Philadelphia Residential Mortgage Foreclosure Diversion Program

1. Philadelphia Residential Mortgage Foreclosure Diversion Program Philadelphia VIP Negotiation Training for Pro Bono Counsel May 11, 2011 Trainers: Maisha Elonai, Esq. Michelle Brix Independence Fellow Senior Housing Counselor Philadelphia VIP Center in the Park Andrea Saah, Esq. Alfonso Madrid, Esq. LawWorks Senior Staff Attorney Principal Philadelphia VIP Law Offices of Alfonso Madrid

2. Foreclosure Nationally • 1 of every 11 residential mortgages in U.S. is more than 30 days delinquent but not yet in foreclosure • 1 in 21 residential mortgages is in foreclosure – over half of those being subprime fixed or adjustable rate mortgages • More than two-thirds of mortgages are in default due to unemployment or underemployment • In Pennsylvania, foreclosures are concentrated in modest and low income communities

3. Reasons for Default(based on currently open, reported cases referred to VIP attorneys) • Unemployment: 48% • Illness of homeowner or family: 23% • Combination illness/unemployment: 16% • Divorce: 8% • Other: 5%

4. Demographics of VIP-Assisted Clients(for all households assisted by VIP at court or in ongoing representation = 1,744 as of April 2011) • 63% are female • 58% have children in the household (more than 2,000 to date) • 21% are single caregivers with children • 10% are seniors • Mean client age = 37 years • 63% African-American • 24% Caucasian • 9% Hispanic • 2% Asian • 2% Other

5. Foreclosure Process in Pennsylvania • Foreclosure in PA is a judicial process – the lender must commence an action in court in order to be able to foreclose on and sell the property ► See p.4 for a foreclosure process timeline • Homeowner receives notice before the complaint is filed, before judgment is entered, and before the sheriff’s sale can occur ► See p.5 for sample notices

6. Relevant Statutes and Rules • An action of mortgage foreclosure is governed by PA Rules of Civil Procedure 1019, 1024, 1028, 1141-1150 • Act 91 created HEMAP, the Homeowners Emergency Mortgage Assistance Program ►“Act 91 Notice” is sent to homeowner prior to commencement of mortgage foreclosure action; provides HEMAP information to the homeowner • Act 6 governs mortgage foreclosure procedure in PA ► “Act 6 Notice” is a Notice of Intent to Foreclose See Appendix pp.57-64 for text of relevant rules and statutes.

7. Diversion Program Residential Mortgage Foreclosure Diversion Pilot Program established by Joint General Court Reg. No. 2008-1, 4/16/08; reauthorized by court order on 12/16/09 Provides an opportunity for homeowners and lenders to avoid foreclosure by resolving the dispute through a negotiated agreement under court supervision Covers all mortgage foreclosure cases involving owner-occupied residential properties in Philadelphia Owner-occupied residential properties cannot proceed to judgment or to sale unless a conciliation conference (CC) is held under court supervision Every Thursday in Courtroom 676, at 9am and 1pm, 100 - 125 cases/session ► See Appendix p.65 for data on cases in the program

8. Foreclosure Process BEFORE Diversion Program

9. Notification of Conciliation Conference Date Homeowner calls Hotline Referral to Housing Counselor Homeowner, Housing Counselor meet Loan workout proposal submitted Conciliation Conference: VIP Attorney assigned All parties negotiate Negotiation Unsuccessful Negotiation Successful Workout Agreement Reviewed/Signed Foreclosure Process WITH Diversion Program

10. How Process (Ideally) Works Homeowner receives Act 91/Act 6 notice with HEMAP information and information about housing counseling agencies Plaintiff files complaint Homeowner (HO) receives letter with conciliation conference (CC) date and Save Your Home Philly hotline number (215-334-HOME) with the complaint HO calls hotline for appointment with a Housing Counseling (HC) agency OR HO calls agency as result of Office of Housing and Community Development outreach or referral by a lender HC submits loan workout proposal to plaintiff at least 10 days before the conference At CC, lender’s counsel, HC and HO discuss foreclosure alternatives, hopefully with VIP volunteer’s assistance OR If financial proposal was not submitted prior to 1st CC but HO appears for the CC, a 2nd CC is scheduled automatically 35 days hence, and the financial proposal must be submitted no later than 14 days prior to the 2nd conference

