January 31, 2011 (Brian Michael)

U.S. Bankruptcy Court Judge Arthur N. Votolato upheld the court’s right to establish a mediation program for homeowners facing foreclosure. The ruling was in response to objections filed by creditors in two bankruptcy cases. The creditors are PHH Mortgage Corp., doing business as PHH Mortgage Service Center, and Ocwen Loan Serving LLC as servicer of Deutsche Bank National Trust Co.

Votolato implemented the program, called the loss mitigation program, in November 2009 “in response to the home mortgage and foreclosure crisis generally,” and also because the court “repeatedly had to postpone hearings” due to delays that debtors were experiencing in seeking out-of-court mortgage-loan modifications.

“This practice of parties repeatedly seeking more time simply because they had not yet connected was counterproductive, it was a huge waste of time for the parties and the Court, and was forcing needless litigation …” the order stated. “…We decided to break the log jam” by introducing a process that would open “communications between debtors and the lenders’ decision-makers.”

Rhode Island Senator Sheldon Whitehouse (D) issued the following statement today regarding the decision by Judge Votolato:

“Today’s decision by Judge Votolato is a win for Rhode Island homeowners. The Rhode Island bankruptcy court’s foreclosure mediation program helps distressed families to cut through the red tape of our broken mortgage modification process and has already saved at least 100 homes in our state. I hope today’s decision will encourage other bankruptcy districts to follow Rhode Island’s lead and adopt similar programs.”

Last week, Whitehouse introduced the Limiting Investor and Homeowner Loss in Foreclosure Act (S. 222) to support these successful programs. Last year he held a field hearing of his Judiciary Subcommittee on Administrative Oversight and the Courts to examine the effectiveness of mediation programs. This Tuesday he will chair a hearing of the full Judiciary Committee entitled “Foreclosure Mediation Programs: Can Bankruptcy Courts Limit Homeowner and Investor Losses?”

At a hearing in October, Whitehouse praised Votolato’s program, saying it is especially needed because of the documented failures of the federal government’s flagship foreclosure-prevention program, the Home Affordable Modification Program (HAMP).

For the most part, the mortgage industry has been against forced mediation programs on the grounds that the states and the mortgage companies are ill-equipped for the amount of mediations that would be necessary to work through the current level of foreclosed properties, thus prolonging the housing slump for years.

John Mechem, a spokesman for the Mortgage Bankers Association which represents the largest mortgage lenders, said the group is opposed to both mandatory and voluntary mediation programs. He argued that the programs are expensive and are often used by borrowers as a tactic to stall foreclosure.

Mechem said the industry on its own has done almost 1.5 million mortgage modifications this year outside of mediation programs. If such programs must be implemented, he said, the MBA favors a voluntary system over mandatory meetings.

Tags: foreclosure mediation program, homeowners, mortgage borrowers, loan modifications, debtors, lenders, bankruptcy, housing slump, HAMP