Emerging Strategies in Foreclosure Mediation

The nation’s foreclosure crisis requires innovative solutions that protect the rights of the homeowner while relieving stress on overburdened court dockets. Well-structured foreclosure mediation programs can ably serve both purposes.

Melanca Clark
Senior Counsel, Access to Justice Initiative, U.S. Department of Justice

Daniel Olmos
Senior Counsel, Access to Justice Initiative, U.S. Department of Justice
2011

Federal, state, and local law and policy makers have initiated a broad array of interventions to the foreclosure pandemic, including loan modification programs such as the federal Home Affordable Modification Program (HAMP), mortgage-payment-assistance and principal-reduction programs, counseling assistance, funds to promote neighborhood stabilization, and regulatory reform.  One vehicle that can usefully coordinate a number of these foreclosure mitigation tools is foreclosure mediation.  Jurisdictions around the country are increasingly offering mediation programs as an opportunity for lenders and homeowners to reachInterventions mutually agreeable and beneficial alternatives to foreclosure.1  Mediation programs have the potential to decrease the number of defaults resulting in foreclosure, increase the likelihood that mortgage terms can be renegotiated, and facilitate “graceful exits” by negotiating short sales, deeds-in-lieu-of foreclosure (where the homeowner deeds the home to the lender in exchange for a release of liabilities under the mortgage), or other alternatives for homeowners who are unable to keep their homes.

More than 30 foreclosure mediation programs have been created in at least 20 states and the District of Columbia.  Although many programs are still finding their footing, outcomes from several established programs are impressive, with some boasting 70 to 75 percent settlement rates with approximately 60 percent of homeowners reaching settlements that allow them to remain in their homes (see Cohen and Jakabovics, 2010).

This article describes several program features that appear to have a positive impact on the effectiveness of mediation programs and offers those features for consideration by jurisdictions that are seeking to develop or expand programs.  The article also includes a list of existing foreclosure mediation programs throughout the nation that are interested in sharing their experiences with mediation program stakeholders in other jurisdictions.  

Program Administration and Design

A defining feature of mediation programs is the presence of neutral third-party mediators who can help parties reach agreement on an alternative to foreclosure where such an outcome is feasible.  The third party does not have to be present at every stage of mediation.  For example, the foreclosure mediation program in Philadelphia relies on premediation “conciliation conferences,” where the parties are required to meet to discuss foreclosure alternatives.  A mediation session with a third-party mediator is required only where the parties are unable to reach an agreement at the conciliation meeting.  Further, foreclosure cases come before a judge only if formal mediation fails to resolve the matter.  These conferences and mediation sessions ensure that judges are being called upon to address only the toughest cases and, thus, are an effective way to decrease the mediation program’s burden on court officers.

Although many programs rely on sitting judges to oversee mediation sessions, this is by no means uniformly true.  New York City’s foreclosure mediation program and others rely on court-supervised “referees”—typically retired judges and lawyers—to supervise mediation.  Several jurisdictions have contracted with nonprofit organizations, such as the Center for Conflict Resolution in Illinois and the Collins Center for Public Policy in Florida, to administer mediation programs.  The Milwaukee Foreclosure Mediation Program is run by Marquette University Law School, where a full-time chief mediator oversees a roster of trained volunteer attorney-mediators.

Judicial foreclosure states are also not the only forums in which mediation programs have been established.2  The state of Nevada, a nonjudicial foreclosure state, requires lenders to participate in mediation before a foreclosure can proceed.  Providence, Rhode Island imposes a fine on servicers that proceed to foreclosure without attempting mediation, while New Hampshire’s foreclosure mediation program relies on the voluntary participation of lenders.

Mediation Program ListMediation programs can also be used as an intervention tool before the lender files a foreclosure notice, when homeowners may be in the best position to rectify arrears and when servicers can potentially avoid the significant costs of initiating the foreclosure process.  Fannie Mae has recently announced a policy that requires servicers to determine whether delinquent mortgage loans secured by properties in Florida are eligible for mediation before initiating foreclosure proceedings and, if they are eligible, to proceed in accordance with Fannie Mae’s policy guidance on pre-filing mediation.

