Changing the Rules

Can Philadelphia's bold experiment in preventing foreclosures work?

by Isaiah Thompson

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Published: Jun 18, 2008

Michael T. Regan VISIONARY? Judge C. Darnell Jones is trying to intervene in the foreclosure crisis with an innovative but controversial program. (CLICK IMAGE FOR LARGER VERSION)

Two months ago, on April 16, the Honorable C. Darnell Jones, president of Philadelphia's Court of Common Pleas, decided to take a stand. With the foreclosure crisis in full swing, Jones issued an unprecendented administrative order declaring that before any foreclosure goes to sale, a representative for the lender must sit down with the borrower in court. He also postponed all sales of owner-occupied houses scheduled for April or May until July.

The number of houses foreclosed upon in Philadelphia has risen steadily in the last three years, from about 5,000 in 2006 to more than 6,200 last year to a projected 8,500 this year. Philly is not unique in this regard, of course. But nowhere else has a local civil court intervened so directly in the foreclosure crisis. Jones' order immediately drew national attention, as half-blighted cities like Pittsburgh and Cleveland expressed interest in instituting similar policies.

It also created a massive backlog — suddenly, the 661 cases scheduled for foreclosure on July 1 had to be brought in for conference. The court, under the direction of Judge Annette Rizzo, planned to pack them all into one week, in City Hall's Courtroom 676. And so, last Tuesday morning, the experiment began.

The room was flooded as soon as the clock struck 9. On one side of the courtroom, housing counselors and pro bono lawyers gathered; across from them, and much better dressed, sat attorneys for the lenders. Private attorneys were drafted from the bar to preside as stand-in judges. In front of the sacred bench, where the judge usually sits, a great photocopier was dragged in, in anticipation of mounds of paperwork.

Lines of borrowers began to form. Extra lawyers were called in, and housing counselors found themselves taking on a flurry of new clients. The scene looked more like a social service agency than a courtroom.

Judge Rizzo, who oversaw the process, was thrilled with the turnout. "It's organized bedlam," she admitted, "but that's a positive — because at least we're getting these cases into the theater."

The diversion program is based on the premise that foreclosures are bad for lender and borrower alike, and that a compromise to savethe loan is in everyone's inter-est. Jones' court order brought together traditional enemies — lenders and delinquent borrowers, corporate lawyers and community advocates — because they're believed to share common ground.

The next day's Inquirer had a positive article on the program. But as the week wore on, it became increasingly clear that there were obstacles ahead.

"This is going to be difficult," admitted Michael T. McKeever, an attorney representing various lenders who sits on the task force that created the program. "We support the program as long as there are not unreasonable delays. But we have to be careful with the lenders."

One lawyer, who represented a lender (he wouldn't say which), approached City Paper. "You live in Philadelphia County?" he asked bitterly. "Because if you do, stop paying your mortgage right now. ... In Philadelphia, apparently, you don't have to pay anymore."

So far, the "delays" feared by lenders appear to be the main outcome of the program. A majority of homeowners who came to court last week had not previously met with housing counselors. Their foreclosure dates were uniformly reset to September, and they were asked to come in for another conference on August 7.

By the end of the week, only 27 cases even proceeded to conference. Of those, 18 resulted in a request for more time. Nearly everyone who showed up for the program was able to get their sale date postponed — but according to statistics released by the Deputy Court administrator, only four of the 661 total cases have resulted in deals that avoid foreclosure.

That doesn't mean the program is doomed. Simply scheduling conferences was an achievement, and housing counselors and lenders' attorneys alike say they need more time to work out loan modifications. What's more, the cases processed last week represent foreclosures at their latest possible stage. In the future, the court hopes to bring in clients before their houses are scheduled for a sheriff's sale.

Still, the program's first week did suggest some fundamental challenges that diversion efforts will face.

John Dodds, executive director for the Philadelphia Unemployment Project (PUP), watched the proceedings in courtroom 676 with cautious optimism. "Look, the fact that everyone is being brought together under the auspices of the court is a great thing. It's manna from heaven," he said on Monday. But, he says, "the question is: What's going to happen when everyone doesn't agree? You have to realize that there's a whole culture of enforcing loans by foreclosures."

Indeed, the court is requiring lenders to meet with borrowers before foreclosing, but it can't require them to cut a deal. And while both parties, in theory, have an incentive to avoid foreclosure, there are a few reasons that lenders, in particular, might prefer not to.

For one thing, while lenders may lose money on a foreclosure, it's loan "servicers" who actually collect on mortgages — and their incentives are different. "Servicers are the ones who foreclose loans, and it's lucrative for a servicer to service a defaulted loan," explains Irwin Trauss, an attorney for Philadelphia Legal Aid, which represents PUP. "These attorneys here represent servicers."

Moreover, Trauss says, the idea of sitting down to bargain with homeowners in default simply goes against the way lenders have done business for decades.

"They don't want to make deals," Trauss says. "They want the perception to be that if you don't pay, you lose your home."

Even a simple extension can be a bitter pill for lenders. Three hundred and thirty-seven homeowners who received extensions from April or May didn't show up for conferences last week; in the meantime, says McKeever, "my clients are paying the insurance, paying taxes every single month."

Because of all this, some groups representing the mortgage banking industry are eyeing Philadelphia's program — and the idea that it might become a national model — with suspicion.

"The simple fact of the matter is that when you disrupt the mortgage finance delivery system, the ability to foreclose being a part of it, it immediately has some impact," says E. Robert Levy, executive director of the Mortgage Bankers Association of Pennsylvania. "You're impeding a foreclosure process."

On Friday afternoon, Ian Phillips, a housing counselor and legislative director of the Association of Community Organizations for Reform Now (ACORN), walked slowly across the courtroom floor, holding the hand of a frail, 74-year-old African-American woman named Jean Ruffin. Ms. Ruffin, who is nearly blind from cataracts in both eyes, was scheduled for July foreclosure on the small North Philadelphia house in which she grew up, and which she now owns.

She had paid off her mortgage. But a few years ago, she says, she got a knock on the door from someone offering to put siding on her house and install a railing. He understood that she couldn't pay up front, he said, but got her to sign some paperwork — a second mortgage, it turned out, that put her $9,000 in debt. Ruffin, who receives $700 a month from Social Security, paid just over $100 a month, for about a year, but finally began to fall behind. Late fees and attorney fees were added. When Phillips knocked on her door last week, she was over $27,000 in debt.

"You can imagine how I felt," she explained on Friday as she waited to meet with lenders. "Oh, my goodness."

"If the court and the sheriff hadn't stopped the foreclosures," Phillips says, "her house would have been sold in July." He's currently trying to help Ruffin get the loan forgiven completely by the lenders.

So far, only two of Phillips' clients have received loan modifications from the diversion program. But he remains optimistic. "This is a pretty ground-breaking initiative and there are a few kinks to be worked out, but I think the modifications will start rolling as the program builds," he says. "The next step is to find people who are two or three months from foreclosure and get them to reach agreements."

On Monday, City Paper called Ruffin and asked her what the outcome of her visit has been so far.

Her case, she said, had been rescheduled to August 7.

"I guess I'm supposed to meet with them then," she said over the phone. "That was really what I was supposed to do on Friday, so I really don't know what to think. ... I just hope it'll be a thing where I'll be all right, where I can stay I my house. But you know, like I say, I don't have no credit."

(isaiah.thompson@citypaper.net)

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