Sherman: ‘Gordian knot’ of foreclosures loosening

HOME STAY: Appointed as special master for foreclosure cases in R.I., Merrill Sherman has proposed loan-modification arbitration to keep people in their homes. / PBN FILE PHOTO/RUPERT WHITELEY
HOME STAY: Appointed as special master for foreclosure cases in R.I., Merrill Sherman has proposed loan-modification arbitration to keep people in their homes. / PBN FILE PHOTO/RUPERT WHITELEY

The “Gordian knot” of the foreclosure crisis, as former Bank Rhode Island President and CEO Merrill W. Sherman described the glut of homeowners defaulting on underwater mortgages last year, appears to be loosening.
Eighteen months into her appointment as Rhode Island special master for foreclosure cases, Sherman said lenders are now more open to reducing mortgage balances than at any time since the recession.
As recently as March, Sherman had proposed binding loan-modification arbitration between lenders and borrowers to prod reluctant lenders to forgive principal in order to keep people in their homes.
While the lenders resisted arbitration, Sherman said they have begun to see the light on principal forgiveness, easing the foreclosure problem and speeding the resolution of lawsuits brought over improper foreclosure practices.
“More and more defendants are adopting more loan forgiveness,” Sherman said in a phone interview. “If you look at the primary issue that was preventing loan modifications being acceptable to [homeowners], it was the amount of overhang involved and how deeply underwater they were. I am generally pleased with the direction we are heading.”
Whether this progress will continue, however, is a major question since a federal appeals court ruled that the suspension of foreclosures Sherman is working under was established improperly.
Last week, Sherman said she didn’t know how the appeals court ruling would affect the mediation talks she’s holding between lenders and homeowners and she might not know until a hearing on the foreclosure injunction takes place.
Inundated with lawsuits against lenders for improper foreclosure, U.S. District Court Judge John J. McConnell Jr. in January 2012 froze all Rhode Island cases and named Sherman special master to negotiate settlements between the parties. Since then, Sherman has worked to find ways to bring troubled homeowners and lenders together, either through loan modifications or so-called “cash-for-keys” agreements, in which borrowers agree to drop their claim and move out.
In many cases, the special master’s office collects “use and occupancy payments” from plaintiffs (50 percent of mortgage balance with a 4 percent interest rate) who have defaulted on their mortgage but remain in their homes under the judicial stay until a settlement is reached.
As the court process has dragged on, Sherman has tried to convince lenders that it is in their best interest to reduce loan principals in cases where properties are worth so little.
One example in Sherman’s March 15 progress report involved a lender, whose identity was redacted, proposing a modified loan balance of $274,827 on a property appraised at $85,000.
“What is lacking is any realistic upside for the plaintiffs,” Sherman said in rejecting the proposal. “Rather, a mountain of debt overhang remains. Moreover, if the plaintiffs received job offers out of state, they cannot afford to take them.”
For these types of deeply underwater, low-asset cases, Sherman recommended modifications based on 120 percent of a property’s current value.
Along with mortgage holders and servicers finally becoming realistic, Sherman said a coming change in leadership at the Federal Housing Finance Authority may also be opening the door to significant modifications.
Despite all the settlement efforts over the past 18 months, Sherman still had 733 active foreclosure cases at the end of April, up from 697 at the end of last year, according to the most recent court filing; 143 cases have been disposed so far.
Of the 277 cases in conference at the end of June, 50 were the subject of “cash-for-keys” talks, 162 were on loan modifications and the remainder were listed in a miscellaneous category that includes impasses. Independent from the Rhode Island foreclosure case, state and federal officials are tracking lender compliance with a $25 billion national settlement.
A report released last week from federal monitors found lingering noncompliance issues related to “single points of contact, dual tracking, the loan-modification process and the accuracy of customers’ account information,” according to R.I. Attorney General Peter F. Kilmartin.
“The monitors’ report reflects what we hear from Rhode Island homeowners – the banks continue to engage in some of the behavior that led this country into the housing crisis,” Kilmartin said in a press release.
Through the end of March, 2,064 homeowners in Rhode Island had received some form of relief through the national settlement, worth an aggregate amount of $150 million and an average benefit of $72,708 per homeowner, Kilmartin said.
Kilmartin has filed a bill that would bar financial institutions from buying and selling mortgages through the Mortgage Electronic Registrations Systems Inc.
To save the time and money involved in registering mortgage transfers with local land-record authorities, banks record the transaction with MERS, which becomes their nominee.
In addition to relieving local governments of the fees they would otherwise collect, critics of MERS say it contributes to the confusion and inaccuracy of mortgage-ownership records that surrounded the foreclosure crisis.
MERS is a defendant in the cases Sherman is overseeing, with the registry’s standing as mortgagee one of the central legal complaints from plaintiff homeowners.
MERSCORP Holdings Inc. spokesman Jason Lobo declined to comment on the pending Rhode Island legislation. •

No posts to display