Automatically Scheduled vs. Opt-in Process for Homeowners

Mediation programs generally follow one of two models for homeowner participation: an opt-in process, where the homeowner is notified of his or her eligibility but must affirmatively request mediation; or an automatically scheduled, or opt-out, process, where homeowners who receive a notice that foreclosure has begun are automatically scheduled for a mediation session.  Participation rates appear to be considerably higher in jurisdictions that have automatically scheduled programs, generally 70 percent and higher in jurisdictions such as Connecticut and New York, compared to opt-in programs, which typically have participation rates for eligible homeowners below 25 percent.  Notably, Connecticut’s program, the nation’s first statewide foreclosure mediation program, was originally opt-in and did not see a drop in settlement rates when the program switched to an automatically scheduled process, despite an increase in the number of homeowners participating in the program.  An important question for any jurisdiction that is contemplating an opt-in versus an automatically scheduled program is whether the program has the capacity to accommodate the higher volume of homeowners who will likely be brought into the program through automatic scheduling.

Stakeholder Involvement

Stakeholder involvement is a major factor in the success of mediation programs.  In several jurisdictions, the courts, legislatures, lenders, and homeowner advocates have come to the table at an early stage to devise meaningful interventions for foreclosure mediation programs.  By working together, all parties can voice their concerns and help craft a process that is both efficient and fair and not unduly burdensome to any party.  To the extent possible, the involvement of all parties, including representatives from the lending community, during the planning stages increases the likelihood that parties will be receptive and active participants once the program gets off the ground.  

Access to Counselors

There is broad consensus that homeowners fare better in mediation when assisted by a knowledgeable housing counselor, a lawyer, or both.  These advocates can also help the process run more smoothly by helping gather loan documents, identifying loan modification options, and facilitating communication among the homeowner, mediator, and counsel for the lender.  Almost all mediation programs provide homeowners with notice of the availability of free housing counselors, and sometimes legal assistance, or otherwise require the lender to do so.  A smaller number of programs, including those in Cook County, Illinois, Philadelphia, and New Jersey, go further by coordinating or requiring counseling assistance before or at mediation sessions.  Some programs also have established or facilitated relationships among counseling agencies, legal-aid providers, and pro bono attorneys.

For example, the Circuit Court of Cook County’s Mortgage Foreclosure Mediation Program requires a homeowner who is seeking Foreclosure filings 2006-2010mediation to meet with a HUD-certified housing counselor (either with an on-site counselor directly through the program or with another HUD-certified housing counselor of his or her choosing) and with an attorney in advance of mediation.  The program provides housing-counseling services and legal services at no cost to any homeowner who needs the assistance and meets the eligibility requirements, regardless of income.  The housing counselor helps the homeowner obtain necessary paperwork and make an assessment of the best option for the homeowner (modification, short sale, etc.).  The homeowner also has a consultation session with a pro bono attorney who reviews the paperwork to make an initial determination of whether the homeowner has a legal defense to foreclosure that should be pursued through the courts.  Where appropriate, the attorney will help the homeowner prepare a request to the court for appointment of pro bono counsel.  If there is no defense to the foreclosure, and the case proceeds to mediation, the homeowner will have the assistance of a pro bono attorney throughout the mediation process.  At least anecdotally, foreclosure mediation programs, such as Cook County’s, that coordinate counselor and attorney resources have improved access to qualified housing counselors and legal assistance for homeowners facing foreclosure.

Training and Support

To be successful, mediation programs must ensure that participants helping to facilitate the mediation process are well trained.  The housing-counseling agencies that participate in many programs have extensive in-house training both on available resources and programs at the federal and state level, including state and federal mortgage assistance programs and community-based resources, as well as on the details and functioning of the mediation program itself.

Well-trained lawyers are also an important tool in mediation programs, as there may be homeowners for whom mediation reveals a legal issue that requires the assistance of an attorney.  Although legal resources for homeowners in mediation programs generally are quite limited, many programs do enjoy the participation of legal-aid offices and pro bono attorneys coordinated by a local bar association or other organization.  However, these attorneys may be hamstrung by a lack of familiarity with the complex legal issues that arise in foreclosures.  Legal-aid offices and other organizations that closely supervise and train volunteer attorneys, thus, can play a vital role in increasing program effectiveness. 

