The National Mortgage Settlement and Dual Tracking

On October 2, 2012, the National Mortgage Settlement's servicing regulations went into effect. One of the provisions that people often misunderstand is the settlement's prohibition against dual-tracking. Dual-tracking is the practice of moving a foreclosure case forward while also considering a borrower's loan modification application.

This practice is dangerous for homeowners. Many people believe that applying for a loan modification will stop the foreclosure process. By prohibiting dual-tracking, the settlement begins to approach the common expectation of most homeowners.

However, simply applying for a loan modification is not enough. The National Mortgage Settlement provides specific time frames in which a borrower must apply for a loan modification in order to stop the foreclosure process. As the sale date approaches, borrowers are afforded less protection by the anti-dual tracking provision.

If a borrower submits a complete loan modification application within 120 days of the first missed payment, then the lender must review the borrower's package and make a decision before referring the loan to foreclosure. If the borrower submits an incomplete package, then the lender must allow the borrower 10 days to submit the rest of the necessary documents. If the borrower successfully submits the documents, then the foreclosure cannot proceed until the lender reviews the package and makes a determination.

Once a loan has been referred to foreclosure, timeframes become much more important.

If a borrower submits a loan modification application within 30 days of receiving "the attorney letter," then the lender cannot proceed to sale or seek a judgment. The settlement does not define "attorney letter," but I would imagine that this is either the letter that the lender's attorney sends to the borrower prior to filing a foreclosure lawsuit or the summons. Given that a summons and a letter are vastly different documents, I'm going to assume that it is the former.

Once the lender has received the loan modification application and decided to extend a loan modification, it must put the lawsuit on hold until the borrower responds to the offer. If the borrower accepts the offer, the case must be stopped entirely to see if the borrower fully performs on the trial modification.

If the borrower misses the 30 day mark, then it is imperative that the borrower apply for a loan modification up to 37 days before a scheduled sale. In Illinois, this means that most borrowers will want to apply for a loan modification before their 3-month right to redeem expires. If the lender decides to extend a loan modification to the borrower, the borrower must respond within 14 days. If the offer is accepted, the case is put on hold to see if the borrower fully performs.

If the borrower applies for a loan modification between 37 and 15 days prior to a scheduled sale date, the lender must perform an expedited review of the package and make a determination. My sense is that "expedited" reviews aren't as thorough -- borderline cases will likely be denied. Again, the borrower has 14 days to accept any offer that the bank may make.

Beyond those timeframes, applying for a loan modification won't stop the progress of a foreclosure lawsuit -- at least not pursuant to the National Mortgage Settlement's servicing standards. As is the case with many of my posts about timeframes and foreclosure, it is always better to act sooner rather than later.

Waiting until the last minute to defend against a foreclosure lawsuit is a dangerous affair no matter what servicing guidelines are in place.

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