• Philadelphia Judge Reforms Mortgage Foreclosure Process; Takes Moderate Path
  • May 16, 2008 | Authors: Stephen G. Harvey; Travis P. Nelson
  • Law Firms: Pepper Hamilton LLP - Philadelphia Office ; Pepper Hamilton LLP - Princeton Office
  • Responding to the Philadelphia City Council’s request for a moratorium on residential mortgage foreclosure sales in the city, President Judge of the Court of Common Pleas of Philadelphia County, Judge C. Darnell Jones, II, opted for a moderate road instead. He announced the creation of the Residential Mortgage Foreclosure Diversion Pilot Program, designed to slow the mortgage foreclosure process. See Joint General Court Regulation No. 2008-01.

    This program recognizes the economic and legal challenges that a residential mortgage foreclosure sales moratorium would create for lenders and borrowers in Philadelphia. It also affirms that the current housing crisis is caused not just by subprime lending but also by “rising interest rates, unemployment and underemployment.”

    The program applies only to residential owner-occupied properties exposed to judicial sale to enforce a residential mortgage. It prohibits a lender from proceeding to a sheriff sale unless a conciliation conference is held as directed by the General Court Regulation. The conciliation conference, which would be presided over by a case manager or other designated person, would address:

    • whether the borrower is represented, and if not, whether a volunteer counsel may be available or appointed
    • whether the borrower met with a Housing Counseling Agency, as required
    • whether the Housing Counseling Agency has prepared an assessment or report providing an available loan work-out arrangement for the borrower
    • the borrower’s income and expense information
    • the borrower’s employment status
    • the borrower’s qualifications for any of the available work-out programs, upon review and application of guidelines established pursuant to the General Court Regulation
    • assistance with preparation of work-out plans and required court orders, as appropriate
    • the necessity of a subsequent conciliation conference
    • whether the case may proceed to a sheriff’s sale where there is no prospect of an amicable resolution
    • any other relevant issue.

    The General Court Regulation and conciliation conference essentially impose a mandatory foreclosure mediation requirement that brings together the lender and borrower with the goal of ensuring that the borrower is fully informed of the available options. It also provides borrowers with a mechanism to stay in their homes and avoid foreclosure. At the very least, the program will result in delay of inevitable foreclosure evictions.

    Pepper Points – The General Court Regulation announced by President Judge Jones certainly takes a moderate route toward providing foreclosure relief for Philadelphia residents. It also avoids some of the negative economic consequences that would likely have resulted from the City Council’s resolution, such as higher loan costs imposed by lenders to compensate for the possibility of delayed sales and a scarcity of available mortgage lending entirely.

    The General Court Regulation does contain some points of concern for lenders. For example, the regulation prohibits the sale of foreclosed property “unless a conciliation conference is held,” and requires an order to issue memorializing the result of the conciliation conference. However, it does not provide a timeframe to complete case management. Since the regulation allows the conciliation conference presiding officer to consider “the necessity of a subsequent conciliation conference” (Sec. 6(b)(8)), and “any other relevant issue” (Sec. 6(b)(10)), there is some risk that the formalities of the regulation may be drawn out unnecessarily. As a more general issue, while the regulation provides an additional layer of bureaucracy for lenders to navigate in the foreclosure process, lenders always have the option of seeking the court’s intervention if they perceive a case manager as needlessly delaying the process.

    In the end, President Judge Jones’ plan likely presents a good balance in answering the call of legislators and consumer groups to provide relief to affected borrowers, while still assuring lenders that the foreclosure process will proceed and that Philadelphia remains a viable market for mortgage lending. It should be noted that similar foreclosure delay plans are either being considered or have already become law in Maryland, New York, New Jersey, Massachusetts, Michigan, and Minnesota.