Foreclosures: Worst 10 statesIntegration with Federal and State foreclosure Relief Programs

The Obama administration’s foreclosure relief programs, including HAMP, the Hardest Hit Fund, principal reduction programs, FHA loss mitigation options, and the Home Affordable Foreclosure Alternatives (HAFA) programs, as well as state relief programs, have increased the options available to homeowners at risk of foreclosure.  Mediation programs that take advantage of or help facilitate homeowners’ access to these programs, either through the assistance of knowledgeable mediators or counselors, or with other program requirements, will in all likelihood achieve greater success than programs that do not.

The Dodd-Frank Wall Street Reform and Consumer Protection Act also offers protections to homeowners that may be realized in a mediation program.  For example, the act requires that every servicer participating in HAMP that denies a homeowner’s loan modification request on the basis of net-present-value (NPV) analysis provide that homeowner with the data used to make its calculation.  A foreclosure mediation program is a proper venue in which a lender may provide the information to a homeowner, and well-structured programs should provide a space for that transaction to occur.

Several mediation programs have been working to educate program administrators about HAMP and other federal and state foreclosure prevention programs and have instituted oversight measures to help increase the number of homeowners who can secure foreclosure relief through these programs.  Connecticut’s foreclosure mediation program retains all mediation cases in which a homeowner has received a temporary HAMP modification until a permanent HAMP modification is obtained.  Vermont is the first mediation program to require lenders, as part of the mediation process, both to calculate the NPV in accordance with HAMP guidelines and actually to produce the NPV inputs and outcome to the homeowner and mediator.  If the lender fails to comply with the mediation statute, the court is empowered to impose sanctions, including prohibiting the lender from scheduling or conducting a foreclosure sale.

Documentation Requirements

Most foreclosure mediation programs require homeowners to provide documentation of available resources and a budget plan.  Some programs, like Maine’s foreclosure mediation program, also require that homeowners and lenders provide information to complete the FDIC’s publicly available NPV worksheet, which determines whether a loan modification is feasible, and that the lender or its representative participating in mediation have authority to agree to a proposed settlement.  Although requiring documentation by the lender at the outset of mediation may prove to be an unnecessary obstacle to commencing the negotiation process, there may come a time during mediation where such documentation is necessary.  Thus, facilitating or requiring the production of documents may be an important feature of the program.  

Accountability Measures

Several jurisdictions have developed program rules that help ensure accountability by mediation program participants.  For example, in some court-run mediation programs, such as Maine’s, courts have the authority to assess costs and fees to either party for failure either to appear at mediation sessions or to make a good-faith effort to mediate.  Providence’s foreclosure mediation program allows mediators to request that lenders provide written documentation of reasons for rejecting a loan modification proposal.  Vermont’s foreclosure mediation program requires lenders to provide a copy of any pooling and servicing or similar agreement when a lender claims that such an agreement prohibits a loan modification.

Research and Evaluation

The way to determine whether a mediation program is actually effective is through careful tracking and evaluation of program data.  At a minimum, participation and settlement rates should be tracked.  A more comprehensive approach would include tracking not just the occurrence of a settlement, but also the substance of the agreement (e.g., loan modification, HAMP/non-HAMP, repayment/forbearance plan and principal forbearance amount, cash for keys, short sale, and other agreements), the time period for achieving resolution (tracked in Cuyahoga County, Ohio), and whether homeowners had the assistance of a counselor or attorney (tracked in New York City).

The Philadelphia mediation program has also been tracking homeowner participant demographics to ensure that there are not unwarranted disparities in community participation rates.  Several programs have been evaluated with private foundation support, but smaller programs, like that in Butler County, Pennsylvania, have been experimenting with low-cost ways to track at least some data.

Conclusion

For millions of homeowners at risk of foreclosure, mediation programs offer an opportunity to evaluate their options and appraise possible alternatives to losing their homes.  Well-structured foreclosure mediation programs that are designed to take advantage of available resources at the local, state, and federal level can be valuable and even essential tools as jurisdictions around the country seek ways to combat the foreclosure crisis.  The program features described in this article should be considered by states and localities as they study how to construct new programs or support existing ones.