A Thought On Structuring Settlements – The Mortgage Modification

We begin with two compelling propositions relating to foreclosure settlements in New York:  mortgage modifications are the strongly encouraged settlement du jour; mortgage modifications most often fail.

A first look at the dilemma then becomes obvious – lenders enter into settlements that don’t work.  But there is more danger lurking here.

Returning for the moment to basics, New York statute vintage December, 2009 imposes the requirement to conduct settlement conferences in all home loan cases.  (This excludes commercial matters.)  So after the 90 day notice, and after the 30 day breach letter, and after the pleadings are filed, and after service of process has run its course, when finally either an order of reference or a motion for summary judgment is pursued (essentially the first stage of a foreclosure in New York when the matter actually comes before the court) there is the mandate of the settlement conference.  Not surprisingly, this consumes a number of months until the conference is actually scheduled with adjournments frequent for various reasons.  This is yet another area where borrowers can quietly delay the case even further.

When finally the conference is conducted, the courts strongly encourage mortgage modification agreements.  And so – when conferences appear to succeed at all – that is often the result.  A main problem with this course, however, and as noted earlier, is that mortgage modifications too often fail.  Borrowers who could not pay their mortgage in the first instance very frequently cannot pay the mortgage even when modified.

We now come to the heart of the problem.  The lender expends many many months in the notification and foreclosure process until finally the “settlement” is reached.  Thereupon, the mortgage foreclosure action is discontinued and then a month or two or three or more later, there is a default on the modification agreement.  The lender is then banished to start the foreclosure process all over again – and ironically be subjected to yet another settlement conference as part of the procedure.  So the mortgage modification agreement entered into in vain buys the defaulting borrower yet many more months to live rent free, but at the same time causing the lender to incur greater delay, more accrual of interest and legal costs, all interminably postponing what is unfortunately too often inevitable.

While there is no absolute answer to this conundrum, one suggestion strongly suggested for consideration is to substitute a forbearance agreement for a mortgage modification.  Structure the forbearance so that the payments made will be the equivalent of the sums to be paid if a modification had been put into place.  If those payments are made for some reasonably telling period, be that three months – or better six to eight months or even more – then there might be some indication that the borrower has the ability to comply with a mortgage modification on such terms. (It is not a guaranty of course.)  The agreement would thus provide that if the payments were timely made for the noted duration, the lender would only then tender a mortgage modification agreement to reflect certain defined terms – which again would be the equivalent of the payments the borrower was making during the forbearance agreement.

While as mentioned this gives no assurance that the forbearance agreement will thereafter be honored – or if it is for how long – it is a more accurate predictor of optimism for the agreement.  This is better than just relying upon the promise, expectation or hope that the borrower can meet the payments.  It is worth considering.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.