Loss mitigation in a foreclosure case Lawyer Manual

Loss mitigation is a generic term for options to avoid foreclosure. Some of the most common “loss mitigation options” include:

• Deeds-in-lieu of foreclosure
• Short-sales
• Repayment plans
• Forbearances
• Loan modifications

The details of loss mitigation options are largely dependent on the “type” of loan involved, and what the investor guidelines dictate. While loss mitigation options generally follow the same pattern, the specifics of loss mitigation options can vary greatly depending on:

• Whether the homeowner has received prior loss mitigation options, and, if so, how recently;
• The nature of the homeowner’s hardship and current income;
• Whether the loan is insured by the federal government, Federal Housing Administration (FHA), Rural Housing Service (RHS), or Veteran’s Affairs (VA); and
• Whether the loan is owned by a government-sponsored enterprise, Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

Working directly with the loan servicer early in the process can be very important to avoiding foreclosure. If the homeowner is in default or is at imminent risk of default, the homeowner should immediately contact the servicer and try to reach a loss mitigation agreement. The loss mitigation process can be difficult, but communication, diligence, and persistence are usually helpful in obtaining a loss mitigation agreement.

Clients should attempt to decide if they can realistically retain the house, or if they wish to move. A realistic and careful assessment of the client’s income and expenses must be done to determine if it is feasible to keep the home.

Homeowners should also attempt to make payments as much as possible and save any funds returned to them by the servicer. Homeowners should also continue to save payments as the number of missed monthly payments accrues. Some public benefits, like Supplemental Security Income, Medicaid, or SNAP have resource limits, however, which should be considered when advising clients to save large sums of money.

Loss mitigation procedures

The loss mitigation process is largely governed now by Regulation X – a federal regulation promulgated by the Consumer Financial Protection Bureau (CFPB). Attorneys assisting a with a foreclosure must review the timelines established by the CFPB in Regulation X. With certain exceptions, Regulation X dictates, for instance, that the servicer shall not initiate foreclosure if the borrower has submitted a “complete loss mitigation application” within the 120-day pre-foreclosure review period. If a borrower submits a “complete loss mitigation application” after initiation of the foreclosure but more than 37 days prior to a scheduled sale, the plaintiff shall not move for judgment or conduct a judicial sale. Additionally, if a loan servicer receives a loss mitigation application 45 days or more before the judicial sale, the loan servicer must promptly review the application, and, within 5 days of receiving the application, acknowledge receipt of the application. In that acknowledgment, the servicer must also state whether the application is complete or incomplete, and must state what additional information must be submitted to render the application complete. 12 C.F.R. 1024.41. These provisions of Regulation X may be enforced pursuant to Section 6(f) of the Real Estate Settlement Procedures Act (RESPA). 12 U.S.C. 2605.

HUD-approved housing counseling agencies

• Repayment plan: The homeowner agrees to pay the arrearage as an additional payment each month. Repayment plans may be limited in duration depending on the type of loan involved. You should warn homeowners to call back if, after negotiating a workout agreement, they receive a notice from the servicer raising the total monthly payment because delinquent escrow accounts must be made up. This usually means the loss mitigation department has not contacted the escrow department. Buyers should not have to pay back the delinquent escrow twice.
• Deferral of principal: The homeowner pays only interest for a period and then resumes normal principal and interest payments.
• Forbearance: Monthly payments are suspended or reduced temporarily. A forbearance is usually coupled with a more permanent solution like a loan modification.
• Loan modification: A change in one or more terms of the original loan to eliminate the arrearage and usually attempt to lower the monthly payments. In a loan modification, the account is usually brought current by adding the arrearages back into the principal balance of the loan. Then, the interest rate may be lowered, and the term extended.

Common non-retention loss mitigation options

If the homeowner does not want to keep the house, the client can sell the house, offer a deed-in-lieu of foreclosure, or file bankruptcy.

