What foreclosure mediation could look like for homeowners
Gov. Martin O'Malley wants to make mediation a part of the foreclosure process in Maryland, offering it as one way to avoid more avoidable trips to the auction block. Mediation has popped up in other states, but not in the same way everywhere. So what's the plan here?
Kathleen Skullney, the staff attorney for the foreclosure legal assistance project at Maryland Legal Aid, kindly offered to walk us through it.
The idea, she said, is to tuck new requirements into the state's current foreclosure timeline. Right now, lenders must wait 45 days between notifying Maryland homeowners that they intend to foreclose and actually filing with the court to start those proceedings.
O'Malley's most recent summary of legislative priorities says the bill he is submitting "prohibits the filing of a foreclosure action without completion of loan modification review."
When lenders or servicers file foreclosure actions, they would have to include "an affidavit documenting completion of review, reasons for denial and calculations on which denial was based, or showing that review could not be completed because borrower failed to engage in the process." They would also have to document that they considered other alternatives to foreclosure.
"Meaning you use the 45 days to figure out what else you can do," Skullney said. "And you make sure that that’s a fairly efficient process by giving homeowners the information they need the minute they get the notice of intent to foreclose -- they can immediately apply, whether it’s the federal program, whether it’s the lender’s own program."
On the flip side, homeowners can't expect that failing to respond will bring the process to a halt.
"It really pumps the maximum incentive into that 45 days, both for the homeowner and for the lender, we hope," Skullney said.
She said members of the state's mediation task force did talk about the problem frequently cited by homeowners and housing counselors -- that information sent to lenders gets lost in a sort of loan-mod black hole. The group thought the key was forgoing faxes and just using certified mail, she said.
What if the lender gets the documents, looks them over and is convinced that the borrower doesn't qualify for a modification? There are other alternatives to foreclosure if the lender agrees, Skullney said. For instance, a short sale, in which the homeowner sells for less than the mortgage balance. Or returning the deed to the lender to remove the need for an auction.
She hopes these so-called softer landings will become more common with a law requiring a closer look at what could be done besides foreclosing.
So where does the mediation come in? O'Malley's description of his bill says homeowners would have the right to request a face-to-face mediation session.
Skullney thinks the legislation would give borrowers more legal defenses if they actually do qualify for -- say -- the federal Home Affordable Modification Program. They could point it out in court, she said.
Among states requiring mediation, Nevada's experience stuck out to her:
"They do not have judicial foreclosure at all, but what they instituted was a mandatory mediation program that's administered by the court," she said. "Absolutely every homeowner who requests mediation -- and it’s an opt-in system, so they’ve got to affirmatively ask for it -- is entitled to mediation before the house can be sold. The way that it is enforced is that the foreclosing entity must file a certification from the mediator [before going to auction]. ... The mediation has to be conducted in good faith, so there has to be a genuine discussion of what, if anything, can be done. And the mediator will certify that that in fact took place. If really nothing can be done, then the servicer or the lender, the secured party, sells the house."
What she's hearing from Nevada is that about 20 to 25 percent of homeowners who have gone through mediation there haven't been able to keep their homes, 30 to 35 percent have gotten "significant help as a result," and the rest are just waiting because the lenders haven't responded.
"This makes me believe that the governor is right, and there is an opportunity for workout if the process includes a mandatory period to do that," Skullney said.
What do you all think?
(Note: I've changed this post to reflect that the mediation wouldn't be mandatory, but rather the loss-mitigation consideration. Residents would have the right to choose mediation.)
Categories: Foreclosure help, The foreclosure mess
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Comments
Until there is an "equity balance" established, meaning that the equity is set at the rate it should have been in the first place, not the over-inflated price it was to grease the lenders, realtors, and appraisers palms that it was, nothing will happen. People will have no real incentive to keep paying for an asset that will take years, if ever, to recover lost equity.
Banks may agree to temporarily lower payments, but what they do is slick math and put it at the back of the loan, in many instances increasing the principle owed...So an owner is even more underwater. The lenders in MD have every incentive to foreclose, because more than likely the loan is insured. So why not let the borrower foreclose, collect on the entire amount of the overpriced home, and sell at whatever, to make an additional profit? We, borrowers are screwed, because the banks will not do the right thing, and deflate the price of the home to what it should have been all along...I have lost faith, I don't think anything will change until boatloads of folk simply walk away...
Posted by: Wallace | February 1, 2010 8:45 AM
I think it misses the point.
If the state is going to push anything it should be the strict and objective MINIMUM standards of qualifications (and despite the banks role in getting to this point) with the onus put on the homeowner to prove their level of worthiness before anything of an accommodating nature comes into play.
EG: documented average monthly gross income of $1450 per $100,000 of existing loan balance. (40% budgeted to pay a 5% 30yr mrtg when it shouldn't be above 30%)
When the bank notifies the 3 months delinquent mortgage holder that they are liable to be foreclosed on the notice should include a simple loan application and a 10 (20?) day instruction to comply.
