Mortgage Modifications in Wonderland: Conquering the Red Queen

Mortgage Modification in Chapter 13 through Mediation

Robert Jacobs

Nathan Scheg

Loan modification, the systematic alteration of mortgage loan agreements that help those having problems making the payments by reducing interest rates, monthly payments or principal balances, have been utilized by lending institutions to relieve financial pressure on borrowers to prevent foreclosure since the 1930s.  During the so-called “Great Recession” of the early 21st century, beginning in 2007-2008, loan modifications became a matter of national policy, with various actions taken to alter mortgage loan terms to prevent further economic destabilization.

Stemming from the “Great Recession,” and related mortgage meltdown, the Federal Government established the Troubled Asset Relief Program (“TARP”) (which was part of the Emergency Economic Stabilization Act of 2008).  Under TARP, the Making Home Affordable (“MHA”) program was established.  This Making Home Affordable program sought to help homeowners by making their home mortgages affordable through the “Home Affordable Modification Program” (“HAMP”).  HAMP was designed to help financially struggling homeowners avoid foreclosure by modifying loans to a level that could be sustained over the long term.  The goal of the program was to provide clear and consistent loan modification guidelines that the entire mortgage industry could use.  The Home Affordable Modification Program included incentives for borrowers, servicers and investors.  See Fannie Mae’s website for HAMP. The available incentives included interest rate reductions, fixing interest rates that had been variable, principle reductions or forbearances, and term extensions. Despite very rocky beginnings, HAMP proved to ultimately be a valuable tool in helping borrowers, servicers and investors make headway in resolving the mortgage crisis.

Not all borrowers were  eligible for HAMP.  In order to be eligible, among other requirements, the loan could not have been guaranteed by Fannie Mae, Freddie Mac, FHA, VA or USDA, the loan had to have originated before January 1, 2009, the unpaid principal balance prior to capitalization had to have been less than or equal to $729,750 for a single family home, the home had to have been the borrower’s primary residence and the borrower had to be able to establish a verifiable financial hardship.

Once a loan was determined as being eligible, HAMP utilized a “waterfall” technique in order to determine whether a loan modification was possible.  The Standard Modification Waterfall is a stated order of successive steps that must be applied until the borrower’s target monthly mortgage payment ratio (for monthly principal, interest, taxes, insurance and HOA dues combined) is reduced to 31% of their gross monthly income.  The steps, which had to be performed in sequence, were as follows:  capitalization, interest rate reduction, term extension, principal forbearance.  Once a borrower’s target monthly mortgage payment ratio was reduced to 31% of their gross monthly income, the waterfall would stop.

HAMP expired as of December 31, 2016, with the result that its mortgage modification provisions and incentives are no longer available to borrowers.  The HAMP program generally worked well in saving homes of troubled borrowers.  Both the mortgage industry and troubled homeowners benefitted from application of the HAMP program.  Recognizing that without HAMP many more loans of troubled borrowers would likely end up in foreclosure, some bankruptcy courts throughout the country began exploring the possibility of proactively working with lenders, servicers and investors in an effort to try to preserve home loans for borrowers who could make their house payments if their loans were modified (as had been done under HAMP).  Fortunately, the economy has stabilized since HAMP was first introduced.

Following the expiration of HAMP, many lenders still offer “proprietary” programs that are either strictly or loosely based on the prior HAMP guidelines. However, application processing problems are common. These issues, such as claimed loss of documents, document expiration, or lack of communication often lead to frustration among both borrowers and lenders.

Bankruptcy provides a means of either avoiding the loan modification morass altogether or streamlining it. Avoidance comes in the form of troubled borrowers who file Chapter 13 bankruptcy petitions who are able to cure their mortgage arrearages within the sixty (60) months as provided by their plans. Streamlining comes in the form of the Mortgage Modification Mediation (“MMM”) Program, which was adopted by the United States Bankruptcy Court for the Northern District of California in August 2015.

