Clearing the Foreclosure Crisis: Foreclosure Mediation Can Reduce Uncertainty
Clearing the Foreclosure Crisis: Foreclosure Mediation Can Reduce Uncertainty
Alon Cohen details why responsible homeowners, lenders, and investors in mortgages can help themselves and the housing markets recover from the foreclosure crisis.
Bank of America Corp. and Ally Financial Inc., two of our nation’s largest home mortgage lenders, announced last week that that they would resume active foreclosures in 23 so-called judicial foreclosure states, or those states where foreclosures move through the courts. The two banks had previously announced they were suspending foreclosures across the country on October 1 after claims came to light that they and other prominent lenders used “robo-signers” to sign thousands of affidavits at multiple lending institutions certifying that they had reviewed loan documents that they had never in fact seen.
As Barbara J. Desoer, president of Bank of America Home Loans, put it, “We did a thorough review of the process, and we found the facts underlying the decision to foreclose have been accurate.” That implied 102,000 loans reviewed by Bank of America in 10 business days—more than 10,000 per day. To put this in perspective, Bank of America reports modifying approximately 680,000 loans in the past 18 months under both Home Affordable Modification Program, or HAMP, the federal government’s mortgage modification program, and its own proprietary programs—the equivalent of approximately 1,500 per day. Instead, Bank of America reviewed less than 1,000 loan files before making the decision to restart foreclosures, even after finding multiple mistakes during its review.
Ally Financial did not specify the number of foreclosures it would be resuming, though its mortgage portfolio is one-tenth that of Bank of America. Ally Financial was, however, at the center of the recent shakeup; the company says that documents being resubmitted to courts will not bear the signature of Jeffrey Stephan, the “robo-signer” whose statements in a Florida deposition that he signed 10,000 foreclosure affidavits a month helped spark the controversy.
The banks’ announcements capped two weeks of increasing uncertainty in the housing market. While some state’s attorneys general continue to push for a foreclosure moratorium, there is growing consensus that pressing “pause” on the crisis is no solution.
Instead, jurisdictions and the federal government should implement foreclosure mediation programs so that responsible homeowners and their lenders or mortgage servicers have at least one chance prior to foreclosure to review the documentation and ensure the foreclosure is both legal and appropriate. Getting the parties face to face with each other and the documents in the presence of a neutral, third-party expert on foreclosure mediation can immediately help restore certainty to the foreclosure process before foreclosures run their course. Specifically:
- Review of the documentation supporting foreclosure, which ensures legal compliance
- Review of the lender’s efforts to modify the mortgage under government or private programs to ensure compliance with those programs and provide homeowners with the assistance they are due
- High mortgage modification settlement rates, which would quickly remove foreclosures from court dockets and result in higher returns to mortgage servicers and than foreclosure would provide
- Options for “graceful exits” for homeowners who really can’t meet their mortgage obligations that rapidly clear court dockets, reducing costs to servicers and often providing homeowners assistance with and greater control over their transition to more stable housing
There is consensus that ending the housing crisis and stabilizing housing markets requires us to address the glut of foreclosures as quickly as possible. That has been the goal of federal Making Home Affordable programs, including HAMP, similar state initiatives, increased housing counseling, and increasingly foreclosure mediation. The faster we sustainably modify mortgages where possible or dispose of a property via short sale or foreclosure sale, the faster lenders and investors can regain control of their balance sheets, states and local governments can stabilize tax revenues, and homeowners can achieve a stable home life.
The recent uncertainty due to the “robo-signer” scandal threatens to do the opposite, slowing and stalling foreclosures. With Bank of America and Ally Financial resuming foreclosures, others are sure to follow shortly. When these foreclosures resume, along with the remainder of Bank of America’s foreclosures in nonjudicial states, or those states in which lenders and servicers can sell a home after the homeowner defaults on the mortgage without any court involvement, they will face growing legal opposition from homeowners and investors trying to secure their assets. And, of course, this will all take place in the same chaotic system of lender-homeowner communication that has slowed modification efforts to this point—only now with the added uncertainty about the lender’s documentation and right to foreclose.
Foreclosure mediation can speed up foreclosure and restore certainty to the process by bringing the parties together in the presence of a neutral third party expert to:
- Review the documentation.
- Ensure that foreclosure is legal and appropriate.
- Discuss settlements that could forgo or speed up foreclosure.
In this way, settlements in one way or another are dealt with swiftly. Right now, communications between mortgage servicers and homeowners—whether as part of the federal government’s HAMP initiative or as part of a private request for modification—are primarily handled on paper. The process is slow and participants routinely report missing documents and repeated requests. By getting the parties to meet in person, mediation permits them to review the mortgage documents and ensure that, foremost, foreclosure is appropriate.
Moreover, in states and municipalities where foreclosure mediation is in use, among them Connecticut, Florida, New York, Nevada, Ohio, and Philadelphia, the benefits are not limited to increasing certainty regarding the propriety of foreclosures. These programs were created originally to benefit courts whose civil dockets were clogged with foreclosure cases, raising costs and grinding court proceedings to a halt. The goal was to have parties engage in settlement talks to see whether a more profitable resolution could be reached, whether it be loan modification, short sale, deed in lieu of foreclosure, or other remedies. Over time, however, these programs also evolved to provide a venue for the parties:
- To review and negotiate the lender’s calculation of principal balance, fees, and costs outstanding on the loan
- To test the lender’s assumptions about the home and the homeowner’s income for the purpose of loss mitigation program, both private and public
- To act as de facto compliance check or appeal in relief programs such as HAMP
It is the norm in these states and municipalities for parties to extend mediation beyond a single session so that a lender can re-run HAMP or similar state or private calculations with corrected assumptions that indicate that the homeowner may indeed qualify for modification. This process, not surprisingly, works.
The proof is in the pudding. Jurisdictions in more than a third of U.S. states are benefiting from foreclosure mediation programs already, and more are on the way. Jurisdictions with fully implemented programs such as Connecticut, Philadelphia, and Nevada report settlement rates nearing 75 percent, with the majority of homeowners remaining in their homes. The remainder negotiate a “graceful exit,” a term coined in Philadelphia’s program, including:
- A deed in lieu of foreclosure, in which the homeowner transfers the deed to the lender instead of going through a lengthy foreclosure process, often in exchange for additional time before moving out
- Short sale, which enables the borrower to sell their home for less than the amount owed on the mortgage with the lender’s consent
- Cash for keys, in which a homeowner receives assistance in transitioning to his or her new home
- A negotiated departure date instead of eviction from the home, giving the homeowner more control and peace of mind
In all of these possible steps, lenders and servicers are supportive stakeholders as they complete the process more quickly and net greater returns.
The bottom line is this—foreclosure mortgage mediation is working in both judicial and nonjudicial foreclosure states. Judicial foreclosure states, such as Connecticut and Florida, have freed up their court systems once again. And both judicial foreclosure and nonjudicial foreclosure states reap the benefits of mediation through faster foreclosures and stable homeownership leading to reduced vacancy, stabilization of property taxes, reduction in vandalism and squatting, and stability in surrounding home values.
Alon Cohen is a co-author of several reports from the Center for American Progress on mortgage mediation, including “Now We’re Talking: A Look at Current State-based Foreclosure Mediation Programs and How to Bring Them to Scale.”
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