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Temporary Restraining Order Removed in South Carolina

Columbia, SC-A temporary restraining order involving loans subject to modification under the Home Affordable Modification program has been removed by Chief Justice Jean Hoefer Toal of the Supreme Court of South Carolina. Instead of shutting down foreclosure sales in the state the move could now delay the process of a foreclosure action in some cases.

In a new administrative order issued by the judge, any servicer that has signed on to the president's new loan modification program must confirm that it has followed the program's guidelines before the servicer may complete the foreclosure.

"The order sounds more ominous than it really is," said Larry Platt, a partner with the Washington law firm K&L Gates.

There are two circumstances where a servicer is obligated to conduct a loan modification analysis before resorting to foreclosure. "First, each GSE mandates such an analysis of any loan that is owned or securitized by the GSE. Second, the Department of Treasury requires such an analysis of any loan that is covered by the Servicer Participation Agreement that a servicer may have elected to execute in order to enroll in the loan modification program. The court order requires an affidavit that these requirements have been satisfied."

William LeRoy, president and CEO American Legal Financial Network, St. Louis, says there has been confusion over implementation of the program. The trouble is the Obama plan gives specifics as to what loans are in and out of the program, but there is a lot of ambiguity there, too, he adds. "If folks go into foreclosure without taking advantage of some of the provisions under Obama's plan, then they lose certain rights to modification. That was the fundamental kicker, which prompted the judge to issue the TRO in the first place."

In order for any foreclosures to happen, the lender, investor or plaintiff will have to execute an affidavit indicating that the loan does not qualify for any government programs or that it did qualify but the lender has exhausted all loss mitigation efforts pursuant to the requirements of the programs, he said.

"We are encouraging lenders and servicers with South Carolina portfolios to contact their local South Carolina counsel with any questions," said Mr. LeRoy. "Everybody is trying, lawyers on the creditor's side are in contact with all of their clients making sure these affidavits are prepared. On the borrower's side, they are trying to figure out how to respond. A lot of borrowers themselves probably don't even know their property qualifies. It will be interesting to see what happens."

Mr. LeRoy said he would like the opportunity to sit down with members of Congress along with others from the AFN industry segment, which includes the creditors' lawyers, to discuss the Home Affordable Modification program.

"There are many parts and pieces to the industry. There has been nothing but individual groups that have handled each of their parts. Now everyone is being forced together probably for the first time in history," he said.

Under the new plan, servicers are complaining the administration is restructuring its housing rescue plan so that they are required to compare modifications to short sales as well as foreclosures.

Short sales have always been a part of the loss mitigation tools that servicers use, but for some reason Treasury never included them in the original plan, according to Mr. Platt, who says the move is like the game of "scissors cuts paper."

"If modification beats foreclosure, modification wins.

"If foreclosure beats modification, foreclosure wins. One's rock, one's paper. Now they are adding scissors. If a short sale beats foreclosure, then pursue a short sale. Borrowers are given 90 days to try and sell the property.

"If that doesn't work, then you start foreclosure," said Mr. Platt.

Given all the delays on foreclosure, it's now going to elongate the period even more, he says. "If a short sale doesn't work, you just added that timeframe to the time you've already lost.

"This is a disguised moratorium on foreclosure."

He says Fannie is wearing two hats here - first, as either the owner of mortgage loans in foreclosure or the guarantor of the related mortgage backed securities.

"It essentially is saying that it wants to postpone foreclosures until it is clear that the borrower has realized his or her right to be considered for a loan modification under Fannie's eligibility guidelines. Any owner has a right to postpone a home loan foreclosure that is being pursued on its behalf," he said.

Second, Mr. Platt said Fannie is acting as an agent of the Department of Treasury in cases where a servicer has signed a Servicer Participation Agreement with Fannie Mae on behalf of Treasury.

"That agreement obligates participating servicers to delay the finalization of foreclosures until after the servicer has determined whether the borrower qualifies for a modification.

"In this case, Fannie is using the courts to enforce compliance with the contracts that it is administering on behalf of Treasury."

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