To that end, Hon. Roger L. Efremsky, a United States Bankruptcy Court Judge in the Northern District of California, recognized very early  that, as the “Great Recession” progressed, an increasing number of borrowers were at risk of losing their homes, either inside or outside of Chapter 13, and especially after the expiration of HAMP. At the time, Chapter 13 plans were being confirmed conditioned on borrowers’ loans being modified but, following confirmation, the modifications fell through with the result that the Chapter 13 failed and the bankruptcies being converted to Chapter 7 proceedings. Many times borrowers were trying diligently to achieve modifications so that their Chapter 13 plans would work, but they met difficulties that they could not, on their own, overcome: there was no single point of contact with the lenders or servicers, documents were  being lost or were expiring, and often nobody – including the borrower and the court – knew whether or not the lender would actually agree to a modification, or on what terms.  In some instances Chapter 13 plans were being conditionally approved based on the lender agreeing to a loan modification but then, a year after confirmation, the court would discover that the lender had denied the debtor’s loan modification application.

Judge Efremsky became aware that several bankruptcy courts throughout the United States had adopted differing programs designed to facilitate workouts between lenders, servicers and borrowers that would greatly improve the possibly of achieving successful mortgage modifications that would allow borrowers to stay in their homes. Judge Efremsky surveyed several of these programs, determined that the MMM Program was among the best, and then spearheaded the program in the Northern District of California that facilitated achieving loan modifications between lenders and servicers.

The goal of the MMM Program is to facilitate communication and the exchange of information in a confidential setting and to encourage the parties to finalize a feasible and beneficial agreement under the supervision of the United States Bankruptcy Court for the Northern District of California. Options available under the MMM Program include modification of a mortgage or surrender of real property owned by an individual debtor.

The MMM Program establishes a “single point of contact,” an internet portal created by Default Mitigation Management LLC (the “DMM Portal”) where borrowers, servicers, and a “mediator” could upload and track all required documentation.  In addition to serving as a repository for lender and servicer paperwork, the DMM Portal also serves as a tracking mechanism so that no documents are ever “lost”and no paperwork ever needs to be resubmitted.  The loan for each borrower has a specific location on the portal, and borrowers, servicers and the mediator all have equal access to the uploaded documentation.

The MMM Program also provides an online set of required documents for all lenders that have agreed to participate in the program.  The provision of these documents (generated by docUmods™, another Default Mitigation Management LLC creation) allow the creation of complete and accurate loan modification packages via a customized set of online questions.  docUmods™ also indicates exactly what supporting documentation is needed.  docUmods™ reduces both common errors and the time required to complete a package.

The MMM Program is completely voluntary. Either a debtor or a lender may seek a referral to the MMM Program. If a party desires to participate in the MMM Program, that party files the appropriate motion with the bankruptcy court. (All MMM Program procedures and forms can be found here.) The moving party proposes a mediator (from a registry of approved mediators) in the motion seeking referral of the case to the MMM Program, and if the moving party fails to propose a mediator in the motion, the clerk of the court randomly assigns a mediator for the case from the register of mediators.

The issuance of an order referring the case to the MMM Program triggers many requirements. Within seven (7) days after entry of an order referring the case to the MMM Program or lender’s registration on the MMM Portal, whichever occurs later, the debtor must upload to the MMM Portal: (i) the Debtor’s Prepared Package; (ii) a copy of the order referring the case to the MMM Program; and (iii) all additional documents and information specified by lender on the MMM Portal (collectively, these documents and information are referred to as the “completed package.”) The debtor  also designates the selected mediator on the MMM Portal and pays the following non-refundable fees: (i) the MMM Portal submission fee ($40) directly to the MMM Portal vendor; and (ii) one-half (1/2) of the applicable mediator fee ($300) directly to the mediator.  Within fourteen (14) days after entry of an order referring the case to the MMM Program, the lender and the lender’s California counsel (if any) are required to register on the MMM Portal (if not already registered). The parties then exchange documents under the watchful eye of the mediator until an initial decision regarding the modification is reached. Once an order of referral is entered, the parties have a total of 150 days to get a modification completed. If the modification is not completed within 150 days, the bankruptcy trustee may file a motion to dismiss. However, extensions can be granted for good cause shown. If the parties agree on a loan modification, then they must file a report with the court, and the debtor must file an amended plan within 14 days after filing the report with the court.

