Larry Buckley is a managing shareholder with Buckley Madole, PC, and works out of the firm’s Dallas, Texas, office. He received his JD from Pepperdine University and is a member of the state bars in California, Texas, and Arizona. He focuses his practice on bankruptcy, foreclosure, and litigation.
Adam Womack is a shareholder with Buckley Madole, PC, and works out of the firm’s Dallas, Texas, office. He received his JD from the Texas Tech University School of Law and is a member of the state bars in Texas and Florida. His practice focuses on bankruptcy, litigation, foreclosure, probate, and real estate.
What are some of the things that can delay the completion of foreclosures or bankruptcy filings and keep them stuck in the pipeline?
Buckley: Document impediments have been a historical and a continuing challenge. Basic legal documents are required for filings in court, whether it’s in foreclosure or in bankruptcy, and it really doesn’t matter whether it’s a judicial or a non-judicial foreclosure jurisdiction. Bankruptcy has a more universal set of rules, but in general the baseline documents, including the note, the endorsement to a note, recorded deed of trust, and one of the most critical documents that is frequently missing is an assignment of mortgage. Breaks in the chain of title make it difficult if not impossible to establish legal standing to take an action on behalf of a mortgage creditor. Frequently, the referral of those documents is incomplete, and that creates delays in either the first legal action or other actions that are part of the timeline for any legal proceeding, whether it’s a foreclosure or a bankruptcy action.
What happens to the deed of trust or assignment of mortgage? How do they get lost?
Buckley: It’s something in the servicer world, because there are so many transfers in servicing over the last several years. The documentation from servicer to servicer is not always complete, so that documentation has to be located from a custodian of records, or in the case of an assignment of mortgage, frequently has to be created to fill in the gap in title. When those documents are not available, then legal proceedings come to a halt and it puts a lot of pressure on law firms that have timeline requirements and it creates challenges for servicers with investors who are also pressed on a timeline to move these cases forward.
At our firm, we create impediment reporting that we submit to clients. While there are proactive efforts to get those documents, it takes time, and sometimes, particularly with assignments of mortgage, it’s difficult to find all the appropriate parties that can duly execute those documents under oath for recording in the public records.
What are the challenges you face as far as the proof of claim?
Womack: An enormous challenge for the servicers is not only getting the proof of claim right in the bankruptcy space, but then once they have the proof of claim done correctly, it is a challenge to continue managing the ongoing payments that should reconcile with the proof of claim and bankruptcy plan. What the trustee expects is the correct posting of payments and delinquency calculations, which can last several years out. It’s an enormous challenge for servicers and for law firms to comply. The key is getting off on the right foot in bankruptcy, so to speak—doing your escrow correctly, analyzing the fees and costs at the time of the bankruptcy filing, trying to determine what should possibly be written off and not included in the bankruptcy—getting all that correct, then casting it out correctly and receiving payments month to month from various sources. A big challenge in a lot of our jurisdictions in bankruptcy will be receiving a payment from the trustee and also a payment from the borrower, and understanding where that money goes and how it’s applied to all delinquency versus any new debts under the bankruptcy plan. It’s a huge challenge, but we believe our firm is good at doing it, and there is technology that a lot of servicers out here are utilizing which helps them do that.
Buckley: One of the additional challenges has been the rule changes in bankruptcy, most recently in December 2015, that require preparation of a ledger to the last date that the borrower was current. That takes a lot of time, effort, and energy to gather the necessary data and put it into the bankruptcy required form, and that has created a significant delay in the filing of the proofs of claim since December 2015. It has also put a lot of pressure on servicers and law firms to get the information accurately represented on a sworn document, the proof of claim that’s filed in the bankruptcy court.
How does loss mitigation delay foreclosure proceedings?
Buckley: In a foreclosure proceeding today, based upon various rules and regulations, when a borrower requests loss mitigation, there is no dual track—that is, foreclosure and loss mitigation are not proceeding simultaneously. The loss mitigation process for a modification, a deed-in-lieu of sale, or a short sale requires documentation from the borrower. So, there is a process that takes place over a period of time, even if all the documentation is submitted. If the customer preliminarily qualifies for a loan modification, there often is a trial period in which the borrower needs to perform. On average, I would say from the date of an initial request for loss mitigation to a completed successful conclusion is somewhere in the neighborhood of 120 to 150 days. During that time, those foreclosure files are stuck. For law firms, it creates challenges in that those files remain open in our case management systems. We have requirements by both investors and servicers to update those files through various systems, and to, at some level, have responsibility for oversight on the file. But the loss mitigation process is generally happening, for the most part, outside of our visible line of sight. It creates a lot of inventory. Those files don’t generate fees for law firms, but they do create management responsibility, which creates a challenge.
That 120 to 150 day timeline is for a first request. Frequently in loss mitigation there are multiple requests. The loss mitigation process may be closed and then the foreclosure proceeding moves forward, and then a request for reconsideration comes from a borrower. That frequently puts the file back on hold for an additional period of time, which can vary from 30 to 90 days and beyond. So it can drag on for a significant period of time. We have files active in our system that have been on loss mitigation holds in excess of 180 days. It’s not uncommon at all.
Womack: A challenge and a good issue for any law firm to review with a servicer is how to best postpone or suspend foreclosures in states to save the most money against the loans. The challenge is that how you postpone a foreclosure in California for loss mitigation is very different from how you do it in Texas, even though they are both similar non-judicial foreclosure states. In other places, maybe you would have to republish the sale notice, and that could cost thousands of dollars in some of the northeastern states. Just acknowledging that there is an ongoing challenge with servicers and with law firms to keep costs low, but also afford the right opportunities for borrows to suspend their foreclosures when they are evaluating loss mitigation options.