Read the full report (pdf)
More from CAP’s Foreclosure Mediation Series: It’s Time We Talked: Mandatory Mediation in the Foreclosure Process by Andrew Jakabovics and Alon Cohen and Now We’re Talking: A Look at Current State-Based Foreclosure Mediation Programs and How to Bring Them to Scale by Alon Cohen and Andrew Jakabovics
Our country is now three years into a rolling housing crisis that first brought us the Great Recession and now threatens our economy’s nascent recovery. Total existing home sales dropped this summer to their lowest level since the National Association of Realtors began tracking the metric in 1999. New home sales hit a similar low, missing already conservative July estimates by more than 32 percent. Finally, the so-called “shadow inventory,” or foreclosed homes held by lenders, continues to grow.
This disheartening evidence of a still struggling housing market is bad news for our economy and for every homeowner—those who are making steady payments on their monthly mortgage, those who are struggling to do so, and those who face foreclosure on their homes, sometimes through no fault of their own. To solve a problem of this magnitude will require every tool we can muster. That includes home mortgage foreclosure mediation—when homeowners, their lenders, and their mortgage services companies (representing investors in mortgages that were bundled into mortgage-backed securities and sold worldwide) come together to talk about the best way for all parties to resolve foreclosures quickly and effectively so our housing market can recover as quickly as possible so that our economy can return to sustained growth.
Foreclosure mediation achieves two things simultaneously. It is the last line in foreclosure prevention where all the parties can settle upon a loan modification that is both sustainable for the homeowner and nets the mortgage servicing company greater value than it can expect from selling the home in foreclosure. (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 since most loans are handled by a third-party servicer acting on behalf of lenders or investors.) And foreclosure mediation also is the first line of speeding up the foreclosure process for those homeowners who simply cannot make their mortgage payments even if modifications were made.
These two benefits of foreclosure mediation are readily evident in the wake of the recent uncertainty about the right of servicers to foreclose. First came the “robosigners” scandal, in which it turns out legally vetted mortgage documentation for foreclosure processing was woefully lacking. That scandal, which broke in late September, was followed closely by renewed claims that lenders’ use of the Mortgage Electronic Registration Systems, or MERS, instead of recording their mortgages with local governments hurt their ability to prove they owned the loans on which they were foreclosing. Then—partly as a consequence of the two previous problems—major mortgage-backed securities investors, including the New York Federal Reserve Bank, notified the lenders who sold them thousands of mortgages that the lenders may have to buy back a sizable portion because they did not meet the standards set for the securities.
Servicers’ initial reaction was to halt foreclosures. And observers believe that even as foreclosures resume, challenges from homeowners and even courts themselves could tie up already overloaded state courts with costly, time-consuming foreclosure litigation. Foreclosure mediation can speed these claims and provide a much needed pressure release valve for state courts.
Foreclosure mediation boasts additional benefits for servicers, homeowners, and government. Servicers benefit from avoiding a full and lengthy foreclosure process as more than 70 percent of mediations reach a settlement. That saves them the administrative costs of foreclosure, the costs of carrying a nonperforming asset, and legal fees. Moreover, because the parties only settle if it is in their best interest—there is nothing in mediation that requires settlement—servicers are presumably getting greater value in more than 70 percent of cases than they would if they foreclosed.
The benefit to homeowners of a process in which more than half keep their homes is obvious. Those who cannot obtain a sustainable modification can also benefit by negotiating a “graceful exit” that can give the homeowner some say in the move out as well as assistance in transitioning to new housing.
And for government, mediation reduces home vacancies, stabilizes government income from property tax, and serves as a review and appeal of federal Making Home Affordable programs such as the Home Affordable Modification Program, the Home Affordable Foreclosure Alternatives program, and the 2nd Lien Modification Program, and similar state programs. Communication in HAMP, HAFA, and 2MP is primarily carried out on paper and subject to the delays andconfusion that occur when hundreds of thousands of complex applications must be processed quickly. These programs rely solely on paper communication and provide the homeowner no chance to appeal. Foreclosure mediation offers the parties a chance to ensure servicer compliance before the homeowner loses his or her home.
This paper explains how best to structure a foreclosure mediation program. We favor automatic foreclosure mediation, in which mediation is scheduled automatically at the start of the foreclosure process instead of waiting for a party to request it. The recommendation is based on our analysis of previous foreclosure mediation data from states and communities across our nation as well as on our interactions with all the stakeholders and program participants in past and current foreclosures. We come to this conclusion based on two previous papers in our series of four reports from the Center for American Progress on the value of home mortgage foreclosure mediation as part of the response to the U.S. housing crisis.
In June 2009, then-CAP staffer Andrew Jakabovics and I reviewed 11 state foreclosure mediation programs, identifying best practices and making recommendations to both state and federal actors in a paper titled “It’s Time We Talked.”5 A year later, we released an update of state efforts at foreclosure mediation titled “Now We’re Talking: A Look at Current State-Based Foreclosure Mediation Programs and How to Bring Them to Scale.”6 The upshot of that update: The number of states with foreclosure mediation programs nearly doubled in one year to 21.
