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Bankruptcy Courts Impose Mitigation Programs

ABI report analyzes loss mitigation programs in NY and RI

March 7, 2011

By staff

Bankruptcy courts have been successfully forcing servicers to modify mortgages, according to an analysis of cases in two states.

When the Obama administration originally announced plans for the government's loan modification program in February 2009, between 4 million and 5 million borrowers were expected to benefit from the program.

As of Jan. 31, there have been 539,493 loan modifications completed under the Home Affordable Modification Program.

The spectacular failure of HAMP has Congress examining a repeal of the program, the American Bankruptcy Institute says.

The Alexandria, Va.-based group reported that an analysis in its ABI Journal found that several bankruptcy courts have adopted loss-mitigation programs.

"Bankruptcy courts can play an important role in avoiding unnecessary foreclosures and facilitating mortgage modifications through implementation of loss-mitigation programs," according to John Rao of the National Consumer Law Center Inc.

The Boston-based group says it is a non-profit organization that advocates for low-income and other economically disadvantaged Americans.

According to Rao, bankruptcy court loss-mitigation programs reinforce the loan modification process with additional layers of supervision, accountability and timelines.

In Rhode Island and New York, Rao found that more than a third of the cases using the loss mitigation programs from Nov. 1, 2009, to Dec. 31, 2010, resulted in an approved modification.

Loss-mitigation programs adopted by the U.S. Bankruptcy Court for the Southern District of New York as well as bankruptcy courts in Rhode Island and Vermont designate loss-mitigation periods. They also require dates for the filing of status and final reports.

But mortgage servicers looking to terminate negotiations have to make a filing with the bankruptcy court stating their reasons. Rao says this provision gives borrowers basic due process and remedies the HAMP flaw that borrowers whose modifications were declined didn't learn why they were denied.

Rao claims that that the automatic stays imposed by bankruptcy courts protect the borrower at least until at least the conclusion of loss-mitigation negotiations. He said second mortgages, which compound modification issues, are solved through bankruptcy-imposed mitigation because all of the liens on a property can be provided for in a debtor's chapter 13 plan.

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