• Selling the house: The house can be sold at any point through the final redemption date. Proceeds are used to redeem the mortgage. This is a particularly good option for a homeowner who has substantial equity in the home. An assumption of the mortgage by the purchaser is also possible. The lender may also agree to a short-sale – a sale for less than the debt – if the house has been assessed at less than the value of the debt. Many lenders require that the home is listed for at least 90 days before they will consider a short sale. Also, unless the lender waives their right to a deficiency, a short sale rarely benefits the homeowner.
• Deed-in-lieu: The client deeds the house to the lender and moves out in exchange for a release from personal liability on the debt. The procedures are set forth at 735 ILCS 5/15-1401. There can be no junior liens on the property for this to work. The Illinois ARDC recommends that the homeowner use an attorney for the preparation of these documents to avoid chances of practicing law without a license. A deed-in-lieu agreement may shorten the time the client has to remain in the home. Note, a deed-in-lieu and a short sale may have tax consequences – forgiveness of debt is generally considered taxable income – and buyers should be advised accordingly.
• Consent foreclosure: In this option, the court enters a judgment satisfying the indebtedness by vesting absolute title to the foreclosed property in the plaintiff. In this option, the rights of reinstatement and redemption may be waived. A consent foreclosure requires the plaintiff to waive the right to collect any personal deficiency. A judgment for foreclosure, however, is entered and reported on the defendant’s credit report.

Bankruptcy options

• Chapter 13 “Repayment” Bankruptcy: Chapter 13 bankruptcy is a “repayment plan” under which the client repays the missed mortgage payments over the period of up to 60 months. During Chapter 13 bankruptcy, the client must make a monthly bankruptcy payment to repay the mortgage arrears in addition to the regular monthly mortgage payment. Thus, Chapter 13 bankruptcy is typically not feasible unless it is affordable. If the client has enough regular income to repay the arrearages within 60 months, he or she may be eligible for a Chapter 13, which would allow home retention. Chapter 13 bankruptcy may also have additional benefits if the client has substantially burdensome unsecured debt, or has no equity in the house but has additional liens on the property. Wholly “unsecured” subordinate mortgages may be “stripped-off” the property and treated as unsecured debt in a Chapter 13 bankruptcy. In order to avoid foreclosure through Chapter 13 bankruptcy, the Chapter 13 bankruptcy must be filed before any judicial sale occurs
• Chapter 7 “Liquidation” bankruptcy: Chapter 7 bankruptcy will only stop the foreclosure process temporarily. At the very least, a successful Chapter 7 may delay the foreclosure process and may discharge the client’s personal liability for the house debt. While some debts are not dischargeable, Chapter 7 bankruptcy may also eliminate the client’s other debts. In the course of Chapter 7, however, any assets owned by the client, which are not otherwise exempt, may be sold by the bankruptcy trustee and used to satisfy as much of the client’s debt as possible. In a Chapter 7 bankruptcy, keeping the home is usually only feasible if payments are current and the client’s equity in the house is protected by the applicable homestead exemption amount.

Illinois Supreme Court Rule 113 and Rule 114

Illinois Supreme Court Rule 113 governs “prove-up affidavits.” However, the court may enforce the standards outlined in Supreme Court 113 under the Illinois Rules of Evidence or other Illinois law.

The Rule 113 prove-up affidavit must include:

• The identity of the affiant and an explanation as to whether the affiant is a custodian of records or a person familiar with the business and its mode of operation. If the affiant is a person familiar with the business and its mode of operation, the affidavit shall explain how the affiant is familiar with the business and its mode of operation;
• An identification of the books, records, and/or other documents in addition to the payment history that the affiant reviewed and/or relied upon in drafting the affidavit, specifically including records transferred from any previous lender or servicer. The payment history must be attached to the affidavit in only those cases where the defendant(s) filed an appearance or responsive pleading to the complaint about foreclosure; and
• The identification of any computer program or computer software that the entity relies on upon to record and track mortgage payments. Identification of the computer program or computer software shall also include the source of the information, the method and time of preparation of the record to establish that the computer program produces an accurate payment history, and an explanation as to why the records should be considered “business records” within the meaning of the law.

Illinois Supreme Court Rule 114 governs “loss mitigation affidavits.” This rule requires the lender to file a loss mitigation affidavit with the court prior to or at the time of requesting a judgment of foreclosure. The loss mitigation affidavit must specify:

• Any type of loss mitigation which applies to the subject mortgage;
• What steps were taken to offer said type of loss mitigation to the mortgagor(s); and
• The status of any such loss mitigation efforts.

You may try to contest the entry of a judgment of foreclosure if you believe the plaintiff did not properly offer or evaluate the defendant for all available loss mitigation options. However, in order to contest entry of judgment on this basis, you should scrutinize the plaintiff’s affidavit, in substance and/or form, and provide a counter-affidavit.