The Bankruptcy Court for the Southern District of New York has adopted Loss Mitigation Program Procedures to facilitate negotiation in cases where individual debtors are in danger of losing their homes due to foreclosure. In Bambi, the bankruptcy court imposed sanctions on a bank that held a mortgage loan on the debtors’ home for failing to participate in good faith in the loss mitigation process. On the one hand, this case illustrates that there may be adverse consequences if a court loses patience. On the other hand, it also suggests that sometimes it may take a lot to cause the court to lose its patience.
During a chapter 7 bankruptcy, the debtors requested “loss mitigation” with respect to the first mortgage on their home. As described in the procedures:
The Loss Mitigation Program is designed to function as a forum for debtors and lenders to reach consensual resolution whenever a debtor’s residential property is at risk of foreclosure. The Loss Mitigation Program aims to facilitate resolution by opening the lines of communication between the debtors’ and lenders’ decision-makers. …
The term “loss mitigation” is intended to describe the full range of solutions that may avert either the loss of a debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction. The terms of a Loss Mitigation solution will vary in each case according to the particular needs and goals of the parties.
The sequence of events as recited by the court is as follows:
- July 12, 2011: The debtors requested loss mitigation.
- August 1, 2011: Wells Fargo Bank, N.A. (Wells Fargo) filed an affidavit requesting documents for review. (Wells Fargo was the servicer of the loan, which was owned by Hudson City Savings Bank (Hudson City).)
- August 11, 2011: The debtors filed an affidavit advising that they submitted requested documents.
- August 24, 2011 – February 21, 2012: Five status updates were filed by Wells Fargo. Based on the reports and status conferences, the court was under the impression that “Loss Mitigation appeared to be progressing subject to the usual issues.”
- April 13, 2012: Almost 8 months into the process, Wells Fargo filed a letter indicating that Hudson City did not allow a variety of terms in connection with loan modifications (including HAMP, reduction of principle, capitalization of arrears, modification of interest rate, and extension of maturity date). This made it virtually impossible to modify a loan.
- April 18, 2012: The court was advised that Hudson City did not perform loan modifications. The debtors requested a copy of its investor guidelines, which the court ordered Hudson City to provide.
- May 9, 2012: A letter dated February 17, 2010 purporting to be investor guidelines was filed that merely repeated the information in the April 13 Wells Fargo letter.
- May 16, 2012: The court determined that the letter did not satisfy its order.
- June 5, 2012: Hudson City appeared and told the court that it only did modifications on loans that it serviced itself. This appeared to be inconsistent with its investor guidelines and website. So the Hudson City representative stated that they would change their guidelines to allow servicers to modify loans. However, among other requirements, the mortgage loan could not be more than 95% of the home’s value (which would preclude most homeowners from modification since homes are typically underwater).
- July 24, 2012: The parties advised that negotiations had continued. The debtors believed they could qualify, and Hudson City agreed to re-review the request if they obtained an appraisal.
- September 19, 2012 : The debtors advised the court that they had obtained an appraisal which showed they qualified. Wells Fargo asked for time to perform its own independent appraisal. The court instructed Wells Fargo to have an answer on eligibility before November 28, 2012.
- December 19, 2012: Three months later Wells Fargo appeared at a status hearing and advised that the appraisal had not yet been completed. In addition communications between Hudson City and Wells Fargo had “broken down.”
- December 27, 2012: The court ordered Hudson City to appear and show cause why it should not be sanctioned for failing to participate in the loss mitigation process in good faith.
- February 27, 2013: Representatives from Wells Fargo and Hudson City appeared. The debtors’ counsel stated that they had been offered an oral modification. The show cause hearing was adjourned to allow Hudson City to prepare paperwork.
- March 29, 2013: The debtors filed a status report and requested sanctions against Wells Fargo, as servicer. Among other things, according to an SEC filing, Hudson City had adopted a loan modification policy during 2011 that was inconsistent with the February 2010 letter produced in May 2012. The debtors argued that Hudson City intentionally failed to disclose the policy.
- April 3, 2013: Court was informed that the debtors received only a Temporary Forbearance Agreement with no mention of previously agreed terms nor any indication of whether a permanent modification would be forthcoming. At this point “the Court told Wells Fargo’s counsel to ‘bring them all in’ and ‘tell them to come see me.’”
- April 9, 2013: Wells Fargo counsel and a lending officer appeared and reported that the debtors did not qualify. However debtors’ counsel indicated that he had been provided with a letter of intent to enter into a modification with the terms previously offered. The offer was not in writing. Hudson City representatives did not appear.
Based on this record, the court found that Hudson City failed to participate in good faith. The whole point of the loss mitigation program was to “put the decision-making parties in direct contact with each other, and set a schedule for their discussion as to what could be done about the debtors’ home.” The court found that this process was similar to a court ordered mediation program. While parties cannot be forced to settle, good faith requires that parties “attend conferences, provide any requested memoranda, and produce representatives with settlement authority.”
The court acknowledged that individual acts of Hudson City might not rise to the level of bad faith, but together they showed a “pattern of evasive delay tactics.” Hudson City could have objected when the loss mitigation was first requested. If it had simply stated that it did not modify mortgages and provided relevant guidelines, the loss mitigation process almost certainly would have been terminated. Instead it chose to “move the goal post,” engaging in a long series of delay tactics.
The Loss Mitigation Program Procedures specifically allow for imposition of sanctions, which the court found was supported by the inherent power of a bankruptcy court to supervise and control its own proceedings. It also found that it could use its civil contempt powers. Consequently, the court ordered Hudson City to pay the debtors’ attorney’s fees as a sanction for failing to participate in the loan mitigation process in good faith.
It is not clear what Hudson City gained from the 20 month delay. One could view this case as providing the lesson that you ignore court procedures and orders at your peril. Alternatively, perhaps the lesson is that if you want to do battle, you better have staying power.
Vicki R. Harding, Esq.