A South Carolina appeals court has ordered a suspension of all foreclosures in the state. But the action might not be as bad as it sounds.
An administrative order signed by Chief Justice of South Carolina Jean H. Toal was filed Monday in the Supreme Court of South Carolina.
The order impacts foreclosure actions on owner-occupied properties that are pending as of May 9.
According to the order, a notice of the mortgagor’s right to foreclosure intervention must be given to the borrower and filed with the court before a foreclosure can complete.
The mortgagee’s attorney needs to certify that the borrower was served, that the notice was received by the borrower or the borrower’s designated agent, and that the borrower had an opportunity to submit additional information about personal circumstances. The attorney must also certify that the borrower does not qualify for a modification or other mitigation programs.
In addition, a certification that the borrower was served with a denial notice indicating an answer or other response to the summons and complaint could be filed within 30 days of the notice.
“If within 30 days after having been served with notice of the mortgagor’s rights, the mortgagor has failed, refused, or voluntarily elected not to participate in any foreclosure intervention process, the mortgagee, through its attorney, shall certify that fact to the court, and the foreclosure action may proceed,” the order stated.
The court order could help third-party mortgage servicers — who are bound by the terms of securitization contracts and saddled with the labor-intensive expense associated with processing loan modifications — avoid more foreclosures through loan modifications and loss-mitigation programs.
Some servicers see loan modifications as a less expensive option than foreclosure after all is said and done. But others see the costs associated with the technology, people and administration needed to make a modification as more expensive than REO disposition.
If a loan modification or other foreclosure prevention alternative is approved, then the foreclosure will be stayed for 90 days unless the borrower defaults on the agreement. In the event of a default, the servicer’s attorney needs to file a notice of breach of agreement — at which point the foreclosure can proceed.
The judge said he previously issued an administrative order in May 2009 for foreclosures that were subject to the Home Affordable Modification Program. He noted that a subsequent Treasury Department directive expanded program from just loans that were guaranteed or owned by Fannie Mae or Freddie Mac to non-agency loans — though the directive didn’t impact non-HAMP servicers.
The judge acknowledged that South Carolina foreclosures have increased since the previous order. But he noted that trial courts are having trouble completing foreclosures because “failed or delayed loss mitigation efforts between lender-servicers and mortgagor-debtors.” The lower courts, Toal explained, report that borrowers and servicers are having “difficulty in communication.”
A court can impose “such sanctions as it determines to be reasonable and just” if lenders don’t meet the requirements of the order. This includes the assessment of legal costs.
But this could create an issue, according to Patton Boggs LLP Partner Anthony Laura.
“I wonder whether South Carolina courts might wind up wrestling with the type of HAMP-related claims that most other courts, federal typically, have said … plaintiffs have no private right of action … for a lender’s failure to offer them a HAMP modification or to … provide them … with a HAMP modification that they think is satisfactory,” Laura said in a telephone interview. “I wonder how this order conflicts with that developing body of case law that says these plaintiffs have no private right of action.”
Laura added that most courts don’t provide a private right of action to borrowers for HAMP entitlement.
The order requires a notice of dismissal to be filed if the borrower maintains the foreclosure-prevention agreement for 90 days.
The order will slow the pace of foreclosures in the state, Laura explained. But the foreclosure litigation expert sees a bright side to the order.
“In the short term for the lenders it’s going to serve to increase their costs of foreclosure” for loans that are not modified, Laura said. “But, ultimately, since loan modification is often a less expensive alternative for the lenders than foreclosure is, they may wind up saving money themselves.”
He added that lenders who hesitated with loss-mitigation efforts because of investor or other obligations “are now forced to do so.”
Chief Justice Toal wants to ensure that loan modifications and other mitigation actions have been exhausted before a foreclosure completes. He also wants uniform procedures followed around the state.
Laura warned that borrowers might complain to the courts that lenders didn’t engage in good faith efforts on HAMP modifications — putting the state in the potential position of “imposing HAMP obligations for the benefit of a private borrower.” Up until this point, courts have said that this shouldn’t be done.
“No court has yet said HAMP preempts … state law causes of actions … with respect to modification efforts,” Laura stated. “All they said is, if you come into court and say, ‘I was denied a HAMP modification because the lender didn’t follow the procedures that HAMP requires the lender to follow,’ you don’t have a private right of action.”
The order said that none of the foreclosure intervention documents can be used on subsequent actions.
