Beginning October 1, 2012, there will be new protection for homeowners who are facing foreclosure. The change reflects an ongoing problem which has greatly affected Georgia homeowners, and prevented many of them from being able to prevent the foreclosure of their residences. Before addressing the change, a little background is in order.
Georgia is a non-judicial foreclosure state, which means that it is not necessary to institute a lawsuit or other legal proceeding in order to foreclose on real estate. There are certain statutory requirements which must be fulfilled , including the following: notice of the delinquency to the homeowner with an opportunity to cure; acceleration of the loan; and advertisement of the foreclosure sale in the county paper. In addition, the actual sale can only take place on the first Tuesday of the month following the advertisement of the sale. Many homeowners who are unable to cure the delinquency prior to the foreclosure sale may resort to the filing of a Chapter 13 bankruptcy to stop the foreclosure, and establish a plan to repay the delinquency over a term of years through a bankruptcy court supervised repayment plan.
With the advent of various federal and state sponsored loan modification plans, many Georgia homeowners attempted to modify the loans in an attempt to make the payments more affordable, and prevent a default and/or foreclosure. (cite to what to know about loan modification blog). Many of these loan modification attempts were initiated in a direct response to a notice of foreclosure, often by the foreclosing lender. Unfortunately, homeowners were unaware that the foreclosure sale was not delayed or suspended while the loan modification negotiations were ongoing. To further complicate matters, there was little or no coordination between the law firm hired to conduct the foreclosure, and its lender/client who was also working with the homeowner on a loan modification. In some instances the homeowner would be notified on the eve of foreclosure that the loan modification was not approved, and would have little or no time to file a Chapter 13 bankruptcy to avoid foreclosure and save the home.
There were multiple factors at play which served to delay a loan modification to the point where the risk of the house was imminent. Programs such as the “Home Affordable Modification Program” were well-intentioned but poorly-conceived.[i] Most mortgage companies and banks were not equipped with a “loan modification” division or unit, and the procedures for loan modifications were haphazard and inconsistent. Consequently documents submitted by homeowners were frequently lost or misplaced. Borrowers never had the opportunity to speak with the same representative, further delaying the process. Rarely did the law firms representing the lenders participate in the loan modification process, resulting in the classic situation of “one hand doesn’t know what the other hand is doing”. This would lead to a consummation of a foreclosure even in instances where the loan modification was approved. In addition, the success rate for modified loans was so low, that there was rarely an economic incentive for lenders to engage in meaningful modifications.[ii]
The new law prohibits “dual-tracking”, which means that a loan cannot be simultaneously considered for a loan modification and foreclosure. [iii] This will prevent the unfortunate situation encountered by many Georgia homeowners who were unaware that their house was on schedule for foreclosure even while the loan modification negotiations were ongoing. However, this does not mean that a homeowner will be more likely to receive a loan modification. Our expectation is that lenders will take less time in processing such modifications, and will make the decision to deny them much sooner, so that a foreclosure can be commenced. This is not to discourage anyone from negotiating a loan modification (if you are in default), but if you are more than 2 months behind on your payments, it may be a good idea to meet with a bankruptcy attorney so that you know what relief will be available in the event that a loan modification is denied, and a foreclosure commences.
[i] Sheila Bair, former head of the FDIC during the economic crisis, opined in her book “Grabbing the Bull by the Horns” that the program was little more than a public relations move, with little opportunity for meaningful results.
[ii] Because the time and expense associated with a non-judicial foreclosure in Georgia is so low, compared with other jurisdictions such as South Carolina, lenders were not faced with significant out-of-pocket costs which may have encouraged a loan modification.