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Mortgage Foreclosure: More Shift in the Balance of Power.

Posted By Cliff Tuttle | January 9, 2009

Posted by Cliff Tuttle

So what’s with Citigroup? The megabank is reversing a long-held and strongly-pressed position and is now publicly supporting Senator Dick Durbin’s bankruptcy reform legislation that would give bankruptcy judges the power to modify delinquent residential mortgages as to both principal and interest. In doing so, it broke ranks with J P Morgan-Chase, Wells Fargo and the other big national lenders who jointly opposed the Durbin legislation vigorously during the last Congress.

Presently, first mortgages are sacred in bankruptcy court. First lenders can generally obtain relief from the automatic stay, whereupon they proceed with the foreclosure that has been temporarily delayed by the bankruptcy filing. There has been a long-standing “cramdown” provision in the law which permits, roughly speaking, bankruptcy judges to reduce the principal of junior liens that exceed the equity in the property but this is not applied to first mortgages. Nor does it permit modification of the interest rate, as proposed by Durban. Here is an article from the New York Times about the subject.

Citigroup, as the NYT article mentions, is receiving billions in federal bailout funds. It is not too hard to imagine that the two phenomena are connected. The new Congress that was sworn in this week is shaping up to be as activist as the one that was elected with Roosevelt in 1932. When Democratic Congressional leaders ask Citi what it intends to do to earn continuing support, they don’t believe self-serving statements that it will voluntarily modify mortgages. And so, Citi “proves” its dedication to this proposition by publicly supporting the same kind of modification decreed by bankruptcy judges, although it proposes that the provision not be applied to mortgages granted going forward.

While bankruptcy judges will use such powers if given, the reasonable expectation of Congressional sponsors is that it will motivate lenders like Citi to make many more “voluntary” modifications before the judge enters the picture.

The threat of filing bankruptcy by a mortgage foreclosure defendant has up to now carried no punch. It has usually meant only delay. But if the Durban bill is enacted, relief from stay will not come so quickly or so easily. On the contrary, the lender would face the real risk of emerging from a post-Durban bankruptcy with a haircut. This increases the motivation to modify. Better to make a deal now that rolls up the arrearages in the back of the loan than to lose them altogether. So, slowly but surely, the fulcrum is moving — granting a little more leverage to the borrower and a little less to the lender. Of course, this legislation may never be adopted or may be significantly altered before passage. Nevertheless, the fact that Citi is endorsing the Durban bill, even with reservations, speaks a great deal concerning the shift in power that is already occurring.

As further evidence of this trend, Allegheny County finally made a formal announcement of its foreclosure mediation program. Beginning on Monday, January 12, Sheriff’s deputies will include a brightly colored notice with the complaint for owner-occupied mortgage foreclosure. By calling the telephone number on the sheet, the homeowner will receive a 90 day extension to negotiate a workout plan and free assistance in putting together a proposal. The matter will be mediated before Common Pleas Court Judge Michael McCarthy. The lender is required to produce a representative with the power to negotiate a modification. While a common pleas judge does not have the power to “cram down” a modification, he does have the power to hold up the foreclosure and perhaps to sanction a non-cooperative party. This may be enough power to get the job done.

To borrowers who have the ability to resume monthly payments but not to bring the loan balance current in a single payment, this development represents a crucial break. A common complaint they have with servicers for national lenders is that it is impossible to talk to someone with the authority to agree to a workout plan. The Allegheny County plan gives them that and more.



CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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