Changing course? New directive from HUD to mortgage lenders-reach out to borrowers in bankruptcy

Recently, the department in charge of federal "loss mitigation" programs issued a new directive, which says in part:

"Effective immediately, mortgagees must, upon receipt of notice of a bankruptcy filing, send information to debtor’s counsel indicating that loss mitigation may be available, and provide instruction sufficient to facilitate workout discussions including documentation requirements, timeframes and servicer contact information.  Working through debtor’s counsel, mortgagees may offer appropriate loss mitigation options prior to discharge or dismissal, without requiring relief from the automatic stay and in the case of a Chapter 7 bankruptcy, without requiring re-affirmation of the debt.  It is strongly recommended that the bankruptcy trustee be copied on all such communications.  All loss mitigation actions must be approved by the Bankruptcy Court prior to final execution"

We reported that New Jersey, like other bankruptcy courts, are instituting programs to encourage and facilitate mortgage modifications or other "loss mitigation" approaches like a deed-in-lieu of foreclosure or "short sale". It seems that the federal government is joining the bandwagon.

It remains to be seen if mortgage lender trusts and their servicers will follow through. Efforts to coordinate "short sales" through bankruptcy trustees, in which the trustee sells property, taking a percentage for costs and something for creditors have reportedly fallen flat. Lenders, it seems, just don't get it...they are better off with half a loaf now than much less, much later.

Stay tuned...the foreclosure mess is one of the big problems holding back the economy...isn't it time for all parties to sit down and work out intelligent solutions that cut their losses now and in the future?