Philadelphia's Residential Mortgage Foreclosure - Diversion Pilot Program

In response to the national and in particular the City's foreclosure crisis, the Philadelphia Sheriff, John Green, cancelled the April, 2008 Sheriff's foreclosure Sale. On the heels of that moratorium, President Judge Jones of the Court of Common Pleas sua sponte ordered a stay of the May, 2008 sale announcing the Residential Mortgage Foreclosure Diversion Pilot Program as Joint General Court Regulation number 2008-01.

In July, an administrative order was entered requiring foreclosing plaintiffs identify owner-occupied homes in their complaints. This identification triggers the Prothonotary to issue a Case Management Order setting a date for a Conciliation Conference. This Case Management Order must be served along with initial process. No default judgment can be entered if a homeowner defendant completes forms requesting the Conference. No sale may occur if there is a pending request to "participate in a conference that may enable you to save your home." At the conference, judges pro tem preside and attorney volunteer advocates counsel defaulted borrowers towards a settlement of the foreclosure action via a workout between the plaintiff lender and defendant borrower.

At a time when hundreds of Philadelphia homes were slated to be sold at Sheriff's Sales, many homeowners have already benefited through this opportunity towards conciliation with their lender which may otherwise have appeared or even been unresponsive and monolithic in approaching this foreclosure crisis.

During the Great Depression, foreclosing lenders challenged Minnesota's foreclosure-relief statute (extending a mortgagor's right to redemption) as violating the Constitution's Contracts Clause (forbidding substantial governmental impairment with right to privately contract). In Home Bldg. & Loan Ass'n v. Blaisdell, the Supreme Court upheld Minnesota's statute finding states' regulatory power over remedial processes in harmony with party's substantive contractual rights vis-à-vis the states' inherent authority to "safeguard the vital interests of its people... to secure the peace and good order of society" (a holding seemingly inapposite to the framers' intents, lending credence to Chief Justice Marshall's pronouncement in McCulloch v. Maryland-that intent is not controlling). Years later, this authority was procedurally codified in Pennsylvania in authorizing courts to stay foreclosure sales for "any legal or equitable reason." Pa.R.C.P. 3121(b)(2), 3183(d)(3).

In 1983, in response to a similar economic downturn, the Pennsylvania Legislature passed the Homeowners' Emergency Mortgage Assistance Act (HEMAP), also known as "Act 91". Through HEMAP, the Pennsylvania Housing Finance Agency (PHFA) is enabled to provide to eligible pre-foreclosure homeowners a second mortgage in the amount equal to the first mortgage arrearage thereby preventing the foreclosure and curing the delinquency via reinstatement. If the defendant(s) is statutorily pre-qualified, a foreclosing plaintiff must send notice (i.e., Act 91 notice) or risk the subsequent foreclosure complaint be divested of its jurisdiction.

In 1983, likewise, the Allegheny County Sheriff caused the President Judge to order a moratorium of all owner-occupied sales. Thereafter, the Philadelphia Sheriff caused the Court to implement a moratorium lasting for over a year. Incidentally, that local Pittsburgh President Judge's action gained such popularity among the unemployed Pittsburgh steelworkers that he was eventually elected to the Pennsylvania Supreme Court.

In 2004, Sheriff Green (unilaterally and likely unlawfully) postponed the March sale of owner-occupied homes until April mailing an invitation to all foreclosure defendants to a "save your home event." Approximately 170 participants attended. The lasting result of the short 2004 moratorium was the creation of a foreclosure "steering committee" ultimately leading to the current foreclosure diversion program.

In July, 2008, President Bush signed the Housing and Economic Recovery Act including therein the Hope for Homeowners Act of 2008. The act authorizes FHA to refinance homeowners into conventional (30-year fixed rate) mortgages. Separately, Congress debates a "mortgage bailout" of unprecedented proportions which is to free the largest lenders from being tied to bad assets (loans) rendered so largely by diminishing collateral (property values) to allow lenders more movement towards making additional loans.

