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This is the last of a four-paper series on foreclosure mediation as a tool in responding to the still-troubled U.S. housing market. The most recent papers in the series provided updates on the status of and best practices for state foreclosure mediation programs. This paper addresses the issue at the national level to ask how the federal government, so deeply immersed in the nation’s housing markets, can support a solution that is demonstrably valuable to homeowners, the mortgage lenders, investors, servicing companies that handle those single-family mortgages, the local governments now dealing with a steady flood of foreclosures, and ultimately taxpayers who stand behind the majority of these mortgages.
And our solution? Require that all mortgages backed by the U.S. government go through mediation prior to foreclosure and that all lenders participating in the government’s so-called Home Affordable Mortgage Program mediate prior to foreclosure. In foreclosure mediation the homeowner and mortgage lender or servicing company sit down for settlement negotiations in the presence of a neutral third party. Even though none of the parties are under any obligation to settle in mediation, in practice they settle more than half the time. We encourage automatic foreclosure mediation in which an administrator automatically schedules mediation sessions for both parties rather than waiting for the homeowner to request it, radically increasing participation rates.
Fannie Mae and Freddie Mac alone have begun over 850,000 foreclosures this year. Automatic foreclosure mediation programs could help hundreds of thousands of these homeowners who through no fault of their own face eviction from their homes. This, in turn, would help communities across our nation cope with a continuing foreclosure crisis. American taxpayers gain, too, because the federal government today insures, guarantees, or holds outright around three of every five family mortgages in our country.1 In the past year, new mortgage lending depended even more on the federal government, with 90 percent of loans bearing government guarantee or insurance.2 Thus, nobody stands to benefit more than the American taxpayer from the greater value and shorter timelines that automatic foreclosure mediation ensures.
So what do we stand to save? The estimates below indicate that for every mortgage modified in mediation, the mortgage servicer cuts its losses by 60 percent. (As in our previous papers, the term mortgage service companies, or “servicers,” will be used here to refer to the party foreclosing on a property because most loans are handled by a third-party servicer acting on behalf of lenders or investors.) Applying that estimate conservatively to the two mortgage finance giants Fannie Mae and Freddie Mac, both of which are operating under government conservatorship, it could represent a savings of over $6 billion, and more importantly, over 177,000 homeowners that would keep their homes. The spillover effect on communities of all these homes would mean stronger local property tax bases and reduced strains on municipal services—gains that could account to billions of dollars more in savings.
This paper demonstrates how the federal government in all three branches, executive, legislative, and judicial, can support automatic foreclosure mediation across our country. Our proposals would enable this to happen directly by implementing it through the federal government’s main mortgage entities—Fannie and Freddie, the Federal Housing Administration, the Veterans Affairs Administration, and the Department of Agriculture’s Rural Housing Services programs and indirectly by supporting state programs designed to foster automatic mortgage mediation. Here is a summary of our recommendations.
Direct federal involvement
Automatic foreclosure mediation is working in many states and communities around our nation, as the previous papers in this series detailed. To best leverage the power of automatic foreclosure mediation going forward:
- Fannie Mae, Freddie Mac, FHA, and all other federal agencies that make or guarantee loans should require their servicers to implement automatic mediation prior to foreclosure. These “government mortgage entities” should direct the servicers responsible for managing these government-backed loans to add automatic foreclosure mediation to the list of “loss mitigation” activities already required of them.
- The U.S. Department of the Treasury, which runs the federal government’s foreclosure prevention program called the Home Affordable Mortgage Program, should require all financial institutions that signed up to participate in HAMP to automatically mediate potential foreclosures.
- In the absence of action by the government mortgage entities or Treasury, Congress should require automatic foreclosure mediation for mortgages owned, guaranteed, or insured by government mortgage entities as well as of all HAMP signatories.
- Congress should make clear that judges in federal bankruptcy courts have the power to require parties to mediate mortgage issues, just as they have the power to order alternative dispute resolution (such as negotiation or mediation) for any issue at any time.
In this way, the federal government is directly ensuring that automatic mortgage mediation becomes the standard way of dealing with foreclosures. It does not mean all foreclosures will end or that all homeowners will receive a modification. Those in investment properties or those who cannot affordably be provided with a modification will still lose their homes, but hopefully in a faster, less costly, and more dignified matter. Automatic foreclosure mediation provides a better deal to the parties when they can reach a settlement and helps speed up the process even when they don’t, contributing to the common good of our communities, our taxpayers, and our economic recovery.
Indirect federal support
To continue the progress of state foreclosure mediation programs, Congress should encourage states and municipalities to create automatic foreclosure mediation programs (both new programs and those moving from opt-in to automatic mediation) through the use of matching funds. States or municipalities with qualifying programs could receive a dollar-for-dollar match, enabling larger more robust programs with better outreach and advertising efforts. The funds needed for these programs can come from existing appropriations, such as the Hardest Hit Funds announced last year.
This paper continues our push for support for automatic foreclosure mediation on multiple fronts. Already, the Department of Housing and Urban Development has adopted our recommendation from “It’s Time We Talked.” HUD’s Community Development Block Grants can now be explicitly used to fund housing counselors involved in helping homeowners through the foreclosure mediation process. These CDBG grants provide basic funding to state housing counselors, who help hundreds of thousands of Americans facing housing difficulties. These housing counselors are particularly crucial when helping homeowners understand how mediation can help them and what they need to do to participate effectively. Most of these housing counselors have been pushed to their limits by recent demands. These funds provide some relief.
We hope that the recommendations in this report and our other recent work help advance the use of a tool that has already helped thousands of homeowners keep their homes, saved servicers and investors millions in losses, and shored up suffering neighborhoods.
Alon Cohen is a consultant on housing issues for the Center for American Progress.
Download this report (pdf)
Download the executive summary (pdf)
Download the report to mobile devices and e-readers from Scribd