No later than seven (7) days after the mediator determines that lender has received and reviewed all of the required information transmitted through the MMM Portal, the mediator  schedules the MMM Conference (i.e., mediation).

The reason that the meeting between borrower, lender and mediator is termed a “conference” is that the “Mortgage Modification Mediation” program is not a true “mediation” in the traditional sense. It is a facilitation. Lenders and borrowers need to be able to have a complete and consistent set of documents in order to be able to apply for, review for, and discuss a potential modification. However, the court recognizes that borrowers may not be likely to willingly share all relevant income and other information unless confidentiality is preserved (from both the outside world and the court itself).  As a result, the program was designated as a “mediation” program so that if no modification is granted, the parties’ confidentiality is preserved in any subsequent litigation or proceedings. Despite this moniker, however, the MMM Conference acts mainly as a means of discussing the details of a loan modification approval or denial, the reasons therefor, and possible reapplication or other alternative means of avoiding foreclosure (deed-in-lieu, short sale, etc.).

The approved and designated “mediators” are not court employees, but are private attorneys listed on the court’s registry of approved MMM Program mediators. Their fees are paid one-half by the debtor and one-half by the lender. In addition to conducting the MMM Conference, the mediator oversees the loan modification application process and follows up with the borrower and lender to make sure all of the necessary documentation and information is uploaded to the “portal” within a reasonable time. The mediator also assists in resolving possible roadblocks that may arise during the process.

For the borrowers, the MMM Program can be handled by either the debtor’s bankruptcy counsel or by specially-designated MMM Program counsel. Some bankruptcy attorneys may elect to handle the MMM Program on their own, but many bankruptcy attorneys prefer to hire outside special counsel. This is because outside counsel often specialize in loan modifications, increasing the chance of success for borrowers and allowing the program to be more cost effective for bankruptcy counsel. Fees charged by MMM Program counsel are currently set by the court at $2,500 and they are paid through the borrower’s Chapter 13 plan.

Some attorneys attempt to seek loan modifications outside of this Mortgage Modification program. The court, however, believes this is a difficult approach.  Unless the debtor elects to use the program, the court doesn’t give the debtor any special time allowances to seek a modification and, because modifications often take additional time, these time considerations can cause problems in the Chapter 13 proceedings. Further, modifications obtained outside the MMM Program often do not receive a court order approving and confirming the modification, whereas modifications obtained through the MMM Program receive a court order. In the event that a modification is not approved in the program, the borrower can still utilize their bankruptcy counsel to amend the plan in an effort to cure pre- and post-petition arrears.

As mentioned above, some lenders now have in-house mortgage modification programs that mirror HAMP. These programs seem to be working well, and the court believes these programs are likely here to stay. However, if housing continues to appreciate to the point where it makes more financial sense for a lender to foreclose rather than modify, some lenders may begin to elect that option over modification. Until then, lenders are most likely to grant modification requests when the borrower submits an organized, complete, and timely set of documents. Additionally, borrowers have the greatest chance at success when their current income is at a level or has recovered to the point where they can afford a mortgage equal to 31% of their gross income, and the current unpaid principal balance plus arrearages allows for the creation of a reasonable mortgage under those guidelines.

The MMM Program has been extremely successful in obtaining loan modifications for qualifying borrowers.


Nathan Scheg of Ironhorse Law Group PC, represents clients in a broad spectrum of areas focused on and related to real estate and construction law.  He also provides mediation, special master, and discovery referee services throughout the San Francisco Bay Area.

Robert B. Jacobs, Esq. is a mediator/arbitrator in the East Bay.  He helps parties settle real estate, business and construction disputes.

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