The Wall Street Journal and others report that banks recently offered $5 billion in their latest efforts to reach accord in an investigation by the 50 state attorneys general into mortgage servicing fraud by mortgage lenders and servicers that contributed to the national housing crisis. That figure is just one-fourth of the $20 billion penalty previously discussed, and was reached only after the 14 largest servicers settled with federal regulators in April.
The amount is disappointing and should total more, not less. But more importantly, while remunerating homeowners victimized by the fraud will be the top priority, a portion of the settlement should go to boost mortgage mediation at the state level to help those homeowners and others facing foreclosure so housing markets nationwide can begin to recover in earnest. The states these attorneys general represent have seen massive drop-offs in their property tax base; spent additional money on counseling, social services, and emergency services; and seen unemployment rise all due in significant part to the downturn in the economy precipitated by the bursting of the housing bubble. If that’s what the settlement is intended to remedy, then the penalty money should at the very least be directed not just backward to pay back victims but also forward to help dig these states out of the crisis as fast as possible.
Specifically, foreclosure mediation should be part of the mix going forward. As detailed in research by the Center for American Progress and continued below, foreclosure mediation is working to help thousands of homeowners keep their homes while returning greater value to investors and communities than they would see in foreclosure. State governments recognize this and continue to create and expand these programs. One of the major hurdles for all states today is funding.
To date, the sums spent by state and local governments on foreclosure mediation is in just the tens of millions of dollars nationwide. Courts, mediators, housing counselors, and counsel are working late and taking on extra responsibilities to make it work. They are strained. Connecticut, for example, is successfully running its foreclosure mediation program statewide for around $1.5 million a year, but doubling or tripling that sum would enable greater program participation through better outreach. In other states, settlement funds would provide the budget—unavailable otherwise—to make a new program possible.
The timing could not be better. Existing state foreclosure mediation programs (detailed in an accompanying table) are making progress in mortgage mediation, and a review in greater detail of the newest programs in states reveals they also see the power of foreclosure mediation as a tool to stabilize housing while providing all involved maximum value. State attorneys general should insist on greater penalties in this settlement and then earmark a portion of those funds to create and maintain state foreclosure mediation programs.
States continue to add and expand programs
When we released our review of state mediation programs in June 2010—“Now We’re Talking”—21 states had implemented foreclosure mediation programs, with many just set to start in July 2010. Today, that total is 24.
See the updated table with a deeper dive into states with the newest programs. To be counted in this list, a state program has to require the lender or mortgage servicer to participate either automatically or at the request of the homeowner. One of the major reasons for these programs is the inability of homeowners to reach their lender or mortgage servicer for meaningful discussions. Otherwise, the program is voluntary and thus has no “teeth.”
States either treat foreclosure like any other civil lawsuit and require that it be filed in a court of law—so-called “judicial foreclosure”—or they permit the lender or its representative to post the property for sale without any court involvement, known as “nonjudicial foreclosure.” In slightly more than half of the states, nonjudicial foreclosure is the predominant method.
“Opt-in” programs are those in which the homeowner must take the affirmative step to request mediation, usually by returning a form included in the notice of foreclosure. In automatic foreclosure mediation, mediation is scheduled automatically and is carried out unless the homeowner opts out.
Finally, the program initiator is the part of the state government whose action created the program, whether by statute, rule, or order. Most programs are created by a legislature (by law) or a judiciary (by order). The one exception is Rhode Island, where the city councils have created the programs and are part of the executive branch.
Hawaii was on our previous list but it is bolded again here. In November 2009, Hawaii’s judiciary began diverting foreclosures to mediation. Thing is, the majority of Hawaii’s foreclosures happen without any involvement by the court—so-called “nonjudicial foreclosures” that are the norm in the majority of states and the District of Columbia.
Earlier this month, Hawaii remedied that, signing into law S.B. 651, requiring both the homeowner and mortgage servicer to attend a mediation session and negotiate prior to the completion of a foreclosure. The program puts the state in an elite group of jurisdictions that have chosen automatic foreclosure mediation (where mediation is automatically scheduled for both parties) over opt-in mediation that has floundered in so many states.
Massachusetts is not listed in the table above because its legislative efforts fall short of a real mediation (or even a negotiation) program. On August 7, 2010, however, Massachusetts signed into law Session Law 258, which extends a homeowner’s time to cure a mortgage default from 90 days to 150 days unless the mortgage servicer meets with the homeowner and negotiates in good faith to attempt a workout. Thus, it remains the lender’s option whether to reach out to the homeowner at all. We do not count such voluntary programs. To have real impact, a foreclosure mediation or negotiation program must require the mortgage servicer to participate either automatically or where the homeowner opts in and affirmatively requests the meeting.
The District of Columbia established a program that borrows heavily from the one in Maryland. While the measure was adopted in October 2010, the agency in the city responsible for administering the program did not release regulations until April 8, 2011, so the program has only just begun. Unfortunately, there is little reason to believe that D.C.’s program will fare better than Maryland’s, which has been plagued by the same low participation rates as other opt-in programs nationwide. For more information on the success rates in foreclosure mediation and how to increase participation effectively, see “The Latest Mortgage Mediation Lesson: Maryland’s Experience Points to the Way Forward” and “Walk the Talk.”
On April 1, 2011, Washington state adopted a law similar to the one in Nevada under which homeowners could request a mediation session once they were notified by their mortgage servicer of the impending foreclosure sale. Washington state, like Nevada, uses nonjudicial foreclosure so the court is not involved in most cases. Nevada has seen promising results from its program. The hope is that the enthusiasm seen from both the state government and nonprofit groups for the program leads to outreach efforts that help drive participation.
Just because these programs aren’t perfect, doesn’t mean they aren’t worth it
Our critique of these programs is based on the fact that they can do more, not that they aren’t worthwhile in their current form. To the contrary, even the tens or hundreds of settlements (as opposed to the planned thousands) seen by less-successful programs more than justify and pay for their existence. As laid out in “Talking It Up,” we estimate that each foreclosure loses mortgage servicers, lenders, and investors more than $57,000. A mortgage modification resulting from mediation saves these parties more than $35,000. Even 100 settlements at this savings total $3.5 million, well in excess of the funding allotted to these programs.
Our estimate appears even more conservative next to the Center for Responsible Lending, which estimates that losses in foreclosure range between $76,500 and $112,500. And all this is without taking into account the thousands of dollars saved in eroded values of surrounding houses and public services, or the importance of giving homeowners a voice in the mess that modifying a mortgage with a lender has become.
Thus, even with modest results, these programs more than pay for themselves; we just want to see these powerful tools wielded well to help as many homeowners and mortgage lenders and servicers as possible. State AGs can make that happen in their settlement with mortgage servicers.
Alon Cohen is Housing Policy Advisor at the Center for American Progress. He has been working on mortgage foreclosure mediation and related issues since 2008.