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.