A program pioneered in federal court in Orlando to help prevent foreclosures by trimming monthly payments and sometimes forgiving mortgage principal is coming to the Tampa Bay area.
The Orlando program has a higher success rate than the mediation required in foreclosures in state courts. Borrowers in the federal program are being given lower interest rates, extended-payment options and, in some cases, lenders are reducing loans on overvalued homes.
The catch: They need to file a Chapter 13 bankruptcy. That chapter requires debtors to have income to repay debts over a five-year period. The bankruptcy filing negatively affects a borrower's credit rating.
The program also has advantages that the state mediation doesn't. Second mortgages and credit card debt can be wiped out in bankruptcy court, allowing borrowers to funnel more cash each month to mortgage payments.
Lenders are also forgiving borrowers' arrearages; they make the amount due at the end of the loans instead of insisting it is paid immediately, said the court's Orlando division Chapter 13 trustee, Laurie Weatherford. Lenders are more willing to negotiate because borrowers have jobs and can make payments, she added.
"The banks know they're serious," she said about borrowers. "We want to keep people in their houses."
Using the program, Orlando's two bankruptcy judges sent 295 cases to mediation last year and 60 cases received modifications. Through June this year, 190 of 415 received modifications.
By comparison, less than 4 percent of the nearly 58,000 cases sent to state mediation from March through November 2010 were successfully modified.
Although training in the bay area will officially be rolled out later this summer, some homeowners are already asking for the federal mediation. There is talk of expanding the program to other parts of the country, Weatherford said.
The federal mediation originated in April 2010 as borrowers grew frustrated waiting on responses from lenders about mortgage modifications. Weatherford, along with attorneys representing lenders and debtors, urged bankruptcy judges to adopt the program.
In the federal program, homeowners pay a $350 mediation fee and some additional attorney fees. In contrast, lenders pay $750 for each case in state courts.
Matthew Weidner, a St. Petersburg lawyer who focuses on foreclosures, said homeowners and lenders are held to higher standards in federal mediation. That is why the state mediation hasn't been as successful, he added.
"There is more of an authority in the federal courts," Weidner said. "You're playing in the big leagues."
Orlando bankruptcy attorney Robert Branson, who has represented homeowners in federal and state mediations, said the state program is just another stepping stone before lenders kick homeowners to the curb. He pointed to the case of a Kissimmee homeowner he represented in the federal program.
His client bought a home for $268,000 in 2007 and fell behind on an adjustable-rate mortgage when the payment increased and emergency expenses arose. The woman filed for bankruptcy in 2009.
This year, the lender converted the loan to a traditional mortgage and offered to wipe out $138,842 of the principal if the client made timely payments for three years. The new loan requires the borrower to make a final balloon payment of about $35,000 when the loan matures in 2037.
Many bay area homeowners, he said, can benefit from the program.
"It makes sense to keep people in their homes," he said. "This is working."
Mark Puente can be reached at [email protected] or (727) 893-8459. Follow him on Twitter at twitter.com/markapuente.