Rhode Island Senator Proposes Law That Would Empower Judges

Rhode Island Senator Proposes Law That Would Empower Judges To Order Lenders to Talk to Their Borrowers

The practice of some bankruptcy courts to pressure lenders and borrowers to enter into mediation over mortgage debts drew scrutiny Tuesday during a Senate Judiciary Committee hearing as foreclosures are expected to top 13 million through 2012

Sen. Sheldon Whitehouse (D., R.I.), who chairs a Senate administrative oversight and courts subcommittee, introduced a bill last week that would clarify existing law to allow troubled borrowers to enter into court-supervised talks with lenders. In Whitehouse’s view, this would ensure that mortgage servicers owned by the nation’s biggest banks don’t reject proposed settlements that would benefit investors and borrowers.  Successful Bankruptcy court mediation programs exist in Rhode Island, New York, Florida and Vermont, but Whitehouse’s bill would expand it to all U.S. jurisdictions. So far, it has no co-sponsors. “Servicers too often act in their own fee-driven interests and not in the interests of the investors who actually hold the mortgages,” Whitehouse said at the hearing. “A court-supervised negotiation can ensure that servicers don’t reject reasonable settlements.”

He said such bankruptcy court programs can help some frustrated homeowners get answers to their modification requests. An individual with full settlement authority for the bank and open to good-faith negotiations must show up for the mediation proceeding, according to the bill. The top four U.S. mortgage servicers are owned by Bank of America Corp, Wells Fargo & Co, J.P. Morgan Chase & Co and Citigroup Inc., according to Inside Mortgage Finance. These four companies are also top securitizers of mortgage loans.

Servicers collect a fee for administrating all aspects of a loan, including sending monthly payments to mortgage investors, maintaining records and collecting and paying taxes and insurance. Whitehouse contends that court-ordered talks could pressure servicers to modify mortgages that they wouldn’t otherwise agree to modify. At issue are concerns, in part, that the bank-owned servicers can recoup their costs more quickly when there is a foreclosure than when there is a modification. Whitehouse added that court-supervised talks can help alleviate servicer concerns that modifications open them up to investor litigation. “Pooling and servicing agreements often leave servicers unsure if they should modify mortgages or foreclose. A court can help to alleviate this uncertainty by signing off on the reasonableness of a settlement,” he said.

Slippery slope to cramdowns?

Sen. Charles Grassley (R., Iowa) had reservations about the bill.

Grassley said he worried that court-ordered talks could lead to a much more powerful role for bankruptcy judges to allow so-called “cramdowns” — an approach that would enable bankruptcy courts to reset mortgage terms, extend repayment periods, reduce interest rates and fees and lower the principal balance of mortgages so homeowners can avoid foreclosures.