Fannie Mae pilot program uses law firms to avert foreclosures

A Center City law firm that handles mortgage foreclosures for Fannie Mae gets hundreds of calls a day from homeowners facing the loss of their houses.

In the past, all Phelan, Hallinan & Schmieg L.L.P. could do for delinquent borrowers who wanted to work out a catch-up plan was refer them to the company that collects their payments.

Then last month, under a pilot plan by Fannie Mae, the nation's largest mortgage finance company, the law firm's loss-mitigation department worked out 26 repayment plans with borrowers - on their first call.

Now the program is expanding. Starting this week, the firm and another, Goldbeck, McCafferty & McKeever P.C. of Philadelphia, will be allowed to take more dramatic immediate steps to help borrowers, such as reducing the principal on the spot and even approving sale of a property for less than is owed.

Fannie Mae's program is "a tool to eliminate one of the layers of authority that you need to make the deal," said Lawrence T. Phelan, managing director at the firm, among the most active users of the program in the country.

As the national foreclosure rate rises, government and industry are searching for ways to reduce the number of foreclosures that end with a money-losing sheriff's sale and, likely, an empty house that drags down neighborhood property values.

At Fannie Mae, which invested mostly in loans to people with good credit, the percentage of loans on single-family houses at least three months behind jumped from 0.66 percent at the end of 2006 to 0.98 percent at the end of last year.

Advocates for borrowers praised the Fannie Mae pilot program, with reservations.

"It's an improvement," said Bruce Dorpalen, the Philadelphia-based national director of housing counseling for Acorn Housing, a nonprofit that advocates for the poor.

Patricia Hasson, president of the nonprofit Consumer Credit Counseling Service of the Delaware Valley, cautions borrowers that the law firm is working for Fannie Mae and must put its client's interests first.

Fannie Mae pays Phelan Hallinan Schmieg $200 for every repayment plan it completes, significantly less than the $1,300 fee it gets for its foreclosure services ending in a sheriff's sale.

"That's OK," Phelan said. "The law firm is never going to be in the position where its fees are the difference between someone saving their home or not."

Its foreclosure fee is prorated, so the law firm does not bring in $1,300 on every foreclosure filing. Last year in Pennsylvania, 25 percent of foreclosure filings ended in a sheriff's sale, Phelan said. The historical rate was in the 15 percent to 20 percent range, he said.

Fannie Mae turned to its law firms for help after learning that many borrowers were responding more readily to those law firms than to servicers.

"They will respond to lawyers when that notice of default goes out," said Victor Medrano, single-family servicing consultant with Fannie Mae.

He said that 40 percent to 50 percent of borrowers in foreclosure never contact their mortgage servicer. The company's goal was to reduce that rate, he said.

Fannie Mae is allowing 39 law firms in 15 states to work out repayment, or forbearance, plans. It started sending out payments to law firms on Feb. 7 and by March 6 had paid them $50,000.

This week Fannie Mae is adding Pennsylvania to the group of states where it lets law firms takes steps such as reducing the amount of principal owed, approving the sale of the property for less than is owed, or allowing borrower to sign the deed over to the mortgage holder.

The firms can earn an incentive fee of up to $600 for negotiating a deal with borrowers that cuts losses for the holder of the mortgage.

The expanded responsibility could mean even busier days for the 14-member loss-mitigation team at Phelan Hallinan & Schmieg, which employs 400 overall, including 22 attorneys.

When calls come in from borrowers who just got a default notice, staff members at the law firm tell them how much they owe. "If they can't make it, we'll start negotiating with them," said Dan Heredia, who leads the loss-mitigation team.

The primary goal is to bring the loan up to date through a one-time payment or a repayment plan with as little as 10 percent down and the remainder of the overdue amount paid over as many as 12 months.

The goal is to make arrangements immediately. Housing counsellors complain that it often takes weeks for them to negotiate deals with mortgage servicers.

That doesn't surprise Phelan.

"Under the current climate, the servicers are besieged," he said. "This is a volume that no one anticipated."