When President Obama announced his $75 billion foreclosure- prevention plan back in February, he said that “in the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen.” Secretary of Housing and Urban Development Shaun Donovan stated that the plan “will help make home ownership more affordable for 9 million American families.”
However, since then, the administration’s signature mortgage- modification effort, the Home Affordable Modification Program (HAMP), has sputtered. HAMP provides financial incentives to mortgage servicers that lower borrowers’ payments to sustainable levels, but those participating have been incapable of slowing the pace of foreclosures. Only 500,000 modifications have been completed nationwide in six months, and servicers actually signed up fewer homeowners for modifications in September than they did in August. Meanwhile, in the third quarter of this year alone 937,840 homeowners received a foreclosure letter.
But goading lenders into modifying mortgages by throwing dollars at them isn’t the only way to prevent foreclosures. One option that has received scant national attention is mandatory mediation, which is a requirement that a mortgage servicer meet with the borrower–in the presence of a mediator or other neutral third party–to try to find an alternate arrangement before putting the borrower’s home into foreclosure.
There is no requirement that the two sides come to an agreement. Unlike in binding arbitration (where the arbitrator decides what the deal looks like), in mediation neither side is obligated to make an offer the other wouldn’t be willing to accept. But the hope is that if all parties are forced to spend some time together, a resolution can be found under which borrowers resume payments at a level that they can afford, and lenders avoid the need to dispose of a foreclosed property.
More than a dozen areas of the country are pursuing mediation, with encouraging results. Programs that automatically schedule mediation sessions as part of the foreclosure process are already under way in Philadelphia, Connecticut and parts of Florida, while California and Maryland are both exploring instituting their own mediation programs. On average, more than 70 percent of mediations are settled with the homeowner staying out of foreclosure. However, it’s estimated that about 80 percent of homeowners at risk of losing their homes don’t engage in any efforts to negotiate with their lender. And those who do so on their own often run into a bureaucratic nightmare: hours on hold, records submitted and then lost, and customer service representatives who know nothing about the borrower’s situation.
Roberta Palmer, program manager for the Court Operations Unit of the judicial branch of Connecticut, created and oversees that state’s mediation effort. She sees mediation as a way to cut through the red tape that comes with attempting to get a modification from a large lender that is unfamiliar with the borrower.
“Mediation is the avenue for getting parties in the same room,” she said. “We have homeowners come in every day and say, ‘Look, I’ve been trying to get this modification for months.'” But they can’t, because every time they call their lenders “they talk to different people, and these people have no authority,” she said.