11. Housing Counseling Agencies • City Office of Housing and Community Development (OHCD) has invested $4.3 million a year for the past 20 years in free first-time homebuyers counseling for Philadelphia residents – began providing mortgage foreclosure prevention counseling in 2008 • 31 housing counseling agencies in Philadelphia have contracts with OHCD • Agencies typically have 1-6 counselors • In most agencies, the counselor who prepares the homeowner’s loan workout application is also present at the CC; in a few agencies, the counselor representing the HO at the CC is not the counselor who met with homeowner and prepared the proposal

12. What Happens at Conference? • Courtroom 676 City Hall • Homeowners check in at sign-in table and then at Housing Counselor table – if they do not have a Housing Counselor, they are assigned to one then • If HO and HC determine there is a need for pro bono attorney, client comes to VIP table • Volunteer paralegals conduct client intake See pp.11-12 for intake form • VIP staff member assigns client to volunteer attorney – provides information on client and case and makes introductions ► PA RPC 6.5 – rule regarding conflicts of interest in provision of short-term, limited legal services

13. VIP Eligibility Requirements • Eligibility for continued representation – eligible clients receive priority and may be represented beyond conference date • At or below 200% federal poverty level for size of household (see Appendix p.66) • Cannot own more than one residential property • Must be living in (or want to live in) and want to keep the home, but need not be on the deed – differs from diversion program guidelines, which require that property be owner-occupied • Ineligible clients may receive representation on day of conference only, will have to come back to VIP table at future conference dates • Continuing representation for income-ineligible HOs is not covered by VIP malpractice insurance

14. Initial Tasks for Volunteer Attorney Sign non-solicitation agreement and give to VIP (at 1st conciliation conference only) (p.14) Obtain client’s signature on representation agreement (p.15) Obtain client’s signature on authorization to speak to third parties (p.16) Look for potential title problems (HO not on deed or mortgage) ►Alert VIP immediately! Discuss status of case w/HC and HO, obtain copy of budget info and loan workout proposal if one has been submitted to the lender

15. Resources at the CC Foreclosure complaint – ask HC, client, lender’s attorney Mortgage/deed – ask VIP staff or PLA attorney Court file – docket record can be requested from VIP staff or court staff by providing client’s call list number VIP staff – provide assistance throughout, review orders, have binder with foreclosure mitigation program guidelines PLA attorney – reviews orders when requested, gives advice to HCs and VIP attorneys, can look up docket and mortgages/deeds

16. Client Communication • Clients are frightened about the prospect of losing their home and intimidated by the legal process • Some clients cannot read well or comprehend the documents they have received • Clients often have other problems in their lives: illness, disability, unemployment, abuse, separation/divorce • For all clients, VIP intake is a place to tell their story to someone who is sympathetic ► Clients may become emotional – reassure them calmly and let them know you will do your best to help them ► Clients may go into great detail – keep them focused on the details YOU need to know, be firm but polite

17. Case Analysis • Examine relevant issues (verify answers with the housing counselor): • Were the notice of intent to foreclose (Act 91 or 6 notice) and the complaint served upon the homeowner more than 10 days prior to the CC? ► If not, alert court staff – plaintiff must serve homeowner and file affidavit of service; new conciliation conference will be scheduled • Why did client become delinquent on the loan (short-term or long-term problem)? • How much is owed in arrears and in total? • Is the case pre- or post-judgment?

18. Case Analysis (continued) • Who pays the property taxes and homeowner’s insurance? • Is there a second or third mortgage on the property? • Are there other liens on the property? Other debt? • How often has client come back for a conference? Why? • Has client been setting aside funds for mortgage payments? If not, why not? ►Use Mortgage Foreclosure Issue Spotting Guide and Evaluating a Mortgage Foreclosure Diversion Case to evaluate homeowner’s options See Appendix pp.67-77

19. Conference Tasks for Attorney • Reach agreement with opposing counsel re. postponement of entry of judgment (or of sheriff’s sale) – if HO comes to 1st CC, a 2nd CC is granted 35 days hence and default judgment is postponed to no sooner than the day after the 2nd CC • Review the court order completed by lender’s attorney for accuracy and specificity BEFORE it is submitted • Use correct “Day Forward” (action filed in or after September 2008) or “Day Back” (action filed before September 2008) orderSee pp. 24-26 for orders • Order should include date of next conciliation conference; entry of judgment should be postponed to day AFTER next conference

20. If No Agreement with Lender’s Counsel If counsel states that s/he does not have authority to postpone entry of default judgment or to grant another conciliation conference, ask court staff for a JPT conference ► JPT can recommend that judge order a postponement “over counsel’s objection”

