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September 2, 2014

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Foreclosure help could hinge on who holds the note

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STEVE MARCUS / LAS VEGAS SUN file

A home in Henderson is listed for auction in November. Legislation signed by Gov. Jim Gibbons is designed to avert more home losses by allowing homeowners facing foreclosure to demand mediation with their lenders. The program is expected to be available in mid-July.

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Homeowners facing foreclosure may have a new friend on their side, if they’re willing to pay for it — a judge.

A new state law, signed by Gov. Jim Gibbons and which takes effect in July, allows homeowner-occupants facing foreclosure to demand a sit-down mediation with lenders, overseen by a retired judge or an attorney.

It’ll cost homeowners up to $200, but it might help them save their homes.

At the least, the law allows homeowners who otherwise might have had trouble getting their lenders’ ear, to sit down with them and a mediator to discuss whether foreclosure could be avoided by renegotiating loan terms. And at best for homeowners, the process might stave off foreclosure altogether because of a major technicality.

One of the more dramatic components of the foreclosure mediation law compels lenders to produce promissory notes, showing that money is owed, and deeds of trust, showing the banks’ security on the loans. If they can’t, then mediators could reduce the loans significantly, allowing struggling homeowners to stay put.

“It’s a basic consumer protection that most states are looking at,” says Assembly Speaker Barbara Buckley, who wrote the bill. “We don’t want people paying mortgages to people who don’t own the mortgage.”

Producing mortgages might be problematic for lenders, because deeds of trust and promissory notes are sometimes sold to investment banks and third-party companies.

Bill Uffelman, president of the Nevada Bankers Association, unsuccessfully lobbied Assembly Democrats to exempt lenders from mediation if they demonstrate willingness to renegotiate loan terms.

Last year — before the law was on the books — Las Vegas Valley resident John Ernestberg attempted to use the “produce the note” tactic as a way to dodge foreclosure.

It was a last-ditch effort for Ernestberg — and an increasingly popular one that started in Florida and has spread nationwide. Countrywide didn’t produce the document when he asked the company to prove ownership of the deed.

But a federal judge rejected Ernestberg’s bid in January, noting that Nevada doesn’t require lenders to process foreclosures through the court system, so it couldn’t order Countrywide Home Loans to present the document.

The “produce the note” strategy dates to at least 2007, when a federal judge in Cleveland tossed out more than a dozen foreclosures processed by a bank that couldn’t prove it was the lender.

Mediation programs to address foreclosure issues are growing across the country. A nearly year-old mediation program in Philadelphia that requires defaulting homeowners to attend conciliation conferences with their creditors reports having helped more than 75 percent of the participating homeowners.

Previous to the passage of the Nevada law, lenders here had to file three documents in the foreclosure process: a 90-day notice-of-default and election to sell, a 21-day notice-of-sale and a three-day eviction notice, Uffelman says.

Upon receiving the 90-day default notice under the new law, homeowners have 30 days to seek mediation.

If lenders produce the necessary paperwork, there may be no compelling reason to stop foreclosure and modify the loan except for good will. But if lenders can’t present the requisite documents — perhaps the promissory notes have been sold to third parties and/or the deeds of trust have been sold to other financial institutions — mediators would recommend to the program administrator sanctions against lenders, including possible loan modification.

James Hardesty, chief justice of the Nevada Supreme Court, leads a working group that is developing mediation rules. The group includes judges and attorneys for borrowers and lenders. The Supreme Court will hold public hearings on these rules in the coming weeks, with the hope of initiating the mediation program by mid-July, Hardesty says.

Despite the new layer of bureaucracy, Hardesty says it won’t cost the state money. Program advocates hope to hire a foreclosure mediation administrator, two assistants and an accountant, but the costs would derive from participants submitting to the foreclosure process. Mediators could be paid up to $85 an hour for their services. More than 360 attorneys statewide have signed up to help.

For all the efforts to mediate a resolution to a foreclosure, it may come down to whether lenders can produce the necessary documents.

“From a pure legal perspective, it seems crazy that you can be thrown out of the home without the note handy,” says Andrew Jakabovics, associate director for housing and economics at progressive think tank Center for American Progress. “But at the same time, I doubt we’ll see thousands of zombie homeowners,” referring to owners who will refuse to leave their homes.

Some banking officials fret that lenders failing to produce deeds of trust could enable homeowners to live mortgage-free indefinitely, but securitization analysts say that, at best, homeowners are only delaying inevitable foreclosure.

Buckley doubts Nevada mediators would allow mortgage-free living if lenders fail to produce the notes. But at the least, renegotiated and more-affordable loan terms might help homeowners stay in their houses. If homeowner still struggle, lenders can once again begin foreclosure proceedings — and by then, may have secured the necessary paperwork to follow through.

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