Failure to comply initiates the traditional remedies, As very few aren't already deeply aware that they can't afford anything close to their obligation anything done to prolong this agony of uncertainty only hurts them more.
Everyone (and especially the debtor) needs a mechanism to separate that chaff from the wheat as early in the process as possible.
But lenders be warned too: If you aren't ready to quickly follow through then don't start the process.
Posted by: MrRational | February 1, 2010 9:44 AM
I never been a advocate of government involvement in the private sector however this proposal to the foreclosure process has merit.
Properly structured the homeowner and lender are on equal footing during this short time frame to find an alternative to foreclosure. Currently the lender has the upper hand in any type of loan modification negotiations. This change also opens the loan modification negotiations to a third party review.
I suggest the file include the pre-foreclosure appraisal and terms stating in the bill this is a one time event with the homeowner.
Assume foreclosure is avoid with a successful loan modification and the homeowners again fails to keep the payment current the lender now has a fast track to foreclosure.
Posted by: TC | February 2, 2010 12:14 PM
I don't think the proposed mediation will do anything significant to prevent foreclosures. About 50% of all loans that are modified end up re-defaulting. In my opinion, this will be used by the homeowner to gain extra time in the home before finally walking away. This will most certainly delay the foreclosure process. However, it won't be the solution to the problem. The only way to prevent "strategic default" is to write down principal. If you are underwater, it could take at least another 10 years (probably longer) to regain the phantom equity that has been lost. Many people put very little money down and that has contributed to the problem. Even if the lender is able to reduce the payment a few hundred dollars, that does nothing to address the real problem in defaults. As long as borrowers are underwater, the risk of strategic default will continue to haunt the housing market. For this reason, I think it will take until 2014 for this problem to be solved. The foreclosure process already takes over 12 months. All this will do is delay the process, making the pain spread out over a longer period of time as opposed to getting it done and over with.
This plan sounds good in theory, but realistically, it will prove to only delay the inevitable. Sure, this plan will help about 50% of those that go in default. But the other 50% will end in foreclosure anyway. This will create a "moral hazard" so even more people could contemplate defaulting even if they can afford their payment. Those that have been denied in refinancing are prime candidates. For most, sinking loan values, lower DTI requirements, limited assets, sub par credit scores, closing costs etc. are enough reasons to go this route.
This plan will only contribute to strategic defaults. People will think if this requirement is set in place, that they will not have a problem being approved for a loan mod. The DTI limits set by the lender for a loan mod are even more stringent than for a refinance (30% for loan mod vs. 45% for refinance). The majority of people will find themselves hopeless, as many of these defaults were originated with stated income and high debt to income ratios. To compensate for the excessive DTI, more borrowers were placed in "interest only" loans to keep the payment as low as possible. When you switch from interest only to paying principal interest, the savings will be minuscule.
As I stated in another post on your blog, Gov. O'Malley needs to consider adding a provision/statute in his proposal. The "Deficiency Judgment" issue is more important than the foreclosure mediation. Those that lose their home to foreclosure or short sale can still be held liable for the difference on their loan. I am curious if you are able to ask someone in Annapolis about this issue.
Posted by: Frank Rizzo | February 3, 2010 7:48 AM
I think Governor O’Malley’s proposal is an excellent idea. There needs to be a legal mechanism to force lenders to negotiate in good faith with homeowners. I see this proposal as a way to also sort out those borrowers who simply can no longer afford their home regardless of the type of assistance given from those who just need a helping hand.
Not every borrower falls behind on their mortgage for the same reasons. I have been practicing bankruptcy law in Maryland for more than a decade now, and I have seen people from all income brackets, from all over the state fall behind on their mortgage for different reasons, such as illness, incarceration, divorce, unemployment, and drug addiction to name a few. But I have never seen so many people willing to simply walk away from their homes as I do now. The level of frustration and anger is very high. I see the foreclosure situation in our state and nationwide getting a lot worse.
Governor O’Malley’s proposal should include a mechanism for state judges to lower a borrower’s principal balance to bring it in line with the homes actual market value. The banks lien on the home is only good up to the actual market value anyway. With a reduced principal borrower’s could actually begin to have some hope, instead of saying “what’s the point in paying my mortgage when my house is so far underwater?”
Federal judges can remove a second lien on a house when the second lien is actually unsecured because the first mortgage is equal to or greater than the fair market value of the home. Governor O’Malley should give state judges this ability. The widespread repercussions of thousands of Marylanders losing their homes is to great to let it happen. The Obama administration proclaimed that AIG, the giant insurance company was “to big to fail”, Maryland homeowners are to big a part of our economy to let fail.
Posted by: Lawyer B | February 16, 2010 4:41 PM