21. Judge Pro Tem (JPT) Experienced attorney Must participate in training Acts as a mediator – does not address issues that must be litigated (e.g., lack of standing, predatory lending) Makes recommendations to Judge Rizzo Often keeps case once involved – always ask for the JPT’s contact info ►Obtain copy of JPT order (p.27)

22. Process Problems • Lender’s counsel unable to reach plaintiff’s representative to obtain response: ► Court will not permit sheriff sale or entry of default judgment without a response from lender; another conference will be scheduled • Lender refuses to provide answer or cannot be reached during multiple conferences: ► Court can order lender’s representative with authority to negotiate to appear in person or be present by telephone during next conference – notify Judge Rizzo’s Court Administrator if lender’s response is lagging despite multiple (more than 3) conferences • Lender refuses to negotiate: ► Examine whether retention of home is truly affordable for client • If NO, evaluate other options • If YES, ask court for a conference with JPT or the judge

23. Concluding the Conference • Obtain copies of unsigned court order and checklist of documents HO must submit to lender’s counsel for VIP, the client, and housing counselor See p.17 for document checklist • Complete status form for VIP and return to VIP staff person (pp.18-19) • Exchange contact info with all parties if continuing the representation – client, HC, lender’s counsel, JPT • Confirm with HC and HO that communications will go to lender’s counsel; ask lender’s counsel if documents should also be sent to lender directly See Appendix p.78 for lenders’ counsel contact list

24. If Attorney Keeps the Case Once the case clears the attorney’s conflicts check, VIP will send the case file to the attorney: Conference intake form, order and other documents Philadelphia Legal Assistance intake form Foreclosure docket Recorded deed & mortgage history Property tax information Copies of relevant deed(s), mortgage(s), assignments Formal referral letters to attorney and client, with copy to HC ► Volunteer attorney is covered under VIP’s malpractice insurance for ongoing assistance to eligible clients only – if the client’s income increases during the continued representation and volunteer is aware of the increase, contact VIP to determine client’s income eligibility status

25. If Attorney Keeps the Case – continued Documents lender’s counsel should be able to provide without formal document discovery: • Mortgage, possibly a title report • Itemized list of arrearages, fees and costs, reinstatement amount and pay-off amount • Payment history (client should request from lender if lender’s counsel does not have a copy) Documents lender’s counsel is not likely to provide without litigation or RESPA request (“discoverable documents”): • Loan application • Loan closing documents (incl. HUD-1 settlement statement) • Loan note

26. Communication is Key • Communicate proactively communicate with client, HC, lender’s attorney and court staff to ensure that process moves forward • You are not “attorney of record” – must follow up regularly with lender’s counsel to obtain response and/or copies of any documents (cc: Judge’s clerk on email if lender’s counsel does not respond) • Insist that client notify you of all documents received in reference to the foreclosure • VIP emails status update request to you 1 month after referral and every 3 months thereafter until case closes ► VIP staff always available to answer questions and provide support

27. Finalizing Negotiated Settlement Request that both client and you receive copy of the written agreement – participation in CC does not mean you are attorney of record Remind client to contact you immediately upon receipt of any document Review agreement to determine if terms are those negotiated at CC – they often differ! Get confirmation from lender’s counsel (confirm on case docket record) that praecipe to vacate judgment and/or stay the sale and dismiss without prejudice was filed

28. Closing the Case • Once case is resolved, attorney should send client a termination letter and send VIP a brief closing report with details of outcome Required information • Copy of termination letter sent to client • Terms of loan prior to negotiation • Type of outcome (retention or non-retention) and details of the resolution Optional information • Copies of any submissions made to the court that might be useful to other volunteers (VIP will redact any personal info) • Comments about your mentor (if you worked with one) • Comments about the housing counselor on the case • Comments/documentation regarding any rescue scams • Comments about your experience working with VIP

29. Lender, Servicer, Trustee • Mortgage originator (issuer/initial lender): Usually a bank, thrift company, or mortgage banker that then sells the loan, which usually ends up in a pool of mortgages backing a security purchased by investors • Servicer: The company that collects monthly payments from the borrower and passes them to the lender or the investors in the mortgage pool • Trustee: Institution that manages the mortgages held in mortgage-backed securities for the investors ► Servicer or trustee is generally the plaintiff

