Saving Homes With Mandatory Mediation
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.
Rachel Gallegos, law clerk to Judge Annette Rizzo of the Philadelphia Court of Common Pleas, said that oftentimes mediation is simply an avenue for getting borrowers the right information to communicate adequately with their lender, such as the name of a specific person to work with, or even a correct fax number. And because the Philadelphia program has been in effect since April 2008, the lenders and attorneys involved with it have built up a relationship that makes the program more effective.
"At this point, it's the same lenders and attorneys in the room every week. There's a lot more willingness to work something out," Gallegos said, adding that while lenders won't pursue a modification at all cost, "when you've got a homeowner who missed a single payment or lost a job for a short time, the lenders will go to great lengths to keep them in their home."
According to Palmer, more than 4,000 Connecticut homeowners have successfully completed mediation (which began as a voluntary program in July 2008 and became mandatory in July 2009). Seventy-five percent of those homeowners have come to some sort of settlement with their lender, with 62 percent staying in their homes.
Philadelphia officials have estimated that the city's program has kept almost 60 percent of participants in their homes. While the Philadelphia court doesn't officially track such data, Gallegos said that 2,000-2,500 Philadelphia homes have been saved outright by the mediation process, with another 2,000-2,500 mediations still taking place. And it's not only the homeowners who gain from mandatory mediation efforts. According to Palmer, many homeowners come into the program believing that they don't qualify for HAMP, but during the mediation process find out that an error has been made and that they do in fact qualify. If so, the mediation session also secures federal money for the lender, which would have missed out otherwise. "It's helping both sides," Palmer said.
Senator Jack Reed (D-RI) has introduced legislation (S. 1731) that would create an $80 million grant program for state mediation programs that adopt best practices. When asked if Philadelphia could use the support, Gallegos replied, "Oh God, yes," saying that the funds would be used to compensate housing advocates--who do all of the pre-trial paperwork and counseling in the Philadelphia program--and to support more outreach in the community.
Reed's bill is a good place to start, but should by no means be considered the end of the effort to promote mediation. The government should also explicitly state that community development block grants can be used to fund mediation and should require mediation on all federally held mortgages. Until the flood of foreclosures abates, economic recovery will not be truly under way, and by all appearances HAMP is going to fall far short of what is needed. Congress should help states to make mediation part of the solution.