- The New Jefferson County, Kentucky "Foreclosure Conciliation Project"
- May 28, 2009 | Author: William T. Repasky
- Law Firm: Frost Brown Todd LLC - Office
On March 30, 2009, Jefferson County, Kentucky’s Circuit Court began their new “Foreclosure Conciliation Project.” The program is immediately effective in four divisions of the Circuit Court, with the future plan of applying the Project to all foreclosure cases filed in the County. Under the Project’s terms, with the service of the foreclosure complaint, the defendant homeowner will receive a notice from the Court about the Project, what the homeowner must do to participate, and a court selected date for a “conciliation conference.” If the homeowner desires the conference, he or she will complete a financial packet and deliver it to the Commissioner’s office two weeks before the scheduled conciliation conference date. The homeowner must also deliver a copy of the financial packet to the lender. So long as the homeowner does this, the lender is required to appear at the conference, and must do so through a person with “decision-making authority.” Should the lender fail to appear, the penalty is that no sale date for the real estate will be scheduled by the Master Commissioner, even if the Court itself renders a judgment in the lender’s favor on the filed Complaint. At the scheduled conference, the homeowner may be represented by counsel and, should they be unable to afford one, a pro bono lawyer will be appointed. The conciliation conferences will be held each Thursday at the Commissioner’s offices. The Court’s Order establishing the Project states that the conferences’ purpose is “to explore the possibility of settlement before a court-ordered sale of the property” or, should the parties be unable to agree on a compromise, then the borrower may negotiate “a graceful exit and time to find appropriate alternative housing.”
In Kentucky, the Circuit Courts have the authority to force civil litigants into mediation, but this authority has never been pursued on the scale or with the formality which the Foreclosure Conciliation Project requires. This pilot program raises a number of questions for real estate lenders. Banks are already leanly staffed. Their new burden of finding a person, with “decision-making authority,” who can devote one day of each work week to attend settlement conferences at the Commissioner’s office, will be an imposition.
The Project may impose additional delay on an already too slow foreclosure process. The Project was modeled upon a foreclosure diversion project originally instituted in the City of Philadelphia. A study of the Philadelphia program revealed that during a four month study period approximately 80% of the cases handled resulted in the delay of the sale date or its prevention all together. A stated goal of Jefferson County’s Project is in fact the imposition of delay in those cases where a settlement cannot be achieved (the time for a “graceful exit” language). Our experience shows that a borrower has already had a reasonable amount of time to consider his graceful exit options, before the time a lender feels compelled to institute a foreclosure lawsuit. There is further systemic factor supporting the delay concern. In Jefferson County, a rough estimate is that approximately 300 foreclosure cases are filed each month. Theoretically then there must be 75 conciliation conferences completed every Thursday, or else a potential new bottleneck will exist.
Delay has understandable consequences. Non-performing assets, almost by definition those in a foreclosure, have several adverse consequences to banks, including an escalation of the institution’s FDIC insurance charges. The longer they remain on the books as such, the greater to costs and risks for lenders. Another example is the negative impact to the collateral’s value the longer it remains the possession of a defaulting borrower no longer vested in its maintenance.
Banks pursue foreclosure litigation only as a last resort, and usually seek to exhaust all possible settlement grounds before doing so. One may legitimately question if a venue, where 75 mediations may be held on a single day, is likely to uncover meaningful new grounds for compromise between the parties. Unless the Commissioner’s office intends to inject some new, unspoken form of pressure on the lender, we are having trouble grasping how an overly burdened mediation process will yield newly discovered grounds for compromise. Here we will watch closely to see if the Commissioner’s office seeks to adopt the Treasury Department’s “Making Homes Affordable” mortgage modification guidelines as a model for all mediations, even those that would fall outside the Treasury’s announced scope of those guidelines.
It is also possible that the Project’s requirements may incent lenders to move more quickly properties into foreclosure litigation. Prior inclinations to work with genuinely distressed homeowners may become economically problematic because either the pre-litigation offers will be viewed as new “floors” in the mandatory conciliation session, or because the possible systemic delays in the new process may provide a financial incentive for an early filing.
While the program is being implemented on a limited basis in order to work out procedural kinks, we anticipate that one common foreclosure situation may not have been adequately addressed. In situations where a Warning Attorney is required, will that re-set the clock for the scheduling a conciliation conferences, and what will the notice requirements be?