Pace of R.I. foreclosure settlements speeding up

FAST MOVING: New rules for the foreclosure-mediation program overseen by Special Master Merill Sherman are helping cases settle at an “accelerated rate,” she said. / COURTESY BANK RHODE ISLAND
FAST MOVING: New rules for the foreclosure-mediation program overseen by Special Master Merill Sherman are helping cases settle at an “accelerated rate,” she said. / COURTESY BANK RHODE ISLAND

Perhaps it was always a longshot that JP Morgan Chase CEO Jamie Dimon would be subpoenaed to Rhode Island to negotiate in court-ordered foreclosure mediation cases.
But one year ago, mediation program Special Master Merrill Sherman said she would consider calling Dimon to Rhode Island if it was the only way to guarantee decision-making authority on the lenders side of the table.
Twelve months later, the landscape surrounding the hundreds of lawsuits brought against lenders for allegedly improper foreclosures has changed, as has the mediation program itself.
Last summer, just as the glacial pace of negotiations had begun to quicken, the U.S. First Circuit Court of Appeals (in an opinion by former Supreme Court Justice David H. Souter) ruled that an order freezing foreclosures in pending cases had been improper and would have to be changed.
After ending the blanket foreclosure injunction in September, U.S. District Court Judge John J. McConnell Jr. in December wrote new rules for Sherman’s mediation program, streamlining it and putting a limit on the time cases can bounce around in it.
The result has been a rapid increase in the pace of settlements between lenders and homeowners, including loan modifications and “cash-for-keys.”
At the end of the first week of January, 568 cases on the special master’s docket had been disposed of, compared with just 58 cases at the end of 2012, according to a report filed with the court in January.
“The cases are moving and seem to be settling at an accelerated rate,” Sherman, a former president of Bank Rhode Island, said in a recent phone interview. “Some of this is because many, if not most, of the [lenders] are willing to consider loan modifications. That has helped everyone in pre-foreclose. Post-foreclosure it is more difficult and defendant-specific. Some will consider settlements and some will not.”
Sherman said defendants have become better at dealing with foreclosure cases but it would be “less than candid” to suggest the end of the foreclosure injunction hadn’t contributed to the faster settlements on the plaintiff end. Becoming more familiar with the system had also helped her office speed things along, she said. In the early days of the mediation program, Sherman had urged reluctant lenders to consider forgiving some principal on severely underwater properties worth only a fraction of their loan value.
Now Sherman said some have come around to the idea, but it varies widely on a case-by-case basis.
“Fannie, Freddie and the FHA have not changed their policy on principal forgiveness, but what we find with other servicers and noteholders is all over the lot,” Sherman said. “Some will consider it. Some have specific parameters on settlements with the Justice Department that include forgiveness. Others have gone to investors and will do it. But it is all over the lot and very hard to predict.”
As of Jan. 7, there were 588 active cases in the mediation program, compared with 697 at the start of 2013, which Sherman said pointed toward an eventual end in sight for the program, which had previously been only growing.
“There is more of a horizon out there,” Sherman said.
For most of the last two years, decisions in foreclosure abuse cases that went to trial have mostly gone the way of lenders.
In his order ending the blanket foreclosure injunction, McConnell pointed to some of those recent decisions as signs that plaintiffs did not have a “likelihood of success” in their cases, one of the standards for awarding a preliminary injunction.
In most cases, homeowners have challenged foreclosure procedures, such as robo-signing or the use of the secondary mortgage market clearing house Mortgage Electronic Registration Systems Inc. as loan designee.
“Among other things, they argue that MERS assignments are invalid because they do not assign both the mortgage and the note, that robo-signing invalidates the mortgage documents, and that the MERS structure is prohibited by Rhode Island law,” McConnell wrote. “Recent opinions issued after this court’s stay and mediation order were put in place from the Rhode Island Supreme Court [and the First Circuit] address many of these issues. Both decisions seem to undercut many of plaintiffs’ legal arguments in the cases currently consolidated before this court.” But George E. Babcock, the Pawtucket lawyer who has represented the bulk of the plaintiffs (and whose office now represents them while he is suspended from McConnell’s court) said things were not as bad for the homeowners as they seem.
McConnell had to find a rationale to end the injunction after Souter’s ruling, Babcock said, and a more recent R.I. Supreme Court case – Chhun v. MERS – has given homeowners a “ray of hope.”
“In the Chhun case the R.I. Supreme Court has made the biggest decision yet, which says homeowners have standing to challenge documents in a chain of title,” said Babcock, principal of the Law Office of George E. Babcock. “Cases were kicked out of Superior Court left and right for lack of standing and that will have to be overturned. And the federal court will have to listen to respect that.”
As for the lifting of the foreclosure injunction and the mediation program, Babcock said it hasn’t resulted in more foreclosures than would have happened eventually, just removed some of the incentives for not settling.
“The only difference is volume, once the stay lifted, without the guarantee, some people didn’t have the stomach for litigation and went immediately for modification,” Babcock said. “I will say some banks have been more open to making offers to get rid of cases. About the only one that isn’t is Fannie Mae. The government just doesn’t care and won’t listen.”
If and when the mediation program winds down, foreclosure cases may slow, but the issue is unlikely to go away.
One proposed solution would come from the Statehouse, where lawmakers, supported by Attorney General Peter F. Kilmartin, have filed bills that would require mortgage transfers to be recorded with land records, derailing the MERS system.
Last year the proposal passed the House Corporations Committee but didn’t make it to the House floor and was held in the Senate Judiciary Committee.
Kilmartin spokeswoman Amy Kempe said the attorney general will push to get the bill refiled this year. •

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