30. Loan Insurers/Guarantors Institutions that guarantee the loan against default; may also hold the loan or the mortgage-backed security • Fannie Mae - Federal National Mortgage Association • Freddie Mac - Federal Home Loan Mortgage Corporation • FHA - Federal Housing Administration • VA - Veteran’s Administration ► If the loan falls into one of these categories, this may increase workout options available to the homeowner – check with the HC or VIP staff

31. Loan Types • FHA (federally insured) loans – require payment of mortgage insurance by homeowner • Conventional prime (for homeowners with good credit and lower LTV ratio) • Fixed or adjustable interest rate • Conventional subprime (for homeowners with poorer credit and higher LTV ratio) • Some fixed • Of late, almost always adjustable • Predatory loans: bait and switch tactics, solicited by lender, settlement in HO’s house, required disclosures often missing ► Alert VIP if you suspect a predatory loan!

32. Meeting with Housing Counselor • Face-to-face meeting with homeowner • Counselor gathers information about • Homeowner’s financial situation • Type of Mortgage (FHA, Conventional, VA, etc.) • Hardship, circumstances surrounding delinquency • Counselor completes necessary forms, including those required by specific lender • Counselor submits applications to emergency mortgage loan assistance programs if HO is eligible • Forms are sent to lender’s counsel and possibly also to lender

33. Counseling Session • Usual Documents: • Authorization to talk to servicer on client’s behalf • Income Verification • Bank Statements • Utility bills • Explanation of hardship • Documents requested by lender’s counsel See p.17 for list • Making Home Affordable • Request for Modification and Affidavit See Appendix pp.80-82 • Form 4506-T See Appendix pp.83-84 • Income verification • Residency verification (credit report or utility bill)

34. Challenges Proposal not submitted at least 10 days before 1st conference or 14 days before 2nd conference Missing or incomplete documentation by HO Homeowners don’t have documents available Clients are difficult to reach Conference may need to be postponed while more documentation is gathered Constantly changing program- or lender–specific forms and requirements

35. Determining Options – Basic Outline

36. Retention Options • Refinance • State and local payment assistance programs: • in U.S. ► Emergency Homeowners Loan Program (EHLP) • in PA ► Homeowners Emergency Mortgage Assistance Program (HEMAP) • in Philadelphia ► Philadelphia Housing Retention Program • Loan Repayment • Forbearance • Loan Modification • Partial Claim (for mortgages with mortgage insurance) • Reverse Equity Mortgage (used by senior homeowners age 62+ to convert the equity in their home into a loan – not used often, contact VIP for more information)

37. FHA-Specific Retention Options Lender must evaluate HO’s eligibility for these options in specific sequence ►Lenders often don’t follow FHA guidelines, so housing counselors and attorneys with a client with an FHA loan must push lender to ensure consideration of all options (see Appendix p.79) Repayment Plan Special Forbearance Loan Modification Partial Claim FHA-HAMP ►In PA, failure to consider HO for all options is an equitable defense and may provide HO with leverage in negotiations

38. Refinancing • A new loan that pays off the delinquent mortgage in full or in part (lender must agree to a “short pay” if refinance is less than what is owed) and results in satisfaction of the mortgage ► Homeowner in default is unlikely to be approved for a refinance other than through a public (state or federal) program • In PA : Homeowners’ Equity Recovery Opportunity (HERO) has been phased out; no replacement • Federal: Home Affordable Refinance Program (HARP) – not relevant to homeowners in the diversion program because they are already delinquent and therefore ineligible for HARP

39. Payment Assistance - HEMAP Homeowners Emergency Mortgage Assistance Program PA program for conventional loans (not FHA loans) Loan for homeowners who became delinquent through no fault of their own: death, unemployment, disability, etc. and have reasonable expectation of resuming employment and mortgage payments HEMAP can provide a one-time lump sum payment to cover arrears or can provide monthly assistance for up to 36 months Homeowner must begin repayment of HEMAP loan immediately; repayment plan will be based on affordability (min. $25 per month) – interest rate for HEMAP loans given in 2011 is 5.25%

40. HEMAP (continued) If homeowner applies for HEMAP within 30 days of receiving Act 91 notice, lender cannot continue with foreclosure until PA Housing Finance Authority has made a determination Homeowner must apply through a housing counseling agency If denied for HEMAP, homeowner can appeal If homeowner comes to conciliation conference and realizes that s/he can apply for HEMAP, can still apply, but the application will not stall the foreclosure proceedings NOTE: Funding for this program may be eliminated in the 2011/2012 state budget – the program may not exist after June 30, 2011.

