NCLC Report Faults Preforeclosure Mediation in States

Washington-The spate of state and local programs requiring mortgage servicers to sit down with troubled borrowers before initiating foreclosure proceedings lack the teeth necessary to make them effective, a Boston-based consumer group charged recently.

Although the National Consumer Law Center admitted there is "no data" to confirm whether preforeclosure mediation programs have led to a substantial number of both affordable and sustainable loan modifications, it's blistering 50-page report said that without rules that make such conferences mandatory for lenders, they probably won't slow the wave of foreclosures.

"Under most of the existing foreclosure mediation programs, servicers have all the discretion and homeowners have little or no power," said the study's author, NCLC staff attorney Geoffrey Walsh.

"If the programs continue to demand little or no accountability from servicers, they will likely go the way of federal efforts to control foreclosures that have failed as a result of relying on voluntary compliance by the lending industry."

A spokeswoman for the National Conference of State Legislatures said she could not comment specifically on the report, which she had not seen yet. But she offered that state lawmakers recognize the importance and severity of the foreclosure crisis and are trying to do whatever they can to ameliorate it.

"It's good to see that there is someone looking to see if these programs are working," said Heather Morton, a legislative analyst with the NCSL. "But big picture, many of them are pretty early in the process and are not set in stone. Legislators can always go back and tweak them in the future if need be."

Figures from the Hope Now, the private sector alliance of loan servicers, investors, mortgage insurers and nonprofit counselors, seem to refute the NCLC's findings.

As of July, the latest month for which data are available, Hope Now estimates that nearly 1.8 million homeowners have received workout solutions to avoid foreclosure since the beginning of the year. The group also estimates that there has been a 20% improvement in mitigation activity since it began tracking data two years ago.

The NCLC, a nonprofit organization that seeks marketplace justice on behalf of low-income and vulnerable Americans, studied 25 different programs in 14 states. Some were created by legislators, others by courts, but all with the intention of preventing owners from losing their homes before being presented with other possible options.

According to the report, however, many of the programs lack mandatory rules and fail to impose sanctions for noncompliance with what minimal rules exist.

Additionally, it faulted the programs because they do not require servicers to provide information substantiating a right to foreclose and do not mandate analyses of loan modification alternatives. And it claimed many programs set such "unreasonable procedural barriers" that large numbers of homeowners are restricted from participating.

If the programs continue to demand this little accountability," Mr. Walsh of the NCLC said in a telephone press briefing, they are destined to fail.

Steven Horne, president of default servicing company Wingspan Portfolio Advisors, Carrollton, Texas, tended to agree with the study's findings. If servicers aren't prepared to sit down with borrowers, said Mr. Horne, whose firm specializes in highly delinquent loans, the programs "are not going to work any better than talking to them for three and a half minutes on the phone."

But Greg Hebner, president of the MOS Group, Irvine, Calif., one of the largest loan mods companies in the nation, said he's "not an advocate" of forcing servicers to present their cases before the foreclosure process has actually begun. "There could be some adverse consequences," he said.

Nevertheless, Mr. Hebner favors preforeclosure contact with borrowers, even if it is mandated. "I have seen specific cases where mediation has at least brought the parties together and borrowers were told of the programs for which they may qualify," he said. "There really is a lot that can be done for them."

The study's author conceded that the programs hold the potential to help homeowners who have been rebuffed in their efforts to talk with their lenders, but said that "few are capable of being effective" unless "substantial changes" are made.

Among the group's litany of recommendations: A requirement that servicers give borrowers a document showing its affordable loan modification calculation and net present value calculation; produce specified documents, such as a pooling and servicing agreement, loan origination documents, an appraisal and loan payment history; establish proof of their standing as the real party interest and document that they have considered alternatives to foreclosure.

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