One of the plethora of new procedures enacted in the 2016 General Assembly’s legislative session is a concept which is being dubbed a “judgment of loss mitigation.” The procedure seems straightforward at first – a lender can seek to have the Court approve a modification of a mortgage loan and sanction the mortgagee’s priority over any other encumbrances of record or it can approve a conveyance of all interest of the mortgagor to the mortgagee within the new statutory structure. So, why do lenders need to be aware of this new procedure? And will this newly enacted process help anyone?

A review of the Act outlines that it can, theoretically at least, permit lenders to modify what it has defined as “underwater mortgages” (i.e. debt exceeds value) and retain priority over any other subsequent lien of record on the property without the necessity for additional litigation or incurring the costs associated with battling over lien priority. It also, at least in theory, can permit a short sale or other transfer of the mortgaged property to be processed through the Court.

Holders of these subsequent mortgage interests must be aware of potential impairment of collateral…

However, the most obvious drawback in the Act arises in the context of a mortgage that is subsequent in priority to the mortgage which is subjected to a judgment of loss mitigation. Holders of these subsequent mortgage interests must be aware of potential impairment of collateral; loss of security and deprivation of any meaningful opportunity to redeem the property in instances where the property is to be transferred to a third party or the mortgagee. In these situations, the only entitlement of a subsequent mortgagee outlined in the Act is the ability to participate in the hearing when the judgment of loss mitigation is considered. As to what level of participation will be allowed or how an objection by a subsequent lienholder will be handled is yet to be determined…

In short, any mortgagee in Connecticut who may hold a mortgage that qualifies as “underwater” should familiarize itself with the provisions of the Act before it becomes effective on October 1, 2016.