Pennsylvania foreclosure diversion programs: Out of Control?
Mortgage foreclosure diversion programs exist in approximately one-third of Pennsylvania’s counties.
While each program has unique characteristics, there are two general common denominators for all programs: eligibility is limited to owner-occupied residential properties and borrowers must submit one or more county-specific forms to participate.
There are some exceptions: Philadelphia County is mandatory (there is no opt-in procedure) and tends to allow estate-owned properties into its program; Cumberland County is mandatory and, if no work-out is feasible, requires that a motion be filed to obtain a court order allowing foreclosure to resume; and Butler County’s Program also covers defaulted credit cards.
The Good, the Bad, and the Ugly
These programs are intended to provide a neutral forum for loss-mitigation discussions with the ultimate objective of an amicable resolution; and there are certainly many success stories of permanent modifications or mortgage reinstatements amounting to a win-win for all parties. However, lenders/servicers can be confronted with the following:
1. borrowers not submitting financial information and documentation in a timely manner, or at all;
2. borrowers filing opt-in forms and then deliberately not showing up for conciliation conferences, which are obvious delay tactics;
3. borrowers filing opt-in forms for non-eligible properties (e.g. vacation, rental, or commercial properties);
4. courts not removing cases from diversion programs when loss mitigation has been denied and/or is otherwise unavailable, but instead, continuing or rescheduling them;
5. courts not removing cases when borrowers are interested only in the sale, short sale or otherwise, of properties (these Programs are designed to help borrowers “save” their residences, not provide a stay of proceedings to accommodate them in “selling” the properties);
6. partial judges (one judge has remarked that he would do “everything in his power” to help borrowers who wanted to save their homes);
7. courts not removing cases to accommodate borrowers in negotiating (unrelated) IRS liens;
8. non-foreclosure cases being remanded into such programs (a post-sheriff’s deed ejectment case, where there can be no loan work-out, was once
remanded into a diversion program; though it is possible that the court did so in order to broker a cash-for-keys);
9. foreclosures being permitted or remanded into diversion programs on the eve of sheriff’s sale when borrowers file motions for nunc pro tunc entry into such programs.
How do we explain these phenomena? Law of unintended consequences, Murphy’s Law, rogue judges, homeowner protection, all of the above?
Here are a few options:
To minimize losses and/or delays and to otherwise adapt to the “new normal” of increased homeowner protection, lenders/servicers may need to consider investments (financial investments, too) in non-traditional, aggressive, and/or creative strategies.
At the referral stage, lenders and servicers could opt to foreclose in federal court or file breach of promissory note cases (instead of foreclosures) in state court to try to circumvent diversion programs. Or, motions can be filed seeking removal of cases from the diversion programs under appropriate circumstances (such as where a borrower files opt-in forms for a non-eligible property), which has yielded positive results for lenders a few times.
Finally, appellate options may need to be seriously considered if available.
With respect to appeals, while they are costly, they may prove to be a sound tactical decision, particularly when trial courts are reluctant to remove cases from the diversion program and loss mitigation or loan work-outs are simply not feasible or investor guidelines prohibit same.
In Pennsylvania, the Superior Court has stated that loss mitigation cannot be forced on a party and that an indefinite stay on a creditor’s right to execute on collateral violates the creditor’s due process rights. Assuming other jurisdictions have similar precedent, it may actually be preferable under certain circumstances to beta-test the strategy of surreptitiously obtaining, or allowing a trial court to issue, an order indefinitely staying a foreclosure for the express purpose of seeking a more favorable decision – and, incidentally, favorable precedent – on appeal.
Why are these programs limited to matters involving debs? Why aren't courts expanding these programs to cover all types of lawsuits?
Did any of these counties or jurisdictions ever bother to take a referendum vote to see if the majority of the populace supports and/or is willing to have their taxes paying for such Programs?
Did anyone ever bother to consider whether deliberately extending foreclosures is actually harmful to mortgagors because of the increased interest, late charges, court costs, and attorneys' fees that will inevitably accrue on delinquent loans?
Are they really even necessary at this point given the existing federal and state homeowner assistance programs, the various quantitative easing policies of the Federal Reserve Board designed to artificially keep interest rates low, and the federal government’s insistence that there has been improvement in the housing market?
One can argue that the diversion programs are, in part, political machinations, instituted by judges who are elected as a means to garner votes for re-election.
After all, in today’s world (where banks are coined as the “evil empire,” have become poster children for misconduct, and are blamed for causing the recent financial meltdown), diversion programs designed for business divorces, slip and fall cases, and complex commercial cases would probably not be of interest to voters.
The reality is that diversion programs are here to stay and, consequently, adverse outcomes as well as unforeseen and atypical delays should be expected and accounted for in timelines.
Therefore, getting what you want may sometimes require creative and unique legal strategies, one-upmanship, and persistence. An aggressive approach sends a message to mortgagors, the courts, and the defense bar that lenders and servicers are not afraid to be vigilant and willing to exercise their rights.