41. Payment Assistance – EHLP Emergency Homeowners Loan Program (ntl. version of HEMAP) • Administered by PA Housing Finance Authority in PA - state received $105 million that must be spent by 9/30/2011; operational since 4/1/2011 • HO’s income must have declined by at least 15% because of unintentional unemployment, underemployment or medical problems • HO must have reasonable prospect of resuming mortgage payments within 2 years of receiving assistance • HO must be at least 3 months behind on payments and have received notice of foreclosure • Must be 1-4 unit property and HO’s principal residence

42. EHLP continued • All first mortgages may be eligible, including FHA and VA loans • HO must pay 31% of gross income towards mortgage payments, but no less than $25/month • Maximum loan amount is $50,000 – includes arrears and then monthly mortgage payments above the amount contributed by the homeowner for up to 24 months • After last payment is made, money advanced becomes a declining balance, 0% interest loan – will be forgiven over five years if homeowner remains current on mortgage and remains in home for five years • Application does not stall foreclosure process; no appeals process

43. Philadelphia Housing Retention Program Grant program initially to prevent homelessness, now also available to homeowners facing foreclosure Can provide $1,500 - $2,500 grant to be used towards delinquency, but only if HO will then be current on the mortgage Apply through one of specified counseling agencies Income eligibility guidelines must be met Proof of delinquency required Program shuts down when funds are expended

44. Repayment Plan Simplest work-out option Written agreement where borrower agrees to cure the delinquency by adding additional amount to regular monthly mortgage payments until current 3 -12 months Must be in writing • When to use: • Financial crisis has been resolved • Unemployed but found work • Temporary disability • Issues: • Must have income to make higher payment • Often difficult to complete without significant surplus

45. Agreement to suspend or reduce normal monthly payments for a fixed period of time At end of forbearance period, borrower must cure default through lump sum payment or long-term repayment plan Viable option when: Cause of the default is specific and temporary There is reasonable evidence that the borrower will be able to resume making payments by a certain date and will have surplus income to support a repayment plan Forbearance Plan

46. Written agreement that permanently changes one of more of original terms: Interest rate Term Unpaid principal balance ►Results in permanent change in the mortgage payment When to use: Change to terms would reduce payment amount Failure to modify would result in foreclosure Only way to make payments affordable Issues: Paperwork More work for servicer Extreme delinquency may prevent lender’s cooperation or may result in higher, not lower payments Loan Modification

47. Steps for Affordable Loan Modification Interest rate reduction, preferably permanent Capitalization of arrears Principal reduction (rare) Extension of mortgage term Extension of amortization period Fees/costs reduction: Easier to do before judgment than after judgment – saves about $2,000 Inspection/appraisal Late charges Attorney’s fees (ask for itemization - often excessive)

48. Home Affordable Modification Program • HAMP: for any eligible homeowner • whose servicer participates in the program or • who has a loan owned or guaranteed by Fannie Mae/Freddie Mac • FHA and VA versions • For more information: www.makinghomeaffordable.gov www.hmpadmin.com/portal/programs www.fanniemae.com/loanlookup www.freddiemac.com/mymortgage • Eligibility • Current monthly payments (PITI) are greater than 31% of gross monthly income • Property was purchased before January 2009 • Primary residence • Mortgage equal to or less than $729,750 (for one-unit property) • Projected income to lender from modified loan would exceed projected income from foreclosure sale

49. Lender Programs Many lenders/servicers have their own in-house loss mitigation programs, which are in constant flux – housing counselor will submit application for non-HAMP modification or other loan workout VIP provides a binder at the conferences with information on federal, state, city and individual lender programs Links to lender-specific programs: www.consumerlaw.org/issues/financial_distress/loan_modification.shtml www.palegalaid.net

50. Partial Claim • Available primarily in the context of FHA and VA mortgages: • Insurer pays the lender the amount of the arrearage (“partial claim”) to bring the homeowner current on the mortgage; amount paid becomes a loan the homeowner must repay over time • Borrower may not be more than 12 months in arrears when application is made – sometimes can pay down arrears to reach the 12-month limit • Can use partial claim for up to 12 months of payments in total (could be 3 partial claims for 4 months of payments each) • VA uses the term “refunding” rather than “partial claim” • NOTE: Loans with private mortgage insurance (PMI) may also have this option