The Department of Justice’s Access to Justice Initiative earlier this week released its report on foreclosure mediation, coming out strongly in favor of two key points: more research and a more active federal role in foreclosure mediation, both of which can greatly benefit American homeowners.
Foreclosure mediation offers lenders and homeowners a chance at the start of foreclosure to meet, preferably in person, and see if there is settlement that would benefit both. This often comes at the end of months or even years of often-stymied efforts at communication between the parties. And yet experience in multiple jurisdictions has shown that, even with federal modification programs under the Obama administration’s Home Affordable Modification Program and private lenders’ modification programs unable to help, a significant number of lenders and homeowners settle and avoid foreclosure when they have a chance to sit down and talk.
As with all mediation, nothing in the process requires the parties to settle; just to talk. And yet as many as three in four cases reach an agreement that finds both the lenders and homeowners better off. That’s why the DOJ report comes at a critical time for foreclosure mediation. With Florida’s Supreme Court canceling its statewide initiative just weeks ago, some wonder whether DOJ’s call for more research could be catching foreclosure mediation on the downswing. But DOJ’s detailed and thoughtful report could, to the contrary, spur more adoption of successful response to the housing crisis nationwide.
First, the more people know about foreclosure mediation, the more they see its value. Those jurisdictions with foreclosure mediation programs and robust reporting show significant impacts. As we often note, Philadelphia and Connecticut see settlements in approximately three of every four mediations that occur. Even jurisdictions thought originally to lag, such as Nevada, show a 42 percent settlement rate for participants. Most people would respect be impressed by a nearly one-in-two chance of saving their home after all other attempts had failed.
Perhaps more impressive is what Nevada’s own research has turned up: Only 15 percent of mediations result in foreclosures. The remaining 43 percent are suspended because the lender’s representative failed to appear with documentation evidencing a right to foreclose or the authority to make a deal. This is a clear indication that lenders’ lack of effective participation is hurting the program.
Equally important are the financial savings for lenders. Not only did Nevada help save its lenders more than $21 million (5,903 settlements multiplied by the approximately $36,000 in costs avoided by each foreclosure, as calculated in the Center’s report “Talking It Up”—a short explanation appears here), but by avoiding foreclosure and millions of dollars more in plummeting neighborhood home values, foreclosure mediation identified ways in which it could significantly improve its program.
Since it takes time for the financial benefits to materialize and become widely known, however, giving mediation programs more time to mature is critical to wider participation by servicers and banks. Nevada was famously skeptical about its program for the first year, seeing settlements in a commendable one-quarter of cases, but successful mediations have really picked up since then.
Research can also help cast in relief the importance of participation to the success of a program. It sounds obvious, but foreclosure mediation does no good for those who don’t participate. Our research shows that the major driver of participation is whether mediation is opt-in or opt-out for homeowners. In Philadelphia and Connecticut, mediation is automatically scheduled, while, in Nevada, mediation only takes place where the homeowner opts in.
The different results are self-evidently in favor of automatic—or opt-out—mediation. Philadelphia and Connecticut see participation rates of around 75 percent. Nevada, by contrast, reports a participation rate of just 15 percent. One would think that opt-in jurisdictions would do better as only the homeowners most qualified for a settlement would opt in. The research these jurisdictions have done provides a powerful counterpoint, showing that more participation simply multiplies the effect of the program and does not diminish it. More research can help foster a broader public understanding of this point.
And, as DOJ points out, this is just the beginning. The department rightly notes that obtaining information on foreclosure mediation is hard—a point I heartily echo after several years of doing the same. Those administering the programs have limited resources and, when faced with having to choose between deploying those resources to help more lenders and homeowners versus doing research, we understand why they keep choosing the former.
There is far more we can learn about how to optimize these programs to ensure settlements that are most beneficial to homeowners, lenders, and their communities. Research will help jurisdictions improve programs that exist but would work better if modified. Originally, most were set up as emergency measures without a clear understanding of how long the crisis would last. Increased tracking will help tell us how the market’s needs are changing and when it may be proper to sunset mediation.
Second, DOJ advances the notion that, given the scope of the housing crisis and the response, the federal government should take “a more active role [in] providing resources for mediation programs and research.” Indeed, any research assistance the federal government can provide would take the burden off of individual jurisdictions that can little afford the expense.
Further, every branch of the federal government can go further to actively encourage foreclosure mediation. The Obama administration, for example, could require all participants in the Home Affordable Modification Program to enter mediation prior to foreclosure through the Department of the Treasury. It could, through the Federal Housing Finance Agency and the Department of Housing and Urban Development, require the two government-controlled housing finance giants Fannie Mae and Freddie Mac, now under government conservatorship, and the Federal Housing Administration to have their mortgage services mediate before foreclosure.
Congress also could act on pending bills to create competitive grants for state mediation programs meeting baseline requirements based on proven best practices. Such bills have died in committee in the past two congressional sessions but new versions have been introduced.
And the judicial branch through the bankruptcy courts could exercise their existing discretion to divert cases involving a home loan to mediation, as the courts in the Southern District of New York and Rhode Island have already done.
DOJ recognizes the value of foreclosure mediation. It is now up to us, at the local, state, and national levels, to look deeper both to establish new programs and to strengthen existing ones.
Alon Cohen is a consultant for the Center for American Progress on housing issues and a member of the Center’s Mortgage Finance Working Group. He also was part of the Department of Justice’s workshop on mortgage mediation.