(Our fourth and final paper in the series due out in a few weeks will focus on national recommendations for establishing and supporting automatic foreclosure mediation. These will include recommendations for the Departments of Treasury and Housing and Urban Development, the Federal Housing Finance Authority, the Federal Housing Administration, the two housing finance mortgage giants Fannie Mae and Freddie Mac, and Congress.)
As more and more states consider how to implement or improve their foreclosure mediation responses, we’ve received an increasing number of requests for concrete suggestions. This paper does that. Our recommendations are based on our review of the laws, rules, and orders that govern these programs; the documentation of their performance; and our own discussions with stakeholders, including servicers, homeowners, and government officials. As more and more jurisdictions implement their own versions for foreclosure mediation, their experience has altered how foreclosure mediation is thought about, talked about, and implemented.
This update covers all three aspects of foreclosure mediation—how to think about it, how to talk about it, and how to implement it—so that different states and communities at different stages of undertaking foreclosure mediation programs can all benefit from our analysis and recommendations. In the pages that follow, we will go into detail about these three aspects of foreclosure mediation, but here let’s briefly summarize our findings.
Thinking about foreclosure mediation
First and foremost, automatic foreclosure mediation should be among the tools in every state’s response to this crisis. Automatic mediation keeps more homeowners in their homes, achieves higher overall returns on investment for lenders and investors in mortgage-backed securities, and maintains the property tax base among other benefits to state and local governments.
When establishing programs, stakeholders representing servicers, homeowners, and the government must be engaged and be pragmatic to a fault. If terms such as “mandatory mediation” are causing friction among the stakeholders, then find a better term to define the process. And if defining the meaning of “good faith” negotiations among all the parties in the program’s legislation or rule is not possible, then leave it out. Focus instead on detailing specific objective requirements for mediation. Finally, we are now in the middle of a still festering housing crisis. We have to incentivize all parties—homeowners, servicers, and government—to help get us out, regardless of fault.
Talking about foreclosure mediation
Referring to foreclosure mediation as “mandatory mediation,” as we did in our first report, made some people think we were recommending “forced settlements,” which isn’t true. We now speak about automatically scheduled mediation or “automatic mediation,” which focuses instead on the defining feature of such programs: the automatic scheduling of mediation sessions. Mediation isn’t a magic word. It is just negotiation in the presence of a neutral thirdparty.
If a jurisdiction has an existing legal definition of “mediation” that brings with it requirements or structures that are not helpful in the foreclosure context, then find a different term, such as “monitored negotiation” or “workout session.”
And avoid requiring “good faith” because the term is impossible to define. Instead, detail specific objective requirements. For instance, require servicers to provide a detailed breakdown of the amount outstanding, including all costs and fees while requiring homeowners to provide tax documents and pay stubs as proof of income.
Implementing foreclosure mediation
Being pragmatic means not letting the perfect be the enemy of the good. States should put a foreclosure mediation program in place quickly instead of waiting and hand-wringing about getting it right the first time. None of the current programs were perfect when they started yet they still helped thousands of homeowners and their lenders and mortgage servicers. There is no perfect program for everyone because of differing laws and regulations governing mortgages across the country. But we do set out provisions that every program should avoid to help jurisdictions get started. Specifically:
- Foreclosure mediation programs should be set up so that program administrators have discretion to react to changing needs, such as adding informational meetings, which Philadelphia has considered.
- Housing counselors need more money, more training, and more staff. Homeowner requests for assistance rose several-fold for many of these agencies. Housing counselors are being asked to assist in valuations, negotiations, and workouts on a scale never before seen. And states currently rely on them to educate homeowners. By providing them resources to do it, everyone benefits.
This paper concludes with a set of best practices from our original June 2009 report that are gaining traction across the country:
- Set a clear, broad standard for determining which homeowners are eligible for foreclosure mediation.
- When setting up and running a program, start by getting buy-in from stakeholders in government, the courts, the lending and servicing communities, community organizations, and homeowners.
- Regardless of your program’s structure, involve all three branches of government because every program requires executive, legal, and financial assistance.
- Focus on outreach because participation is the key to foreclosure mediation’s success and outreach is the key to participation.
- Put in place a reporting regime to help improve the mediation program over time and help others learn from the program’s successes and mistakes.
We’re confident that when you finish reading our paper you will understand why foreclosure mediation is so critical to ending our nation’s housing crisis and putting our economy back on the road to sustained recovery. And we’re sure you’ll find value in the foreclosure mediation steps and best practices we outline to help all this happen swiftly and efficiently.
Alon Cohen is SVP and general counsel of FightMetric LLC, a Washington, D.C., startup focusing on sports statistics.
Read the full report (pdf)
More from CAP’s Foreclosure Mediation Series:
- It’s Time We Talked: Mandatory Mediation in the Foreclosure Process by Andrew Jakabovics and Alon Cohen
- Now We’re Talking: A Look at Current State-Based Foreclosure Mediation Programs and How to Bring Them to Scale by Alon Cohen and Andrew Jakabovics