In a few short years, successful foreclosure mediation programs could head off many of the forecast 10 million foreclosures, fix the broken housing market and help rebuild the economy.
Unfortunately, most states don't offer foreclosure mediation, some states offer temporary programs and still others offer programs that don't work as well as they should, according to a comprehensive new report "Rebuilding America: How States Can Save Millions of Homes Through Foreclosure Mediation," by the National Consumer Law Center (NCLC)
"Our report reviews programs in use in 19 states and makes recommendations for best practices drawn from that analysis. The evidence is in that mediation programs can be financially self-sustaining, do not prolong inevitable foreclosures, and are a proven tool that can help rebuild the fragile U.S. economy. If all states adopted strong foreclosure mediation programs, it would prevent further harm to millions of families while also saving local communities and investors billions of dollars," said Geoff Walsh, an attorney at NCLC.
Mediation involves a third, neutral party, a mediator, who negotiates a dispute to generate a fair settlement that's mutually acceptable to opposing parties.
In the case of mortgage foreclosure mediation, the mediator works with the struggling homeowner and the lender or servicer to work out new mortgage terms that will both satisfy the lender and prevent the homeowner from defaulting. Where mandated foreclosure mediation exists. lenders and servicers must review foreclosure options before a foreclosure can be completed.
NCLC says foreclosure mediation programs typically connect borrowers with housing counselors . A growing library of studies reveal that borrowers who receive homeownership education and counseling are better equipped to avoid foreclosure and better able to obtain affordable, sustainable loan modifications.
Effective mediation programs can shorten prolonged pain that often comes with foreclosures. Mediation programs typically must work within the time frames required by law. In Philadelphia, for example, the typical foreclosure case spent 53 days in a foreclosure conference while the average time frame to complete an uncontested foreclosure was 10 months, according to NCLC.
Foreclosure mediation programs can work alongside the federal Home Affordable Modification Program (HAMP) and other mortgage workouts.
Foreclosure mediation programs also provide substantial community benefits at little or no cost. Mediation fees average from none to less than $1,000, typically paid by the homeowner and or the mortgage lender. In comparison, investors lost an average $145,000 per home foreclosure in 2008, according to NCLC.
Unfortunately not all foreclosure mediation programs are created equal.
Some lack enforceable standards, don't compel servicers to negotiate in good faith, lack effective outreach component, or otherwise fail to get the job done.
NCLC says a more far reaching web of foreclosure mediation programs is needed in all states, with provisions that include:
Permanent foreclosure mediation programs. Some states have temporary programs subject to an expiration date, but the programs should be retained as permanent foreclosure law provisions.
State enforced funding. States should fund housing counseling and legal support for homeowners through filing fee surcharges that also fund mediation programs. (The recent National Mortgage Settlement comes with $766.5 million fine which, when collected from banks named in the settlement, will be used to pay for counseling programs for struggling homeowners eligible for benefits under the larger $25 billion settlement. )
HAMP connections. HAMP ends in two years. To maximize HAMP modifications, mediation programs should require servicers to document their compliance with HAMP rules.
An end to "dual tracking." Mediation programs should disallow foreclosures on loans already modified under HAMP. NCLC says some servicers are already foreclosing on loans permanently modified under HAMP, a practice called "dual tracking," now outlawed by the recent National Mortgage Settlement.
Monitoring for proprietary modifications. Servicers who give homeowners their own modifications instead of HAMP modifications often load them with more onerous terms including higher interest rates and smaller principal reductions.
Reduced impact of Federal Housing Finance Agency (FHFA) guidelines. New FHFA guidelines encourage services to speed up foreclosures, especially after a case has been referred to an attorney. That makes it tough to stop foreclosures once they've begun. Rules for mediation should be tightened so that foreclosure stays remain in place pending a full review of options to foreclosure.
Rental market information. Renting often becomes the only available housing option for those who suffer a foreclosure. However, renters are more than twice as likely as homeowners to spend more than half their income on housing, according to NCLC. That can make retaining homeownership more affordable and homeowners should have the rental information to weigh their housing options.
More attention to minorities. Targeting minorities with toxic loans led to disproportionate foreclosures in minority communities during the housing crisis. Similar practices continue to steer minorities to proprietary modifications that are less affordable than those offered non-minorities. Mediation programs should come with oversight to guard against fair housing violation practices that continue to disproportionately impact minorities.