Senator Obama champions additional bankruptcy reform which would (contrary to the relatively recently passed Bankruptcy Reform Act) enlarge bankruptcy courts' powers to modify first mortgages similar to the current concept of cramdown (reducing or eliminating a second mortgage's security in relationship to the property's value). Both Senators McCain and Obama preach personal responsibility re personal finances (borrow what you can afford today instead of what you anticipate to be able to afford tomorrow). Every major city is teeming with credit counseling agencies, volunteers for the indigents, and community legal services organizations.

With available diversions from ultimate Sheriff's foreclosure Sale (as opposed to Sheriff's tax Sale) along with local through to national efforts at debtor assistance, the options available to a delinquent homeowner appear many. The questions remain, however, how did this happen, is it enough, and what can be done to prevent recurrence?

Though the science is not yet in, anecdotally, though, it appears that this foreclosure crisis was caused by the coincidental combination of lender deregulation, historically low mortgage interest rates, growing types of non-conventional mortgages, economic prosperity, a "seller's" real estate market, the rise of the necessarily unlicensed mortgage broker, and self-defeating private lending polices favoring closings over underwriting, which all ultimately collapsed at simultaneously.

Living in an economically prosperous time, homeowners borrowed not what they could then afford but what was anticipated to be affordable in the future. Wanting to meet the demand, lenders offered unusual varieties of non-conventional mortgages (such as, "Interest Only," "Option ARM's," "103%," and "Negative Amortization") predicated on an initially low interest rate which would exponentially, relatively shortly rise or otherwise be tied to the home's fair market value (requiring a homeowner come forward with additional money to off-set property devaluation). Institutionally, a lender's loans were bundled and sold incentivizing lender's to overlook underwriting with a view towards increasing the size of these bundles which amount of loans over their quality was favored in the market. Home prices were sky-high causing purchasers to borrow to their breaking point. Unlicensed mortgage brokers (only Brokerages are licensed) paid only upon closing were substituted for the neighborhood bank, and the internet replaced one-on-one loan applications. All in all, a recipe for fraud and disaster on many levels.

For the mortgage marketplace, the Italian curse, "may you live in interesting times," came to fruition-mortgage collateral (homes) values crashed at a time when the economy likewise headed towards recession leaving lenders with limited cash-flow and borrowers likewise unable to pay to prevent foreclosure. For purchasing improperly over-valued loans, burned mortgage investors dried up causing lenders to stop lending. Fraud became rampant as underwriting became non-existent. All, resulting in a downward spiral perhaps requiring governmental intervention.

For the foreclosure relief efforts, defendant-borrower benefits are indisputably available and should be applauded. Mortgage default assistance, by necessary implication, focuses strictly to seek to stop the bleeding instead of preventing another hemorrhage. As it is, there are very few legal devices available to prevent an over-reaching loan at its origination or to require personal responsibility vis-à-vis living within one's present means.

This is not to say that the pilot program is not a success nor a good idea. On the contrary, it is both, and Judges Jones and Rizzo (its architects) should be applauded as should all attorney participants. This is not to say that HEMAP was not a good enactment and the Hope Now program is not its truly beneficial federal successor. On the contrary, both legislatures (Pennsylvania and Federal) seemed to have beneficially reacted to times of need.

But, if history is to predict, it appears this crisis will be repeated every three or so decades. Only through the enactment of legislation, both state and federal, to curb bad mortgage origination along with the above beneficial programs can the next financial disaster be avoided.

Without more and stronger lending origination laws (such as the licensure of mortgage brokers, regulation of mortgage brokerages, a simplification of the Truth In Lending Act's notice provisions, uniform loan applications with underwriting's deviation creating a private right of action, federally enacted "UDAP" (unfair or deceptive acts and practices) laws, and the Real Estate Settlement Procedures Act's ban on fee-sharing to include the yield spread premium which should also be TILA required to be disclosed, etc.). Simply, the industry will not reform unless it is afraid not to through the prospect of trial verdicts.

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