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.)