating that the opinions set out in this post are my own. I can’t prove them; I just have the intuition that I’m right.

Many of my clients have fallen behind on their mortgage payments and are facing a foreclosure action. And mortgage servicers are quick to shoot out loan modification packets to anyone who has gotten 30 days behind on their mortgage. If you are one of these borrowers, think carefully about when you complete and submit that packet. Denials seem to breed future denials when it comes to loan modification.

When the foreclosure action is filed, you are going to have the opportunity to participate in the Foreclosure Settlement Conference, a mechanism that the New York courts established during the height of the subprime mortgage crisis. Each county has its own variation. Almost without exception, you are better off waiting to submit the papers until you participate in the conference. Then, at least you’ll be submitting papers to attorneys for your mortgage servicer, who will acknowledge receipt and save you from the ‘We cannot find your [fill-in the blank]; you’ll need to resubmit the papers, etc., ad nauseam. And, the process is supervised by a court-appointed lawyer referee. The referees work to try to provide a level playing field for both the borrowers and the banks. They have no authority to direct any result. But because so much of a given lender’s default administration business crosses their (the referees’) desks, the mortgage servicing companies have an understandable incentive to cooperate, within reason.

The mortgage servicing companies are no longer bound by the guidelines of the Home Affordable Modification Program established by the U.S. Treasury and required for all lenders who had taken some of that $700 billion in TARP bank bailout money. But over time, the mortgage companies and their investors seem to have gotten more practical about reviewing mortgage modification requests on a retail basis.

Long story short: you might well be better off waiting to submit a loan mod package until you’re in the Foreclosure Settlement Conference.

And then there is the Loss Mitigation protocol established by the U.S. Bankruptcy Court for the Southern District of New York, built upon the court’s already successful mediation program. Loss Mitigation encompasses loan modifications, short sale and deeds in lieu of foreclosure. The bankruptcy judges in the White Plains and Poughkeepsie Divisions strongly encourage economically reasonable decision making. All parties are required to participate in good faith, and there are strict performance deadlines. In my experience (again, this is subjective), this is the most effective forum in which to try to work out the default on your mortgage and get it back performing again, for you and for the bank. Just remember: the fundamental purpose of a bankruptcy case is adjusting the claims of creditors, so if you choose this route, you still must timely perform all of the obligations of a debtor (usually in chapter 13) and move toward obtaining your discharge.

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